<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, 1997
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)
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(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 17, 1997,
outstanding common shares totaled 14,210,155.
<PAGE> 2
JERRY'S FAMOUS DELI, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996............. 2
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1997 and September 30, 1996........................................ 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and September 30, 1996.............................................. 4
Notes to Consolidated Financial Statements............................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations.................................................................. 8
Liquidity and Capital Resources........................................................ 10
PART II - OTHER INFORMATION
Items 1. through 6................................................................................ 12
Signatures............................................................................. 13
</TABLE>
1
<PAGE> 3
JERRY'S FAMOUS DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,593,636 $ 4,145,265
Accounts receivable, net 302,680 347,148
Inventory 437,600 420,819
Prepaid expenses 2,372,842 471,202
Preopening costs 219,920 549,607
Income taxes receivable 282,225 210,153
----------- -----------
Total current assets 5,208,903 6,144,194
Property and equipment, net 30,045,583 25,694,476
Organization costs, net 82,978 104,483
Deferred income taxes 322,056 322,056
Goodwill and covenants not to compete, net 1,854,702 3,868,909
Other assets 549,672 428,867
----------- -----------
Total assets $38,063,894 $36,562,985
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 2,251,504 $ 3,350,099
Accrued expenses 920,360 1,641,784
Sales tax payable 380,830 434,379
Deferred income and income taxes 20,594 15,699
Current portion of long-term debt 745,057 578,739
Current portion of obligations under capital leases 3,020 20,722
----------- -----------
Total current liabilities 4,321,365 6,041,422
Long-term debt 7,835,348 5,959,959
Deferred credits 448,650 496,578
----------- -----------
Total liabilities 12,605,363 12,497,959
Minority interest 481,766 440,998
Shareholders' equity
Preferred stock Series A, no par, 5,000,000 shares authorized,
no shares issued or outstanding at September 30, 1997 and
10,000 issued and outstanding at December 31, 1996 -- 9,153,078
Common stock, no par value, 60,000,000 shares authorized,
14,210,155 and 10,838,062 issued and outstanding at
September 30, 1997 and December 31, 1996, respectively 24,016,532 14,175,109
Retained earnings 960,233 295,841
----------- -----------
Total shareholders' equity 24,976,765 23,624,028
----------- -----------
Total liabilities and shareholders' equity $38,063,894 $36,562,985
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
2
<PAGE> 4
JERRY'S FAMOUS DELI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 13,796,924 $ 10,922,635 $ 41,634,802 $ 26,658,764
Cost of sales 4,402,824 3,408,452 12,817,241 8,291,621
------------ ------------ ------------ ------------
Gross profit 9,394,100 7,514,183 28,817,561 18,367,143
Operating expenses
Labor 5,024,774 4,029,901 15,279,096 9,410,169
Occupancy and other 1,843,148 1,430,727 5,322,354 3,444,589
Occupancy - related party 155,807 150,000 494,465 255,167
General and administrative expenses 1,117,740 952,023 3,411,661 2,804,432
Depreciation expense 755,286 573,420 2,158,073 1,181,815
Amortization expense 195,995 145,387 656,215 189,059
------------ ------------ ------------ ------------
Total expenses 9,092,750 7,281,458 27,321,864 17,285,231
------------ ------------ ------------ ------------
Income from operations 301,350 232,725 1,495,697 1,081,912
Other income (expense)
Interest income 24,047 11,215 64,947 119,728
Interest expense (150,690) (199,550) (456,308) (355,126)
Other income (expense), net 2 9,441 (1,359) 23,509
------------ ------------ ------------ ------------
Income before provision for income
taxes and minority interest 174,709 53,831 1,102,977 870,023
Provision for income taxes 51,300 5,900 327,300 279,900
Minority interest 19,364 39,056 111,285 170,272
------------ ------------ ------------ ------------
Net income $ 104,045 $ 8,875 $ 664,392 $ 419,851
============ ------------ ============ ------------
Preferred stock:
Cash dividends paid 42,082 42,082
