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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 July 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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
August 8, 1995: 11,173,421
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JULY 2, 1995 AND OCTOBER 2, 1994
(Dollars in thousands, except per share amounts)
1995 1994
---- ----
(Unaudited)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,290 $ 1,457
Receivables, net of allowances for uncollectible
accounts of $724 and $276 in 1995 and 1994, respectively 1,238 1,511
Inventories 2,608 2,577
Prepaid expenses and other current assets 2,171 2,249
-------- --------
Total current assets 7,307 7,794
Property and equipment:
Land 10,240 11,203
Buildings and leasehold improvements 120,240 120,034
Machinery and equipment 40,693 39,867
-------- --------
171,173 171,104
Accumulated depreciation and amortization 51,058 43,531
-------- --------
Property and equipment, net 120,115 127,573
Other assets 20,229 21,405
-------- --------
$147,651 $156,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 5,476 $ 7,107
Accrued expenses 12,648 14,900
Income taxes 201
Current portion of long-term debt and capital lease obligations 6,066 902
-------- --------
Total current liabilities 24,190 23,110
Long-term debt and capital lease obligations 51,020 57,868
Deferred income taxes 1,346 3,080
Other long-term liabilities 7,697 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 11,164,000 in 1995 and
11,114,000 shares in 1994 1,861 1,852
Additional paid-in capital 57,838 57,631
Retained earnings 3,699 5,649
-------- --------
63,398 65,132
Deferred Officer Compensation (96)
-------- --------
Total stockholders' equity 63,398 65,036
-------- --------
$147,651 $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 NINE MONTHS ENDED
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
---- ---- ---- ----
Revenue $56,145 $60,670 $175,480 $182,754
------- ------- -------- --------
COSTS AND EXPENSES:
Cost of products sold 48,914 50,407 149,792 152,360
Selling, general and administrative 3,412 3,634 12,099 11,435
Depreciation and amortization 3,652 3,402 11,098 10,038
Interest expense, net 1,284 958 3,762 3,013
Other expense (income) (32) (77) 1,597 (978)
------- ------- -------- --------
57,230 58,324 178,348 175,868
------- ------- -------- --------
Income (loss) before taxes (1,085) 2,346 (2,868) 6,886
Income taxes (benefit) (347) 751 (918) 2,203
------- ------- -------- --------
NET INCOME (LOSS) $ (738) $ 1,595 $ (1,950) $ 4,683
======= ======= ======== ========
Weighted average common shares 11,159 11,113 11,129 11,107
outstanding
NET INCOME (LOSS) PER COMMON
SHARE $ (.07) $ .14 $ (.18) $ .42
======= ======= ======== ========
See notes to consolidated financial statements.
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GROUND ROUND RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED JULY 2, 1995 AND JULY 3, 1994
(Dollars in thousands)
(Unaudited)
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,950) $ 4,683
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 11,370 10,288
Deferred taxes (1,734) 559
Gain on disposition of assets (2,061)
Other 96 68
Change in operating assets and liabilities:
Accounts receivable 397 (148)
Inventories and prepaid expenses 47 3,336
Accounts payable and other liabilities (1,895) (1,458)
-------- ---------
Net cash provided by operating activities 6,331 15,267
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,259) (13,371)
Proceeds on sale of property & equipment 4,053 3,811
Purchase of liquor license (547)
Sale of liquor license 176
Deposits received (paid) 176 (111)
Pre-opening costs (386) (616)
--------- ---------
Net cash used in investing activities (5,240) (10,834)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 44,800 23,500
Payments of long-term borrowings (46,033) (26,375)
Proceeds from issuance of common stock 216 59
Payments of deferred debt costs (241) (705)
--------- ---------
Net cash used in financing activities (1,258) (3,521)
--------- ---------
Net increase (decrease) in cash (167) 912
Cash and cash equivalents at beginning of period 1,457 1,262
-------- --------
Cash and cash equivalents at end of period $ 1,290 $ 2,174
======== ========
See notes to consolidated financial statements.
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GROUND ROUND RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JULY 2, 1995 AND JULY 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 July 2, 1995 and the
results of operations for the 13-week and 39-week periods ended July 2,
1995 and July 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 consolidated 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 April 2, 1995.
