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, 1998
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
Incorporation or Organization) Identification No.)
12711 Ventura Boulevard, Suite 400, Studio City, California 91604
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(Address of Principal Executive Offices)
(818) 766-8311
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(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 19, 1998,
outstanding common shares totaled 15,110,064.
2
JERRY'S FAMOUS DELI, INC.
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 ......... 2
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1998 and September 30, 1997 .................................... 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and September 30, 1997 .......................................... 4
Notes to Consolidated Financial Statements ......................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations .............................................................. 9
Liquidity and Capital Resources .................................................... 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk .......................... 12
PART II - OTHER INFORMATION
Items 1. through 6 ......................................................................... 12
Signatures ......................................................................... 13
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3
JERRY'S FAMOUS DELI, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 1,146,743 $ 2,264,308
Accounts receivable, net 406,643 272,511
Inventory 1,324,530 525,200
Prepaid expenses 699,254 1,729,687
Preopening costs 520,666 105,318
Deferred income taxes 63,063 63,063
Prepaid income taxes 171,021 24,605
----------- -----------
Total current assets 4,331,920 4,984,692
Property and equipment, net 33,710,671 29,835,529
Organization costs 82,388 92,143
Deferred income taxes 725,983 725,983
Goodwill and covenants not to compete 9,832,367 1,757,342
Other assets 1,310,878 581,917
----------- -----------
Total assets $49,994,207 $37,977,606
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 3,595,137 $ 2,195,980
Accrued expenses 1,603,710 1,426,073
Sales tax payable 358,805 402,220
Current portion of long-term debt 2,701,871 752,063
----------- -----------
Total current liabilities 8,259,523 4,776,336
Long-term debt 13,549,675 7,690,219
Deferred rent 425,426 455,129
----------- -----------
Total liabilities 22,234,624 12,921,684
Minority interest 513,759 480,379
Shareholders' equity
Preferred stock Series A, no par, 5,000,000 shares authorized,
no shares issued or outstanding at September 30, 1998 or at
December 31, 1997 -- --
Common stock, no par value, 60,000,000 shares authorized,
15,127,064 and 14,210,155 issued and outstanding at
September 30, 1998 and December 31, 1997, respectively 26,097,153 23,724,484
Equity 1,148,671 851,059
----------- -----------
Total shareholders' equity 27,245,824 24,575,543
----------- -----------
Total liabilities and shareholders' equity $49,994,207 $37,977,606
=========== ===========
The accompanying notes are an integral part of these consolidated
financial statements
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JERRY'S FAMOUS DELI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenues $ 17,200,722 $ 13,796,924 $ 47,560,238 $ 41,634,802
Cost of sales 5,820,944 4,402,824 15,544,925 12,817,241
------------ ------------ ------------ ------------
Gross profit 11,379,778 9,394,100 32,015,313 28,817,561
Operating expenses
Labor 6,177,878 5,024,774 16,945,603 15,279,096
Occupancy and other 2,272,206 1,843,148 6,427,029 5,322,354
Occupancy - related party 253,000 155,807 670,053 494,465
General and administrative expenses 1,307,821 1,117,740 3,537,253 3,411,661
Depreciation and amortization expense 993,167 951,281 3,078,669 2,814,288
------------ ------------ ------------ ------------
Total expenses 11,004,072 9,092,750 30,658,607 27,321,864
------------ ------------ ------------ ------------
Income from operations 375,706 301,350 1,356,706 1,495,697
Other income (expense)
Interest income 649 24,047 36,435 64,947
Interest expense (361,904) (150,690) (924,632) (456,308)
Other income (expense), net -- 2 -- (1,359)
------------ ------------ ------------ ------------
