-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, D0Z/mzGRaP6Du83KYT46QKj9F+5iisJzEUCSy7mLPmmKCDVVM3p5cgET9tKeE3pd 1+KT0fPzZrsQbLrqjujvNw== 0000950135-94-000726.txt : 19941228 0000950135-94-000726.hdr.sgml : 19941228 ACCESSION NUMBER: 0000950135-94-000726 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19941002 FILED AS OF DATE: 19941221 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GROUND ROUND RESTAURANTS INC CENTRAL INDEX KEY: 0000051467 STANDARD INDUSTRIAL CLASSIFICATION: 5812 IRS NUMBER: 135637682 STATE OF INCORPORATION: NY FISCAL YEAR END: 0929 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06192 FILM NUMBER: 94565615 BUSINESS ADDRESS: STREET 1: 35 BRAINTREE HILL OFFICE PARK STREET 2: PO BOX 9078 CITY: BRAINTREE STATE: MA ZIP: 02184-9078 BUSINESS PHONE: 6173803100 MAIL ADDRESS: STREET 1: 35 BRAINTREE HILL OFFICE PARK CITY: BRAINTREE STATE: MA ZIP: 02184-9078 FORMER COMPANY: FORMER CONFORMED NAME: GR FOODS INC DATE OF NAME CHANGE: 19910626 FORMER COMPANY: FORMER CONFORMED NAME: INTERNATIONAL PROTEINS CORP DATE OF NAME CHANGE: 19900614 FORMER COMPANY: FORMER CONFORMED NAME: MARINE & ANIMAL BY PRODUCTS CORP DATE OF NAME CHANGE: 19700806 10-K 1 GROUND ROUND RESTAURANTS, INC. FORM 10-K 1 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. 2 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
(i) 3 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 -1- 4 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. -2- 5 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- -3- 6 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. -4- 7 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, -5- 8 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 -6- 9 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. -7- 10 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 -8- 11 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. -9- 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
-10- 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 -11- 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 -12- 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. -13- 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 (a) Annualized to a 52 week year
-14- 17 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% (1) As a percentage of Company-operated restaurant revenue.
-15- 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. -16- 19 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 -17- 20 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 -18- 21 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. -19- 22 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 -20- 23 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 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. -21- 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 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. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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. -22- 25 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 (C) REPORTS ON FORM 8-K 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. 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 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. 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 44 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 ======== ======= ======= ===== ======== (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 ======= ======== ====== ===== ======= (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 (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 EX-2.1 2 AGREEMENT & PLAN OF MERGER 1 EXHIBIT 2.1 APPENDIX A ---------- Agreement and Plan of Merger by and among Ground Round Restaurants, Inc., GRR, Inc. and GRR Acquisition Corp. dated as of August 23, 1994 2 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of August 23, 1994 ("Agreement" or "Merger Agreement"), by and among GRR, Inc., a Delaware corporation ("Parent"), GRR Acquisition Corp., a New York corporation and a wholly owned subsidiary of Parent ("Purchaser"), and Ground Round Restaurants, Inc., a New York corporation (the "Company"). ARTICLE I THE MERGER 1.1 Merger. ------ 1.1.1 MERGER. Subject to the terms and conditions hereof and in accordance with the applicable provisions of the New York Business Corporation Law (the "NYBCL"), (a) Purchaser will be merged with and into the Company at the Effective Time (as defined in Section 1.1.2) and the separate corporate existence of Purchaser will thereupon cease (the "Merger") and (b) each of the Company and Parent will use its best efforts to cause the Merger to be consummated as soon as practicable after satisfaction, or waiver if permitted, of the conditions hereof. 1.1.2 EFFECTIVE TIME. As soon as practicable following fulfillment or waiver of the conditions specified in Article V, and provided that this Agreement has not been terminated pursuant to Section 6.1, the Company and Purchaser (the "Constituent Corporations") will cause a Certificate of Merger (the "Certificate of Merger") to be filed with the Secretary of State of the State of New York as provided in Section 904 of the NYBCL. The Merger will become effective at the time that the Certificate of Merger has been filed with the Secretary of State of the State of New York in accordance with Section 104 of the NYBCL (the "Effective Time"). 1.1.3 EFFECT OF MERGER. The Company will be the surviving corporation in the Merger (sometimes hereinafter referred to as the "Surviving Corporation"), and the separate corporate existence of Purchaser will cease. The Certificate of Incorporation (the "Certificate") and the By-laws (the "By-laws") of the Company in effect at the Effective Time will be amended at the Effective Time by incorporating the language from Purchaser's certificate of incorporation and by-laws, which by-laws shall contain the provisions required by Section 4.6.1. The directors of Purchaser immediately prior to the Effective Time will be the directors of the Surviving Corporation, and unless the Company and Parent otherwise agree, the officers of Purchaser immediately prior to the Effective Time will be the officers of the Surviving Corporation, from and after the Effective Time, to serve in accordance with the NYBCL and the terms of the Surviving Corporation's certificate of incorporation and by-laws. The consummation of the Merger will have the effects provided in the NYBCL with respect to mergers of two domestic corporations. 1.1.4 CONVERSION OF SHARES. At the Effective Time, (a) each then-outstanding share of Company common stock, par value $.16-2/3 per share (a "Share"), not owned by 3 Parent, Purchaser or any other direct or indirect subsidiary of Parent and other than any Shares held in the treasury of the Company and Dissenting Shares, as defined in Section 1.6, will be cancelled and retired and will be converted into a right only to receive in cash an amount per Share in U.S. dollars equal to nine dollars ($9.00) (the "Merger Price"), (b) each then-outstanding Share owned by Parent, Purchaser or any other direct or indirect subsidiary of Parent will be cancelled and retired, and no payment will be made with respect thereto, (c) each Share issued and held in the Company's treasury will be cancelled and retired, and no payment will be made with respect thereto, and (d) each then-outstanding share of common stock of Purchaser will be converted into and become a share of common stock of the Surviving Corporation, which thereafter will constitute all of the issued and outstanding shares of capital stock of the Surviving Corporation. 1.2 CONSUMMATION OF THE MERGER. The closing of the Merger (the "Closing") will take place (a) at the Boston offices of Nutter, McClennen & Fish as promptly as practicable after the later of (i) the day of (and immediately following) adoption and approval of this Agreement by the Company's shareholders and (ii) the day on which the last of the conditions set forth in Article V hereof is satisfied or, if permitted, duly waived, or (b) at such other time and place and on such other date as Purchaser and the Company may agree. 1.3 PAYMENT FOR SHARES. Purchaser will authorize the depositary for the Offer (or one or more commercial banks organized under the laws of the United States or any state thereof with capital, surplus and undivided profits of at least $100,000,000) to act as Paying Agent hereunder with respect to the Merger (the "Paying Agent"). Each holder (other than Parent, Purchaser or any other direct or indirect subsidiary of Parent) of a certificate or certificates which prior to the Effective Time represented outstanding Shares will be entitled to receive, upon surrender to the Paying Agent of such certificate or certificates for cancellation and subject to any required withholding of taxes, the aggregate amount of cash into which the Shares previously represented by such certificate or certificates will have been converted in the Merger. Immediately prior to the Closing, Parent and Purchaser will make available to the Paying Agent sufficient funds to make all payments pursuant to the immediately preceding sentence, and the Paying Agent shall certify to the Company receipt of such funds. Pending payment of such funds to the holders of Shares, such funds shall be held and invested by the Paying Agent as Parent directs. Any net profit resulting from, or interest or income produced by, such investments will be payable to the Surviving Corporation or Parent, as Parent directs. Parent will promptly replace any monies lost through any investment made pursuant to this Section 1.4. Following the Effective Time, each certificate which immediately prior to the Effective Time represented outstanding Shares (other than Dissenting Shares and Shares owned by Parent, Purchaser or any other direct or indirect subsidiary of Parent) will be deemed for all corporate purposes to evidence only the right to receive upon such surrender the aggregate amount of cash into which the Shares represented thereby will have been converted in the Merger as set forth in Section 1.1.4, subject to any required withholding of taxes. No interest will be paid on the cash payable upon the surrender of the certificates. Any cash delivered or made available to the Paying Agent pursuant to this Section 1.4 and not exchanged for certificates representing Shares -2- 4 within one hundred eighty (180) days after the Effective Time will be returned by the Paying Agent to the Surviving Corporation which thereafter will act as Paying Agent, subject to the rights of holders of unsurrendered certificates representing Shares under this Article I, and any former shareholders of the Company who have not theretofore complied with the instructions for exchanging their certificates representing Shares will thereafter look only to the Surviving Corporation for payment of their claim for the consideration set forth in Section 1.1, without any interest thereon, but will have no greater rights against the Surviving Corporation (or either Constituent Corporation) than may be accorded to general creditors thereof under applicable law. Notwithstanding the foregoing, neither the Paying Agent nor any party hereto will be liable to a holder of Shares for any cash or interest thereon delivered to a public official pursuant to applicable abandoned property laws. Promptly after the Effective Time (but in any event no later than the next business day after the Effective Time), the Paying Agent will mail to each record holder of certificates which immediately prior to the Effective Time represented Shares (the "Certificates") a form of letter of transmittal (the "Transmittal Letter") and instructions for use thereof in surrendering such Certificates which will specify that delivery will be effected, and risk of loss and title to the Certificates will pass, only upon proper delivery of the Certificates to the Paying Agent in accordance with the terms of delivery specified in the Transmittal Letter and instructions for use thereof in surrendering such Certificates and receiving the Merger Price for each Share previously represented thereby. 1.4 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Company will be closed and no transfer of Shares will thereafter be made. If, after the Effective Time, Certificates are presented to the Surviving Corporation, they will be cancelled, retired and exchanged for cash as provided in Section 1.3, subject to applicable law in the case of Dissenting Shares. 1.5 STOCK OPTIONS AND RELATED MATTERS. Immediately prior to the Effective Time, each outstanding stock option (a "Company Option") granted under the Company's 1989 Stock Option Plan or 1992 Equity Incentive Plan (collectively referred to as the "Option Plans"), whether or not then exercisable, shall be cancelled by the Company and each holder of a cancelled Company Option shall be entitled to receive from the Company, in cancellation and settlement of the Company Option, an amount equal to the product of (i) the number of Shares previously subject to the Company Option and (ii) the excess, if any, of the Merger Price over the exercise price per Share previously subject to the Company Option (the "Option Consideration"). Unless on at least five (5) business days' advance notice Purchaser requests and the holder of a Company Option agrees for no consideration to either amend or terminate such Company Option effective as of the Effective Time, as of the Effective Time, each holder of a Company Option will be entitled to receive only an amount equal to the applicable Option Consideration. 1.6 DISSENTERS' RIGHTS. Notwithstanding anything in this Agreement seemingly to the contrary, any Shares which are issued and outstanding immediately prior to the Effective Time and which are held by shareholders of the Company who have not voted such Shares in -3- 5 favor of the adoption of this Agreement and who have delivered a written demand for the payment of the fair cash value of such Shares in the manner provided in Section 623 of the NYBCL ("Dissenting Shares") will not be converted as described in Section 1.1.4 but will thereafter constitute only the right to receive payment of the fair cash value of such Shares in accordance with the provisions of Section 623 of the NYBCL; PROVIDED, HOWEVER, that (i) if any holder of Dissenting Shares subsequently withdraws such holder's demand for payment of the fair cash value of such Shares, (ii) if any holder fails to comply with such Section 623, or (iii) if the Surviving Corporation and any holder of Dissenting Shares have not come to an agreement as to the fair cash value of such holder's Dissenting Shares, and neither such holder of Dissenting Shares nor the Surviving Corporation has filed or joined in a petition demanding a determination of the value of all Dissenting Shares within the period provided in Section 623 of the NYBCL, the right of each such holder to receive such fair cash value will terminate, and upon the expiration of the rights of such holder pursuant to Section 623 of the NYBCL, such Shares will thereupon be deemed to have been extinguished and to have been converted, as of the Effective Time, into the right to receive the Merger Price, without interest. Persons who have perfected statutory rights with respect to Dissenting Shares as aforesaid will not be paid by the Surviving Corporation as provided in this Agreement and will have only such rights as are provided by Section 623 of the NYBCL with respect to such Shares. Notwithstanding anything in this Agreement to the contrary, if Parent or Purchaser abandons or is finally enjoined or prevented from carrying out this Agreement, the right of each holder of Dissenting Shares to receive the fair cash value of such Dissenting Shares in accordance with Section 623 of the NYBCL will terminate, effective as of the time of such abandonment, injunction, prevention or rescission. ARTICLE II REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent and Purchaser hereby jointly and severally represent and warrant to the Company that: 2.1 ORGANIZATION. Parent is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has all requisite power and authority to own, lease and operate its properties and assets and to carry on its business as it is now being conducted. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as it is now being conducted. Parent is the sole legal and beneficial owner of all of the outstanding capital stock of Purchaser. 2.2 AUTHORITY. Each of Parent and Purchaser has the requisite power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly approved by each of the Boards of Directors of Parent and Purchaser and by Parent as the sole shareholder of Purchaser and no -4- 6 other proceedings on the part of Parent or Purchaser are necessary to consummate the transactions so contemplated. This Agreement has been duly executed and delivered by each of Parent and Purchaser and constitutes a valid and binding obligation of each of Parent and Purchaser, enforceable against Parent and Purchaser in accordance with its terms. 2.3 MERGER PROXY STATEMENT. None of the information supplied in writing by Parent, Purchaser or any other affiliate of Purchaser expressly for inclusion in any proxy or information statement of the Company required to be mailed to the Company's shareholders in connection with the Merger (the "Merger Proxy Statement"), or in any amendments or supplements thereto, will, at the time of (a) the first mailing thereof and (b) the meeting of shareholders to be held in connection with the Merger, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 2.4 FEES. Neither Parent nor Purchaser nor any other direct or indirect subsidiary of Parent has paid or become obligated to pay any fee or commission to any broker or finder in connection with the transactions contemplated hereby. 2.5 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution and delivery of this Agreement by Parent and Purchaser nor the consummation by Parent and Purchaser of the transactions contemplated hereby will (a) conflict with, or result in any breach or violation of, any provision of their respective certificates of incorporation or by-laws (or comparable governing instruments), or (b) violate, conflict with, breach, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien or other encumbrance upon any of the properties or assets of Parent or any of its subsidiaries under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Parent or any such subsidiary is a party or to which they or any of their respective properties or assets are subject, except for such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens or other encumbrances, that, individually or in the aggregate, will not have a material adverse effect on the business or financial condition of Parent and its subsidiaries, taken as a whole, or (c) require any consent, approval, authorization or permit of or from, or filing with or notification to, any court, governmental authority or other regulatory or administrative agency or commission, domestic or foreign ("Governmental Entity"), except (i) pursuant to the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "Exchange Act"), (ii) filing the Certificate of Merger, (iii) filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), or (iv) consents, approvals, authorizations, permits, filings or notifications which, if not obtained or made, will not have a material adverse effect, individually or in the aggregate, on the business or financial condition of Parent and its subsidiaries, taken as a whole. -5- 7 2.6 FINANCING. The letter from Bear Stearns & Co. Inc. ("Bear Stearns") dated August 22, 1994 and set forth as SCHEDULE 2.6(A) (the "Bear Stearns Letter") regarding (i) up to one hundred million dollars ($100,000,000) of senior unsecured notes (the "Senior Note Financing") and (ii) up to forty million dollars ($40,000,000) of subordinated discount notes (the "Discount Note Letter" and "Discount Note Financing") has not been withdrawn, amended, modified or qualified as of the date hereof. The letter from 399 Ventures, Inc. dated August 22, 1994 and set forth as SCHEDULE 2.6(B) (the "399 Ventures Letter") regarding certain equity and subordinated debt financing (the "Parent Financing") has not been withdrawn, amended, modified or qualified as of the date hereof. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to each of Parent and Purchaser that, except as otherwise disclosed to Parent and Purchaser prior to the execution hereof: 3.1 CORPORATE ORGANIZATION. The Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and is in good standing as a foreign corporation in each jurisdiction where failure to so qualify or be in good standing is reasonably likely to have a material adverse effect on the business or financial condition of the Company and its subsidiaries, taken as a whole. The Company and each of its subsidiaries has the requisite corporate power to own, lease and operate their respective properties and assets and to carry on their respective businesses as they are now being conducted. The subsidiaries listed on SCHEDULE 3.1 are all of the subsidiaries of the Company, and each subsidiary listed on SCHEDULE 3.1 is a direct or indirect wholly owned subsidiary of the Company. The Company has filed with the Securities and Exchange Commission (the "Commission") pursuant to the Exchange Act true and correct copies of its Certificate and By-laws, as amended to the date hereof. The Company's Certificate and By-laws as so filed are in full force and effect. 