Certain items in specific captions in the accompanying consolidated
financial statements have been reclassified for comparative purposes.
2. COST OF PRODUCTS SOLD
Cost of products sold comprises the following:
THREE MONTHS ENDED NINE MONTHS ENDED
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
---- ---- ---- ----
Food and beverage costs $18,164 $19,105 $ 55,760 $ 57,934
Labor Costs 18,586 19,158 57,601 57,734
Other Costs 12,164 12,144 36,431 36,692
------- ------- -------- --------
$48,914 $50,407 $149,792 $152,360
======= ======= ======== ========
3. 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 155 and franchised 47 family-oriented, full service casual
dining restaurants at July 2, 1995.
For purposes of this discussion and analysis, the 39-week periods ended July 2,
1995 and July 3, 1994 are referred to as the nine months ended 1995 and 1994,
respectively. The 13-week periods ended July 2, 1995 and July 3, 1994 are
referred to as the third quarter of 1995 and 1994, respectively.
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JULY 2,
1995 AND JULY 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 restaurant
revenue, as indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
July 2, July 3, July 2, July 3,
1995 1994 1995 1994
---- ---- ---- ----
Restaurant revenue 98.8% 99.1% 99.0% 99.1%
Franchise revenue 1.2 .9 1 .0 .9
----- ----- ----- -----
Total Revenue 100.0 100.0 100.0 100.0
Cost of products sold (1) 88.2 83.8 86.2 84.1
Selling, general & administrative 6.1 6.0 6.9 6.3
Depreciation and amortization 6.5 5 .6 6 .3 5.5
Interest expense, net 2.3 1 .6 2 .1 1.6
Other (income) expense (.1) ( .1) .9 (.5)
Income (loss) before taxes (1.9)% 3 .9% (1.6)% 3.8%
Income taxes (benefit) (.6) 1 .3 ( .5) 1.2
Net income (loss) (1.3)% 2 .6% (1.1)% 2.6%
<FN>
(1) As a percentage of restaurant revenue.
RESTAURANT REVENUE: Restaurant revenue totaled $55.5 million for the third
quarter and $173.8 million for the nine months ended July 2, 1995, versus $50.1
million and $181.2 million for the third quarter and nine months ended July 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 (revenue generated from new locations not
yet open during more than one full fiscal year and from closed locations).
Comparable restaurant revenue decreased by 7.1% and 4.3% for the third quarter
and nine months ended
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July 2, 1995, respectively, versus the same periods in the prior year.
Non-comparable restaurant revenue decreased $.8 million in the third quarter
and decreased $ .4 million in the nine months ended July 2, 1995, respectively,
over the same periods ended July 3, 1994. Since the beginning of fiscal 1994,
the Company has sold or closed 23 restaurants and opened 12 restaurants.
FRANCHISE REVENUE: The Company's franchise base consisted of 47 restaurants in
the third quarter of 1995 and 44 restaurants in the third quarter of 1994. Net
revenue from franchise restaurants (consisting of royalties and franchise fees)
were approximately $663,000 for the third quarter and $1.7 million for the nine
months ended July 2, 1995, respectively, versus approximately $528,000 and $1.6
million for the third quarter and nine months ended July 3, 1994, respectively.
Three initial franchise fees totaling $115,000 were recognized in the third
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 32.7% and 32.1% of restaurant revenue in the third quarter and nine
months ended July 2, 1995, respectively, versus 31.8% and 32.0% for the third
quarter and nine months ended July 3, 1994, respectively. Restaurant operating
expenses were 55.5% and 54.1% of restaurant revenue in the third quarter and
nine months ended July 2, 1995, respectively, versus 52.0% and 52.1% for the
third quarter and nine months ended July 3, 1994.
Food and beverage costs as a percentage of restsurant revenue increased by .9%
and .1% for the third quarter and nine months ended July 2, 1995, respectively,
due to increased lettuce costs caused by flooding in California during the
third quarter of 1995.
