<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File No. 33-94724
JERRY'S FAMOUS DELI, INC.
(Exact name of registrant as specified in its charter)
California 95-3302338
- ------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
12711 Ventura Boulevard, Suite 400, Studio City, California 91604
-----------------------------------------------------------------
(Address of Principal Executive Offices)
(818) 766-8311
--------------------------------------
(Registrant's Telephone Number, Including Area Code)
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of October 31, 1996,
outstanding common shares totaled 10,386,250.
<PAGE> 2
JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
Number
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995............... 2
Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 1996 and September 30, 1995................................................. 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and September 30, 1995................................................. 4
Notes to Consolidated Financial Statements................................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations..................................................................... 7
Liquidity and Capital Resources........................................................... 9
PART II - OTHER INFORMATION
Items 1. through 6................................................................................. 11
Signatures................................................................................. 13
</TABLE>
1
<PAGE> 3
JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 326,094 $ 7,214,412
Accounts receivable, net 257,670 215,925
Accounts receivable - related party - 16,020
Inventory 260,779 118,382
Prepaid expenses 479,321 222,650
Preopening costs 359,573 83,025
Income taxes receivable 268,695 -
Deferred income taxes 11,133 44,531
--------------- ---------------
Total current assets 1,963,265 7,914,945
Property and equipment, net 23,170,189 10,417,601
Deferred income taxes 103,466 103,466
Goodwill 3,288,972 -
Other intangibles and other assets 1,219,663 346,300
--------------- ---------------
Total assets $ 29,745,555 $ 18,782,312
=============== ===============
LIABILITIES AND EQUITY
Current liabilities
Accounts payable $ 1,621,740 $ 1,678,421
Accrued expenses 963,476 756,997
Sales tax payable 325,320 232,050
Income taxes payable - 79,906
Note payable to related party - 1,154,036
Current portion of long-term debt 124,188 125,137
Current portion of obligations under capital leases 27,035 43,140
--------------- ---------------
Total current liabilities 3,061,759 4,069,687
Long-term debt 7,136,008 1,086,813
Obligations under capital leases 3,068 20,722
Deferred credits 527,803 575,653
--------------- ---------------
Total liabilities 10,728,638 5,752,875
Minority interest 357,211 263,212
Equity
Preferred stock, 5,000,000 shares authorized,
6,000 shares issued and outstanding 5,537,441 -
Common stock, no par value, 60,000,000 shares
authorized, 10,386,250 issued and outstanding 12,664,752 12,664,752
Equity 457,513 101,473
--------------- ---------------
Total equity 18,659,706 12,766,225
--------------- ---------------
Total liabilities and equity $ 29,745,555 $ 18,782,312
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
2
<PAGE> 4
JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 10,922,635 $ 6,861,524 $ 26,658,764 $ 20,887,931
Cost of sales 3,408,452 2,167,728 8,291,621 6,838,760
------------ ------------ ------------ ------------
Gross profit 7,514,183 4,693,796 18,367,143 14,049,171
Operating expenses
Labor 4,029,901 2,246,358 9,410,169 6,971,962
Occupancy and other 1,535,727 994,073 3,564,756 2,986,737
Occupancy - related party 45,000 45,000 135,000 135,000
General and administrative expenses 952,023 532,136 2,804,432 1,522,751
General and administrative expenses -
related party - 177,973 - 747,155
Depreciation and amortization expenses 718,807 233,682 1,370,874 753,365
Restaurant concept discontinuation costs - - - 137,396
------------ ------------ ------------ ------------
Total expenses 7,281,458 4,229,222 17,285,231 13,254,366
------------ ------------ ------------ ------------
Income from operations 232,725 464,574 1,081,912 794,805
Other income (expense)
Interest income 11,215 33 119,728 1,163
Interest expense (199,550) (73,702) (355,126) (179,927)
Other income, net 9,441 - 23,509 -
------------ ------------ ------------ ------------
Income before provision for
income taxes and minority interest 53,831 390,905 870,023 616,041
(Provision) benefit for income taxes (5,900) (49,571) (279,900) 62,711
Minority interest (39,056) (50,617) (170,272) (109,399)
------------ ------------ ------------ ------------
Net income $ 8,875 $ 290,717 $ 419,851 $ 569,353
============ ============ ============ ============
Net income per common share $ 0.00 $ 0.04
============ ============
Weighted average shares outstanding 10,485,472 10,479,317
============ ============
Pro forma data for 1995
Pro forma net income per common share $ 0.03 $ 0.05
============ ============
Pro forma common shares outstanding 10,386,250 10,386,250
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE> 5
JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 419,851 $ 569,353
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Depreciation and amortization 1,370,874 753,365