Income before provision for income
taxes and minority interest 14,451 174,709 468,509 1,102,977
Provision (benefit) for income taxes (37,373) 51,300 71,101 327,300
Minority interest 41,994 19,364 94,296 111,285
------------ ------------ ------------ ------------
Net income $ 9,830 $ 104,045 $ 303,112 $ 664,392
============ ============ ============ ============
Earnings per share:
Basic $ 0.00 $ 0.01 $ 0.02 $ 0.05
============ ============ ============ ============
Diluted $ 0.00 $ 0.01 $ 0.02 $ 0.05
============ ============ ============ ============
Weighted average shares
outstanding - Basic 15,127,064 14,210,155 14,827,294 13,086,868
============ ============ ============ ============
Weighted average shares
outstanding - Diluted 15,148,326 14,255,727 14,901,989 14,129,366
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements
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JERRY'S FAMOUS DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30, 1998
1998 1997
------------ ------------
Cash flows from operating activities:
Net income $ 303,112 $ 664,392
------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities, net of acquisitions
Depreciation and amortization 3,078,669 2,814,288
Gain on sale of assets -- (2,756)
Minority interest 94,296 111,285
Deferred income taxes -- (11,774)
Deferred income -- 16,669
Changes in assets and liabilities
Accounts receivable (134,132) 44,468
Inventory (390,259) (16,781)
Prepaid expenses 1,016,456 (1,151,640)
Prepaid income taxes (146,416) --
Preopening costs (624,800) (140,816)
Other assets (769,879) (120,805)
Accounts payable 1,399,157 (1,098,595)
Accrued expenses 177,637 (721,424)
Sales tax payable (43,415) (53,549)
Income tax payable -- --
Deferred credits -- (120,000)
------------ ------------
Total adjustments 3,657,314 (451,430)
------------ ------------
Net cash provided by operating activities 3,960,426 212,962
------------ ------------
Cash flows from investing activities:
Purchase of Epicure Market (8,518,674) --
Acquisition of restaurant (1,760,000) --
Additions to equipment (1,421,313) (1,970,978)
Additions to improvements - land, building and leasehold (1,244,751) (2,692,446)
Reductions in construction-in-progress 149,518 --
Proceeds from sale of fixed assets -- 7,000
------------ ------------
Net cash used in investing activities (12,795,220) (4,656,424)
------------ ------------
Cash flows from financing activities:
Borrowings on credit facilities 15,965,000 2,500,000
Payoff on long-term debt (7,405,719) --
Payments on long-term debt (750,019) (458,293)
Capital lease payments -- (17,702)
Dividends paid to minority shareholders (69,555) (70,517)
Proceeds from exercise of 65,000 warrants, net of related costs -- 57,048
Registration costs of the Company's common stock -- (15,500)
Purchase of Company's common stock (22,478) (103,203)
------------ ------------
Net cash provided by financing activities 7,717,229 1,891,833
------------ ------------
Net decrease in cash and cash equivalents (1,117,565) (2,551,629)
Cash and cash equivalents, beginning of period 2,264,308 4,145,265
------------ ------------
Cash and cash equivalents, end of period $ 1,146,743 $ 1,593,636
============ ============
The accompanying notes are an integral part of these consolidated
financial statements
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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, 1998 and September 30, 1997 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, 1997 balance sheet is derived from the
audited financial statements included in the Company's December 31, 1997 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."), a California corporation, JFD-Encino
("JFD--Encino"), a California limited partnership and National Deli Corporation,
("NDC"), a Florida corporation and wholly-owned subsidiary of JFD--Inc.
JFD--Inc. and JFD--Encino operate family oriented, full-service restaurants. NDC
operates the Epicure Market ("Epicure"), a specialty gourmet food store located
in Miami Beach, Florida, which was acquired on April 1, 1998. 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, Costa Mesa and the
two Rascal House restaurants, which are located in Miami Beach and Boca Raton,
Florida. The Boca Raton Rascal House restaurant opened July 1, 1998.
