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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly period ended April 2, 1995
/ / 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 incorporati on (I.R.S. Employer
or organization) 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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of Common Stock, $ .16 2/3 par value outstanding as of May 11,
1995: 11,158,896
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 2, 1995 AND OCTOBER 2, 1994
(Dollars in thousands, except per share amounts)
1995 1994
---- ----
(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,202 $ 1,457
Receivables, net of allowances for uncollectible
accounts of $709 and $276 in 1995 and 1994, respectively 1,266 1,511
Inventories 2,351 2,577
Prepaid expenses and other current assets 1,833 2,249
-------- --------
Total current assets 6,652 7,794
Property and equipment:
Land 10,240 11,203
Buildings and leasehold improvements 119,810 120,034
Machinery and equipment 40,294 39,867
-------- --------
170,344 171,104
Accumulated depreciation and amortization 48,108 43,531
-------- --------
Property and equipment, net 122,236 127,573
Other assets 20,495 21,405
-------- --------
$149,383 $156,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 6,478 $ 7,107
Accrued expenses 12,720 14,900
Income taxes 201
Current portion of long-term debt and capital lease obligations 4,321 902
-------- --------
Total current liabilities 23,519 23,110
Long-term debt and capital lease obligations 52,063 57,868
Deferred income taxes 1,718 3,080
Other long-term liabilities 7,963 7,678
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 1995 and 1994; issued 11,159,000 in 1995 and
11,114,000 shares in 1994 1,859 1,852
Additional paid-in capital 57,824 57,631
Retained earnings 4,437 5,649
-------- --------
64,120 65,132
Deferred Officer Compensation (96)
-------- --------
Total stockholders' equity 64,120 65,036
-------- --------
$149,383 $156,772
======== ========
See notes to consolidated financial statements.
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GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
---- ---- ---- ----
REVENUE $ 56,937 $ 59,885 $119,335 $ 122,084
-------- -------- -------- ---------
COSTS AND EXPENSES:
Cost of products sold 48,818 50,485 100,879 101,953
Selling, general and administrative 4,175 3,672 8,684 7,801
Depreciation and amortization 3,781 3,367 7,446 6,636
Interest expense, net 1,276 979 2,479 2,055
Other expense (income) 849 (902) 1,629 (901)
-------- -------- -------- --------
58,899 57,601 121,117 117,544
-------- -------- -------- --------
Income (loss) before taxes (1,962) 2,284 (1,782) 4,540
Income taxes (benefit) (628) 730 (570) 1,452
-------- -------- -------- --------
NET INCOME (LOSS) $ (1,334) $ 1,554 $ (1,212) $ 3,088
======== ======== ======== ========
Weighted average common shares 11,114 11,113 11,114 11,106
outstanding
NET INCOME (LOSS) PER COMMON
SHARE $ (.12) $ .14 $ (.11) $ .28
======= ======== ======== ========
See notes to consolidated financial statements.
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GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED APRIL 2, 1995 AND APRIL 3, 1994
(Dollars in thousands)
(Unaudited)
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,212) $ 3,088
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 7,626 6,801
Deferred taxes (1,362) 14
Gain on disposition of assets (1,542)
Other 96 46
Change in operating assets and liabilities:
Accounts receivable 122 (139)
Inventories and prepaid expenses 642 3,748
Accounts payable and other liabilities (709) (1,093)
-------- --------
Net cash provided by operating activities 5,203 10,923
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (7,177) (8,664)
Proceeds on sale of property & equipment 3,524 1,950
Purchase of liquor license (16) (181)
Sale of liquor license 84
Deposits received (paid) 172 (101)
Pre-opening costs (302) (532)
-------- --------
Net cash used in investing activities (3,715) (7,528)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 30,200 21,200
Payments of long-term borrowings (32,136) (21,682)
Proceeds from issuance of common stock 200
Payments of deferred debt costs (7) (604)
-------- --------
Net cash used in financing activities (1,743) (1,086)
-------- --------
Net increase (decrease) in cash (255) 2,309
Cash and cash equivalents at beginning of period 1,457 1,262
-------- --------
Cash and cash equivalents at end of period $ 1,202 $ 3,571
======== ========
See notes to consolidated financial statements
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GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED APRIL 2, 1995 AND APRIL 3, 1994
(Unaudited)
1. BASIS OF PRESENTATION
In the opinion of Management, the accompanying unaudited Consolidated
Financial Statements contain all adjustments, which are of a normal
recurring nature, necessary to present fairly Ground Round Restaurants,
Inc.'s (the "Company") financial position as of April 2, 1995 and the
results of operations for the 13-week and 26-week periods ended April 2,
1995 and April 3, 1994. These financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such regulations, although the Company believes the disclosures provided are
adequate to prevent the information presented from being misleading. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's annual
report on Form 10-K for the year ended October 2, 1994 and Form 10-Q for the
quarterly period ended January 1, 1995.