3.2 CAPITALIZATION. As of the date hereof, the authorized capital stock of the Company consists of (i) 35,000,000 Shares and (ii) 30,000 shares of Cumulative Preferred Stock, par value $100 per share ("Preferred Shares"). As of the close of business on the date hereof, (a) 11,113,269 Shares were issued and outstanding, (b) no Preferred Shares were issued and outstanding and (c) Company Options to purchase an aggregate of 628,461 Shares were outstanding pursuant to the Option Plans. All issued and outstanding Shares are validly issued, fully paid and nonassessable and are not subject to preemptive rights. Since the close of business on the date hereof, the Company has not issued any additional Shares or any Preferred Shares other than pursuant to the exercise of Company Options, has not granted any additional Company Options, and has not modified outstanding Company Options, except as expressly contemplated in this Agreement. As of the date hereof, except for Shares and Preferred Shares, there are no shares of capital stock of the Company authorized, issued or outstanding, and except for the Company Options, there are no outstanding subscriptions, options, warrants, puts, calls, rights, convertible securities, -6- 8 exchangeable securities or any other agreements or commitments of any character relating to the issued or unissued capital stock or other securities of the Company obligating the Company to issue, deliver or sell, or cause to be issued, delivered or sold, additional shares of capital stock of the Company or obligating the Company to grant, extend or enter into any subscription, option, warrant, right, convertible security or other similar agreement or commitment, except as disclosed on SCHEDULE 3.2. There are no voting trusts or other agreements or understandings to which the Company or, to best of the Company's knowledge, any other person is a party with respect to the voting of the capital stock of the Company, except as disclosed on SCHEDULE 3.2. There are no stock appreciation rights, phantom stock or other similar arrangements or understandings to which the Company is a party. 3.3 AUTHORITY. The Company has the requisite corporate power and authority to execute and deliver this Agreement and, except for any required vote of the Company's shareholders, to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly approved by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement or to consummate the transactions so contemplated, subject to the extent required with respect to the consummation of the Merger, to the adoption and approval of this Agreement by the shareholders of the Company. This Agreement has been duly executed and delivered by, and constitutes a legal, valid and binding obligation of, the Company, enforceable against the Company in accordance with its terms. 3.4 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution, delivery nor performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby will (a) conflict with, violate, result in any breach, termination, acceleration or violation of any obligation under, or constitute a default under, any provision of the Certificate or By-laws, or (b) violate, conflict with, breach, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the creation of any lien or other encumbrance upon any of the properties or assets of the Company under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or any of its subsidiaries is a party or to which they or any of their respective properties or assets are subject, except for such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens or other encumbrances that, individually or in the aggregate, will not have a material adverse effect on the business or financial condition of the Company and its subsidiaries, taken as a whole, or that are described on SCHEDULE 3.4, or (c) require any consent, waiver, approval, authorization or permit of or from, or filing with or notification to, any Governmental Entity, except (i) pursuant to the Exchange Act, (ii) filing the Certificate of Merger, (iii) filings under the HSR Act, (iv) consents, approvals, waivers, authorizations, permits, filings or notifications which, if not obtained or made will not have a material adverse effect, individually or in the aggregate, on the business or -7- 9 financial condition of the Company and its subsidiaries, taken as a whole, or (v) as disclosed on SCHEDULE 3.4 hereto. 3.5 COMMISSION FILINGS AND FINANCIAL STATEMENTS. The Company has heretofore filed all reports, registration statements and other documents including, without limitation, any financial statements and schedules included therein, with the Commission required to be filed with the Commission under the rules and regulations of the Commission since September 29, 1991 (the "SEC Documents"). The SEC Documents (a) did not (as of their respective filing dates) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading and (b) complied as to form in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act, as applicable. The audited and unaudited consolidated financial statements, together with the notes thereto, of the Company included (or incorporated by reference) in the SEC Documents complied in all material respects with Commission requirements as of the respective dates thereof and fairly presented the financial position of the Company and its consolidated subsidiaries, in each case as of the dates thereof, and the results of their operations and changes in financial position for the periods then ended in accordance with, and have been prepared in accordance with, generally accepted accounting principles applied on a consistent basis (except as stated in such financial statements), subject, in the case of the unaudited financial statements, to year-end adjustments and to the disclaimers contained in footnote 1 to the financial statements contained in the Company's Quarterly Reports on Form 10-Q previously filed with the Commission. 3.6 GOVERNMENTAL AUTHORIZATIONS. The Company and each of its subsidiaries has all licenses, permits, approvals, and other authorizations (collectively, "Governmental Authorizations") from all Governmental Entities as are necessary for the conduct of its business and operations, except for Governmental Authorizations where the failure to obtain such would not have a material adverse effect, either individually or in the aggregate, on the Company's consolidated financial condition or business, and all Governmental Authorizations which the Company or any of its subsidiaries has are in full force and effect and are not subject to any material condition, qualification or limitation. Neither the Company nor any of its subsidiaries has received any notification from any agency, department or instrumentality (or the staff thereof) of any Governmental Entity asserting noncompliance in any material respect with any of the laws, rules, regulations or orders that such governmental authority enforces or threatening to revoke any Governmental Authorization. 3.7 OWNED REAL ESTATE. Except as disclosed in the SEC Documents filed prior to the date of this Agreement, the Company or one of its subsidiaries has good, clear and marketable title to all the properties and assets either reflected in the latest audited balance sheet included in such SEC Documents as being owned by the Company or one of its subsidiaries or acquired after the date thereof, which are material to the Company's business on a consolidated basis (except properties sold or otherwise disposed of since the date thereof -8- 10 in the ordinary course of business), free and clear of all claims, liens, charges, security interests or encumbrances of any nature whatsoever, except (i) as set forth on SCHEDULE 3.7, (ii) statutory liens securing payments not yet due and (iii) such imperfections or irregularities in title or such claims, liens, charges, security interests or encumbrances as do not materially affect the use of the properties or assets subject thereto or affected thereby or otherwise materially affect the Company's business operations at such properties. 3.8 REAL ESTATE LEASES. SCHEDULE 3.8 hereof sets forth a list of (a) all leases and subleases under which the Company or its subsidiaries is lessor or lessee of any real property together with all amendments, supplements, nondisturbance agreements and other agreements that are in effect as of the date of this Agreement; (b) all material options held by the Company or its subsidiaries or contractual obligations on the part of the Company or its subsidiaries to purchase or acquire any interest in real property; and (c) all options granted by the Company or its subsidiaries or contractual obligations on the part of the Company or its subsidiaries to sell or dispose of any material interest in real property. There exists no default or event of default, violation, occurrence, condition or act on the part of the Company or any subsidiary, or, to the best knowledge of the Company, on the part of any other party thereto, which, with or without the giving of notice or lapse of time or both, would have a material adverse effect upon the condition (financial or otherwise), properties, assets, business, results of operations or prospects of the Company and its subsidiaries, taken as a whole. The Company has not granted any liens on any of the leasehold interests set forth on SCHEDULE 3.8 except for (i) liens reflected in the balance sheet included in the July 3, 1994 Form 10-Q, (ii) liens consisting of zoning or planning restrictions, easements, permits and other restrictions or limitations on the use of real property which do not materially detract from the value of, or materially impair the use of, such property by the Company or its subsidiaries in the operation of their respective businesses, (iii) liens for current taxes, assessments or governmental charges or levies on property not yet delinquent, (iv) statutory liens securing payments not yet due and (v) liens which do not materially affect the operation of the business of the Company and any subsidiaries, taken as a whole, or as may be set forth on SCHEDULE 3.8. 3.9 COMPLIANCE WITH LAWS. The Company and its subsidiaries have complied with and are not in violation of applicable federal, state or local statutes, laws and regulations, including, without limitation, any applicable building, zoning, health, sanitation, safety, labor relations or other law, ordinance or regulation, other than violations, if any, which would not have a material adverse effect on the condition (financial or otherwise), properties, assets, business, results of operations or prospects of the Company and its subsidiaries, taken as a whole. Neither the Company nor any subsidiary has failed to obtain any license, permit, franchise or other governmental authorization which is applicable to its respective operations, except for licenses, permits, franchises or other governmental authorizations the failure of which to obtain would not have a material adverse effect on the condition (financial or otherwise), properties, assets, business, results of operation or prospects of the Company and its subsidiaries, taken as a whole. -9- 11 3.10 ENVIRONMENTAL PROTECTION. There are no pending or, to the best knowledge of the Company, threatened, actions or claims against the Company or any of its current or, to the best knowledge of the Company, former subsidiaries arising out of the presence or release into the environment of any chemicals, pollutants or contaminants related to the operations of the Company or its current or former subsidiaries or arising in connection with any of the properties owned by them or as to which the Company or any subsidiary or former subsidiary of the Company is or could be a potentially responsible party under applicable law, except for such matters which would not have a material adverse effect on the condition (financial or otherwise), properties, assets, business, results of operation or prospects of the Company and its subsidiaries, taken as a whole. 3.11 NO UNDISCLOSED LIABILITIES. There is no liability or obligation of the Company or any subsidiary of any nature, whether absolute, accrued, contingent or otherwise, which, individually or in the aggregate, is material to the Company and its subsidiaries, taken as a whole, other than (i) the liabilities and obligations reflected on the balance sheet contained in the July 3, 1994 Form 10-Q and (ii) all liabilities and obligations of the Company incurred since July 3, 1994 in the ordinary course of business. There is no prepayment premium with respect to any of the Company's outstanding indebtedness for borrowed money. 3.12 FEES. Except as described on SCHEDULE 3.12 hereto, neither the Company nor any of its subsidiaries has paid or become obligated to pay any fee or commission to any broker or finder in connection with the transactions contemplated hereby. 3.13 ABSENCE OF MATERIAL ADVERSE CHANGES. Since July 3, 1994, neither the Company nor any of its subsidiaries has undergone or suffered any changes in its condition (financial or otherwise), properties, assets, business, results of operations or prospects which have been, or may reasonably be anticipated to be, individually or in the aggregate, adverse to the Company, except for such changes which, individually or in the aggregate, would not have a material adverse effect on the condition (financial or otherwise), properties, assets, business or results of operation of the Company and its subsidiaries, taken as a whole. 3.14 FAIRNESS OPINION. The Board of Directors of the Company has received an opinion from Smith Barney Inc. ("Smith Barney") to the effect that, as of the date hereof, the Merger Price is fair, from a financial point of view, to the holders of the Shares (the "Fairness Opinion"). 3.15 SHAREHOLDER AGREEMENT. A majority of the members of the Company's Board of Directors that have not been designated by HM Holdings, Inc. ("HMH") have taken all action necessary to approve, including in accordance with Section 3.2(b) of that certain Stockholder Agreement between HMH and the Company dated as of August 1, 1991, (i) HMH's grant of an option and irrevocable proxy to Parent and Purchaser pursuant to that Shareholder Agreement by and among Parent, Purchaser and HMH dated as of the date hereof and as set forth as SCHEDULE 3.15 (the "Shareholder Agreement") and (ii) the -10- 12 performance by HMH of its obligations under the terms and conditions of the Shareholder Agreement in effect as of the date hereof. ARTICLE IV COVENANTS 4.1 CONDUCT OF THE BUSINESS OF THE COMPANY PRIOR TO THE EFFECTIVE TIME. The Company agrees that, prior to the Effective Time and except as described on SCHEDULE 4.1, otherwise consented to or approved in writing by Purchaser or expressly permitted by this Agreement: (a) the businesses of the Company and its subsidiaries shall be conducted in all material respects only in, the Company and its subsidiaries shall not take any action except in, and the Company and its subsidiaries shall maintain their facilities in, the ordinary course of business and consistent with immediate past practice; (b) the Company shall not (i) amend its Certificate or By-Laws, (ii) issue or sell any securities (including any options, warrants, convertible or exchangeable securities, stock appreciation rights, phantom stock or similar rights) or otherwise change the number of authorized, issued or outstanding shares of its capital stock other than the issuance of Shares upon exercise of any Company Options, (iii) declare, set aside or pay any dividend or other distribution or payment (whether in cash, stock or property) with respect to, or make any direct or indirect redemption, retirement, purchase or other acquisition of any shares of capital stock or options issued by, the Company (except as contemplated by Section 1.5); or (iv) enter into any arrangement or contract with respect to the purchase or voting of shares of its capital stock, or adjust, split, combine or reclassify any of its capital stock or other securities; (c) the Company shall, and shall cause each of its subsidiaries to, (i) use its best efforts to preserve intact its business organization and operations, keep available the services of its operating personnel, and preserve the goodwill of those having business relationships with each of them, (ii) make whatever repairs and maintenance that may be necessary to maintain their properties in substantially their present condition and (iii) conduct relations with its employees, including, without limitation, termination and hiring practices, only in the ordinary course of business and consistent in all material respects with immediate past practice; PROVIDED, however, that any inability of the Company or any of its subsidiaries to keep available the services of such operating personnel or to maintain any such business relationship despite its aforesaid best efforts to do so shall not constitute a breach of this Section 4.1(c); -11- 13 (d) the Company or any of its subsidiaries will not, directly or indirectly, (i) increase the compensation payable or to become payable by it to any of its officers, directors or employees (except increases for non-officer employees in the ordinary course of business consistent in all material respects with immediate past practice or as required by collective bargaining agreements), (ii) make any payment or provision (except as required by existing plans or agreements, disclosed on SCHEDULE 4.1(d) or contemplated by Section 1.5) with respect to, or adopt or amend, any bonus, profit sharing, pension, retirement, severance (including "golden parachutes"), deferred compensation, employment or other payment plan, agreement or arrangement for the benefit of employees of the Company or any of its subsidiaries, (iii) grant any stock options or stock appreciation rights, (iv) enter into or amend any employment or consulting agreement, except that nothing contained in this clause (iv) shall prohibit the Company from terminating a consulting agreement with any person who is not a senior management employee of the Company, (v) make any loan or advance to, or enter into any written contract, lease or commitment with, any officer or director of the Company or its subsidiaries, other than routine advances to employees in the ordinary course of business and consistent in all material respects with immediate past practice, (vi) encumber or pledge any of the respective assets of the Company or any of the subsidiaries, or make any acquisition of assets or securities, except in the ordinary course of business and consistent in all material respects with immediate past practice, (vii) incur any long-term or short-term debt for borrowed money from any bank or lending institution, except pursuant to existing credit agreements in the ordinary course of business and consistent in all material respects with immediate past practice, (viii) assume, guarantee, endorse or otherwise become responsible for the obligations of any other individual, firm or corporation or make any loans or advances to any individual, firm or corporation, except in the ordinary course of business and consistent in all material respects with immediate past practice, (ix) enter into any contract or agreement or effect any transaction or commitment relating to the assets or business (including the acquisition or disposition of any substantial assets) of the Company or relinquish any contract or other right which, in each case, is material to the Company, other than the transactions, commitments and relinquishments disclosed on SCHEDULE 4.1 or contemplated by this Agreement, (x) enter into any material new leases for real property or terminate any of the lease agreements identified on SCHEDULE 3.8 except in the ordinary course of business and consistent in all material respects with immediate past practice or (xi) make any loan, or make any distribution or other transfer of assets to or from the Company or any of its subsidiaries from or to any shareholder or Affiliate (which term for purposes of this Agreement shall have the meaning set forth in Rule 405 of the Commission promulgated under the Securities Act) of the Company or of any subsidiary, except for any distribution or transfer to or from the Company or any of its wholly owned subsidiaries from or to any wholly owned subsidiary; (e) the Company shall use its best efforts to cause its current insurance (or reinsurance) policies not to be cancelled or terminated or any of the coverage -12- 14 thereunder to lapse, unless simultaneously with such termination, cancellation or lapse replacement policies providing coverage substantially similar to the coverage under the cancelled, terminated or lapsed policies for substantially similar premiums are in full force and effect; or (f) authorize or enter into an agreement to do any of the things not permitted under this Section 4.1. Notwithstanding the foregoing, the Company may incur costs, expenses, obligations or liabilities in connection with any Qualifying Acquisition Proposal (as defined in Section 4.9) including, without limitation, costs, expenses, obligations or liabilities incurred in the prosecution of, or defense against, any cause of action related thereto or any costs, expenses, obligations or liabilities incurred from activities permitted by Section 4.9. 