Loss (gain) on sale of assets (1,262) 137,396
Minority interest 170,272 109,399
Deferred income taxes 33,398 (240,676)
Changes in assets and liabilities
Accounts receivable - related party 16,020 -
Accounts receivable (67,331) (85,455)
Inventory (67,397) (6,851)
Prepaid expenses (256,671) (102,490)
Preopening costs (421,504) (545)
Other assets (177,613) (426,042)
Organization costs (22,971) (13,807)
Accounts payable (56,681) (1,265,827)
Accrued expenses 206,479 (815,882)
Sales tax payable 93,270 (28,814)
Income taxes payable (348,601) (5,473)
Deferred credits (25,797) (64,729)
------------ ------------
Total adjustments 444,485 (2,056,431)
------------ ------------
Net cash provided by (used in) operating activities 864,336 (1,487,078)
------------ ------------
Cash flows from investing activities:
Acquisition of restaurants (7,605,392) -
Purchases of equipment and leasehold improvements (4,263,842) (1,439,436)
Additions to construction-in-progress (2,015,201) (571,116)
Purchase of building and related purchase option payments (764,068) (9,000)
Disposal of transportation equipment 20,150 -
------------ ------------
Net cash used in investing activities (14,628,353) (2,019,552)
------------ ------------
Cash flows from financing activities:
Borrowings from credit facilities 703,165 400,000
Payments on credit facility (400,000) (100,000)
Borrowings on long-term debt 2,500,000 1,225,000
Payments on long-term debt (4,093) (1,454,960)
Payments and advances to related parties (1,128,450) (779,195)
Payments from related parties - 802,226
Capital lease payments (34,585) (30,393)
Cash distributions paid to shareholders (21,728) (19,602)
Dividends paid to minority shareholders (76,273) (78,399)
Proceeds from preferred stock issuance, net 5,537,441 -
Preferred stock dividends paid (42,082) -
Purchase of limited partner interest (157,696) -
Proceeds from common stock issuance, net - 3,419,852
------------ ------------
Net cash provided by financing activities 6,875,699 3,384,529
------------ ------------
Net decrease in cash and cash equivalents (6,888,318) (122,101)
Cash and cash equivalents, beginning of period 7,214,412 290,425
------------ ------------
Cash and cash equivalents, end of period $ 326,094 $ 168,324
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE> 6
JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION:
Basis of Presentation
The accompanying consolidated financial statements of Jerry's Famous
Deli, Inc. and its subsidiaries ("the Company") for the three and nine months
ended September 30, 1996 and September 30, 1995 have been prepared in
accordance with generally accepted accounting principles and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. These financial
statements have not been audited by independent accountants, but include all
adjustments (consisting of normal recurring adjustments) which are, in
management's opinion, necessary for a fair presentation of the financial
condition, results of operations and cash flows for such periods. However,
these results are not necessarily indicative of results for any other interim
period or for the full year. The December 31, 1995 balance sheet financial
statement is derived from audited financial statements included in the
Company's December 31, 1995 Form 10-K.
Certain information and footnote disclosures normally included in
financial statements in accordance with generally accepted accounting
principles have been omitted pursuant to requirements of the Securities and
Exchange Commission. Management believes that the disclosures included in the
accompanying interim financial statements and footnotes are adequate to make
the information not misleading, but should be read in conjunction with the
consolidated financial statements and notes thereto included in the Form 10-K
for the preceding fiscal year.
Organization
The accompanying financial statements are comprised of the
consolidated financial statements ("consolidated statements"), which consist of
Jerry's Famous Deli, Inc. ("JFD--Inc."), a California corporation; JFD-Encino
("JFD--Encino"), a California limited partnership; and Pizza By The Pound, dba
Jerry's Famous Pizza, a California corporation, which ceased operations in June
1995. JFD--Inc., JFD--Encino and Jerry's Famous Pizza operate or operated
family oriented, full-service restaurants. These entities are collectively
referred to as "Jerry's Famous Deli, Inc." or the "Company".
JFD--Inc. and JFD--Encino include the operations of Southern
California restaurants located in Studio City, Encino, Marina del Rey, West
Hollywood, Pasadena and Westwood, as well as Sherman Oaks and Woodland Hills
which restaurants were purchased on July 1, 1996, and Rascal House, which was
purchased September 9, 1996. The Sherman Oaks restaurant has on its premises a
bakery which supplies baked goods to other Jerry's Famous Deli restaurants.
On August 30, 1996, the Company completed the sale to Yucaipa Waterton
Deli Investors, L.L.C. of 6,000 shares of Series A Preferred Stock and a
warrant to purchase 65,000 shares of the Company's common stock, for an
aggregate gross purchase price of $6,000,100. Yucaipa is an affiliate of The
Waterton Investment Group, an investment partnership formed by Ken Abdalla and
Ron Burkle, Chairman of the Yucaipa Companies. The net proceeds of
approximately $5,540,000 were used to purchase the Florida restaurant disclosed
in the following paragraph.