Reclassification
Certain amounts in the previously presented financial statements have
been reclassified to conform with current period presentation.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September 30,
1998 1997
---------- ----------
Supplemental cash flow information:
Cash paid for:
Interest ............................................................... $ 900,000 $ 475,000
Income taxes ........................................................... $ 311,000 $ 413,000
Supplemental information on noncash investing and financing activities:
Common Stock issued in purchase of Epicure ............................. $2,395,147 $ --
Preferred stock converted into common stock ............................ $ -- $9,153,000
Write-off of fully depreciated capital leases,
equipment, and leasehold improvements ............................... $ -- $ 169,000
Issuance of 200,000 unregistered common shares in
connection with a consulting agreement .............................. $ -- $ 450,000
Based on independent appraisal of owned property,
Reclassification from: Goodwill to land ................................ $ -- $1,850,000
Building to land ................................ $ -- $ 100,000
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Construction in progress balance on January 1: transferred
To leasehold improvements or equipment ............................ $ -- $ 244,000
3. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Consistent with the restaurant industry, the Company defers its
restaurant preopening costs and amortizes them over a twelve-month period
following the opening of the respective restaurant. In April 1998, the American
Institute of Certified Public Accountants ("AICPA") issued Statement of Position
("SOP") 98-5 entitled "Reporting on the Costs of Start-Up Activities." The SOP
requires entities to expense as incurred all start-up and preopening costs that
are not otherwise capitalizable as long-lived assets. The SOP is effective for
fiscal years beginning after December 15, 1998, with earlier adoption
encouraged. Restatement of previously issued financial statements is not
permitted by the SOP, and entities are not required to report the pro forma
effects of the retroactive application of the new accounting standard. The
Company's adoption of the new accounting principle at January 1, 1999, will
involve the recognition of the cumulative effect of the change in accounting
principle required by the SOP as a one-time charge against earnings, net of any
related income tax effect, retroactive to that date. Net unamortized deferred
preopening costs were approximately $521,000 at September 30, 1998.
4. NEW CREDIT FACILITY
In September 1998, the Company entered into a new Credit Facility with
BankBoston, N.A. The agreement includes a $9,000,000 term loan and a $6,000,000
revolving line of credit. In conjunction with the agreement, the Company paid
off certain existing debt with the proceeds from the term loan. The term loan
and revolver mature five years from inception and bear interest at the
Eurodollar rate plus a variable percentage margin totaling 8.00% at September
30, 1998. The debt is collateralized by assets of the Company and includes
certain financial covenants.
5. EARNINGS PER SHARE
Basic earnings per share is computed by dividing the net income
attributable to common shareholders by the weighted average shares outstanding
during the period. Diluted earnings per share is computed by dividing the net
income attributable to common shareholders by the weighted average number of
common and common share equivalents outstanding during the period. Common share
equivalents included in the diluted computation represent shares issuable upon
assumed exercise of stock options using the treasury stock method.
6. CHANGE IN ACCOUNTING ESTIMATE
Effective July 1, 1998, the Company changed the estimated useful lives
of certain restaurant equipment and furniture and fixtures from a five-year to
an eight-year useful life and also recorded certain other adjustments to
depreciation. These changes resulted in a pre-tax increase to net income of
approximately $300,000 during the three and nine months ended September 30,
1998. The change in estimated useful life was made to better reflect the years
of benefit to be received from these assets and which will also approximate
industry practice.
7. UNAUDITED PRO FORMA FINANCIAL STATEMENTS
On April 1, 1998, Jerry's Famous Deli, Inc. ("JFD") acquired certain
assets and the operations of the Epicure Market, Inc., a specialty gourmet food
market located in Miami Beach, Florida.
The following table presents the Unaudited Pro Forma Statement of
Operations as if the purchase of assets and operations of Epicure had occurred
as of January 1, 1998. This financial statement should be read in conjunction
with the Company's Form 10-K for the year ended December 31, 1997 and the
Company's Form 8-K and Amended Form 8-K/A filed April 16, 1998 and April 23,
1998, respectively. In Management's opinion, all adjustments necessary to
reflect the purchase of Epicure by JFD have been made. The amounts below
indicated in the JFD column represent the consolidated operations of JFD and
Epicure from April 1, 1998 to September 30, 1998. The Epicure column represents
activity for January 1, 1998 to March 31, 1998.
The Unaudited Pro Forma Statement of Operations is not necessarily
indicative of what the actual results of operations of JFD and Epicure would
have been had the acquisition actually occurred as of January 1, 1998, nor do
they purport to represent the results of operations for future periods.