4.2 ACCESS AND INFORMATION. The Company will afford to Parent and its agents, accountants, representatives and representatives of its potential financing sources such access during normal business hours throughout the period prior to the Effective Time to the Company's properties, contracts, commitments, books, records, personnel and to such other information concerning its business as Parent reasonably requests. Parent shall, and shall cause each of its agents, accountants and representatives of its potential financing sources to, hold in confidence all such non-public information in accordance with the provisions of the Letter Agreement between Smith Barney Inc., as agent for the Company, and Parent, dated June 21, 1994 (the "Letter Agreement"), and if this Agreement is terminated, Parent and its agents, accountants and representatives of its potential financing sources shall redeliver or otherwise provide for all such information and other materials as required pursuant to the Letter Agreement. 4.3 CERTAIN FILINGS, CONSENTS AND ARRANGEMENTS. Parent, Purchaser and the Company will (a) promptly, but in any event within fifteen (15) days, make their respective filings, and will thereafter use their best efforts promptly to make any required submissions, under the HSR Act with respect to the Merger and the other transactions contemplated by this Agreement and (b) cooperate with one another (i) in promptly determining whether any filings are required to be made or consents, approvals, permits or authorizations are required to be obtained under any other federal, state or foreign law or regulation and (ii) in promptly making any such filings, furnishing information required in connection therewith and seeking timely to obtain any such consents, approvals, permits or authorizations. 4.4 ACTIONS OF DIRECTORS AND SHAREHOLDERS. The Company shall take all action necessary in accordance with the NYBCL and its Certificate and By-Laws to convene promptly a special meeting of its shareholders (the "Special Meeting") to consider and vote upon this Agreement and the Merger, subject to the exercise by the Board of Directors of the Company of its fiduciary duties consistent with the provisions of Section 4.9. The Merger Proxy Statement shall contain the recommendation of the Board of Directors of the Company -13- 15 in favor of the Merger and the adoption and approval of this Agreement, subject to the Board of Directors' exercise of its fiduciary duties consistent with the provisions of Section 4.9. The Company shall, if and to the extent requested by Purchaser, use all reasonable efforts to solicit from shareholders of the Company proxies in favor of such adoption and approval and shall take any other reasonable action. The Company shall use its best efforts to take all action necessary for the Merger not to be subject to any state anti-takeover statute. At the Special Meeting, all of the Shares then owned by Parent, Purchaser or any other direct or indirect subsidiary of Parent, if any, will be voted in favor of adoption of this Agreement. 4.5 MERGER PROXY STATEMENT. The Company shall use all reasonable efforts to prepare and file with the Commission as promptly as practicable, and in any event within fifteen (15) business days after the date of this Agreement, and have cleared by the Commission and promptly thereafter mail to its shareholders the Merger Proxy Statement, which shall include, subject to the exercise by the Board of Directors of the Company of its fiduciary duties consistent with the provisions of Section 4.9, a recommendation by the Board of Directors that the Company's shareholders adopt and approve this Agreement and which shall include all information required under applicable laws to be furnished to the stockholders of the Company in connection with the transactions contemplated hereby, shall comply as to form in all material respects with all applicable requirements of federal securities laws and shall be in form reasonably satisfactory to Purchaser and its counsel. The Company shall request Smith Barney to prepare and, subject to Smith Barney's consent, shall include in the Merger Proxy Statement a letter from Smith Barney, dated the date of the Merger Proxy Statement, confirming its Fairness Opinion. The Merger Proxy Statement shall include all information and statements which the Company or the Purchaser reasonably believes to be necessary for inclusion therein but shall not, in the reasonable opinion of the Company or the Purchaser, include any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Company shall notify Purchaser promptly of the receipt by it of any comments of the Commission and of any requests for supplements to the Merger Proxy Statement and will supply Purchaser with copies of all correspondence between it and its representatives, on the one hand, and the Commission or the members of its staff, on the other hand, with respect to the Merger Proxy Statement. The Company shall use its best efforts to obtain and furnish the information required to be included in the Merger Proxy Statement, and the Company, after consultation with Purchaser, shall use its best efforts to respond promptly to any comments made by the Commission with respect to the Merger Proxy Statement and any preliminary version thereof. Parent, Purchaser and the Company will cooperate with each other in the preparation of the Merger Proxy Statement; without limiting the generality of the foregoing, Parent and Purchaser will furnish to the Company in writing the information relating to Parent and Purchaser required by the Exchange Act to be set forth in the Merger Proxy Statement. -14- 16 4.6 Indemnification and Insurance. ----------------------------- 4.6.1 BY-LAWS. The by-laws of the Surviving Corporation will contain the provisions with respect to indemnification set forth in Article Ninth of the Certificate and Article XI of the By-laws, as in effect on the date hereof, which provisions will not be amended for a period of six years from the Effective Time in any manner that would adversely affect the rights thereunder of any person who, immediately prior to the Effective Time, is a current or former director, officer, employee or agent of the Company, except if such amendment is required by law. 4.6.2 PARENT INDEMNITY. From and after the Effective Time, Parent shall indemnify, defend and hold harmless each person who, immediately prior to the Effective Time, is a current or former officer or director of the Company or any of its subsidiaries or who prior to the Effective Time acted as a fiduciary under any employee benefit plan (each an "Indemnified Party") against all losses, claims, damages or liabilities arising out of acts or omissions occurring at or prior to the Effective Time to the fullest extent permitted under the NYBCL and the Certificate or By-laws (to the extent consistent with applicable law), including, without limitation, provisions relating to advances of expenses incurred in the defense of any action or suit; PROVIDED, HOWEVER, that such Indemnified Parties as a group may retain only one law firm to represent them in any jurisdiction with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issues between the positions of any two or more Indemnified Parties. Without limiting the foregoing, Parent shall periodically advance expenses as incurred with respect to the foregoing to the fullest extent permitted under applicable law provided that the Indemnified Party to whom the expenses are advanced provides an undertaking to repay such advance if it is ultimately determined that such person is not entitled to indemnification. 4.6.3 INSURANCE. Prior to the Effective Time, Parent or Purchaser shall have purchased a noncancellable run-off policy for officers' and directors' liability insurance (the "D&O Policy") providing such coverage for persons who, immediately prior to the Effective Time, were current or former directors or officers of the Company, which insurance shall commence as of, and continue for a period of six years after, the Effective Time and shall be no less favorable in scope and amount of coverage than the Company's existing officers' and directors' liability insurance and provided by an insurer of no lesser financial standing than the Company's existing insurer; PROVIDED, HOWEVER, that Parent and Purchaser shall have no obligation under this Section to pay more than two hundred twenty-five thousand dollars ($225,000) (the "D&O Limit"), and PROVIDED FURTHER that if the cost of the D&O Policy exceeds the D&O Limit, the Company will be entitled to modify, in its sole discretion, the terms and conditions of the D&O Policy such that the cost of the D&O Policy does not exceed the D&O Limit. 4.6.4 DETERMINATION. Any determination which is required to be made with respect to whether an Indemnified Party's conduct complies with the standards set forth under New York law, the Certificate or the By-laws and any decision which is made as to -15- 17 the necessity for such determination shall be made by independent counsel approved by the Indemnified Party; PROVIDED, HOWEVER, that the Indemnified Parties as a group shall designate one independent counsel with respect to each such matter. The fees and expenses of such counsel will be paid by Parent or the Surviving Corporation promptly after the submission of invoices by such counsel in accordance with its standard practices. 4.7 EMPLOYEE BENEFIT MATTERS. (a) Parent will provide, or cause the Surviving Corporation to provide, employees of the Company with pension, health, medical, disability, life insurance, severance and other similar employee benefits under employee benefit plans (as such term is defined under Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended), immediately following the Effective Time, which are competitive with industry practice. Notwithstanding the foregoing, except as otherwise expressly contemplated by this Agreement, nothing herein shall require the Surviving Corporation to maintain any particular plan or arrangement following the Effective Time or shall be construed to obligate Parent or the Surviving Corporation to issue to employees of the Company, or adopt any plans or arrangements to provide for the issuance of, any shares of its capital stock or any options, warrants, stock appreciation rights or other rights in respect of any shares of its capital stock or any securities convertible into or exchangeable for such shares. (b) From and after the Effective Time, Parent agrees to cause the Surviving Corporation to honor in accordance with the terms thereof the employment, severance, consulting, retirement and deferred compensation agreements or arrangements existing on the date hereof to which the Company or any subsidiary is a party, including, without limitation, the Company's non-qualified deferred compensation plan and its non-qualified retirement plan. Prior to the Effective Time, Parent agrees not to take or to permit Purchaser or any other affiliate of Parent to take any action inconsistent with the immediately preceding sentence. (c) The Company will terminate or amend, in a manner satisfactory to Parent and certain holders of Company Option, the Company Options held by such persons; PROVIDED, HOWEVER, that such termination or amendment will take effect immediately prior to Effective Time. The Company agrees to take all action necessary to fully vest the restricted stock held by the Company's Chief Executive Officer and all Company Options issued and outstanding as of the date hereof, in each case effective no later than immediately prior to the Effective Time. 4.8 ADDITIONAL AGREEMENTS. Upon the terms and subject to the conditions herein provided, each of the parties hereto agrees to use its best efforts to take or cause to be taken all action, to do or cause to be done, and to assist and cooperate with the other party hereto in doing, all things necessary, proper or advisable under applicable laws and regulations, to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated hereby, including, but not limited to, (i) the obtaining of all necessary actions or inactions, waivers, consents and approvals from the applicable Governmental Entities and the making of all necessary registrations and filings, (ii) the obtaining of all necessary -16- 18 consents, approvals or waivers from third parties, (iii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby and (iv) the execution and delivery of such instruments, and the taking of such other actions as the other party hereto may reasonably require in order to carry out the intent of this Agreement and any agreements entered into between the parties pursuant to this Agreement. If, at any time after the Effective Time, the Surviving Corporation considers or is advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of either of the Constituent Corporations acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or otherwise to carry out the purposes of this Agreement, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of each of the Constituent Corporations or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of each of the Constituent Corporations or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation or otherwise to carry out the purposes of this Agreement. 4.9 NO SOLICITATION. The Company shall immediately cease, and cause each of its, and its subsidiaries', representatives, agents and advisors to terminate, any existing activities, discussions or negotiations previously conducted with any parties other than Parent and Purchaser with respect to any Alternative Transaction (as defined in Section 6.10); and the Company shall not, and shall cause each of its, and its subsidiaries', officers, directors, representatives, agents and advisors not to, solicit or encourage inquiries or proposals with respect to, or furnish any non-public information relating to or participate in any negotiations or discussions concerning, any proposal regarding an acquisition or purchase of all or a substantial portion of the assets of, or a substantial equity interest in, the Company or any of its subsidiaries or any merger or other business combination with the Company or any of its subsidiaries or any recapitalization involving the Company or any of its subsidiaries resulting in an extraordinary dividend or distribution to the Company's shareholders or a self-tender for or the redemption of some or all of the Shares (hereinafter collectively referred to as an "Acquisition Proposal") other than as contemplated by this Section 4.9. Notwithstanding the immediately preceding sentence, neither the Company nor its Board of Directors shall be prohibited from (i) engaging in discussions or negotiations with a third party which has made in writing a bona fide Acquisition Proposal which satisfies the conditions set forth in the proviso of this sentence (a "Qualifying Acquisition Proposal") and thereafter providing to such third party information previously provided or made available to Parent, provided the third party shall have entered into a confidentiality agreement substantially similar to the Letter Agreement, (ii) following receipt of a Qualifying Acquisition Proposal, taking and disclosing to its shareholders a position contemplated by Rule 14e-2(a) under the Exchange Act or otherwise making disclosure of the Qualifying Acquisition Proposal to its shareholders or (iii) following receipt of a Qualifying Acquisition Proposal, withdrawing its -17- 19 recommendation referred to in Section 4.4 or adjourning or otherwise postponing the Special Meeting; PROVIDED, HOWEVER, that the Company shall engage, and shall permit its, and its subsidiaries', officers, directors, representatives, agents and advisors to engage, in any of the activities referred to in clauses (i) through (iii) of this sentence only to the extent that the Board of Directors of the Company (or an authorized committee thereof) shall have determined in good faith that such action is required under the fiduciary duties owed by the Board of Directors of the Company to the shareholders of the Company on the basis of a written opinion from the Company's counsel and a written analysis of the Acquisition Proposal by its financial advisor Smith Barney which analysis shall include a comparison of the financial terms of such Acquisition Proposal and the transactions contemplated in this Agreement. The Company shall notify Parent promptly if any Acquisition Proposal is received by, or any such negotiations or discussions are sought to be initiated with, the Company or any of its subsidiaries regarding an Acquisition Proposal and shall disclose to Parent the identity of the third party making such Acquisition Proposal and the terms and conditions thereof. 4.10 FINANCING. Parent and Purchaser shall each use its best efforts to obtain within ten (10) business days after the date of this Agreement a commitment letter from Chemical Bank, N.A. or other lender reasonably satisfactory to Parent (the "Revolving Credit Facility Letter") regarding between twenty million dollars ($20,000,000) to twenty-five million dollars ($25,000,000) under a revolving credit facility (the "Revolving Credit Facility" and together with the Senior Note Financing, the Discount Note Financing and the Parent Financing, the "Financing"). Parent and Purchaser shall each use its best efforts to complete the negotiation of definitive agreements (collectively, the "Definitive Financing Agreements") relating to the Financing and containing customary terms and conditions; and Parent or Purchaser shall deliver to the Company copies of such agreements promptly after they have been executed. In the event that Parent or Purchaser learns that any portion of the financing to be made available by any party which has committed to provide financing to Parent or Purchaser becomes unavailable or is likely to become unavailable, regardless of the reason therefor, Parent and Purchaser will each as promptly as practicable so notify the Company in writing and will use its best efforts to obtain alternative financing from other sources. Each of Parent and Purchaser shall use its best efforts to satisfy, as promptly as practicable, all requirements of its agreements relating to the Financing that are conditions to consummating the Financing and to drawing down the cash proceeds thereunder. The Company covenants and agrees to cooperate with Parent and Purchaser in negotiating (to the extent requested by Parent and Purchaser) the Definitive Financing Agreements and in furnishing all information reasonably required in connection with the negotiation and implementation thereof. 4.11 NOTICE OF ADVERSE CHANGES. The Company will promptly advise Parent and Purchaser in writing, and keep Parent and Purchaser fully informed, of (i) any inability or perceived inability by the Company to perform or comply with the terms or conditions of this Agreement or (ii) any event which may reasonably be expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue, or in -18- 20 any of the conditions to the Merger set forth in Article V not being satisfied, or in a violation of any provision of this Agreement. 4.12 PUBLICITY. The initial press release announcing this Agreement will be a joint press release substantially in the form set forth on SCHEDULE 4.12, and thereafter the Company and Parent will consult with each other prior to issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and in making any filings with any Governmental Entity or with any national securities exchange with respect thereto. ARTICLE V CONDITIONS 5.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The obligations of Parent, Purchaser and the Company to consummate the Merger are subject to the satisfaction of the following conditions, none of which may be waived: 5.1.1 SHAREHOLDER APPROVAL. Holders of at least two-thirds of the Shares shall have voted in favor of the adoption of this Agreement in accordance with the applicable provisions of the NYBCL. 5.1.2 INJUNCTIONS; ILLEGALITY. The consummation of the Merger shall not be prohibited by any order, injunction, decree or ruling of a court of competent jurisdiction or any domestic Governmental Entity (each party agreeing to use its respective best efforts to obtain the stay or removal of any of the foregoing), and there shall not have been any statute, rule or regulation enacted, promulgated or deemed applicable to the Merger by any Governmental Entity which would prevent the consummation of the Merger. 