On September 9, 1996, the Company purchased for $4,934,000 Wolfie
Cohen's Rascal House, a 425-seat and approximately 23,000 square foot
delicatessen restaurant located in Miami Beach, Florida. It had annual
revenues in 1995 of approximately $7,800,000. The purchase includes the real
estate, fixtures and equipment. The Company intends to continue to operate the
restaurant under the name "Wolfie Cohen's Rascal House" and to substantially
retain and expand upon the menu and format of operations of the restaurant. On
September 9, 1996, the restaurant closed for its annual two-week closing and
on September 22, 1996, it reopened under Jerry's ownership.
A new 9,400 square foot restaurant is under construction and is
scheduled to open in early 1997 in Costa Mesa, California.
Reclassifications
Certain amounts presented in the financial statements for prior
periods have been reclassified to conform with the current presentation.
5
<PAGE> 7
JERRY'S FAMOUS DELI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INCOME TAXES
Upon termination of the subchapter S election by the Company on
January 11, 1995, deferred income taxes became an asset of the Company and was
recorded in the balance sheet with a corresponding credit to the combined
statement of operations. The deferred tax asset, principally resulting from
temporary differences in the recognition of depreciation expense for financial
statement and tax reporting purposes, as of September 30, 1996, was
approximately $115,000.
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
---- ----
<S> <C> <C>
Supplemental cash flow information:
Cash paid for:
Interest.......................................................................... $ 365,000 $ 218,000
Income taxes...................................................................... $ 595,000 185,000
Supplemental information on noncash investing and financing activities:
Increase in loan payable--related party as a result of distributions.............. - $ 795,000
(Decrease) increase in deferred costs capitalized to
construction-in-progress.................................................... $ (22,000) $ 37,000
Issuance of common stock for services rendered.................................... - $ 130,000
Increase in long-term debt on purchase of restaurant sites........................ $ 3,250,000 $ 1,011,000
</TABLE>
4. NET INCOME PER SHARE AND PRO FORMA DATA
Net income per common share for the 1996 three- and nine-month periods
are based on the weighted average number of common shares outstanding.
Pro forma net income per common share for the 1995 three-and
nine-month periods was calculated using net income and based on, as if,
10,386,250 shares of common stock were outstanding for all of fiscal year 1995.
The pro forma shares outstanding are based on (i) 7,460,000 shares outstanding
for the Company at December 31, 1994, (ii) 40,000 shares issued on January 9,
1995, per the terms of a consulting agreement, (iii) 931,250 shares sold
through a private placement which was completed in March 1995 and (iv) an
additional 1,955,000 shares sold through an initial public offering in October
1995.
5. SUBSEQUENT EVENTS
The Woodland Hills restaurant, which was purchased along with the
Sherman Oaks restaurant on July 1, 1996, was closed at the beginning of October
for approximately two months for remodeling, which management expects will have
a negative impact on total revenues for the fourth quarter of 1996. When the
restaurant is reopened the first part of December, however, it will have
increased seating capacity, longer hours of operation and the full Jerry's
Famous Deli menu, which management anticipates will increase revenues over its
historical revenues under prior ownership. This is a forward looking statement
and is subject to a number of risks, including the public's acceptance of the
Jerry's Famous Deli format in the Woodland Hills location, consumer trends,
competition from other local restaurants, general economic conditions and other
factors.