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Nine Months Ended September 30, 1998
--------------------------------------------------------------------------
JFD Epicure Adjustments Pro-Forma
------------ ------------ ------------ ------------
(in thousands, except per share data)
Revenues $ 47,561 $ 4,146 -- $ 51,707
Cost of goods sold 15,545 1,743 -- 17,288
------------ ------------ ------------ ------------
Gross profit 32,016 2,403 -- 34,419
Operating expenses 24,043 1,312 $ (19)(a) 25,336
General and administrative expenses 3,537 315 (55)(b) 3,797
Depreciation and amortization expense 3,079 29 105 (c) 3,213
------------ ------------ ------------ ------------
Total expenses 30,659 1,656 31 32,346
Income from operations 1,357 747 (31) 2,073
Interest income 36 17 -- 53
Interest expense (925) -- (170)(d) (1,095)
Other income, net -- -- -- --
------------ ------------ ------------ ------------
Income before provision for
income taxes and minority interest 468 764 (201) 1,031
Provision for income taxes (71) -- (191)(e) (262)
Minority interest (94) -- -- (94)
------------ ------------ ------------ ------------
Net income $ 303 $ 764 $ (392) $ 675
============ ============ ============ ============
Pro forma net income per share - Basic $ 0.02 $ 0.04
------------ ------------
Pro forma net income per share - Diluted $ 0.02 $ 0.04
------------ ------------
Pro forma weighted average shares
outstanding - Basic 15,127,064(f) 15,127,064(g)
Pro forma weighted average shares
outstanding - Diluted 15,148,326(f) 15,148,326(g)
(a) Compensation to the owners of Epicure and certain other persons in the
amount of $19,000 has been eliminated.
(b) Removal of former officer's consulting fees, elimination of 401 (k) plan
expenses and reduction of certain other expenses related to Epicure of
approximately $55,000.
(c) Includes amortization of goodwill of $71,762, amortization expense of the
covenants not to compete of $4,500, and depreciation and amortization
expense of the assets acquired (property and equipment) of approximately
$57,500. Depreciation and amortization expense of approximately $29,000
taken by Epicure has been eliminated.
(d) Assumes utilization of lines of credit amounting to $6,965,000 occurred as
of January 1, 1998, resulting in interest expense of approximately $170,000.
(e) Assumes the provision for income taxes is based on a 34% effective income
tax rate based on adjusted Epicure income.
(f) Amount equals applicable outstanding shares as disclosed on the Company's
September 30, 1998 Statement of Operations.
(g) Includes 934,509 common shares issued in the purchase of Epicure which are
treated as outstanding for the entire nine months ended September 30, 1998.
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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, 1998 and 1997, the Consolidated Statements of Operations of the
Company expressed as percentages of total revenue. The results of operations for
the first nine months of 1998 are not necessarily indicative of the results to
be expected for the full year ending December 31, 1998.
PERCENTAGE OF TOTAL REVENUE
------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales
Food 32.1 29.3 30.8 28.2
Other 1.7 2.6 1.9 2.6
------ ------ ------ ------
Total cost of sales 33.8 31.9 32.7 30.8
------ ------ ------ ------
Gross profit 66.2 68.1 67.3 69.2
Operating expenses
Labor 35.9 36.4 35.6 36.7
Occupancy and other 14.7 14.5 14.9 14.0
------ ------ ------ ------
Total operating expenses 50.6 50.9 50.5 50.7
General and administrative expenses 7.6 8.1 7.4 8.2
Depreciation and amortization expense 5.8 6.9 6.5 6.7
------ ------ ------ ------
Total expenses 64.0 65.9 64.4 65.6
------ ------ ------ ------
Income from operations 2.2 2.2 2.9 3.6
Interest income 0.0 0.2 0.1 0.2
Interest expense (2.1) (1.1) (2.0) (1.1)
Other, net 0.0 0.0 0.0 0.0
------ ------ ------ ------
Income before provision for income
taxes and minority interest 0.1 1.3 1.0 2.7
Provision (benefit) for income taxes (0.2) 0.4 0.2 0.8
Minority interest 0.2 0.1 0.2 0.3
------ ------ ------ ------
Net income 0.1% 0.8% 0.6% 1.6%
====== ====== ====== ======
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RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenues for the three months ended September 30, 1998 increased
approximately $3,404,000, or 24.7%, to approximately $17,201,000 for the 1998
quarter from approximately $13,797,000 for the 1997 quarter. The Epicure Market,
acquired on April 1, 1998, contributed revenues of approximately $3,278,000 for
the 1998 period. The Boca Raton Rascal House restaurant, which opened on July 1,
1998, contributed revenues of approximately $1,425,000. In addition, the Costa
Mesa restaurant, which opened in August 1997, had revenues of approximately
$874,000 for the 1998 period compared with $685,000 for the 1997 quarter. The
Rascal House restaurant in Miami Beach, Florida, had decreased revenues of
approximately $250,000 for the 1998 period. Same store sales for the other eight
Southern California stores in operation since July 1, 1997 decreased
approximately $1,230,000, or 11.2% for the 1998 period. A portion of the decline
in the Southern California restaurants' sales is due to the timing of the Jewish
Holiday Yom Kippur, the only day of the year Jerry's Famous Deli restaurant's
are closed, which fell on September 30, 1998 versus October 11, 1997. The result
was a reduction of sales in the third quarter of approximately $110,000. In
addition, the Company believes the lasting publicity surrounding the cleanliness
of many Southern California eating establishments, which included one of the
Company's restaurants, has continued to impact its restaurants' sales.