Certain items in specific captions in the accompanying Consolidated
Financial Statements have been reclassified for comparative purposes.
2. 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 for the
training period before the restaurant opens, are capitalized and amortized
for all restaurants opened in fiscal 1995 and 1994 over the 12-month period
following the restaurant opening. For all restaurants opened prior to
fiscal 1994, costs are amortized over a 24 - month period. The impact of
the change in amortization period was not material on the financial
statements for the quarter and six months ended April 2, 1995.
3. COST OF PRODUCTS SOLD
Cost of products sold comprises the following:
Three Months Ended Six Months Ended
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
---- ---- ---- ----
Food and beverage costs $ 17,958 $ 19,107 $ 37,597 $ 38,829
Labor Costs 18,945 19,110 39,015 38,576
Other Costs 11,915 12,268 24,267 24,548
--------- --------- --------- ---------
$ 48,818 $ 50,485 $ 100,879 $ 101,953
========= ========= ========= =========
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4. LITIGATION
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 bringing 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. Management does not expect that the
resolution of these matters will have a material adverse effect on the
consolidated financial position of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company operated 156 and franchised 44 family-oriented, full service casual
dining restaurants at April 2, 1995.
For purposes of this discussion and analysis, the 26-week periods ended April
2, 1995 and April 3, 1994 are referred to as the first six months ended 1995
and 1994, respectively. The 13-week periods ended April 2, 1995 and April 3,
1994 are referred to as the second quarter of 1995 and 1994, respectively.
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED APRIL 2,
1995 AND APRIL 3, 1994
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:
THREE MONTHS ENDED SIX MONTHS ENDED
April 2, April 3, April 2, April 3,
1995 1994 1995 1994
---- ---- ---- ----
Restaurant revenue 99.1 % 99.2 % 99.1 % 99.1 %
Franchise revenue .9 .8 .9 .9
----- ----- ----- -----
Total Revenue 100.0 100.0 100.0 100.0
Cost of products sold(1) 86.5 85.0 85.3 84.2
Selling, general & administrative 7.3 6.1 7.3 6.4
Depreciation and amortization 6.6 5.6 6.2 5.4
Interest expense, net 2.2 1.6 2.1 1.7
Other (income) expense 1.5 (1.5) 1.4 (.7)
Income (loss) before taxes (3.4) 3.8 (1.5) 3.7
Income taxes (benefit) (1.1) 1.2 (.5) 1.2
Net income (loss) (2.3)% 2.6 % (1.0)% 2.5 %
- - - - ---------------
(1) As a percentage of Company-operated restaurant revenue.
RESTAURANT REVENUE: Restaurant revenue totalled $56.4 million for the quarter
and $118.3 million for the six months ended April 2, 1995, versus $59.4 million
and $121.0 million for the second quarter and six months ended April 3, 1994.
Restaurant revenue is comprised of comparable restaurant revenue (revenue
generated from restaurants open during all of both fiscal years) and non-
comparable restaurant revenue.
Comparable restaurant revenue decreased by 3.6% and 3.0% for the second quarter
and six months ended April 2, 1995, respectively, versus the same periods in
the prior year.
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Non-comparable restaurant revenue decreased $1.1 million in the second quarter
and increased $ .6 million in the six months ended April 2, 1995, respectively,
over the same periods ended April 3, 1994. The decrease in revenue for the
second quarter was due to 11 restaurants that were sold or closed during the
1994 fiscal year and 10 restaurants which were sold or closed during the six
month period ended April 2, 1995. The increase in the revenue for the six
months ended April 2, 1995 is attributable to nine new restaurants opened in
1994 and two new restaurants opened in the first two quarters of 1995, offset
by the 21 restaurants closed during the 1994 and 1995 fiscal years.
FRANCHISE REVENUE: The Company's franchise base consisted of 44 restaurants in
the second quarter of 1995 and 45 restaurants in the second quarter of 1994.