5.1.3 GOVERNMENTAL APPROVALS AND CONSENTS. All approvals of or filings with any Governmental Entity required to permit the consummation of the Merger shall have been obtained. 5.1.4 NOTICE FROM PAYING AGENT. Notice shall have been received by the Company from the Paying Agent stating that the necessary funds for payment of Shares shall have been made available to the Paying Agent, as required by Section 1.4. 5.2 CONDITIONS TO THE OBLIGATIONS OF PARENT AND PURCHASER. The obligations of Parent and Purchaser to consummate the Merger are further subject to the satisfaction, at or prior to the Closing, of the following conditions, any one or more of which may be waived by Parent and Purchaser: 5.2.1 FINANCING. Parent and Purchaser shall have obtained the proceeds of the financing necessary to consummate the transactions contemplated by this Agreement on terms and conditions reasonably satisfactory to Parent. With respect to the Senior Note Financing, -19- 21 the Discount Note Financing, the Revolving Credit Facility and the Parent Financing, the condition set forth in this Section 5.2.1 shall be satisfied if Parent and Purchaser shall be able to obtain such financing on terms and conditions substantially similar to those set forth in the Bear Stearns Letter, the Revolving Credit Facility Letter and the 399 Ventures Letter, respectively. 5.2.2 ACCURACY OF THE COMPANY'S REPRESENTATIONS. The representations and warranties of the Company contained herein shall be true and correct in all material respects as of the date hereof and as of the Closing with the same effect as though all such representations and warranties had been made as of the Closing, except (x) for any such representations and warranties made as of a specified date, which shall be true and correct as of such date, or (y) as expressly contemplated by this Agreement. 5.2.3 ABSENCE OF CERTAIN CHANGES. Since July 3, 1994, there shall not have been any material adverse change in the business, assets, financial condition or results of operations of the Company and its subsidiaries, considered as a whole. 5.2.4 SATISFACTION OF THE COMPANY'S COVENANTS. Each and all of the agreements and covenants of the Company to be performed and complied with pursuant to this Agreement prior to the Closing shall have been duly performed and complied with in all material respects. 5.2.5 CERTAIN THIRD PARTY AND GOVERNMENTAL APPROVALS AND CONSENTS. All approvals or consents of, waivers by or filings with third parties, including without limitation Governmental Entities, required to permit the Company to operate its business in the ordinary course immediately after the Effective Time substantially as it shall have been operated prior to the Effective Time, shall have been obtained, except for those approvals or filings which, if not obtained or made prior to the Effective Time, would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. For purposes of this provision, the inability to transfer or otherwise retain liquor licenses for restaurants which, during the fiscal year ending October 2, 1994, provided in the aggregate six percent (6%) or more of the consolidated revenue of the Company and its subsidiaries, taken as a whole, constitutes a material adverse effect. 5.2.6 DISSENTING SHARES. There shall not be more than 587,000 Dissenting Shares as of the Closing. 5.2.7 CERTIFICATES. The Company will furnish Parent and Purchaser with such certificates of its officers or others and such other documents to evidence fulfillment of the conditions set forth in this Section 5.2 as Parent and Purchaser may reasonably request. 5.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to consummate the Merger are further subject to the satisfaction, at or prior to the -20- 22 Closing, of the following conditions, any one or more of which may be waived by the Company: 5.3.1 FAIRNESS OPINION. The Company shall have received written confirmation from Smith Barney, dated as of the date the Merger Proxy Statement, which satisfies the criteria set forth in Section 4.5, is first to be mailed to the Company's shareholders, that Smith Barney has not withdrawn or, in any material respect, amended or modified the Fairness Opinion; PROVIDED, HOWEVER, that the Company shall be deemed to waive the condition set forth in this Section by mailing the Merger Proxy Statement without such confirmation from Smith Barney. 5.3.2 ACCURACY OF PARENT AND PURCHASER'S REPRESENTATIONS. The representations and warranties of Parent and Purchaser contained herein shall be true and correct in all material respects as of the date hereof and as of the Closing with the same effect as though all such representations and warranties had been made as of the Closing, except (x) for any such representations and warranties made as of a specified date, which shall be true and correct as of such date, or (y) as expressly contemplated by this Agreement. 5.3.3 SATISFACTION OF PARENT AND PURCHASER'S COVENANTS. Each and all of the agreements and covenants of Parent and Purchaser to be performed and complied with pursuant to this Agreement prior to the Closing shall have been duly performed and complied with in all material respects. 5.3.4 CERTIFICATES. Parent and Purchaser will furnish the Company with such certificates of its officers or others and such other documents to evidence fulfillment of the conditions set forth in this Section 5.3 as the Company may reasonably request. ARTICLE VI MISCELLANEOUS 6.1 TERMINATION. This Agreement may be terminated and the Merger contemplated hereby may be abandoned (a) by the mutual consent of the boards of directors of Parent, Purchaser and the Company; (b) by the Company, if Parent or Purchaser is in material breach of any of the representations and warranties, covenants or obligations contained in this Agreement or the Letter Agreement and, in the case of a material breach of any covenant or obligation, such breach has not been cured within ten (10) business days after the Company has notified Parent of such breach; (c) by the Parent or Purchaser, if the Company is in material breach of any representations and warranties, covenants or obligations contained in this Agreement and, in the case of a material breach of any covenant or obligation, such breach has not been cured within ten (10) business days after Parent has notified the Company of such breach; (d) by either Parent and Purchaser, on the one hand, or the Company, on the other hand, if the Merger is not consummated prior to December 31, 1994 (the "Expiration Date"); PROVIDED, HOWEVER, that the right to terminate this Agreement under this Section 6.1(d) shall not be available to any party whose failure to fulfill any -21- 23 obligation under this Agreement has been the primary cause of, or primarily results in, the failure of the Merger to have been consummated within such period; (e) by either Parent and Purchaser, on the one hand, or the Company, on the other hand, if the holders of at least two-thirds of the Shares fail to adopt this Agreement at the Special Meeting as required by applicable law; (f) by either Parent and Purchaser, on the one hand, or the Company, on the other hand, if either one is prohibited by an order or injunction (other than an order or injunction issued on a temporary or preliminary basis) of a court of competent jurisdiction from consummating the Merger and all means of appeal and all appeals from such order or injunction have been finally exhausted; (g) by the Company, if the Company receives a Qualifying Acquisition Proposal prior to shareholder adoption of this Agreement; PROVIDED, HOWEVER, that a condition to the effectiveness of the termination of this Agreement and the abandonment of the Merger pursuant to clause (g) of this sentence is the payment of the Fee and Expenses (each as defined in Section 6.10); (h) by the Parent or Purchaser upon at least five (5) business days' notice, if within ten (10) business days after the Board of Directors of the Company (x) withdraws or modifies its recommendation referred to in Section 4.4 or (y) adjourns or otherwise postpones the Special Meeting, the Board of Directors of the Company has not renewed its recommendation in favor of the Merger and the adoption and approval of this Agreement; or (i) by the Company, if the condition set forth in Section 5.3.1 shall not have been satisfied. In the event of any termination and abandonment pursuant to this Section 6.1, no party hereto (or any of its directors or officers) will have any liability or further obligation to any other party to this Agreement, except for obligations in this Section 6.1, 6.10 and under the last sentence of Section 4.2 and except that nothing herein will relieve any party from liability for any breach of this Agreement. Notwithstanding clause (d) of the second preceding sentence, if the conditions set forth in Sections 5.1.2, 5.2.2, 5.2.3 and 5.2.4 have been satisfied, either the Company or Parent may extend the Expiration Date by up to thirty (30) days if the condition set forth in Section 5.2.5 has not been satisfied due to the inability to transfer or otherwise retain liquor licenses. 6.2 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The representations and warranties or agreements in this Agreement will terminate at the Effective Time or upon the earlier termination of this Agreement pursuant to Section 6.1, as the case may be; PROVIDED, HOWEVER, that if the Merger is consummated, Sections 1.5, 2.4, 4.6, 4.7 and 4.8 will survive the Effective Time to the extent contemplated by such Sections, and PROVIDED FURTHER that Section 6.10, the Letter Agreement, the first sentence of Section 6.9 and the last sentences of Sections 4.2 and 6.12 will in all events survive any termination of this Agreement. 6.3 WAIVER AND AMENDMENT. Subject to the applicable provisions of the NYBCL, any provision of this Agreement may be waived at any time by the party which is, or whose shareholders are, entitled to the benefits thereof, and this Agreement may be amended or supplemented at any time, provided that no amendment will be made after any shareholder adoption of this Agreement which (i) alters or changes the Merger Price, (ii) alters or changes any term of the certificate of the Surviving Corporation, or (iii) alters or changes any of the terms or conditions of this Agreement, if such alteration or change would -22- 24 adversely affect the holders of any class or series of securities of either Constituent Corporation, without further shareholder adoption. No such waiver, amendment or supplement will be effective unless in a writing which makes express reference to this Section 6.3 and is signed by the party or parties sought to be bound thereby. 6.4 ENTIRE AGREEMENT. This Agreement contains the entire agreement by and among Parent, Purchaser and the Company with respect to the Merger and the other transactions contemplated hereby, and supersedes any prior agreements among the parties with respect to such matters, other than the Letter Agreement which remains in full force and effect. 6.5 APPLICABLE LAW. This Agreement will be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflict of laws thereof. 6.6 INTERPRETATION. For purposes of this Agreement, (a) a "subsidiary" of a corporation means any corporation more than 50% of the outstanding voting securities of which are directly or indirectly owned by such other corporation, (b) the descriptive headings contained herein are for convenience and reference only and will not affect in any way the meaning or interpretation of this Agreement, (c) words in the singular include the plural and vice versa, (d) masculine pronouns include feminine and neuter versions thereof, and (e) references to Sections (other than Sections of the Exchange Act and the NYBCL) and Schedules are references to Sections in and Schedules to this Agreement. 6.7 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery) or by facsimile (with a copy provided by overnight courier) to the parties as follows (or to such other addresses and facsimile numbers as shall be specified by the parties by like notice): If to the Company to: Ground Round Restaurants, Inc. 35 Braintree Office Hill Park Braintree, MA 02184-9078 Fax: (617) 380-3207 Attention: Chairman, President and Chief Executive Officer -23- 25 With copies to: Ground Round Restaurants, Inc. 35 Braintree Office Hill Park Braintree, MA 02184-9078 Fax: (617) 380-3207 Attention: Frank M. Puthoff, Senior Vice President, General Counsel and Secretary and Nutter, McClennen & Fish One International Place Boston, Massachusetts 02110-2699 Fax: (617) 973-9748 Attention: Constantine Alexander, Esq. If to Parent or Purchaser to: NEWCO c/o 399 Ventures, Inc. 399 Park Avenue New York, New York 10022 Fax: (212) 888-2940 Attention: Harold Rosser With a copy to: Kirkland & Ellis Citicorp Center 153 East 53rd Street New York, New York 10022 Fax: (212) 446-4900 Attention: Kirk A. Radke, Esq. 6.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one agreement, and shall become effective when one or more counterparts have been signed by each party and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 6.9 PARTIES IN INTEREST; ASSIGNMENT. Except for Sections 1.5, 4.1(d), 4.6 and 4.7 (which are intended to be for the benefit of the persons referred to therein and their beneficiaries, and may be enforced by such persons as intended third-party beneficiaries), -24- 26 this Agreement is not intended to nor will it confer upon any other person (other than the parties hereto) any rights or remedies, and this Agreement is binding upon and is solely for the benefit of the parties hereto and their respective successors, legal representatives and assigns. Purchaser will have the right (a) to assign to Parent or any direct or indirect wholly owned subsidiary of Parent any and all rights and obligations of Purchaser under this Agreement, including without limitation the right to substitute in its place Parent or such a subsidiary as one of the Constituent Corporations in the Merger (such subsidiary assuming all of the obligations of Purchaser in connection with the Merger), provided that any such assignment will not relieve Parent or Purchaser from any of its obligations hereunder, and (b) to transfer to Parent or to any direct or indirect wholly owned subsidiary of Parent the right to purchase Shares tendered pursuant to the Offer, provided that any such transfer will not relieve Purchaser from any of its obligations hereunder. 6.10 EXPENSES. (a) The Company shall pay Parent a fee of three million dollars ($3,000,000) (the "Fee") (i) if the Merger does not occur and the Company consummates an Alternative Transaction (as hereinafter defined) pursuant to a definitive agreement entered into within one year from the date of this Agreement or (ii) prior to the Company's termination of this Agreement pursuant to Section 6.1(g) or the Parent's or Purchaser's termination of the Agreement pursuant to Section 6.1(h). As used herein, the term Alternative Transaction means either (i) a transaction pursuant to which a person other than Parent or its affiliates (a "Third Party") acquires more than 50% of the Shares then outstanding, whether from the Company or pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or other business combination involving the Company pursuant to which any Third Party acquires more than 50% of the outstanding equity securities of the Company or the entity surviving such merger or business combination, (iii) any other transaction pursuant to which any Third Party acquires control of all or substantially all of the Company's assets, (iv) a recapitalization of the Company resulting in extraordinary dividends or distributions to the Company's shareholders or (v) a self-tender for, or redemption of, in the aggregate during such one-year period of more than ten percent of the Shares outstanding immediately prior to the commencement of such initial tender or redemption; PROVIDED, HOWEVER, that the term "Alternative Transaction" shall not include any acquisition of securities by a broker-dealer in connection with a bona fide public offering of such securities. The Fee shall be paid (x) within five (5) business days after the consummation of an Alternative Transaction which satisfies the criteria set forth in clause (i) of the first sentence of this Section 6.10(a) or (y) immediately prior to the termination of this Agreement pursuant to Section 6.1(g) or Section 6.1(h). Notwithstanding any other provision of this Section 6.10(a), the Company shall have no obligation to pay Parent the Fee which would otherwise be due pursuant to clause (i) of the first sentence of Section 6.10(a)(i) in the event that (x) this Agreement is terminated pursuant to Section 6.1(a), (b) or (d) (but only if terminated by the Company under circumstances in which (I) Parent's or Purchaser's failure to fulfill any obligation under this Agreement, or the failure of the condition in Section 5.2.1 to be satisfied, has been the primary cause of, or primarily resulted in, the failure of the Effective Time to occur on or before the date specified therein, (II) as of the date of such termination, the conditions set forth in Sections 5.2.2, 5.2.3 and 5.2.4 were -25- 27 satisfied, and (III) as of such date, Smith Barney has not withdrawn or, in any material respect, amended or modified the Fairness Opinion) or (y) Parent and Purchaser have elected not to consummate the Merger because of the failure of the condition in Section 5.2.1 to be satisfied, PROVIDED that at such time there was no reasonable basis to conclude that the other conditions set forth in Sections 5.1 and 5.2 would not have been satisfied on or before the Expiration Date. (b) In the event that this Agreement is terminated, the Company shall be responsible for its own expenses incurred in connection with the transactions contemplated hereby. Except as otherwise provided in Section 6.10(c), the Company will reimburse Purchaser for its expenses incurred in connection with the transactions contemplated hereby ("Expenses") up to a maximum of one million five hundred thousand dollars ($1,500,000) unless this Agreement has been terminated under the circumstances delineated in the last sentence of Section 6.10(a). (c) Under the circumstances set forth in the next following sentence, the Company and Parent shall bear responsibility for Expenses as follows: (i) Parent shall be responsible for the first five hundred thousand dollars ($500,000) of Expenses, (ii) the Company shall be responsible to reimburse Parent for the next five hundred thousand dollars ($500,000) of Expenses, and (iii) the Company shall be responsible to reimburse Parent for fifty percent (50%) of the next two million dollars ($2,000,000) of Expenses; PROVIDED, HOWEVER, that under no circumstances shall the Company be responsible to reimburse Parent for more than one million five hundred thousand dollars ($1,500,000) of Expenses. The allocation of responsibility for Expenses set forth in the immediately preceding sentence shall be applicable if this Agreement is terminated pursuant to (x) Section 6.1(f) or (y) Section 6.1(d), PROVIDED, with respect to this clause (y), that the failure of the Merger to be consummated prior to the Expiration Date has primarily resulted from (I) the failure of the conditions set forth in either Section 5.1.1 or Section 5.2.6 to be satisfied or waived, and in each case Smith Barney has not withdrawn or, in any material respect, amended or modified the Fairness Opinion, or (II) the failure of the condition set forth in Section 5.2.5 to be satisfied is due to the inability to transfer or otherwise retain liquor licenses as contemplated by Section 5.2.5 unless waived. 6.11 OBLIGATION OF PARENT. Whenever this Agreement requires Purchaser to take any action, such requirement will be deemed to include an undertaking on the part of Parent to cause Purchaser to take such action. 6.12 ENFORCEMENT OF THE AGREEMENT. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties hereto (and intended third-party beneficiaries as provided for herein) will be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the -26- 28 United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity. 6.13 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other terms and provisions of this Agreement will nevertheless remain in full force and effect. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. 6.14 TAXES. If the Merger is consummated, any liability for any tax imposed by any domestic or foreign taxing authority with respect to the property of the Company due with respect to or as a result of the Merger shall be borne by Parent and expressly shall not be a liability of the shareholders of the Company. -27- 29 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in counterparts by their duly authorized officers all as of the day and year first written above.