Accounting deemed dividends 1,165,500 1,165,500
------------ ------------
Net loss applicable to
common stock $ (1,198,707) $ (787,731)
============ ============
Net income (loss) per common share:
Primary $ 0.01 $ (0.11) $ 0.05 $ (0.08)
============ ============ ============ ============
Fully diluted $ 0.01 $ (0.11) $ 0.05 $ (0.08)
============ ============ ============ ============
Weighted average common shares
outstanding - primary 14,240,688 10,485,472 13,122,769 10,479,317
============ ============ ============ ============
Weighted average common shares
outstanding - fully diluted 14,242,092 10,948,990 14,112,267 10,642,494
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
<PAGE> 5
JERRY'S FAMOUS DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 664,392 $ 419,851
------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation 2,158,073 1,181,815
Amortization 656,215 189,059
Gain on sale of assets (2,756) (1,262)
Minority interest 111,285 170,272
Deferred income taxes (11,774) 33,398
Deferred income 16,669 --
Changes in assets and liabilities
Accounts receivable 44,468 (51,311)
Inventory (16,781) (67,397)
Prepaid expenses (1,151,640) (256,671)
Preopening costs (140,816) (421,504)
Other assets (120,805) (177,613)
Organization costs -- (22,971)
Accounts payable (1,098,595) (56,681)
Accrued expenses (721,424) 206,479
Sales tax payable (53,549) 93,270
Deferred credits and income taxes receivable (120,000) (374,398)
------------ ------------
Total adjustments (451,430) 444,485
------------ ------------
Net cash provided by operating activities 212,962 864,336
------------ ------------
Cash flows from investing activities:
Acquisition of restaurants -- (7,605,392)
Additions to equipment (1,970,978) (2,998,919)
Additions to improvements - land, building and leasehold (2,692,446) (1,264,923)
Additions to construction-in-progress -- (2,015,201)
Disposal of transportation equipment -- 20,150
Purchase of building and related purchase option payments -- (764,068)
Proceeds from sale of fixed assets 7,000 --
------------ ------------
Net cash used in investing activities (4,656,424) (14,628,353)
------------ ------------
Cash flows from financing activities:
Borrowings from credit facility -- 703,165
Payments on credit facility -- (400,000)
Borrowings on long-term debt 2,500,000 2,500,000
Payments on long-term debt (458,293) (4,093)
Payments and advances to related parties -- (1,128,450)
Capital lease payments (17,702) (34,585)
Cash distributions paid to shareholders -- (21,728)
Dividends paid to minority shareholders (70,517) (76,273)
Proceeds from preferred stock issuance, net -- 5,537,441
Preferred stock dividends paid -- (42,082)
Purchase of limited partner interest -- (157,696)
Proceeds from exercise of 65,000 warrants, net of related costs 57,048 --
Registrations costs of the Company's common stock (15,500) --
Purchase of the Company's common stock (103,203) --
------------ ------------
Net cash provided by financing activities 1,891,833 6,875,699
------------ ------------
Net decrease in cash and cash equivalents (2,551,629) (6,888,318)
Cash and cash equivalents, beginning of period 4,145,265 7,214,412
------------ ------------
Cash and cash equivalents, end of period $ 1,593,636 $ 326,094
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
4
<PAGE> 6
JERRY'S FAMOUS DELI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION:
Basis of Presentation
The accompanying consolidated financial statements of Jerry's Famous
Deli, Incorporated and its subsidiaries ("the Company") for the three and nine
months ended September 30, 1997 and September 30, 1996 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, 1996 balance sheet is derived from the
audited financial statements included in the Company's December 31, 1996 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 Company's
Form 10-K for the preceding fiscal year.
Organization
The accompanying consolidated financial statements consist of
Jerry's Famous Deli, Incorporated ("JFD--Inc."), Jerry's Famous Deli, L.A.,
Inc., and JFD, Inc., California corporations and JFD-Encino ("JFD--Encino"), a
California limited partnership. JFD--Inc. and JFD--Encino operate 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 the Southern
California restaurants located in Studio City, Encino, Marina del Rey, West
Hollywood, Pasadena, Westwood, Sherman Oaks, Woodland Hills and Costa Mesa, as
well as Rascal House, which is located in Florida.