Net revenue from franchise restaurants (consisting of royalties and franchise
fees) were approximately $495,000 for the second quarter and $1.0 million for
the six months ended April 2, 1995, respectively, versus approximately $487,000
and $1.1 million for the second quarter and six months ended April 3, 1994,
respectively. One initial franchise fee of $40,000 was recognized in the
second quarter of 1995.
COST OF PRODUCTS SOLD: Cost of products sold consists of both food and
beverage costs and restaurant operating expenses. Food and beverage costs
totaled 31.8% of Company-operated restaurant revenue in the second quarter and
six months ended April 2, 1995, versus 32.2% and 32.1% for the second quarter
and six months ended April 3, 1994, respectively. Restaurant operating
expenses were 54.7% and 53.5% of Company-operated restaurant revenue in the
second quarter and six months ended April 2, 1995, respectively, versus 52.8%
and 52.1% for the second quarter and six months ended April 3, 1994.
Food and beverage costs as a percentage of revenue decreased by .4% and .3% for
the second quarter and six months ended April 2, 1995, respectively, due to
lower product costs and management's increased efforts on controlling waste and
portions as the Company introduced a new menu in the first quarter of 1995.
Restaurant operating expenses as a percentage of Company-operated restaurant
revenue increased 1.9% and 1.4% for the second quarter and six months ended
April 2, 1995, respectively. Labor costs have increased 1.4% for the second
quarter and 1.1% for the six months ended April 2, 1995, respectively. This
increase is a result of a change last year in the Company's policy on paying
accrued vacation to employees upon termination of employment in conjunction
with the sales shortfall this year resulting in fixed payroll costs increasing
as a percentage of revenue. Other costs have remained at relatively constant
levels with the exception of casualty insurance accruals which have increased
by .5% of restaurant revenue for the second quarter and .3% of restaurant
revenue for the six months ended April 2, 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were 7.3% of total revenue for the second quarter and
six months ended April 2, 1995 as compared with 6.1% and 6.4% for the same
periods in 1994. Selling expenses, comprised of advertising and development
and production costs for point of purchase materials were 1.2% and 1.3% of
total revenue in the second quarter and six months ended April 2, 1995,
respectively, versus .4% and .5% for the second quarter and six months ended
April 3, 1994. The first six months of 1995 included approximately $1.4
million of radio advertising costs as compared to $ .6 million of advertising
costs for television and radio in the first six months of 1994.
General and administrative costs, comprised of restaurant manager training
expenses, regional overhead and corporate administrative costs were 6.1% and
6.0% of total revenue in the second
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quarter and six months ended April 2, 1995, respectively, versus 5.7% and 5.9%
for the same periods in 1994. The six months ended April 2, 1995 reflects a
decrease in corporate bonus expense of .3% offset by increased litigation
expenses of .3% and a decrease in the executive retirement plan of .1% last
year.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expenses were
6.6% and 6.2% of total revenue in the second quarter and six months ended April
2, 1995, respectively, versus 5.6% and 5.4% for the second quarter and six
months ended April 3, 1994. The increase is the result of nine new restaurants
opened during 1994 and two opened in 1995, as well as 106 completed remodels as
of the second quarter of 1995 as compared to 46 completed renovations as of the
second quarter of 1994. In addition, the second quarter of 1995 reflects a one
time expense of $ .2 million for the write-off of pre-construction costs
associated with proposed new locations that were canceled by the Company.
OTHER EXPENSE: The second quarter of 1995 reflects $ .8 million in expenses
related to the resignation of the Company's President, Chief Executive Officer
and Chairman of the Board, and the six months ended April 2, 1995 also reflects
$ .8 million in expenses related to the termination of the Merger Agreement
among the Company, GRR Acquisition Corp. and GRR, Inc., which the parties
entered into on August 23, 1994 and which was terminated on January 13, 1995.
Developments in the high yield financing market prevented the completion of the
financing for the acquisition. The second quarter of 1994 reflects a pre-tax
gain of $1.4 million on the sale of one location offset by the write-off of $
.6 million in expenses associated with a proposed public offering of
convertible subordinated debentures which the Company withdrew due to market
conditions.
INTEREST EXPENSE. Interest expense increased by .6% and .4% of total revenue
for the second quarter and six months ended April 2, 1995 primarily as a result
of higher base and LIBOR interest rates. The Company's weighted average
borrowing rates were 7.82% and 7.36% for the second quarter and six months
ended April 2, 1995, respectively, versus 5.28% and 5.19% for the same periods
in 1994.
INCOME TAXES. The Company's effective income tax rate was 32% in the first
quarter and six months ended April 2, 1995 and April 3, 1994.