ATTEST: GRR, INC. By /s/ Kirk A. Radke By /s/ Joseph Silvestri --------------------------------- --------------------------------------- Kirk A. Radke Joseph Silvestri Assistant Secretary Vice President GRR ACQUISITION CORP. By /s/ Kirk A. Radke By /s/ Joseph Silvestri --------------------------------- --------------------------------------- Kirk A. Radke Joseph Silvestri Assistant Secretary Vice President GROUND ROUND RESTAURANTS, INC. By /s/ Frank M. Puthoff By /s/ Michael P. O'Donnell -------------------------------- ----------------------------------- Frank M. Puthoff Michael P. O'Donnell Secretary Chairman, President and Chief Executive Office
-28- 30 TABLE OF CONTENTS ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.1 Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.2 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.3 Effect of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.4 Conversion of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Consummation of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Payment for Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Closing of the Company's Transfer Books . . . . . . . . . . . . . . . . . . . . . 3 1.5 Stock Options and Related Matters . . . . . . . . . . . . . . . . . . . . . . . . 3 1.6 Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER . . . . . . . . . . . 4 2.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.3 Merger Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.5 Consents and Approvals; No Violation . . . . . . . . . . . . . . . . . . . . . . . 5 2.6 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.1 Corporate Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.3 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.4 Consents and Approvals; No Violation . . . . . . . . . . . . . . . . . . . . . . . 7 3.5 Commission Filings and Financial Statements . . . . . . . . . . . . . . . . . . . 8 3.6 Governmental Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.7 Owned Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.8 Real Estate Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.9 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.10 Environmental Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.11 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.12 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.13 Absence of Material Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . 10 3.14 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.15 Shareholder Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(i) 31 ARTICLE IV COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.1 Conduct of the Business of the Company Prior to the Effective Time . . . . . . . . . . . . 11 4.2 Access and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.3 Certain Filings, Consents and Arrangements . . . . . . . . . . . . . . . . . . . . . . . . 13 4.4 Actions of Directors and Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.5 Merger Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.6 Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.6.1 By-laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.6.2 Parent Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.6.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.6.4 Determination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.7 Employee Benefit Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.8 Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.9 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.10 Financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.11 Notice of Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.12 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE V CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.1 Conditions to Each Party's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.1.1 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.1.2 Injunctions; Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.1.3 Governmental Approvals and Consents . . . . . . . . . . . . . . . . . . . . . . . . 19 5.1.4 Notice from Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.2 Conditions to the Obligations of Parent and Purchaser . . . . . . . . . . . . . . . . . . 19 5.2.1 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 5.2.2 Accuracy of the Company's Representations . . . . . . . . . . . . . . . . . . . . . 20 5.2.3 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.2.4 Satisfaction of the Company's Covenants . . . . . . . . . . . . . . . . . . . . . . 20 5.2.5 Certain Third Party and Governmental Approvals and Consents . . . . . . . . . . . . 20 5.2.6 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.2.7 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.3 Conditions to the Obligations of the Company . . . . . . . . . . . . . . . . . . . . . . . 20 5.3.1 Fairness Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5.3.2 Accuracy of Parent and Purchaser's Representations . . . . . . . . . . . . . . . . 21 5.3.3 Satisfaction of Parent and Purchaser's Covenants . . . . . . . . . . . . . . . . . 21 5.3.4 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE VI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.2 Non-Survival of Representations, Warranties and Agreements . . . . . . . . . . . . . . . . 22 6.3 Waiver and Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.5 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
(ii) 32 6.6 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.9 Parties in Interest; Assignment. . . . . . . . . . . . . . . . . . . . . . . 24 6.10 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.11 Obligation of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 6.12 Enforcement of the Agreement . . . . . . . . . . . . . . . . . . . . . . . . 26 6.13 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
(iii) EX-2.2 3 1ST AMENDMENT TO AGREEMENT & PLAN OF MERGER 1 EXECUTION VERSION ----------------- EXHIBIT 2.2 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER FIRST AMENDMENT made as of November 16, 1994 to Agreement and Plan of Merger dated as of August 23, 1994 (the "Agreement"), by and among GRR, Inc., a Delaware corporation ("Parent"), GRR Acquisition Corp., a New York corporation and a wholly-owned subsidiary of Parent ("Purchaser"), and Ground Round Restaurants, Inc., a New York corporation (the "Company"). Any capitalized term used in this First Amendment and not defined herein will have the meaning given to it in the Agreement. 1. Section 4.9 of the Agreement is hereby deleted in its entirety and the following is substituted in its place: 4.9 NO SOLICITATION. (a) The Company shall immediately cease, and cause each of its, and its subsidiaries', representatives, agents and advisors to terminate, any existing activities, discussions or negotiations previously conducted with any parties other than Parent and Purchaser with respect to any Alternative Transaction (as defined in this Section 4.9); and after such date, the Company shall not, and shall cause each of its, and its subsidiaries', officers, directors, representatives, agents and advisors not to, solicit or encourage inquiries or proposals with respect to, or furnish any non-public information relating to or participate in any negotiations or discussions concerning, any proposal regarding an acquisition or purchase of all or a substantial portion of the assets of, or a substantial equity interest in, the Company or any of its subsidiaries or any merger or other business combination with the Company or any of its subsidiaries or any recapitalization involving the Company or any of its subsidiaries resulting in an extraordinary dividend or distribution to the Company's shareholders or a self-tender for or the redemption of some or all of the Shares (hereinafter collectively referred to as an "Acquisition Proposal") other than as contemplated by this Section 4.9. Notwithstanding the immediately preceding sentence, neither the Company nor its Board of Directors shall be prohibited from (i) engaging in discussions or negotiations with a third party which orally or in writing has made, or expressed an interest in making, an inquiry with regard to a possible Acquisition Proposal and thereafter providing to such third party information previously provided or made available to Parent, provided the third party shall have entered into a confidentiality agreement substantially similar to the Letter Agreement, (ii) following receipt of an Acquisition Proposal which satisfies the conditions set forth in the proviso of this sentence (a "Qualifying Acquisition Proposal"), taking and disclosing to its shareholders a position contemplated by Rule 14e-2(a) under the Exchange Act or otherwise making disclosure of the Qualifying Acquisition Proposal to its shareholders or (iii) following receipt of a Qualifying Acquisition Proposal, withdrawing its recommendation referred to in Section 4.4 or adjourning or otherwise postponing the Special Meeting; PROVIDED, HOWEVER, that the Company shall engage, and 2 EXECUTION VERSION ----------------- shall permit its, and its subsidiaries', officers, directors, representatives, agents and advisors to engage, in any of the activities referred to in clauses (ii) and (iii) of this sentence only to the extent that the Board of Directors of the Company (or an authorized committee thereof) shall have determined in good faith that such action is required under the fiduciary duties owed by the Board of Directors of the Company to the shareholders of the Company on the basis of a written opinion from the Company's counsel and a written analysis of the Acquisition Proposal by its financial advisor Smith Barney which analysis shall include a comparison of the financial terms of such Acquisition Proposal and the transactions contemplated in this Agreement. As used herein, the term Alternative Transaction means either (i) a transaction pursuant to which a person other than Parent or its affiliates (a "Third Party") acquires more than 50% of the Shares then outstanding, whether from the Company or pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or other business combination involving the Company pursuant to which any Third Party acquires more than 50% of the outstanding equity securities of the Company or the entity surviving such merger or business combination, (iii) any other transaction pursuant to which any Third Party acquires control of all or substantially all of the Company's assets, (iv) a recapitalization of the Company resulting in extraordinary dividends or distributions to the Company's shareholders or (v) a self-tender for, or redemption of, in the aggregate during such one-year period of more than ten percent of the Shares outstanding immediately prior to the commencement of such initial tender or redemption; provided, however, that the term "Alternative Transaction" shall not include any acquisition of securities by a broker-dealer in connection with a bona fide public offering of such securities. 2. Section 6.1 of the Agreement is hereby deleted in its entirety and the following is substituted in its place: 6.1 TERMINATION. This Agreement may be terminated and the Merger contemplated hereby may be abandoned (a) by the mutual consent of the boards of directors of Parent, Purchaser and the Company; (b) by the Company, if Parent or Purchaser is in material breach of any of the representations and warranties, covenants or obligations contained in this Agreement or the Letter Agreement and, in the case of a material breach of any covenant or obligation, such breach has not been cured within ten (10) business days after the Company has notified Parent of such breach; (c) by the Parent or Purchaser, if the Company is in material breach of any representations and warranties, covenants or obligations contained in this Agreement and, in the case of a material breach of any covenant or obligation, such breach has not been cured within ten (10) business days after Parent has notified the Company of such breach; (d) by either Parent and Purchaser, on the one hand, or the Company, on the other hand, if the Merger is not consummated on or before January 31, 1995 (the "Expiration Date"); -2- 3 EXECUTION VERSION ----------------- PROVIDED, HOWEVER, that the right to terminate this Agreement under this Section 6.1(d) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the primary cause of, or primarily results in, the failure of the Merger to have been consummated within such period; (e) by either Parent and Purchaser, on the one hand, or the Company, on the other hand, if the holders of at least two-thirds of the Shares fail to adopt this Agreement at the Special Meeting as required by applicable law; (f) by either Parent and Purchaser, on the one hand, or the Company, on the other hand, if either one is prohibited by an order or injunction (other than an order or injunction issued on a temporary or preliminary basis) of a court of competent jurisdiction from consummating the Merger and all means of appeal and all appeals from such order or injunction have been finally exhausted; (g) by the Company, if the Company receives a Qualifying Acquisition Proposal prior to shareholder adoption of this Agreement; provided, however, that a condition to the effectiveness of the termination of this Agreement and the abandonment of the merger pursuant to clause (g) of this sentence is the payment of the Expenses (as defined in Section 6.10); (h) by the Parent or Purchaser upon at least five (5) business days' notice, if within ten (10) business days after the Board of Directors of the Company (x) withdraws or modifies its recommendation referred to in Section 4.4 or (y) adjourns or otherwise postpones the Special Meeting, the Board of Directors of the Company has not renewed its recommendation in favor of the Merger and the adoption and approval of this Agreement; or (i) by the Company, if the condition set forth in Section 5.3.1 shall not have been satisfied. In the event of any termination and abandonment pursuant to this Section 6.1, no party hereto (or any of its directors or officers) will have any liability or further obligation to any other party to this Agreement, except for obligations in this Section 6.1, 6.10 and under the last sentence of Section 4.2 and except that nothing herein will relieve any party from liability for any breach of this Agreement. Notwithstanding clause (d) of the second preceding sentence, if the conditions set forth in Sections 5.1.2, 5.2.2, 5.2.3 and 5.2.4 have been satisfied, either the Company or Parent may extend the Expiration Date by up to thirty (30) days if the condition set forth in Section 5.2.5 has not been satisfied due to the inability to transfer or otherwise retain liquor licenses. 3. Section 6.10 of the Agreement is hereby deleted in its entirety and the following is substituted in its place: 6.10 EXPENSES. (a) In the event that this Agreement is terminated, the Company shall be responsible for its own expenses incurred in connection with the transactions contemplated hereby. Except as otherwise provided in Section 6.10(b), the Company will reimburse Purchaser for its expenses incurred in connection with the transactions contemplated hereby ("Expenses") up to a maximum of one million five hundred thousand dollars ($1,500,000) unless this Agreement has been terminated under -3- 4 EXECUTION VERSION ----------------- the circumstances delineated in the next following sentence. Notwithstanding any other provision of this Section 6.10(a), the Company shall have no obligation to reimburse Parent for any Expenses in the event that (x) this Agreement is terminated pursuant to Section 6.1(a), (b) or (d) (but only if terminated by the Company under circumstances in which (I) Parent's or Purchaser's failure to fulfill any obligation under this Agreement, or the failure of the condition in Section 5.2.1 to be satisfied, has been the primary cause of, or primarily resulted in, the failure of the Effective Time to occur on or before the date specified therein, (II) as of the date of such termination, the conditions set forth in Sections 5.2.2, 5.2.3 and 5.2.4 were satisfied, and (III) as of such date, Smith Barney has not withdrawn or, in any material respect, amended or modified the Fairness Opinion) or (y) Parent and Purchaser have elected not to consummate the Merger because of the failure of the condition in Section 5.2.1 to be satisfied, PROVIDED that at such time there was no reasonable basis to conclude that the other conditions set forth in Sections 5.1 and 5.2 would not have been satisfied on or before the Expiration Date. (b) Under the circumstances set forth in the next following sentence, the Company and Parent shall bear responsibility for Expenses as follows: (i) Parent shall be responsible for the first five hundred thousand dollars ($500,000) of Expenses, (ii) the Company shall be responsible to reimburse Parent for the next five hundred thousand dollars ($500,000) of Expenses, and (iii) the Company shall be responsible to reimburse Parent for fifty percent (50%) of the next two million dollars ($2,000,000) of Expenses; PROVIDED, HOWEVER that under no circumstances shall the Company be responsible to reimburse Parent for more than one million five hundred thousand dollars ($1,500,000) of Expenses. The allocation of responsibility for Expenses set forth in the immediately preceding sentence shall be applicable if this Agreement is terminated pursuant to (x) Section 6.1(f) or (y) Section 6.1(d), PROVIDED, with respect to this clause (y), that the failure of the Merger to be consummated prior to the Expiration Date has primarily resulted from (I) the failure of the conditions set forth in either Section 5.1.1 or Section 5.2.6 to be satisfied or waived, and in each case Smith Barney has not withdrawn or, in any material respect, amended or modified the Fairness Opinion, or (II) the failure of the condition set forth in Section 5.2.5 to be satisfied is due to the inability to transfer or otherwise retain liquor licenses as contemplated by Section 5.2.5 unless waived. 4. The Agreement, as supplemented and modified by this First Amendment, and any other writing referred to in the Agreement or delivered pursuant thereto which forms a part thereof contain the entire agreement among the parties with respect to the subject matter thereof, and amend, restate and supersede all prior and contemporaneous arrangements or understandings with respect thereto. -4- 5 EXECUTION VERSION ----------------- 5. Upon execution of this First Amendment, on and after the date hereof, each reference in the Agreement to "Agreement," "Merger Agreement," "hereof," "herein" or words of like import, and each reference in the other documents entered into in connection with the Agreement shall mean and be a reference to the Agreement, as amended hereby. Except as specifically amended above, the Agreement will remain in full force and effect and is hereby ratified and confirmed as of the date of this Amendment. 6. This First Amendment will be governed by and construed in accordance with the laws of the State of New York, without giving effect to the principles of conflict of laws thereof. 7. This First Amendment may be executed in any number of counterparts, each of which will be deemed to be an original but all of which together will constitute but one agreement, and shall become effective when one or more counterparts have been signed by each party and delivered to the other parties, it being understood that all parties need not sign the same counterpart. * * * * * -5- 6 EXECUTION VERSION ----------------- IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed in counterparts by their duly authorized officers all as of the day and year first written above. GRR, INC. By /s/ Joseph Silvestri -------------------- Joseph Silvestri Vice President GRR ACQUISITION CORP. By /s/ Joseph Silvestri -------------------- Joseph Silvestri Vice President GROUND ROUND RESTAURANTS, INC. By /s/ Michael P. O'Donnell ------------------------ Michael P. O'Donnell Chairman, President and Chief Executive Office -6- EX-3.1 4 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 [The following instrument is a restatement of the Registrant's Certificate of Incorporation as amended through December 20, 1994; the instrument has been filed as a restatement in accordance with Rule 102(c) of Regulation S-T.] CERTIFICATE OF INCORPORATION OF GROUND ROUND RESTAURANTS, INC. Under Section 807 of the Business Corporation Law FIRST: The name of the corporation is Ground Round Restaurants, Inc. The name under which the corporation was originally formed is Marine & Animal By-Products Corp. SECOND: The purpose of the corporation is to engage in any lawful act or activity for which the corporation may be organized under the Business Corporation Law of New York, provided that the corporation is not to engage in any act or activity requiring the consent or approval of any state official, department, board, agency, or other body without such consent or approval first being obtained. THIRD: The total number of shares of stock which the corporation shall have the authority to issue is 35,030,000 shares, consisting of 35,000,000 shares of the par value of $.16 2/3 per share, which shall be designated Common Stock, and 30,000 shares of the par value of $100.00 per share, which shall be designated Cumulative Preferred Shares. The relative rights, preferences and limitations of the shares of each class are: The Preferred Shares may be issued in series, and each series shall be so designated as to distinguish the shares thereof from the shares of all other series. All Preferred Shares shall be identical except as to the relative rights, preferences, and limitations below enumerated. Authority is hereby expressly granted to the Board of Directors to fix, subject to the provisions herein set forth, before the issuance of any shares of a particular series, the number of shares to be included in such series, the dividend rate per annum, the redemption price or prices, if any, and the terms and conditions of the redemption, any sinking fund provisions for the redemption or purchase of the shares of the series, the terms and conditions on which the shares are convertible, if they are convertible, and any other right, preferences and limitations pertaining to such series. 