On March 28, 1997, the Company announced that Kenneth Abdalla had
assumed the office of President on an interim basis with the specific objective
of assisting in the execution of the Company's acquisition and expansion
strategy. In connection therewith, the Company entered into a consulting
agreement with Kenneth Abdalla and a company affiliated with him for services to
be provided to the Company through December 1998 in consideration of 200,000
shares of common stock to Kenneth Abdalla and $600,000 to his affiliated
company.
Management Employment Agreement
Effective July 1, 1997, the employment agreements for the three
executive officers were amended and extended. The terms of the amended agreement
reduced the base salaries, effective October 1, 1997, and changed the formula
for calculating the performance incentive bonus while limiting the bonus to the
two top executive officers, effective July 1, 1997.
Reclassification
Certain amounts in the previously presented financial statements
have been reclassified to conform with current period presentation.
2. INCOME TAXES
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes." SFAS No. 109 prescribes the use of the liability method to compute the
differences between the tax bases of assets and liabilities and related
financial reporting amounts using currently enacted future tax laws and rates.
Under SFAS No. 109 the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. The
estimated deferred tax credit, principally resulting from temporary differences
in the recognition of depreciation expense for financial statement and tax
reporting purposes, as of September 30, 1997, was approximately $4,000.
5
<PAGE> 7
3. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
----------- -----------
<S> <C> <C>
Supplemental cash flow information:
Cash paid for:
Interest ................................................... $ 475,000 $ 365,000
Income taxes ............................................... $ 413,000 $ 595,000
Supplemental information on noncash investing and financing activities:
Preferred stock converted into common stock ................ $ 9,153,000 --
Decrease in deferred costs capitalized to
construction-in-progress ............................. -- $ (22,000)
Purchase of restaurant ..................................... $ -- $ 3,250,000
Write off of fully depreciated capital leases, equipment and
leasehold improvements ............................... $ 169,000 --
Issuance of 200,000 common shares in connection
with a consulting agreement .......................... $ 750,000 --
Based on independent appraisal of owned property,
reclassification from: Goodwill to land .............. $ 1,850,000 --
Building to land .............. $ 100,000 --
Construction-in-progress balance on January 1; transferred
to leasehold improvements or equipment ............... $ 244,000 $ 4,267,000
</TABLE>
4. NET INCOME PER SHARE
Net income per common share for the 1997 and 1996 three-month and
nine-month periods are based on the weighted average number of common shares
outstanding. Fully diluted shares outstanding include outstanding stock options
utilizing the treasury stock method.
In accordance with the recent Securities and Exchange Commission
position regarding accounting for Preferred Stock which is convertible at a
discount from market price for Common Stock, the Company in its December 31,
1996 Form 10-K reflected an accounting "deemed dividend" for its third and
fourth quarters. Accordingly, the Company has restated its 1996 third quarter
net income (loss) applicable to common stock for this accounting "deemed
dividend," which is a non-cash, non-recurring accounting entry for determining
net income (loss) applicable to common stock. This deemed dividend decreased the
previously presented net income per common share from $0.00 to $(0.11) and from
$0.04 to $(0.08) for the three and nine months ended September 30, 1996,
respectively.
5. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share." SFAS No. 128 supersedes and simplifies the existing computational
guidelines under Accounting Principles Board Opinion No. 15, "Earnings Per
Share." It is effective for financial statements issued for periods ending after
December 15, 1997. Among other changes, SFAS No. 128 eliminates the presentation
of primary EPS and replaces it with basic EPS for which common stock equivalents
are not considered in the computation. It also revises the computation of
diluted EPS. It is not expected that the adoption of SFAS No. 128 for the year
ended December 31, 1997 will have a material impact on the earnings per share
results reported by the Company under the Company's current capital structure.
Other recently issued standards of the FASB are not expected to
affect the Company as conditions to which those standards apply are absent.
6. APPRAISAL OF OWNED PROPERTY IN FLORIDA
In September 1996, the Company acquired Wolfie Cohen's Rascal House
restaurant, located in Miami Beach, Florida. The acquisition was recorded as a
purchase whereby the purchase price, based on available data at the time of
acquisition, was allocated first to the acquired tangible assets--land,
building, inventory, fixtures and equipment--with the balance recorded as
"goodwill." Subsequent to the acquisition and upon completion (in May 1997) of
the related
6
<PAGE> 8
appraisal of the land and building, a purchase price reallocation was recorded.