Management also attributes a portion of the revenue decrease to the reduction in
hours of operation from 24 hours a day in several locations beginning in the
fourth quarter of 1997, which are still in effect. Furthermore, continued major
road construction adjacent to the Company's West Hollywood restaurant has caused
an estimated loss of sales of $150,000 during the quarter.
Consistent with the Southern California restaurants, the Rascal House
restaurants in Florida and the Epicure Market were also closed one day in
September for Yom Kippur. Furthermore, the Rascal House restaurant in Miami
Beach had a utility outage in August 1998 which caused one day's lost sales.
Also, in September 1998, Hurricane Georges, which fortunately spared any
destruction to the Florida restaurants or to Epicure, did cause about one day's
lost sales at each Florida facility. The total of these factors caused a
reduction in revenues of approximately $50,000, $20,000, and $63,000 for Miami
Beach, Boca Raton and Epicure, respectively, net of insurance proceeds. The
Company also attributes a portion of the decline in the Rascal House Miami Beach
sales to the opening of the Boca Raton Rascal House restaurant, based on the
proximity of the two restaurants to each other.
In an effort to improve revenues, the Company has retained an outside
consultant with significant restaurant industry experience to focus on
increasing revenues of the Company. The consultant, whose client roster has
included many family, midscale and casual dining restaurant chains over a 26
year career in the industry, is also completing a review of the Company's
operations, including customer service, menu pricing, and general restaurant
policies and procedures. The Company anticipates implementation of the
consultant's recommendations by the end of the fourth quarter.
Cost of sales, as a percentage of revenues, increased 1.9 percentage
points to 33.8% for the 1998 quarter from 31.9% for the 1997 quarter. Total food
cost including Epicure increased 2.8 percentage points to 32.1% for 1998 from
29.3% for 1997. A portion of this increase is due to the differing margins from
the Company's core restaurants and the Epicure market, which typically has a
higher food cost as a component of sales. Without Epicure, food costs increased
0.3 percentage point to 29.6% in 1998 from 29.3% for the same 1997 quarter. A
portion of this increase is due to the opening of the Boca Raton restaurant July
1, 1998. Newly opened restaurants commonly incur relatively higher food costs
during the first several months after opening, until predictable customer
patterns can be developed. Management also attributes a portion of the increase
to a general increase in the Company's core food purchasing. In response to the
increased core food costs at the restaurants, the Company is utilizing the
purchasing services from one of its major suppliers who assists in coordinating
the Company's purchasing among all restaurants to ensure maximizing volume
purchase discounts.
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 0.3 percentage points to 50.6%
for the 1998 quarter from 50.9% for the 1997 quarter. Labor decreased 0.5
percentage point to 35.9% for 1998 from 36.4% for 1997. This decrease was due
primarily to Epicure, which typically has a significantly lower labor cost when
compared to the restaurants. Without Epicure, labor costs were 37.1% for 1998,
compared to 36.4 for 1997. This increase was due primarily to the opening of the
Boca Raton Rascal House restaurant and increases in labor expense at the Miami
Beach Rascal House restaurant. Offsetting the decrease in labor, was an increase
in occupancy expenses of 0.2 percentage point to 14.7% for 1998 from 14.5% for
1997. Contributing to the increase was an increase of approximately $113,000 in
supplies expense, of which $71,000 relates to Epicure, and approximately $20,000
for Boca Raton. Rent expense also
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increased approximately $179,000, as a result of Epicure, which added $117,000,
Boca Raton, which contributed $62,000 and the Costa Mesa restaurant, which
contributed approximately $52,000 for the quarter as compared to $21,000 for the
same period in 1997. Utilities expense also increased approximately $136,000, of
which approximately $54,000 relates to Epicure, approximately $62,000 to Boca
Raton, and the remainder due to general increases at the restaurants. A portion
of the increase was also due to the decline in sales, as many of the Company's
occupancy expenses are fixed costs.