6
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following table presents for the three and nine months ending
September 30, 1996 and 1995, the Consolidated Statements of Operations of the
Company expressed as percentages of total revenue. The results of operations
for the first nine months of 1996 are not necessarily indicative of the results
to be expected for the full year ending December 31, 1996.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
---------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales
Food 28.2 29.3 28.2 29.9
Other 3.0 2.3 2.9 2.8
------ ------ ------ ------
Total cost of sales 31.2 31.6 31.1 32.7
------ ------ ------ ------
Gross profit 68.8 68.4 68.9 67.3
Operating expenses
Labor 36.9 32.7 35.3 33.4
Occupancy and other 14.5 15.1 13.9 14.9
------ ------ ------ ------
Total operating expenses 51.4 47.8 49.2 48.3
General and administrative expenses 8.7 10.4 10.5 10.9
Depreciation and amortization expenses 6.6 3.4 5.1 3.6
Restaurant concept discontinuation costs - - - 0.7
------ ------ ------ ------
Total expenses 66.7 61.6 64.8 63.5
------ ------ ------ ------
Income from operations 2.1 6.8 4.1 3.8
Interest income 0.1 0.0 0.4 0.0
Interest expense (1.8) (1.1) (1.3) (0.9)
Other income, net 0.1 - 0.1 -
------ ------ ------ ------
Income before provision for income
taxes and minority interest 0.5 5.7 3.3 2.9
(Provision) benefit for income taxes 0.0 (0.7) (1.0) 0.3
Minority interest (0.4) (0.7) (0.7) (0.5)
------ ------ ------ ------
Net income 0.1% 4.3% 1.6% 2.7%
====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Revenues for the three months ended September 30, 1996 increased
$4,061,000, or 59.2%, to $10,923,000 for the 1996 quarter from $6,862,000 for
the 1995 quarter. Included in this increase are revenues of approximately
$4,162,000 from the five restaurants opened or purchased in 1996 and $55,000
from Guy's Place, a private bar and
7
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
lounge, which opened the end of September 1996 and is adjacent to the West
Hollywood restaurant. Revenues for the same four restaurants operated during
both periods decreased slightly, approximately $149,000 or 2.2%. Of the
$149,000 decrease, $98,000 occurred at the Encino restaurant which management
believes is due partly to increased competition in the Encino area.
Cost of sales, as a percentage of revenues, decreased 0.4 percentage
points to 31.2% from 31.6% and decreased 0.9% excluding the Sherman Oaks
bakery's from cost of sales and revenues. The cost of food, which comprises
over 90% of cost of sales, decreased 1.1 percentage points, as a percentage of
revenues, to 28.2% in the 1996 quarter from 29.3% in the 1995 quarter.
Management attributes this decrease primarily to its continuing program of more
effective buying, improved cost control and better financial liquidity since
the Company's October 1995 Public Offering. A change in meat distributors and
in meal preparation methods, coupled with other changes in meat prices,
resulted in an over 4.0% reduction in food costs during the 1996 quarter.
Beginning in August 1996, the recently-acquired bakery adjoining the Sherman
Oaks restaurant began a gradual process of supplying bakery products to Jerry's
Southern California restaurants. Management believes that as bakery operations
become more efficient, by the end of 1996, the cost of supplying its
restaurants with baked goods will be lower than previously charged by outside
suppliers, which should contribute favorably to lower food costs.
Although the third quarter cost of food decreased 1.1 percentage
points, this decrease was less than the reported decreases for first two
quarters of 1996. A major factor for this decrease has been a continuing
overall increase in prices of dairy products, approximately 15% in the third
quarter, which comprise approximately 7% of total food costs. Other cost of
sales, consisting primarily of the costs of liquor and paper goods, increased
by 0.7 percentage point, as a percentage of revenues, in the 1996 third quarter
over the 1995 third quarter. Two significant factors for this increase were
price increases in alcoholic beverages, which have increased approximately 10%
in the last three to six months, and the added cost of catering services, which
have been promoted and expanded since the second quarter of 1996 for the
purpose of increasing restaurant revenues. As a result of the net decrease in
cost of sales, gross profit improved as a percentage of revenues to 68.8% for
1996 from 68.4% for 1995.
Total expenses, as a percentage of revenues, increased 5.1 percentage
points to 66.7% for the 1996 third quarter from 61.6% for the 1995 third
quarter due primarily to increases in depreciation and amortization and labor
expenses.
Depreciation and amortization expense increased approximately
$485,000, or 3.2 percentage points, as a percentage of revenues, to 6.6% for
the 1996 quarter from 3.4% for the 1995 quarter. Included in this increase is
depreciation expense of $137,000 and $94,000 for the Westwood and Pasadena
restaurants, respectively, $53,000 for the two Solley's restaurants and $47,000
for the Marina del Rey restaurant site. Also included is amortization expense
of $108,000 in preopening costs for the Pasadena and Westwood restaurants,
which opened in 1996, and amortization expense of $37,000 of goodwill and of
the covenant not to compete, both arising from the purchase of Solley's Inc.
Operating expenses, which include all restaurant level operating
costs, including, but not limited to, labor, rent, laundry, maintenance,
utilities and repairs, as a percentage of revenues, increased 3.6 percentage
points, as a percentage of revenues, to 51.4% for the 1996 quarter from 47.8%
for the 1995 quarter. Labor increased 4.2 percentage points as a percentage of
revenues to 36.9% for the 1996 third quarter from 32.7% for the 1995 third
quarter. Labor expense for the two new restaurants opened and the three
restaurants purchased in 1996 was 38.5% of revenues. Newly-opened restaurants
commonly have higher labors costs during the first several weeks after opening.
Management is working to bring the labor costs of these new restaurants into
line with average labor costs for existing Jerry's restaurants.