2 FOURTH: The Secretary of State is designated as the agent of the corporation upon whom process against the corporation may be served. The address to which the Secretary of State shall mail a copy of any process against the corporation which may be served upon him pursuant to law is: The Ground Round Restaurants, Inc. 35 Braintree Office Hill Park Braintree, MA 02184-9078 Attention: General Counsel FIFTH: The office of the corporation is to be located in New York County of New York, State of New York. SIXTH: The duration of the corporation is to be perpetual. SEVENTH: The number of directors that shall constitute the entire Board of Directors shall be determined by the Board of Directors from time to time, but in no event shall the number of directors that shall constitute the entire Board of Directors be less than three. EIGHTH: No person, by virtue of being a holder of this corporation's equity or voting shares, shall have any pre-emptive rights to have first offered to him, when the corporation proposes to issue, or to grant rights or options to purchase, equity or voting shares of securities convertible into or carrying rights or options to purchase equity or voting shares, any part of any such shares or other securities. NINTH: To the fullest extent permitted by the New York Business Corporation Law as exists on the date hereof, or as it may hereafter be amended, no director of the corporation shall be liable to the corporation or its shareholders for damages for any breach of duty as a director. Any repeal or modification of the foregoing sentence by the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. This corporation shall indemnify each present and future director and officer of the corporation against any costs and expenses which may be imposed on, or reasonably incurred by him in connection with any claim, action, suit or proceeding hereafter made or instituted in which he may be involved by reason of his being or having been a director or officer of the corporation, or of any other corporation in which he served or serves as a director or officer at the request of the corporation, whether or not he continues to be a director or officer at the time of imposition of such costs, or incurring of such expenses; such costs and expenses to include the cost to such director or officer of reasonable court approved settlements, other than amounts paid to the corporation itself, or to such other corporation served at the request of the corporation. The foregoing right of indemnification shall not be exclusive of other rights to which any director or officer may be entitled as a matter of law, and shall inure to the benefit of the heirs, executors and administrators of any such director or officer." EX-10.35 5 AGREEMENT OF MICHAEL P. O'DONNELL & COMPANY 1 Exhibit 10.35 July 26, 1994 Mr. Michael P. O'Donnell 109 Nichols Road Cohasset, MA 02025 Dear Mr. O'Donnell: The Board of Directors of Ground Round Restaurants, Inc. (the "Corporation") and the Compensation Committee (the "Committee") of the Board have determined that it is in the best interests of the Corporation and its shareholders for the Corporation to agree, as provided herein, to pay you compensation under the circumstances described below. The Board and the Committee recognize that the continuing possibility of a sale or change of control of the Corporation is unsettling to you and other senior executives of the Corporation. Therefore, these arrangements are being made to help assure a continuing dedication by you to your duties to the Corporation by diminishing the inevitable distraction to you from the personal uncertainties and risks created by a pending sale or change of control of the Corporation. In particular, the Board and the Committee believe it important, should the Corporation receive proposals from third parties with respect to its future, to enable you, without being influenced by the uncertainties of your own situation, to assess and advise the Board whether such proposals would be in the best interests of the Corporation and its shareholders and to take such other action regarding such proposals as the Board might determine to be appropriate, including being available to assist in any transition should there be a sale or change of control of the Corporation. The Board and the Committee also wish to demonstrate to executives of the Corporation that the Corporation is concerned with the welfare of its executives and intends to see that loyal executives are treated fairly. 1. In view of the foregoing and in further consideration of your continued employment with the Corporation, the Corporation will pay to you as a bonus a lump sum amount, determined as provided below, in the event that (a) you do not terminate your employment with the Corporation for a period of one hundred twenty (120) days after a Change of Control of the Corporation has occurred (your death or disability which prohibits you from performing your duties to the Corporation for more than 60 consecutive days shall be deemed to be a 2 termination of your employment with the Corporation by you) or (b) within such one hundred twenty (120) day period your employment with the Corporation is terminated by the Corporation for any reason other than Cause. The lump sum compensation so payable (hereinafter referred to as the "Lump Sum Amount") shall be an amount equal to the product of two (2) times the sum of (a) the higher of (i) your current annual base salary and (ii), if your base salary is hereafter increased, your highest annual base salary from time to time hereafter in effect plus (b) the higher of (i) your current targeted bonus under the Corporation's incentive bonus plan and (ii), if your targeted bonus is hereafter increased, your highest targeted bonus from time to time hereafter in effect. The Lump Sum Amount shall be paid to you within one hundred twenty-five (125) days after the date a Change of Control of the Corporation has occurred (hereinafter referred to as the "Payment Date"). 2. In addition: (a) Any compensation and other amounts previously deferred by you, together with accrued interest thereon, if any, to which you are entitled, and any accrued vacation pay not yet paid by the Corporation, shall be paid to you on the Payment Date. (b) All other amounts accrued or earned by you through the Payment Date and amounts otherwise then owing under the Corporation's plans and policies shall be paid to you on the Payment Date, other than benefits due to you under any qualified plan(s) of the Corporation, which benefits shall be paid in accordance with the terms of such plan(s). (c) The Corporation shall pay all legal fees and expenses incurred by you in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome thereof. (d) The Corporation shall maintain in full force and effect, for the continued benefit of you and/or your family for the period beginning on the date of the Change of Control and ending two years after the Payment Date, all employee welfare benefit plans and any other employee benefit programs or arrangements (including, without limitation, medical and dental insurance plans, disability and life insurance plans and car allowance programs) in which you were entitled to participate immediately prior to the Change of Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Corporation shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. At the 3 end of the period of coverage, you shall have the option to have assigned to you at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Corporation and relating specifically to you. (e) All outstanding stock options and all restricted stock which you hold shall vest immediately upon a Change of Control. 3. For purposes of this Agreement: (a) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (b) A "Change of Control" shall be deemed to have taken place if (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) other than HM Holdings, Inc. ("HMH") is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities, (ii) HMH or any of its "affiliates" or "associates" (as such terms are used in Rule 12b-2 promulgated under the Exchange Act), either singly or collectively, is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities, (iii) the stockholders of the Corporation shall have approved (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were stockholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, (B) a liquidation or dissolution of the Corporation, or (C) a sale of all or substantially all of the assets of the Corporation, or (iv) as the result of a tender offer, exchange offer, merger, consolidation, sale of assets or contested election or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of the Corporation immediately before the Transaction shall cease to constitute a majority of the Board of Directors of the Corporation or of any parent of or successor to the Corporation immediately after the Transaction occurs. -3- 4 (c) "Cause" means (i) an act or acts of personal dishonesty on your part intended to result in substantial personal enrichment at the expense of the Corporation, or (ii) your conviction for a felony. 4.(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Corporation for Federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate present value of amounts payable or distributable to you or for your benefit pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Corporation because of Section 280G of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this Section 4 shall be made by Ernst & Young (the "Accounting Firm") which shall provide detailed supporting calculations both to the Corporation and you within 15 business days of the date your employment with the Corporation terminates, or such earlier time as is requested by the Corporation, and an opinion to you that you have substantial authority not to report any Excise Tax on your federal income tax return with respect to the Agreement Payments. Any such determination by the Accounting Firm shall be binding upon the Corporation and you. You shall determine which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if you do not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Corporation shall elect which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify you promptly of such election. Within five business days thereafter, the Corporation shall pay to or distribute to you or for your benefit such amounts as are then due to you under this Agreement. For purposes of this Section 4, "Excise Tax" shall mean the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax. (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, -4- 5 it is possible that Agreement Payments will have been made by the Corporation which should not have been made ("Overpayment") or that additional Agreement Payments which will not have been made by the Corporation could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against you which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Corporation to you or for your benefit shall be treated for all purposes as a loan ab initio to you which you shall repay to the Corporation together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by you to the Corporation if and to the extent such deemed loan and payment would not either reduce the amount on which you are subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Corporation to you or for your benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Payment Date, or otherwise. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which it may have against you or others. 6. Anything in this Agreement to the contrary notwithstanding, if your employment with the Corporation is terminated prior to the date on which a Change of Control occurs, and it is reasonably demonstrated by you that such termination (a) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (b) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to have occurred the date immediately prior to the date of such termination. 7. This Agreement shall be binding upon and inure to the benefit of you, your estate and the Corporation and any successor or assign of the Corporation, but 5 6 neither this Agreement nor any rights arising hereunder may be assigned or pledged by you. 8. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (all notices to the Corporation to be directed to the attention of the Chief Financial Officer of the Corporation with a copy to the Secretary of the Corporation) or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 9. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designed by the Board of Directors of the Corporation (which shall in any event include the Corporation's Chief Financial Officer). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts without regard to principles of conflicts of laws. 10. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Nothing in this Agreement shall prevent or limit your continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Corporation and for which you may qualify. Amounts which are vested benefits or which you are otherwise entitled to receive under any plan or program of the Corporation at or subsequent to any Change of Control shall be payable in -6- 7 accordance with such plan or program. Any payments or other benefits to which you may be entitled under this Agreement shall be in addition to any payments or other benefits to which you may be entitled under any employment contract you may have with the Corporation. 12. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. If you are in agreement with the foregoing, please so indicate by signing and returning to the Corporation the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement under seal between you and the Corporation. Very truly yours, GROUND ROUND RESTAURANTS, INC. By /s/ Michael R. Jorgensen --------------------------- Michael R. Jorgensen Agreed: /s/ Michael P. O'Donnell - - ------------------------ Michael P. O'Donnell -7- EX-10.36 6 AGREEMENT OF PETER J. BEAUDRAULT & COMPANY 1 Exhibit 10.36 July 26, 1994 Peter J. Beaudrault 10 Marian Circle Chalfont, PA 18914 Dear Mr. Beaudrault: The Board of Directors of Ground Round Restaurants, Inc. (the "Corporation") and the Compensation Committee (the "Committee") of the Board have determined that it is in the best interests of the Corporation and its shareholders for the Corporation to agree, as provided herein, to pay you compensation, including termination compensation in the event you should leave the employ of the Corporation under the circumstances described below. The Board and the Committee recognize that the continuing possibility of a sale or change of control of the Corporation is unsettling to you and other senior executives of the Corporation. Therefore, these arrangements are being made to help assure a continuing dedication by you to your duties to the Corporation by diminishing the inevitable distraction to you from the personal uncertainties and risks created by a pending sale or change of control of the Corporation. In particular, the Board and the Committee believe it important, should the Corporation receive proposals from third parties with respect to its future, to enable you, without being influenced by the uncertainties of your own situation, to assess and advise the Board whether such proposals would be in the best interests of the Corporation and its shareholders and to take such other action regarding such proposals as the Board might determine to be appropriate, including being available to assist in any transition should there be a sale or change of control of the Corporation. The Board and the Committee also wish to demonstrate to executives of the Corporation that the Corporation is concerned with the welfare of its executives and intends to see that loyal executives are treated fairly. 1 . In view of the foregoing and in further consideration of your continued employment with the Corporation, the Corporation will pay to you as a bonus (hereinafter referred to as the "Bonus") a lump sum amount, determined as provided below, in the event that (a) within one hundred twenty (120) days after a Change of Control of the Corporation has occurred (hereinafter referred to as the "Stay Period") you terminate your employment with the Company and such termination constitutes Good Reason within the meaning of Section 3(d)(ii) or 2 Section 3(d)(iii) of this Agreement, (b) during the Stay Period your employment with the Corporation is terminated by the Corporation for any reason other than Cause, or (c) upon expiration of the Stay Period you have not terminated your employment with the Corporation (other than for on a basis which constitutes Good Reason within the meaning of Section 3(d)(ii) or Section 3(d)(iii) of this Agreement). The Bonus shall be equal to one-half of your current annual base salary or, if your base salary is hereafter increased, one-half of your highest annual base salary from time to time in effect, and shall be paid to you within five days after the expiration of the Stay Period (hereinafter referred to as the "Payment Date") In further view of the foregoing and in further consideration of your continued employment with the Corporation, the Corporation will pay to you as termination compensation (in addition to any Bonus to which you may be entitled), a lump sum amount, determined as provided below, in the event that (a) within twenty-four months after a Change of Control of the Corporation has occurred, you terminate your employment with the Corporation for Good Reason within ninety (90) days after the event which constitutes Good Reason or (b) within such twenty-four month period your employment with the Corporation is terminated by the Corporation for any reason other than Cause. The lump sum compensation so payable (hereinafter referred to as the "Severance Payment") shall be an amount equal to the product of two (2) times the sum of (a) the higher of (i) your current annual base salary and (ii), if your base salary is hereafter increased, your highest annual base salary from time to time hereafter in effect plus (b) the higher of (i) your current targeted bonus under the Corporation's incentive bonus plan and (ii), if your targeted bonus is hereafter increased, your highest targeted bonus from time to time hereafter in effect. The Severance Payment shall be paid to you within five days after the date of termination of your employment (hereinafter referred to as the "Termination Date"). For the purposes of this Section 1, your death or disability which prohibits you from performing your duties to the Corporation for more than 60 consecutive days shall be deemed a termination of your employment with the Corporation. 2 . In addition: (a) Any compensation and other amounts previously deferred by you, together with accrued interest thereon, if any, to which you are entitled, and any accrued vacation pay not yet paid by the Corporation, shall be paid to you on the Payment Date. (b) All other amounts accrued or earned by you through the Payment Date and amounts otherwise then owing under the Corporation's plans and policies shall be paid to you on the Payment Date, other than benefits due to you under any qualified plan(s) of the Corporation, which benefits shall be paid in accordance with the terms of such plan(s). 