General and administrative expenses, as a percentage of revenues,
decreased 0.5 percentage point, to 7.6% for the 1998 quarter from 8.1% in the
1997 quarter. A portion of this decrease was due to increases in many general
and administrative expenses at rates less than the growth of revenues. To add,
reductions in salaries for three executive officers in October 1997, combined
with a revision in the bonus calculation, accounted for a decrease of
approximately $51,000 for the 1998 quarter. Offsetting these decreases, was
approximately $150,000 in general and administrative expenses contributed by
Epicure during the quarter. General and administrative expenses which relate
directly to restaurant operations, including insurance, employee benefits and
other expenses are expected to continue to increase as new restaurants are
opened and/or acquired.
Depreciation and amortization expense, as a percentage of revenue,
decreased 1.1 percentage points to 5.8% for 1998 from 6.9% for the 1997 quarter.
Depreciation expense decreased approximately $157,000 for the 1998 quarter as
compared to the 1997 quarter, of which approximately $300,000 was due to the
Company's change in estimated useful lives of its fixtures and restaurant
equipment from five years to eight years and recording of certain other
adjustments. Offsetting these decreases, were Epicure and Boca, which
contributed approximately $43,000 and $51,000, respectively, for the quarter.
Furthermore, Costa Mesa added approximately $92,000 for the quarter ended
compared with approximately $28,000 for the 1997 quarter ended. Amortization
expense increased approximately $199,000 for the 1998 quarter as compared to the
1997 quarter. Amortization expense of approximately $96,000 relates directly to
the Epicure acquisition, and approximately $104,000 for the Boca Raton
restaurant preopening expenses. In addition, the Company expensed approximately
$109,000 during the third quarter, which represented the remainder of the loan
origination costs incurred with previous financial institutions. These increases
were offset by a decrease in amortization expense incurred in 1997 related to
preopening costs arising from the five restaurants opened in 1996 and one in
1997.
The increase in interest expense of approximately $211,000 to
approximately $362,000 for the 1998 third quarter from approximately $151,000
for the same 1997 period, resulted primarily from approximately $180,000 in
interest expense on the credit facilities utilized in the purchase of Epicure on
April 1, 1998.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenues increased approximately $5,925,000, or 14.2%, to approximately
$47,560,000 for the 1998 nine-month period from approximately $41,635,000 for
the 1997 nine-month period. The Epicure Market, acquired on April 1, 1998,
contributed revenues of approximately $6,831,000 in 1998. The Boca Raton Rascal
House restaurant, opened July 1, 1998, added revenues of approximately
$1,425,000. The Costa Mesa restaurant, which opened in August 1997, contributed
revenues of approximately $2,656,000 to the 1998 period, compared to
approximately $685,000 for the 1997 nine-month period. The Rascal House
restaurant in Miami Beach, Florida had decreased revenues of approximately
$238,000, or 3.4% for the 1998 period. Revenues for the same eight Southern
California restaurants operated during both nine-month periods, decreased
approximately $3,995,000, or 11.8%. The majority of these decreases are
attributable to the reasons discussed in the quarter-to-quarter comparison.
Cost of sales, as a percentage of revenues, increased 1.9 percentage
points, to 32.7% for the 1998 period from 30.8% for the 1997 period. As
discussed above, Epicure accounted for the majority of the increase. Without
Epicure, cost of sales increased 0.4 percentage point to 31.2% for the 1998
period as compared to 30.8% for the same 1997 period, which is consistent with
the description for the third quarter.
Labor expense, as a percentage of revenues, decreased 1.1 percentage
points, to 35.6% in 1998 from 36.7% for 1997, primarily due to the same factors
as those discussed above with respect to the third quarter.