General and administrative expenses, as a percentage of revenues,
decreased 1.7 percentage points to 8.7% in 1996 from 10.7% in 1995. Most
general and administrative expenses for the 1996 third quarter decreased, even
after taking into account additional labor expense due to the addition of
several new positions necessary to support the Company's expanded restaurant
operations, and due to added costs resulting from the Company becoming a public
company.
8
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
For the 1996 third quarter, the performance incentive bonus accrual of
approximately $67,000 has been waived by the applicable three executive
officers.
The increase in interest income of approximately $11,000 in 1996
primarily represents earnings on the short-term investment of funds received
from the October 1995 Public Offering. Interest expense increased
approximately $126,000 principally due to the financing of the Marina del Rey
real property purchase in the 1996 quarter.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Revenues increased $5,771,000, or 27.6%, to $26,659,000 for the 1996
nine-month period from $20,888,000 for the 1995 nine-month period. The five
restaurants opened or purchased in 1996 contributed approximately $6,139,000 in
revenues in the current year. Partially offsetting this increase were 1995
revenues of $236,000 from JFD Pizza, which closed in June 1995. Revenues for
the same four restaurants operated during both nine-month periods decreased
approximately $603,000, or 2.9%.
Income from operations increased approximately $287,000, or 36.1%, to
$1,082,000 for the 1996 period from $795,000 for the 1995 period, due
primarily to the decrease in food costs, for the reasons described above in the
quarter-to-quarter comparison, and the restaurant discontinuation costs of
$137,000 incurred during the 1995 period. Total labor expense, as a
percentage of revenues, increased to 35.3% for 1996 from 33.4% for 1995. Of
this 1.9 percentage point increase, 1.2 percentage points is due to higher
labor costs at the five recently- opened and purchased restaurants. Higher
labor costs are common to new restaurants during the first several weeks after
opening.
General and administrative expenses increased approximately $534,000,
or 23.5%, to $2,804,000 for the 1996 nine months from $2,270,000 for the 1995
nine months. As a percentage of revenues, general and administrative expenses
decreased, 0.4 percentage points. Depreciation and amortization expense
increased $618,000 or 1.5 percentage points, as a percentage of revenue, to
5.1% for 1996 from 3.6% for 1995. Included in the increase is the
amortization of goodwill and the covenant not to compete for the two
Solley's restaurants, preopening costs for Pasadena and Westwood restaurants
and depreciation of fixed assets on all four restaurants as well on the Marina
del Rey restaurant site, totaling $637,000.
Interest income increased approximately $119,000 to $120,000 for the
1996 period from approximately $1,000 for the 1995 period. This increase is
primarily due to earnings on the short-term investment of funds received from
the October 1995 Public Offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily for the development,
construction and equipping of new restaurants. Generally, the Company leases
the property and extensively remodels the existing building. Each new
restaurant requires between $2,000,000 and $2,500,000 for remodeling and
purchasing of equipment.
The Company has continued its current plans for expansion with the
acquisition of Rascal House restaurant and its plans to open its tenth
restaurant in Costa Mesa, California, in the first quarter of 1997. During
the nine months ended September 30, 1996 the Company used additional bank
borrowings of $2,500,000 and proceeds from its public offering and its private
offering of preferred stock to fund the $2,543,000 cash purchase of the two
Solley's restaurants, the $4,934,000 cash purchase of Rascal House, the
approximately $3,600,000 construction and equipping of the Pasadena and
Westwood restaurants, the $764,000 cash portion of the purchase of the Marina
del Rey restaurant property and $43,000 for the ongoing development of future
restaurant sites, including Las Vegas, Nevada.
In August 1996, the Company granted Waterton Management, L.L.C.,
options to acquire a total of 19,000 shares of Series A Preferred Stock and
warrants exercisable for 205,833 shares of common stock, exercisable by
Waterton or its designated affiliate(s). Yucaipa Waterton Deli Investors,
L.L.C., Waterton's designee for the first option, purchased 6,000 shares of
Series A Preferred Stock and a warrant for 65,000 shares of common stock on
August 30, 1996. Jerry's Investors, L.L.C., Waterton's designee for the second
option, purchased 6,000 shares of Series A Preferred
9
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Stock and a warrant for 65,000 shares of common stock and designated Waterton
as the holder of the warrant, on November 8, 1996. On October 31, 1996, the
Company granted an additional option to Waterton to purchase an additional
6,000 shares of Series A Preferred Stock, such that Waterton held unexercised
options for 13,000 shares of Series A Preferred Stock and warrants for 75,833
shares of common stock as of November 8, 1996.