The purchase price reallocation resulted in an increase of $1,950,000 to the
value of the land and a decrease of $100,000 to the value of the building, with
a corresponding decrease of $1,850,000 to goodwill. The cumulative financial
statement impact of this purchase price reallocation reflected in the 1997 third
quarter Consolidated Statement of Operations resulted with a decrease in
amortization and depreciation expense of approximately $30,000.
7. SUBSEQUENT EVENTS
In October 1997, the Company received verbal commitments for new
lines of credit of $4,000,000 from Bank of Leumi and $2,000,000 from Bank of
America. The Company currently has a term loan with Bank of America.
7
<PAGE> 9
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, 1997 and 1996, the Consolidated Statements of Operations of the
Company expressed as percentages of total revenue. The results of operations for
the first nine months of 1997 are not necessarily indicative of the results to
be expected for the full year ending December 31, 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales
Food 29.3 28.2 28.2 28.2
Other 2.6 3.0 2.6 2.9
----- ----- ----- -----
Total cost of sales 31.9 31.2 30.8 31.1
----- ----- ----- -----
Gross profit 68.1 68.8 69.2 68.9
Operating expenses
Labor 36.4 36.9 36.7 35.3
Occupancy and other 14.5 14.5 14.0 13.9
----- ----- ----- -----
Total operating expenses 50.9 51.4 50.7 49.2
General and administrative expenses 8.1 8.7 8.2 10.5
Depreciation and amortization expenses 6.9 6.6 6.7 5.1
----- ----- ----- -----
Total expenses 65.9 66.7 65.6 64.8
----- ----- ----- -----
Income from operations 2.2 2.1 3.6 4.1
Interest income 0.2 0.1 0.2 0.4
Interest expense (1.1) (1.8) (1.1) (1.3)
Other income, net 0.0 0.1 0.0 0.1
----- ----- ----- -----
Income before provision for income
taxes and minority interest 1.3 0.5 2.7 3.3
Provision for income taxes 0.4 0.0 0.8 1.0
Minority interest 0.1 0.4 0.3 0.7
----- ----- ----- -----
Net income 0.8% 0.1% 1.6% 1.6%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Revenues for the three months ended September 30, 1997 increased
$2,874,000, or 26.3%, to approximately $13,797,000 for the 1997 quarter from
$10,923,000 for the 1996 quarter. This increase includes revenues of
approximately $2,701,000 from the two restaurants acquired or opened since
September 9, 1996.
Revenue for the same eight restaurants and the bakery operated
during both the 1997 and 1996 quarters increased approximately $76,000 or 0.7%.
Included therein was an increase of $649,000 at the Woodland Hills restaurant
netted against decreases of $331,000, $184,000 and $113,000 at the Westwood,
Pasadena, and Encino
8
<PAGE> 10
restaurants. A 1996 fourth quarter remodeling of Woodland Hills, which added 155
seats and 1,600 square feet of space, contributed significantly to increased
revenues in 1997. As common among many newly-opened restaurants, Westwood has
experienced a decrease in revenues following the initial months after opening.
Although Encino's revenues decreased from the prior year quarter, they improved
1.9% over the 1997 second quarter, indicating that management's corrective
actions, described in the June 30, 1997 Form 10-Q, may be beginning to take
effect. The Pasadena restaurant continues to experience decreasing revenues
while corrective actions appear not as yet to have arrested this slide in
revenues. Also, the June 1997 introduction of "Early Bird Specials" dinners to
the remaining Southern California restaurants, in addition to the Sherman Oaks
restaurant which had previously offered them, has had some impact on revenues.
Management continues to monitor the direction of this restaurant and will
implement additional corrective actions as deemed necessary.
Cost of sales, as a percentage of revenues, increased 0.7 percentage
point to 31.9% for the 1997 quarter from 31.2% for the 1996 quarter. The cost of
food, which comprises over 90% of cost of sales, increased 1.1 percentage points
to 29.3% for 1997 from 28.2% for 1996. The California restaurants have
experienced overall rises in the cost of food products. Also, management
believes that another factor relates to the "Early Bird Specials" dinners, which
are offered daily prior to 6:00 pm at approximately 40% discount from the retail
price. They generate less revenue for the same cost of sales. Part of this cost
of food increase should be mitigated in the next quarter by a general menu price
increase, including the "Early Bird Specials," in mid November. As a result of
higher cost of sales, gross profit decreased as a percentage of revenues to
68.1% for 1997 from 68.8% for 1996.