3 (c) The Corporation shall pay all legal fees and expenses incurred by you in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome thereof. (d) The Corporation shall maintain in full force and effect, for the continued benefit of you and/or your family for two years after the Termination Date, all employee welfare benefit plans and any other employee benefit programs or arrangements (including, without limitation, medical and dental insurance plans, disability and life insurance plans and car allowance programs) in which you were entitled to participate immediately prior to the Change of Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Corporation shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. At the end of the period of coverage, you shall have the option to have assigned to you at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Corporation and relating specifically to you. (e) All outstanding stock options which you hold shall vest immediately upon a Change of Control. 3 . For purposes of this Agreement: (a) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (b) A "Change of Control" shall be deemed to have taken place if (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) other than HM Holdings, Inc. ("HMH") is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities, (ii) HMH or any of its "affiliates" or "associates" (as such terms are used in Rule 12b-2 promulgated under the Exchange Act), either singly or collectively, is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities, (iii) the stockholders of the Corporation shall have approved (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were stockholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power -3- 4 entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, (B) a liquidation or dissolution of the Corporation, or (C) a sale of all or substantially all of the assets of the Corporation, or (iv) as the result of a tender offer, exchange offer, merger, consolidation, sale of assets or contested election or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of the Corporation immediately before the Transaction shall cease to constitute a majority of the Board of Directors of the Corporation or of any parent of or successor to the Corporation immediately after the Transaction occurs. (c) "Cause" means (i) an act or acts of personal dishonesty on your part intended to result in substantial personal enrichment at the expense of the Corporation, or (ii) your conviction for a felony. (d) "Good Reason" means: (i) The assignment to you of any duties inconsistent in any respect with your position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as in effect on the date of the Change of Control, or any other action by the Corporation which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice from you; (ii) Any reduction of your base salary or the failure by the Corporation to provide you with an incentive compensation program, welfare benefits, retirement benefits and other benefits which in the aggregate are no less favorable than the benefits to which you were entitled prior to the Change of Control; (iii) The Corporation's requiring you to be based at any office or location more than fifty miles from the location at which you are employed on the date of the Change of Control, except for travel reasonably required in the performance of your responsibilities, or the Corporation's requiring you to move your principal residence more than fifty miles from the location of your principal residence on the date of the Change of Control; or -4- 5 (iv) Any action taken or suffered by the Corporation as of or following the Change of Control (such as, without limitation, transfer or encumbrance of assets or incurring of indebtedness) which materially impairs the ability of the Corporation to make any payments due or which may become due to you under this Agreement. For purposes of this Agreement, any good faith determination of "Good Reason" made by you shall be conclusive. 4.(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Corporation for Federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate present value of amounts payable or distributable to you or for your benefit pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Corporation because of Section 280G of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this Section 4 shall be made by Ernst & Young (the "Accounting Firm") which shall provide detailed supporting calculations both to the Corporation and you within 15 business days of the date your employment with the Corporation terminates, or such earlier time as is requested by the Corporation, and an opinion to you that you have substantial authority not to report any Excise Tax on your federal income tax return with respect to the Agreement Payments. Any such determination by the Accounting Firm shall be binding upon the Corporation and you. You shall determine which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if you do not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Corporation shall elect which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify you promptly of such election. Within five business days thereafter, the Corporation shall pay to or distribute to you or for your benefit such amounts as are then due to you under this Agreement. For purposes of this Section 4, "Excise Tax" shall mean the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax. -5- 6 (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Agreement Payments will have been made by the Corporation which should not have been made ("Overpayment") or that additional Agreement Payments which will not have been made by the Corporation could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against you which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Corporation to you or for your benefit shall be treated for all purposes as a loan ab initio to you which you shall repay to the Corporation together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by you to the Corporation if and to the extent such deemed loan and payment would not either reduce the amount on which you are subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Corporation to you or for your benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Termination Date, or otherwise. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which it may have against you or others. 6. Anything in this Agreement to the contrary notwithstanding, if your employment with the Corporation is terminated prior to the date on which a Change of Control occurs, and it is reasonably demonstrated by you that such termination (a) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (b) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to have occurred the date immediately prior to the date of such termination. 7. This Agreement shall be binding upon and inure to the benefit of you, your estate and the Corporation and any successor or assign of the Corporation, but -6- 7 neither this Agreement nor any rights arising hereunder may be assigned or pledged by you. 8. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (all notices to the Corporation to be directed to the attention of the President of the Corporation with a copy to the Secretary of the Corporation) or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. The failure by you to set forth in any notice of termination of employment any fact or circumstances which contributes to a showing of Good Reason shall not waive any of your rights hereunder or preclude you from asserting such fact or circumstance in enforcing your rights hereunder. 9. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designed by the Board of Directors of the Corporation (which shall in any event include the Corporation's President). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts without regard to principles of conflicts of laws. 10. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Nothing in this Agreement shall prevent or limit your continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Corporation and for which you may qualify. Amounts which are vested benefits or which you are otherwise entitled to receive under any plan or program -7- 8 of the Corporation at or subsequent to any Change of Control shall be payable in accordance with such plan or program. 12. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. If you are in agreement with the foregoing, please so indicate by signing and returning to the Corporation the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement under seal between you and the Corporation. Very truly yours, GROUND ROUND RESTAURANTS, INC. By /s/ Michael P. O'Donnell --------------------------- Michael P. O'Donnell Agreed: /s/ Peter J. Beaudrault - - ----------------------- Peter J. Beaudrault -8- EX-10.37 7 AGREEMENT OF MICHAEL R. JORGENSEN & COMPANY 1 Exhibit 10.37 July 26, 1994 Michael R. Jorgensen 1906 Hockley Drive Hingham, MA 02043 Dear Mr. Jorgensen: The Board of Directors of Ground Round Restaurants, Inc. (the "Corporation") and the Compensation Committee (the "Committee") of the Board have determined that it is in the best interests of the Corporation and its shareholders for the Corporation to agree, as provided herein, to pay you compensation, including termination compensation in the event you should leave the employ of the Corporation under the circumstances described below. The Board and the Committee recognize that the continuing possibility of a sale or change of control of the Corporation is unsettling to you and other senior executives of the Corporation. Therefore, these arrangements are being made to help assure a continuing dedication by you to your duties to the Corporation by diminishing the inevitable distraction to you from the personal uncertainties and risks created by a pending sale or change of control of the Corporation. In particular, the Board and the Committee believe it important, should the Corporation receive proposals from third parties with respect to its future, to enable you, without being influenced by the uncertainties of your own situation, to assess and advise the Board whether such proposals would be in the best interests of the Corporation and its shareholders and to take such other action regarding such proposals as the Board might determine to be appropriate, including being available to assist in any transition should there be a sale or change of control of the Corporation. The Board and the Committee also wish to demonstrate to executives of the Corporation that the Corporation is concerned with the welfare of its executives and intends to see that loyal executives are treated fairly. 1. In view of the foregoing and in further consideration of your continued employment with the Corporation, the Corporation will pay to you as a bonus (hereinafter referred to as the "Bonus") a lump sum amount, determined as provided below, in the event that (a) within one hundred twenty (120) days after a Change of Control of the Corporation has occurred (hereinafter referred to as the "Stay Period") you terminate your employment with the Company and such termination constitutes Good Reason within the meaning of Section 3(d)(ii) or 2 Section 3(d)(iii) of this Agreement, (b) during the Stay Period your employment with the Corporation is terminated by the Corporation for any reason other than Cause, or (c) upon expiration of the Stay Period you have not terminated your employment with the Corporation (other than for on a basis which constitutes Good Reason within the meaning of Section 3(d)(ii) or Section 3(d)(iii) of this Agreement). The Bonus shall be equal to one-half of your current annual base salary or, if your base salary is hereafter increased, one-half of your highest annual base salary from time to time in effect, and shall be paid to you within five days after the expiration of the Stay Period (hereinafter referred to as the "Payment Date") In further view of the foregoing and in further consideration of your continued employment with the Corporation, the Corporation will pay to you as termination compensation (in addition to any Bonus to which you may be entitled), a lump sum amount, determined as provided below, in the event that (a) within twenty-four months after a Change of Control of the Corporation has occurred, you terminate your employment with the Corporation for Good Reason within ninety (90) days after the event which constitutes Good Reason or (b) within such twenty-four month period your employment with the Corporation is terminated by the Corporation for any reason other than Cause. The lump sum compensation so payable (hereinafter referred to as the "Severance Payment") shall be an amount equal to the product of two (2) times the sum of (a) the higher of (i) your current annual base salary and (ii), if your base salary is hereafter increased, your highest annual base salary from time to time hereafter in effect plus (b) the higher of (i) your current targeted bonus under the Corporation's incentive bonus plan and (ii), if your targeted bonus is hereafter increased, your highest targeted bonus from time to time hereafter in effect. The Severance Payment shall be paid to you within five days after the date of termination of your employment (hereinafter referred to as the "Termination Date"). For the purposes of this Section 1, your death or disability which prohibits you from performing your duties to the Corporation for more than 60 consecutive days shall be deemed a termination of your employment with the Corporation. 2. In addition: (a) Any compensation and other amounts previously deferred by you, together with accrued interest thereon, if any, to which you are entitled, and any accrued vacation pay not yet paid by the Corporation, shall be paid to you on the Payment Date. (b) All other amounts accrued or earned by you through the Payment Date and amounts otherwise then owing under the Corporation's plans and policies shall be paid to you on the Payment Date, other than benefits due to you under any qualified plan(s) of the Corporation, which benefits shall be paid in accordance with the terms of such plan(s). 3 (c) The Corporation shall pay all legal fees and expenses incurred by you in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome thereof. (d) The Corporation shall maintain in full force and effect, for the continued benefit of you and/or your family for two years after the Termination Date, all employee welfare benefit plans and any other employee benefit programs or arrangements (including, without limitation, medical and dental insurance plans, disability and life insurance plans and car allowance programs) in which you were entitled to participate immediately prior to the Change of Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Corporation shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. At the end of the period of coverage, you shall have the option to have assigned to you at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Corporation and relating specifically to you. (e) All outstanding stock options which you hold shall vest immediately upon a Change of Control. 3. For purposes of this Agreement: (a) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (b) A "Change of Control" shall be deemed to have taken place if (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) other than HM Holdings, Inc. ("HMH") is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities, (ii) HMH or any of its "affiliates" or "associates" (as such terms are used in Rule 12b-2 promulgated under the Exchange Act), either singly or collectively, is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities, (iii) the stockholders of the Corporation shall have approved (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were stockholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power -3- 4 entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, (B) a liquidation or dissolution of the Corporation, or (C) a sale of all or substantially all of the assets of the Corporation, or (iv) as the result of a tender offer, exchange offer, merger, consolidation, sale of assets or contested election or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of the Corporation immediately before the Transaction shall cease to constitute a majority of the Board of Directors of the Corporation or of any parent of or successor to the Corporation immediately after the Transaction occurs. (c) "Cause" means (i) an act or acts of personal dishonesty on your part intended to result in substantial personal enrichment at the expense of the Corporation, or (ii) your conviction for a felony. (d) "Good Reason" means: (i) The assignment to you of any duties inconsistent in any respect with your position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as in effect on the date of the Change of Control, or any other action by the Corporation which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice from you; (ii) Any reduction of your base salary or the failure by the Corporation to provide you with an incentive compensation program, welfare benefits, retirement benefits and other benefits which in the aggregate are no less favorable than the benefits to which you were entitled prior to the Change of Control; (iii) The Corporation's requiring you to be based at any office or location more than fifty miles from the location at which you are employed on the date of the Change of Control, except for travel reasonably required in the performance of your responsibilities, or the Corporation's requiring you to move your principal residence more than fifty miles from the location of your principal residence on the date of the Change of Control; or -4- 5 (iv) Any action taken or suffered by the Corporation as of or following the Change of Control (such as, without limitation, transfer or encumbrance of assets or incurring of indebtedness) which materially impairs the ability of the Corporation to make any payments due or which may become due to you under this Agreement. For purposes of this Agreement, any good faith determination of "Good Reason" made by you shall be conclusive. 4.(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Corporation for Federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate present value of amounts payable or distributable to you or for your benefit pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Corporation because of Section 280G of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this Section 4 shall be made by Ernst & Young (the "Accounting Firm") which shall provide detailed supporting calculations both to the Corporation and you within 15 business days of the date your employment with the Corporation terminates, or such earlier time as is requested by the Corporation, and an opinion to you that you have substantial authority not to report any Excise Tax on your federal income tax return with respect to the Agreement Payments. Any such determination by the Accounting Firm shall be binding upon the Corporation and you. You shall determine which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if you do not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Corporation shall elect which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify you promptly of such election. Within five business days thereafter, the Corporation shall pay to or distribute to you or for your benefit such amounts as are then due to you under this Agreement. For purposes of this Section 4, "Excise Tax" shall mean the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax. -5- 6 (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Agreement Payments will have been made by the Corporation which should not have been made ("Overpayment") or that additional Agreement Payments which will not have been made by the Corporation could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against you which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Corporation to you or for your benefit shall be treated for all purposes as a loan ab initio to you which you shall repay to the Corporation together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by you to the Corporation if and to the extent such deemed loan and payment would not either reduce the amount on which you are subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Corporation to you or for your benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5 . You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Termination Date, or otherwise. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which it may have against you or others. 6 . Anything in this Agreement to the contrary notwithstanding, if your employment with the Corporation is terminated prior to the date on which a Change of Control occurs, and it is reasonably demonstrated by you that such termination (a) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (b) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to have occurred the date immediately prior to the date of such termination. 