Management believes that cash on hand, cash flow from operations,
drawings on its bank lines of credit and proceeds from the November 1996 sale
of preferred stock will be sufficient to finance the completion of the Costa
Mesa restaurant and the remodeling of the Woodland Hills restaurant. In
planning for future expansion management is investigating other sources of
financing, including equity and/or debt financing. Future growth is dependent
on the Company obtaining additional capital.
10
<PAGE> 12
PART II - OTHER INFORMATION
Item 1. Not applicable.
Item 2. Changes in Securities
On November 8, 1996, Waterton designated its affiliate, Jerry's
Investors, L.L.C. ("JILLC"), to exercise its right to purchase an additional
6,000 shares of Series A Preferred Stock ("Preferred Stock") of the Company and
a warrant (the "Warrant") for 65,000 shares of common stock of the Company, for
an aggregate gross purchase price of $6,000,100. Waterton was designed by
JILLC as the holder of the Warrant. The terms of the sale of the Preferred
Stock and Warrant are set forth in a Private Securities Subscription Agreement
and Registration Rights Agreement, in a form substantially identical to the
Private Securities Subscription Agreement and Registration Rights Agreement
used in connection with the initial purchase of 6,000 shares of Series A
Preferred Stock on August 30, 1996, copies of which were filed by the Company
as exhibits to a Report on Form 8-K filed with the Securities and Exchange
Commission on September 4, 1996. The rights of the holders of the Preferred
Stock and the Warrant purchased on November 8, 1996 are identical to the rights
described in that Report. Consistent with its prior agreement with Waterton,
the Company has agreed that, upon final approval from Nasdaq, the Preferred
Stock purchased on November 8, 1996 may be converted into shares of Series B
Preferred Stock substantially identical to the Series A Preferred Stock except
that each share of Series B Preferred Stock will have voting rights equal to
109 shares of common stock.
On October 31, 1996, the Company also granted an additional option to
Waterton to purchase 6,000 shares of Preferred Stock (also convertible into
Series B Preferred Stock), such that Waterton or its affiliates now have the
right to purchase a total of 13,000 shares of Preferred Stock, in addition to
the 12,000 shares they have already purchased as of November 8, 1996.
The Company has further entered into a separate letter agreement with
Waterton providing that, if, at the time of conversion, the market price of the
Common Stock is between $6.00 and $3.00 per share and, in the reasonable
opinion of Waterton's legal counsel, the conversion of Series B Preferred Stock
would result in a deemed purchase of Common Stock on the conversion date at a
price less than the current market value of the Common Stock at the time of
conversion under Section 16(b) of the Securities Act of 1933, the Company will
in good faith proceed to take all reasonable actions to obtain all necessary
approvals, including any Nasdaq or regulatory approvals, for the Company to
agree as follows. Notwithstanding the terms of the Series B Preferred Stock,
in lieu of a like dollar amount of Common Stock, the Company will pay Waterton,
if it so requests, in cash an amount equal to 17% of the market value of the
Common Stock otherwise issuable upon such conversion, which cash payment may be
made up to 90 days from the conversion date.
Items 3. through 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
10.1 Letter Agreement dated November 5, 1996 between the Company and
Waterton Management, L.L.C.
10.2 Letter Agreement dated November 4, 1996 between the Company and
Waterton Management, L.L.C.
10.3 Letter Agreement dated October 31, 1996 between the Company and
Waterton Management, L.L.C.
Reports on Form 8-K
On July 15, 1996 and September 12, 1996, respectively, a Report on Form
8-K and an Amended Report on Form 8-K were filed regarding the purchase of two
delicatessen restaurants operated under the name of "Solley's" and located in
Woodland Hills and Sherman Oaks, California.
On September 4, 1996, a Report on Form 8-K was filed regarding the
sale to Yucaipa Waterton Deli Investors, L.L.C. of 6,000 shares of preferred
stock and a warrant.
11
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K
Reports on Form 8-K (continued)
On September 11, 1996 and October 22, 1996, respectively, a Report on
Form 8-K and an Amended Form 8-K were filed regarding the purchase of a
restaurant, d/b/a Rascal House, located in Miami Beach, Florida.
On October 4, 1996, a second Amended Report on Form 8-K concerning the
purchase of the "Solley's" restaurants and an Amended Report on Form 10-Q for
the quarter ended June 30, 1996, were filed.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JERRY'S FAMOUS DELI, INC.
Date: November 12, 1996 By: /s/ Isaac Starkman
--------------------------------
Isaac Starkman Chief
Executive Officer and
Chairman of the Board of
Directors
By: /s/ Christina Sterling
--------------------------------
Christina Sterling Chief
Financial Officer
13
<PAGE> 1
EXHIBIT 10.1
JERRY'S FAMOUS DELI, INC.