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, decreased 0.5 percentage
point to 50.9% for the 1997 quarter from 51.4% for the 1996 quarter. Labor
decreased 0.5 percentage point to 36.4% for 1997 from 36.9% for 1996. After
Rascal House restaurant experienced a 1997 second quarter seasonal decline in
revenue without a comparable decrease in labor costs, management's corrective
action in June 1997, as discussed in the Company's June 30, 1997 Form 10-Q,
brought about, as a percentage of revenues for that restaurant, a 1.5% decrease
in labor expense for the 1997 third quarter. Management believes that the
minimum wage increases on October 1, 1996, March 1, 1997 (California only) and
September 1, 1997 to $5.15 from $4.25 an hour, which affected approximately 50%
of the employees in each restaurant, have not had a significant impact on labor
expense for the 1997 quarter.
General and administrative expenses, as a percentage of revenue,
decreased 0.6 percentage point to 8.1% for the 1997 quarter from 8.7% for the
1996 quarter due mostly to increases in many general and administrative expenses
at rates less than the growth of revenues. For both the 1997 and 1996 quarters
the performance incentive bonuses of approximately $12,000 and $67,000,
respectively, have been waived by the applicable executive officers.
Depreciation and amortization expense, as a percentage of revenue,
increased 0.3 percentage point or approximately $232,000, to 6.9% for the 1997
period from 6.6% for the 1996 period. This increase primarily includes
additional depreciation expense from the remodeling of the Woodland Hills
restaurant, completed in December 1996, and the September 1996 acquisition of
the Rascal House restaurant, and an increase in the amortization expense of
preopening costs.
Interest expense, as a percentage of revenue, decreased 0.7
percentage point or approximately $49,000, to 1.1% for the 1997 quarter from
1.8% for the 1996 quarter. This decrease primarily reflects more debt
outstanding during the 1996 quarter.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
Revenues increased $14,976,000, or 56.2%, to $41,635,000 for the
1997 nine-month period from $26,659,000 for the 1996 nine-month period. The two
restaurants, opened or acquired since September 9, 1996, contributed revenues of
approximately $7,700,000 in 1997. The three restaurants and the bakery, opened
or acquired in or at the end of the 1996 second quarter, contributed an increase
in revenues of $8,110,000 in 1997. Revenues for the five same restaurants
operated for both nine-month periods, except Pasadena which opened in February
1996, decreased $809,000, or 3.5%. Most of this decrease is attributable to the
Encino and Pasadena restaurants for the reasons noted in the quarter-to-quarter
comparison. Seasonality in certain of the restaurants continues to be evident,
especially with Rascal House in Florida where the first and fourth quarters
appear to be the stronger periods arising from the winter tourist season.
Cost of sales, as a percentage of revenues, decreased 0.3 percentage
point, to 30.8% for the 1997 period from 31.1% for the 1996 period. The cost of
food remained the same for both periods at 28.2%. As discussed above, management
believes that an overall rise in food costs in Southern California, coupled with
the introduction of "Early Bird Specials" dinners contributed toward offsetting
earlier quarter cost reductions.
9
<PAGE> 11
Income from operations, as a percentage of revenues, decreased 0.5
percentage points to 3.6% for 1997 from 4.1% for 1996. Percentage increases in
labor and depreciation and amortization expense were mostly offset by a
percentage decrease in general and administrative expenses.
Labor expense, as a percentage of revenues, increased 1.4 percentage
points due to the same factors as those discussed above with respect to the
third quarter. Newly-opened restaurants, including the remodeled Woodland Hills
restaurant in December 1996 and the Costs Mesa restaurant in September 1997,
commonly incur relatively higher labor costs during the first several months
after opening until predictable customer patterns are developed. Over the next
several months, the labor costs of the new store restaurants are expected to
decrease. As stated in the quarterly comparison, management believes that the
minimum wage increases since September 30, 1996, which affected approximately
50% of the employees in each restaurant, have had an impact on the 1997 nine
month period.