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 $16.9 million and $15.3 million as of April 2,
1995 and October 2, 1994, respectively.
Net cash provided by operating activities totalled $5.2 million in the first six
months of 1995 as compared with $10.9 million in the first six months of 1994.
The first six months of 1994 included $4.7 million related to the exchange of an
irrevocable letter of credit for cash casualty insurance reserves. In addition,
the Company generated $3.5 million and $2.0 million through the sale of
restaurant locations during the first six months of 1995 and 1994, respectively.
The Company incurred capital expenditures totaling $7.2 million and $8.7 million
in the first six months of 1995 and 1994, respectively, primarily for new
restaurant construction, restaurant remodeling, and capital maintenance. The
Company has reduced its new restaurant development goals to five new
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restaurants through fiscal 1995.
Pursuant to an amendment dated October 8, 1993, the Company's credit facilities
totalled $70 million, 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 and new store
development which converts to term debt on October 8, 1995. Principal payments
under these facilities begin in October 1995 and are scheduled through July
2000. As of April 2, 1995, the Company has prepaid approximately $5.9 million
of term debt, reducing the total commitment to $64.1 million, and amounts
outstanding under the commitment to approximately $51.5 million.
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.
On May 10, 1995 the Company and its banks amended the financial covenants
related to fixed charges coverage and the ratio of funded debt to free operating
cash flow to be less restrictive, and eliminated the interest charges coverage
covenant to accommodate the effects of the Company's recent results. In
addition, the Company permanently reduced the revolving commitment to $11.4
million until October 8, 1995, at which time up to $4.7 million outstanding
under the revolving commitment will be converted to term debt and the revolving
facility is reduced to $6.7 million, of which $4.7 million is available for
letters of credit and $2.0 million is available for advances. The revolving
facility terminates on January 15, 1999. Finally, the Company has agreed to
enter into no new restaurant commitments until the fixed charge coverage ratio
exceeds 2.50 to 1 for two consecutive quarters.
The Company expects to incur approximately $13 million in capital expenditures
during fiscal 1995. Management believes that existing cash, cash flow from
operations, and available borrowings under the credit facilities will be
sufficient to meet operating needs for anticipated capital expenditures, and to
service debt requirements during fiscal 1995.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 24, 1994, a suit styled as Perry v. O'Donnell, et al, Civil
Action No. 94-4648 G, 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. The suit, which was brought by a
purported shareholder seeking to be certified as a representative of
a class of shareholders, alleged in substance that the members of the
Board of Directors acted in breach of their fiduciary duty to the
Company's shareholders in connection with the proposed merger of the
Company pursuant to an Agreement and Plan of Merger dated August 23,
1994 among the Company, GRR, Inc. and GRR Acquisition Corp., as
amended on November 16, 1994. On September 13, 1994, a similar suit
styled Weinstein v. Ground Round Restaurants, Inc., Civil Action No.
94-4714 A was brought by another purported shareholder. Both of
these suits were voluntarily dismissed with prejudice on February 3,
1995.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following nominees for the Board of Directors, each to be elected
for the ensuing fiscal year and until his successor is elected and
qualified, were elected at the Annual Meeting of Shareholders on
March 31, 1995:
FOR WITHHELD
--- --------
Michael P. O'Donnell 10,336,291 26,888
J. Eric Hanson 10,336,822 26,357
Robert E. Lee 10,336,822 26,357
David J.P. Meachin 10,336,822 26,357
Stanley J. Moss 10,335,822 26,357
Thomas J. Russo 10,336,822 26,357
Daniel J. Scoggin 10,335,422 27,757
No other matters were submitted to a vote of security holders.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Title
-------- -----
Exhibit No. 10.39 Third Amendment, dated as of May
10, 1995, to the 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 Chemical
Bank as Co-Agent, and the banks
named therein.
Exhibit No. 10.40 Separation Agreement, dated as of
April 3, 1995, between the Company
and Michael P. O'Donnell
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(b) The Company filed a report on Form 8-K dated January 13, 1995
to report under Item 2, "Acquisition or Disposition of Assets",
that Ground Round Restaurants, Inc. and GRR Acquisition Corp.
announced on January 13, 1995 that effective that they,
together with GRR Inc. entered into a Termination Agreement
dated January 13, 1995 to terminate the Merger Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GROUND ROUND RESTAURANTS, INC.
Date: May 17, 1995 By: /s/ Michael R. Jorgensen
------------------------
Senior Vice President, Chief Financial
Officer and Treasurer
duly authorized