7 . This Agreement shall be binding upon and inure to the benefit of you, your estate and the Corporation and any successor or assign of the Corporation, but -6- 7 neither this Agreement nor any rights arising hereunder may be assigned or pledged by you. 8. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (all notices to the Corporation to be directed to the attention of the President of the Corporation with a copy to the Secretary of the Corporation) or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. The failure by you to set forth in any notice of termination of employment any fact or circumstances which contributes to a showing of Good Reason shall not waive any of your rights hereunder or preclude you from asserting such fact or circumstance in enforcing your rights hereunder. 9. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designed by the Board of Directors of the Corporation (which shall in any event include the Corporation's President). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts without regard to principles of conflicts of laws. 10. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Nothing in this Agreement shall prevent or limit your continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Corporation and for which you may qualify. Amounts which are vested benefits or which you are otherwise entitled to receive under any plan or program -7- 8 of the Corporation at or subsequent to any Change of Control shall be payable in accordance with such plan or program. 12. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. If you are in agreement with the foregoing, please so indicate by signing and returning to the Corporation the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement under seal between you and the Corporation. Very truly yours, GROUND ROUND RESTAURANTS, INC. By /s/ Michael P. O'Donnell --------------------------- Michael P. O'Donnell Agreed: /s/ Michael R. Jorgensen - - ------------------------ Michael R. Jorgensen -8- EX-10.38 8 AGREEMENT OF WILLIAM C. SCHOENER & COMPANY 1 Exhibit 10.38 July 26, 1994 William C. Schoener 15680 Laura Lane Brookfield, Wisconsin 53005 Dear Mr. Schoener: The Board of Directors of Ground Round Restaurants, Inc. (the "Corporation") and the Compensation Committee (the "Committee") of the Board have determined that it is in the best interests of the Corporation and its shareholders for the Corporation to agree, as provided herein, to pay you compensation, including termination compensation in the event you should leave the employ of the Corporation under the circumstances described below. The Board and the Committee recognize that the continuing possibility of a sale or change of control of the Corporation is unsettling to you and other senior executives of the Corporation. Therefore, these arrangements are being made to help assure a continuing dedication by you to your duties to the Corporation by diminishing the inevitable distraction to you from the personal uncertainties and risks created by a pending sale or change of control of the Corporation. In particular, the Board and the Committee believe it important, should the Corporation receive proposals from third parties with respect to its future, to enable you, without being influenced by the uncertainties of your own situation, to assess and advise the Board whether such proposals would be in the best interests of the Corporation and its shareholders and to take such other action regarding such proposals as the Board might determine to be appropriate, including being available to assist in any transition should there be a sale or change of control of the Corporation. The Board and the Committee also wish to demonstrate to executives of the Corporation that the Corporation is concerned with the welfare of its executives and intends to see that loyal executives are treated fairly. 1. In view of the foregoing and in further consideration of your continued employment with the Corporation, the Corporation will pay to you as a bonus (hereinafter referred to as the "Bonus") a lump sum amount, determined as provided below, in the event that (a) within one hundred twenty (120) days after a Change of Control of the Corporation has occurred (hereinafter referred to as the "Stay Period") you terminate your employment with the Company and such termination constitutes Good Reason within the meaning of Section 3(d)(ii) or 2 Section 3(d)(iii) of this Agreement, (b) during the Stay Period your employment with the Corporation is terminated by the Corporation for any reason other than Cause, or (c) upon expiration of the Stay Period you have not terminated your employment with the Corporation (other than for on a basis which constitutes Good Reason within the meaning of Section 3(d)(ii) or Section 3(d)(iii) of this Agreement). The Bonus shall be equal to one-half of your current annual base salary or, if your base salary is hereafter increased, one-half of your highest annual base salary from time to time in effect, and shall be paid to you within five days after the expiration of the Stay Period (hereinafter referred to as the "Payment Date") In further view of the foregoing and in further consideration of your continued employment with the Corporation, the Corporation will pay to you as termination compensation (in addition to any Bonus to which you may be entitled), a lump sum amount, determined as provided below, in the event that (a) within twenty-four months after a Change of Control of the Corporation has occurred, you terminate your employment with the Corporation for Good Reason within ninety (90) days after the event which constitutes Good Reason or (b) within such twenty-four month period your employment with the Corporation is terminated by the Corporation for any reason other than Cause. The lump sum compensation so payable (hereinafter referred to as the "Severance Payment") shall be an amount equal to the product of two (2) times the sum of (a) the higher of (i) your current annual base salary and (ii), if your base salary is hereafter increased, your highest annual base salary from time to time hereafter in effect plus (b) the higher of (i) your current targeted bonus under the Corporation's incentive bonus plan and (ii), if your targeted bonus is hereafter increased, your highest targeted bonus from time to time hereafter in effect. The Severance Payment shall be paid to you within five days after the date of termination of your employment (hereinafter referred to as the "Termination Date"). For the purposes of this Section 1, your death or disability which prohibits you from performing your duties to the Corporation for more than 60 consecutive days shall be deemed a termination of your employment with the Corporation. 2. In addition: (a) Any compensation and other amounts previously deferred by you, together with accrued interest thereon, if any, to which you are entitled, and any accrued vacation pay not yet paid by the Corporation, shall be paid to you on the Payment Date. (b) All other amounts accrued or earned by you through the Payment Date and amounts otherwise then owing under the Corporation's plans and policies shall be paid to you on the Payment Date, other than benefits due to you under any qualified plan(s) of the Corporation, which benefits shall be paid in accordance with the terms of such plan(s). 3 (c) The Corporation shall pay all legal fees and expenses incurred by you in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome thereof. (d) The Corporation shall maintain in full force and effect, for the continued benefit of you and/or your family for two years after the Termination Date, all employee welfare benefit plans and any other employee benefit programs or arrangements (including, without limitation, medical and dental insurance plans, disability and life insurance plans and car allowance programs) in which you were entitled to participate immediately prior to the Change of Control, provided that your continued participation is possible under the general terms and provisions of such plans and programs. In the event that your participation in any such plan or program is barred, the Corporation shall arrange to provide you with benefits substantially similar to those which you are entitled to receive under such plans and programs. At the end of the period of coverage, you shall have the option to have assigned to you at no cost and with no apportionment of prepaid premiums, any assignable insurance policy owned by the Corporation and relating specifically to you. (e) All outstanding stock options which you hold shall vest immediately upon a Change of Control. 3. For purposes of this Agreement: (a) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (b) A "Change of Control" shall be deemed to have taken place if (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) other than HM Holdings, Inc. ("HMH") is or becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Corporation representing 25% or more of the combined voting power of the Corporation's then outstanding securities, (ii) HMH or any of its "affiliates" or "associates" (as such terms are used in Rule 12b-2 promulgated under the Exchange Act), either singly or collectively, is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing 50% or more of the combined voting power of the Corporation's then outstanding securities, (iii) the stockholders of the Corporation shall have approved (A) a reorganization, merger or consolidation, in each case, with respect to which persons who were stockholders of the Corporation immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50% of the combined voting power -3- 4 entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, (B) a liquidation or dissolution of the Corporation, or (C) a sale of all or substantially all of the assets of the Corporation, or (iv) as the result of a tender offer, exchange offer, merger, consolidation, sale of assets or contested election or any combination of the foregoing transactions (a "Transaction"), the persons who were directors of the Corporation immediately before the Transaction shall cease to constitute a majority of the Board of Directors of the Corporation or of any parent of or successor to the Corporation immediately after the Transaction occurs. (c) "Cause" means (i) an act or acts of personal dishonesty on your part intended to result in substantial personal enrichment at the expense of the Corporation, or (ii) your conviction for a felony. (d) "Good Reason" means: (i) The assignment to you of any duties inconsistent in any respect with your position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as in effect on the date of the Change of Control, or any other action by the Corporation which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice from you; (ii) Any reduction of your base salary or the failure by the Corporation to provide you with an incentive compensation program, welfare benefits, retirement benefits and other benefits which in the aggregate are no less favorable than the benefits to which you were entitled prior to the Change of Control; (iii) The Corporation's requiring you to be based at any office or location more than fifty miles from the location at which you are employed on the date of the Change of Control, except for travel reasonably required in the performance of your responsibilities, or the Corporation's requiring you to move your principal residence more than fifty miles from the location of your principal residence on the date of the Change of Control; or -4- 5 (iv) Any action taken or suffered by the Corporation as of or following the Change of Control (such as, without limitation, transfer or encumbrance of assets or incurring of indebtedness) which materially impairs the ability of the Corporation to make any payments due or which may become due to you under this Agreement. For purposes of this Agreement, any good faith determination of "Good Reason" made by you shall be conclusive. 4.(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to you or for your benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be nondeductible by the Corporation for Federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), then the aggregate present value of amounts payable or distributable to you or for your benefit pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be nondeductible by the Corporation because of Section 280G of the Code. For purposes of this Section 4, present value shall be determined in accordance with Section 280G(d)(4) of the Code. (b) All determinations required to be made under this Section 4 shall be made by Ernst & Young (the "Accounting Firm") which shall provide detailed supporting calculations both to the Corporation and you within 15 business days of the date your employment with the Corporation terminates, or such earlier time as is requested by the Corporation, and an opinion to you that you have substantial authority not to report any Excise Tax on your federal income tax return with respect to the Agreement Payments. Any such determination by the Accounting Firm shall be binding upon the Corporation and you. You shall determine which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4, provided that, if you do not make such determination within ten business days of the receipt of the calculations made by the Accounting Firm, the Corporation shall elect which and how much of the Agreement Payments shall be eliminated or reduced consistent with the requirements of this Section 4 and shall notify you promptly of such election. Within five business days thereafter, the Corporation shall pay to or distribute to you or for your benefit such amounts as are then due to you under this Agreement. For purposes of this Section 4, "Excise Tax" shall mean the excise tax imposed by Section 4999 of the Code or any interest or penalties with respect to such excise tax. -5- 6 (c) As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Agreement Payments will have been made by the Corporation which should not have been made ("Overpayment") or that additional Agreement Payments which will not have been made by the Corporation could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against you which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Corporation to you or for your benefit shall be treated for all purposes as a loan ab initio to you which you shall repay to the Corporation together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by you to the Corporation if and to the extent such deemed loan and payment would not either reduce the amount on which you are subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or other substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Corporation to you or for your benefit together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 5. You shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by you as the result of employment by another employer after the Termination Date, or otherwise. The Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunderd shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which it may have against you or others. 6. Anything in this Agreement to the contrary notwithstanding, if your employment with the Corporation is terminated prior to the date on which a Change of Control occurs, and it is reasonably demonstrated by you that such termination (a) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (b) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to have occurred the date immediately prior to the date of such termination. 7. This Agreement shall be binding upon and inure to the benefit of you, your estate and the Corporation and any successor or assign of the Corporation, but -6- 7 neither this Agreement nor any rights arising hereunder may be assigned or pledged by you. 8. For purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement (all notices to the Corporation to be directed to the attention of the President of the Corporation with a copy to the Secretary of the Corporation) or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. The failure by you to set forth in any notice of termination of employment any fact or circumstances which contributes to a showing of Good Reason shall not waive any of your rights hereunder or preclude you from asserting such fact or circumstance in enforcing your rights hereunder. 9. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by you and such officer as may be specifically designed by the Board of Directors of the Corporation (which shall in any event include the Corporation's President). No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts without regard to principles of conflicts of laws. 10. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 11. Nothing in this Agreement shall prevent or limit your continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Corporation and for which you may qualify. Amounts which are vested benefits or which you are otherwise entitled to receive under any plan or program -7- 8 of the Corporation at or subsequent to any Change of Control shall be payable in accordance with such plan or program. 12. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. If you are in agreement with the foregoing, please so indicate by signing and returning to the Corporation the enclosed copy of this letter, whereupon this letter shall constitute a binding agreement under seal between you and the Corporation. Very truly yours, GROUND ROUND RESTAURANTS, INC. By /s/ Michael P. O'Donnell --------------------------- Michael P. O'Donnell Agreed: /s/ William C. Schoener - - ----------------------- William C. Schoener -8- EX-21 9 LIST OF SUBSIDIARIES 1 EXHIBIT 21 GROUND ROUND RESTAURANTS, INC. LIST OF SUBSIDIARIES -------------------- Ground Round Holdings, Inc. G.R. Glendloc, Incorporated Ground Round of Baltimore, Inc. GRXR of Frederick, Inc. GRXR of Bel Air, Inc. GRXR of Hagerstown, Inc. GRXR of Charles County, Inc. GR of Minn., Inc. The Ground Round, Inc. GRH of NJ, Inc. EX-23 10 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-23797) pertaining to the 1982 and 1987 Stock Option Plan, and in the Registration Statement (Form S-8, No. 33-47968) pertaining to the 1989 Stock Option Plan and 1992 Equity Incentive Plan, of our report dated November 1, 1994, with respect to the consolidated financial statements and schedules of Ground Round Restaurants, Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended October 2, 1994. ERNST & YOUNG LLP Boston, Massachusetts December 14, 1994 EX-24 11 POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY The undersigned directors of Ground Round Restaurants, Inc. severally constitute and appoint each of Michael R. Jorgensen and Robin L. Moroz, and each of them individually, their attorneys-in-fact and agent, with full power of substitution for them in any and all capacities, to sign for them and in their names, the Annual Report on Form 10-K of Ground Round Restaurants, Inc. required by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, for the fiscal year ended October 2, 1994, and any amendments thereto filed under cover of Form 8 or otherwise, and to file the same, with exhibits and schedules thereto, and other documents in connection therewith, with the Securities and Exchange Commission and any other regulatory authority or body, granting said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with said Annual Report and any amendment thereto, as fully as they might or could do in person, hereby ratifying and confirming all that each said attorney-in-fact and agent, or his/her substitute or substitutes, may do or cause to be done by virtue hereof. Executed this 12th day of December, 1994. /s/ Michael P. O'Donnell - - ------------------------------------------ Michael P. O'Donnell /s/ J. Eric Hanson - - ------------------------------------------ J. Eric Hanson /s/ Robert E. Lee - - ------------------------------------------ Robert E. Lee /s/ David J.P. Meachin - - ------------------------------------------ David J.P. Meachin /s/ Stanley J. Moss - - ------------------------------------------ Stanley J. Moss /s/ Thomas J. Russo - - ------------------------------------------ Thomas J. Russo /s/ Daniel R. Scoggin - - ------------------------------------------ Daniel R. Scoggin EX-27 12 FINANCIAL DATA SCHEDULE TO FORM 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF GROUND ROUND RESTAURANTS, INC. FOR THE YEAR ENDED OCTOBER 2, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U.S DOLLAR YEAR OCT-02-1994 OCT-03-1993 OCT-02-1994 1 1,457 0 1,787 276 2,577 7,794 171,104 43,531 156,772 23,110 57,868 1,852 0 0 63,184 156,772 243,971 243,971 202,819 27,875 0 0 4,091 9,186 2,940 6,246 0 0 0 6,246 .56 .56
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