Restaurant operating expenses as a percentage of restaurant revenue increased
3.1% and 2.0% for the third quarter and nine months ended July 2, 1995,
respectively. Labor costs as a percentage of Company-operated restaurant
revenue increased 1.6% for the third quarter and 1.2% for the nine months ended
July 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 decrease in sales this year which
resulted in fixed payroll costs increasing as a percentage of revenue. Other
costs have remained at relatively constant dollar levels in conjunction with
the decrease in sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were 6.1% and 6.9% of total revenue for the third
quarter and nine months ended July 2, 1995 as compared with 6.0% and 6.3% for
the same periods in 1994. Selling expenses, comprised of advertising and
development and production costs for point of purchase materials were .4% and
1.0% of total revenue in the third quarter and nine months ended July 2, 1995,
respectively, versus .7% and .6% for the third quarter and nine months ended
July 3, 1994. The first nine months of 1995 included approximately $1.7
million of radio advertising costs as compared to $1.0 million of advertising
costs for television and radio in the first nine months of 1994.
General and administrative costs, comprised of restaurant manager training
expenses, regional overhead and corporate administrative costs were 5.7% and
5.9% of total revenue in the third quarter and nine months ended July 2, 1995,
respectively, versus 5.3% and 5.7% for the same periods in 1994. General and
administrative costs for the third quarter and nine months ended July 2, 1995
have remained relatively constant in dollars spent compared to the same periods
in 1994.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expenses were
6.5% and 6.3% of total revenue in the third quarter and nine months ended July
2, 1995, respectively, versus 5.6% and 5.5%
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for the third quarter and nine months ended July 3, 1994. The increase is the
result of nine new restaurants opened during 1994 and two opened in 1995, as
well as 110 completed renovations as of the third quarter of 1995 as compared
to 62 completed renovations as of the third quarter of 1994. In addition, the
nine months ended July 2, 1995 reflects a one-time expense of $ .2 million for
the write-off of pre-construction costs associated with proposed new locations
that the Company chose not to pursue.
OTHER EXPENSE: The nine months ended July 2, 1995 reflects $ .8 million in
expenses related to the resignation of the Company's President, Chief Executive
Officer and Chairman of the Board, and $ .8 million in expenses related to the
termination of the Merger Agreement among Ground Round, 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 nine
months ended July 3, 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 .7% and .5% of total revenue
for the third quarter and nine months ended July 2, 1995 primarily as a result
of higher base and LIBOR interest rates. The Company's weighted average
borrowing rates were 8.1% and 7.6% for the third quarter and nine months ended
July 2, 1995, respectively, versus 5.5% and 5.3% for the same periods in 1994.
INCOME TAXES. The Company's effective income tax rate was 32% in the first
quarter and nine months ended July 2, 1995 and July 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
July 2, 1995 and October 2, 1994, respectively.
Net cash provided by operating activities totaled $6.3 million in the first
nine months of 1995 as compared with $15.2 million in the first nine months of
1994. The first nine 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 $4.0 million and $3.8 million
through the sale of restaurant locations during the first nine months of 1995
and 1994, respectively. The Company incurred capital expenditures totaling
$9.3 million and $13.4 million during the first nine months of 1995 and 1994,
respectively, primarily for new restaurant construction, restaurant remodeling,
and capital maintenance. The Company adjusted its new restaurant development
goals to a total of three new restaurants during fiscal 1995, which were
constructed and are in operation as of July 2, 1995.
Pursuant to an amendment dated October 8, 1993, the Company's credit facilities
totaled $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 July 2, 1995, the Company has prepaid approximately $6.3 million
of term debt. Amounts outstanding under the facilities total approximately
$53.1 million.
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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 second quarter
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.
In connection with its third fiscal quarter results, the Company requested and
obtained a waiver from its banks with respect to technical defaults under the
funded debt to free operating cash flow covenant and net worth covenant.
Continuing adverse operating results may cause non-compliance in the future.
The Company expects to incur approximately $10.2 million in capital
expenditures during fiscal 1995. Management believes that existing cash and
cash flow from operations 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 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Title
-------- -----
10.41 Employment Agreement, dated as of
July 21, 1995, between the Company
and Daniel R. Scoggin.
(b) No reports on Form 8-K were filed during the third quarter of
fiscal 1995.
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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: August 15, 1995 By: /s/ Michael R. Jorgensen
-------------------------------------
Senior Vice President, Chief Financial
Officer and Treasurer duly
authorized