General and administrative expenses, as a percentage of revenues,
decreased 2.3 percentage points to 8.2% for 1997 from 10.5% for 1996 due mostly
to increases in many general and administrative expenses at rates less than the
growth of revenues. Also, increases in insurance and legal expenses resulted
from the five new restaurants opened or acquired since June 1996 as well as from
increased premiums in directors and officers insurance; and from legal fees
pertaining to litigation in the normal course of business and to contractual
agreements entered into or amended during 1997. Further, the replacement of two
public relations firms with one approximately six months later resulted in an
approximate $63,000 reduction in public relations expense. As new restaurants
are opened and/or acquired, certain general and administrative expenses,
relating directly to restaurant operations including insurance, employee
benefits and others, are expected to increase.
Depreciation and amortization expense, as a percentage of revenue,
increased 1.6 percentage points or approximately $1,443,000, to 6.7% for the
1997 period from 5.1% for the 1996 period. The increase primarily resulted from
the July and September 1996 acquisitions, and related agreements, of the
Solley's restaurants and the Rascal House restaurant, respectively, additional
amortization of preopening costs and the remodeling of the Westwood restaurant.
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 for
each new restaurant. Based on historic experience, each new restaurant requires
between $2,500,000 and $3,500,000 for remodeling and purchasing of equipment.
On August 19, 1997 the Company opened its tenth restaurant in Costa
Mesa, California. Funds to complete the renovation of the Costa Mesa building
have come primarily from the remaining proceeds from the August and November
1996 issuance of 12,000 shares of preferred stock.
Such shares were subsequently converted on March 27, 1997 into common stock.
On July 24, 1997, the Company obtained a $2,500,000 term loan
collateralized by certain real and personal property of Rascal House restaurant.
The loan bears interest at the LIBOR rate for one-, two- or three-month periods
plus 2.5%, up to a maximum rate of 11.0% and will mature on August 1, 2004. The
proceeds of approximately $2,455,000 will primarily be used for the development
or acquisition of new restaurants.
The Company has a revolving line of credit in the aggregate amount
of $965,000 from United Mizrahi Bank, which expires in April 1998. As of
September 30, 1997, the Company had no amounts outstanding under this revolving
line of credit. In October 1997, the Company received verbal commitments
aggregating $6,000,000 from two other banks.
Management believes that cash on hand, cash flows from operations
and its available credit lines will be sufficient to finance the operation of
the Company's existing restaurants. Management is currently seeking new
locations for development or acquisition of restaurants in California, Las
Vegas, Chicago and Florida. In planning for future expansion and the resulting
capital needs of the Company, management is evaluating other sources of
financing, including equity and/or debt financing. Future growth could be
dependent upon the Company obtaining additional capital.
Statements made herein that are not historical facts are forward
looking statements and are subject to a number of risk factors, including the
public's acceptance of the Jerry's Famous Deli format in each new location,
consumer
10
<PAGE> 12
trends in the restaurant industry, competition from other restaurants,
the costs and delays experienced in the course of remodeling or building new
restaurants, the amount and rate of growth of administrative expenses associated
with building the infrastructure needed for future growth, the availability,
amount, type and cost of financing for the Company and general economic
conditions and other factors.
11
<PAGE> 13
PART II - OTHER INFORMATION
Items 1. through 6. Not applicable.
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 10, 1997 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,593,636
<SECURITIES> 0
<RECEIVABLES> 311,205
<ALLOWANCES> 8,525
<INVENTORY> 437,600
<CURRENT-ASSETS> 5,208,903
<PP&E> 37,843,733
<DEPRECIATION> 7,798,150
<TOTAL-ASSETS> 38,063,894
<CURRENT-LIABILITIES> 4,321,365
<BONDS> 7,835,348
0
0
<COMMON> 24,016,532
<OTHER-SE> 960,233
<TOTAL-LIABILITY-AND-EQUITY> 38,063,894
<SALES> 41,634,802
<TOTAL-REVENUES> 41,634,802
<CGS> 12,817,241
<TOTAL-COSTS> 12,817,241
<OTHER-EXPENSES> 27,321,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 456,308
<INCOME-PRETAX> 991,692
<INCOME-TAX> 327,300
<INCOME-CONTINUING> 664,392
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 664,392
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