12711 Ventura Boulevard, Suite 400
Studio City, California 91604
November 5, 1996
Mr. Kenneth J. Abdalla
Waterton Management, L.L.C.
10000 Santa Monica Boulevard, 5th Floor
Los Angeles, California 90067
Dear Ken:
You have advised us today that Waterton Management, L.L.C.
("Waterton") has determined to subscribe for the second tranche of the option
granted to Waterton to purchase $6,000,000 of Series A Preferred Shares
("Preferred Shares") of Jerry's Famous Deli, Inc. ("JFD") and a warrant (the
"Warrant") for 65,000 shares of common stock of JFD. You have further advised
us that Waterton has designated Jerry's Investors, LLC ("JILLC") to purchase
the Preferred Shares.
By your execution of this letter in the space provided below, you
hereby represent that Waterton meets all of the representations and warranties
set forth in the Private Securities Subscription Agreement (the "Subscription
Agreement") for Jerry's Famous Deli, Inc./Yucaipa Waterton Deli Investors,
L.L.C. dated as of October 31, 1996, a copy of which is attached hereto as
Exhibit A and incorporated herein by this reference, and that Waterton agrees
to all of the terms and conditions set forth in the Subscription Agreement.
You have further advised us that JILLC, as Waterton's designee to complete the
purchase of Preferred Shares, meets all of the representations and warranties
set forth in the Subscription Agreement and agrees to all of the terms and
conditions set forth in the Subscription Agreement. Based upon such
representations, warranties and agreements, JFD hereby agrees to accept the
subscription of Waterton and the designation of JILLC as purchaser for the
Preferred Shares, and to be bound by the terms and conditions set forth in the
Subscription Agreement and the Registration Rights Agreement dated as of
October 31, 1996 attached as Annex I to such Subscription Agreement.
This letter will further confirm our agreement that you will deduct
the sum of $45,000 from the purchase price of $6,000,100 for the Preferred
Shares and the Warrant, representing reimbursement of Waterton's filing fee for
the Hart-Scott-Rodino application, as previously agreed by JFD.
<PAGE> 2
Mr. Kenneth J. Abdalla
November 5, 1996
Page 2
Please indicate the acceptance and agreement with the terms of this
letter of Waterton and JILLC in the spaces provided below.
Very truly yours,
/s/ Isaac Starkman
ISAAC STARKMAN,
Chief Executive Officer
AGREED AND ACCEPTED:
JERRY'S INVESTORS, LLC
By: /s/ Kenneth J. Abdalla
Name: Kenneth J. Abdalla
Title: Managing Member,
Waterton Management, L.L.C., Manager
WATERTON MANAGEMENT, L.L.C.
By: /s/ Kenneth J. Abdalla
Name: Kenneth J. Abdalla
Title: Managing Member
<PAGE> 1
EXHIBIT 10.2
JERRY'S FAMOUS DELI, INC.
12711 Ventura Boulevard, Suite 400
Studio City, California 91604
November 4, 1996
Mr. Kenneth J. Abdalla
Waterton Management, L.L.C.
10000 Santa Monica Boulevard, 5th Floor
Los Angeles, California 90067
Dear Ken:
This letter will confirm our understanding with respect to the
purchase by Waterton Management, L.L.C., or any of its designees ("Waterton"),
of Series A Preferred Shares convertible into shares of Common Stock of Jerry's
Famous Deli, Inc. (the "Company"). The Company has previously agreed with
Waterton that, upon the completion of the Nasdaq waiver and Hart-Scott-Rodino
process the Company will issue a new class of Series B Preferred Shares with
the same terms as the Series A except that the Series B will have voting rights
equal to 109 shares of Common Stock for each preferred share. Waterton will
have the right to convert all Series A Preferred Shares into Series B Preferred
Shares. Waterton has purchased $6,000,000 of Preferred Shares and has options
("Options") to purchase an additional $6,000,000 and $7,000,000 of Preferred
Shares in two tranches pursuant to agreements and side letters, including and
through the side letter dated October 31, 1996 delivered to you on November 4,
1996, previously executed by the Company and the Starkman Family Trust
("Option Documentation").
The Company and the Starkman Family Trust have agreed, in
consideration of Waterton exercising on the next tranche of $6,000,000 by
November 7, 1996, to grant Waterton an option to purchase an additional
$6,000,000 of Series A Preferred Shares ("Additional Option") upon the same
terms and conditions with the same conversion rights (including the right to
convert Series A Preferred Shares into Series B Shares) and pro-rata amount of
warrants as issued with the prior tranche of Preferred Stock and to be issued
upon exercise of the Options, all with the same registration rights, and
intends to document the Additional Option with mutually satisfactory
documentation substantially the same as the Option Documentation. The
Additional Option shall be exercisable up and until thirty (30) days after the
exercise period of the last of the Options. Each of the Company and the
Starkman Family Trust agrees to use its best efforts to expand the waiver
previously received from Nasdaq with respect to the shares issuable pursuant to
the Additional Option, to the same extent as agreed by each of them in the
letter to you dated August 26, 1996.
<PAGE> 2
Please confirm your understanding of and agreement to the above terms
by signing below and returning a signed copy of this letter to me.
Sincerely yours,
/s/ Isaac Starkman
Isaac Starkman
President
Jerry's Famous Deli, Inc.
and Trustee, The Starkman Family Trust
Agreed and Accepted:
Waterton Management, L.L.C.
By: /s/ Kenneth J. Abdalla
Kenneth J. Abdalla
Managing Member
Date: 11/7/96
<PAGE> 1
EXHIBIT 10.3
JERRY'S FAMOUS DELI, INC.
12711 Ventura Boulevard, Suite 400
Studio City, California 91604
October 31, 1996
Mr. Kenneth J. Abdalla
Waterton Management, L.L.C.
10000 Santa Monica Boulevard, 5th Floor
Los Angeles, California 90067
Dear Ken:
This letter will confirm our understanding with respect to the
purchase by Waterton Management, L.L.C., or any of its designees ("Waterton"),
of Series A Preferred Shares convertible into shares of Common Stock of Jerry's
Famous Deli, Inc. (the "Company"). The Company has previously agreed with
Waterton that, upon the completion of the Nasdaq waiver and Hart-Scott-Rodino
process the Company will issue a new class of Series B Preferred Shares with
the same terms as the Series A except that the Series B will have voting rights
equal to 109 shares of Common Stock for each preferred share. Waterton will
have the right to convert all Series A Preferred Shares into Series B Preferred
Shares.
You have advised us that there are certain concerns about problems
under Section 16 (b) of the Securities Act of 1933, as amended (the "Act") in
the circumstance where the Series B Preferred Shares would convert into common
stock at a percentage discount to the market with the price being between $3
and $6 per share, as adjusted for stock splits and similar events pursuant to
the Certificate of Determination (the "Price Range"). We have agreed upon the
following solution in consideration of Waterton exercising on the next tranche
of $6,000,000 by November 5, 1996 and the next tranche of $7,000,000 within 30
days thereafter, in both cases conditioned upon completion of mutually
satisfactory documentation substantially the same as used in respect of the
first $6,000,000 investment. If, in the reasonable opinion of your counsel,
the conversion of Series B Preferred Shares as it applies within the Price
Range would result in a deemed purchase of Common Stock on the conversion date
at a price less than the current market value of the Common Stock at the time
of conversion under Section 16(b) (or successor provisions) of the Securities
Act of 1933, as amended (the "Act"), the Company will in good faith proceed to
take all reasonable actions to obtain all necessary approvals for the Company
to agree as follows. Notwithstanding the terms of the Certificate of
Determination of Rights and Preferences of Series B Preferred Shares, if the
market value of Common Stock on the automatic conversion date of the Series B
Preferred Shares is within the Price Range, in lieu of a like dollar amount of
stock at the full market price used to calculate the conversion, the Company
will pay Waterton, if Waterton so requests, in cash an amount equal to 17% of
the market value of the Common Stock otherwise issuable upon such conversion,
which cash payment may be made up to 90 days from the
<PAGE> 2
Mr. Kenneth J. Abdalla
October 31, 996
Page 2
conversion date, and, to the extent so delayed, will be paid with interest at a
10% annualized rate based upon a 365 day year.
Please confirm your understanding of and agreement to the above terms
by signing below and returning a signed copy of this letter to me.
Sincerely yours,
/s/ Isaac Starkman
Isaac Starkman
President
Jerry's Famous Deli, Inc.
Agreed and Accepted:
Waterton Management, L.L.C.
By: /s/ Kenneth J. Abdalla
Kenneth J. Abdalla
Managing Member
Date: 11/7/96
<TABLE> <S> <C>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 326,094
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<ALLOWANCES> 10,001
<INVENTORY> 260,779
<CURRENT-ASSETS> 1,963,265
<PP&E> 28,455,224
<DEPRECIATION> 5,285,035
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0
5,537,441
<COMMON> 12,664,752
<OTHER-SE> 457,513
<TOTAL-LIABILITY-AND-EQUITY> 29,745,555
<SALES> 26,658,764
<TOTAL-REVENUES> 26,658,764
<CGS> 8,291,621
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<OTHER-EXPENSES> 17,285,231
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<INTEREST-EXPENSE> 355,126
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<INCOME-TAX> 279,900
<INCOME-CONTINUING> 419,851
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