Occupancy and other expense, as a percentage of revenues, increased 0.9
percentage point, to 14.9% for 1998 period compared to 14.0% in the same 1997
period, due to the same factors as described above in the quarter-to-quarter
comparison.
General and administrative expenses, as a percentage of revenues,
decreased 0.8 percentage point to 7.4% for 1998 from 8.2% for 1997 due to a
decrease in management labor expense in 1998 due to the reductions in salaries
for three executive officers in October 1997. In addition, the bonus calculation
was revised as well, resulting in a reduction
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of bonus. These changes accounted for a difference of approximately $160,000 in
1998. The Company also reduced expenses for legal, insurance, and public
relations as significantly higher amounts were incurred in 1997 based on the
five restaurants opened or acquired since June 1996. Offsetting these reductions
were Epicure which contributed $260,000 for the nine months ended. 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 revenues,
decreased .2 percentage point to 6.5% in 1998 from 6.7% in the 1997 period,
mostly due to the same factors as those discussed above with respect to the
third quarter.
Interest expense as a percentage of revenues, increased approximately .9
percentage point to 2.0% for 1998 from 1.1% for 1997, primarily due to the
factors as discussed above with respect to the third quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily for the development,
construction and equipping of new restaurants and specialty markets. Generally,
the Company seeks leased locations and extensively remodels the existing
building for each new restaurant. Based on historic experience, each new
restaurant requires between $2 million and $3 million for remodeling and
purchasing of equipment.
The Company has slowed down its plans for expansion as it continues to
focus on improving existing locations performance and implementing the outside
consultant's recommendations. The Company will be seeking to acquire well
established deli-style restaurants in markets conducive to its customer base
during 1999.
The Company obtained a new credit facility, which includes a term loan
for $9 million and a line of credit for $6 million. The company used cash on
hand and cash flows from operations to pay for certain costs related to the
acquisition of Epicure and purchase of the Boca Raton facility, which reduced
its cash position and resulted in an increase in accounts payable compared to
historical levels.
Management believes that cash on hand, cash flows from operations and
its line of credit will be sufficient to finance prospective acquisitions and
operation of the Company's existing restaurants. Management is not currently
seeking any new locations for development or acquisition, however, it is
exploring joint venture and licensing opportunities. 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 may be dependent upon the Company obtaining additional capital.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 computer problems. Such problems may result in
errors and miscalculations or even system failure causing disruptions in
everyday business activities and transactions. The Company is currently
upgrading its equipment to be Year 2000 compliant, or has an existing upgrade
available from the software vendor that is year 2000 compliant for the majority
of its computer software. All systems that are not currently Year 2000 compliant
will either be upgraded to be Year 2000 compliant or replaced with alternative
systems that are Year 2000 compliant during the next year. While achieving Year
2000 compliance is a major task, it is not expected to have a material impact on
the Company's financial condition or results of operations.
Statements made herein that are not historical facts are forward looking
statements. Important factors that could cause the Company's actual results to
differ materially from those projected in, or inferred by, forward looking
statements are (but are not necessarily limited to) the following: the impact of
increasing competition in the moderately priced, casual dining segment of the
restaurant industry; changes in general economic conditions which impact
consumer spending for restaurant occasions; weather and acts of nature which
impact restaurant sales; adverse publicity; availability and cost of labor;
governmental and regulatory problems which impact operations of restaurants such
as health code enforcement changes, land use regulations and pollution controls;
unforeseen events which increase the cost to develop and/or delay the
development and opening of new restaurants and markets; the amount and rate of
growth of administrative expenses associated with building a strengthened
corporate infrastructure to support the development and operation of new
restaurants; the availability, amount, type and cost of financing for the
Company and any changes to that financing; the revaluation of any of the
Company's assets (and related expenses) and the amount of changes to tax rates.
Further information on these and other risk factors is contained in the
Company's Annual Report on Form 10-K
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for the year ended December 31, 1997, Amended Form 8-K filed on April 24, 1998,
and Forms 10-Q filed on May 14, 1998 and August 14, 1998, and its other reports
filed with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Items 1. through 4. Not applicable.
Item 5 Other Information
In September 1998, the Company entered into a new Credit Facility with
BankBoston, N.A. The agreement includes a $9,000,000 term loan and a $6,000,000
revolving line of credit. In conjunction with the agreement, the Company paid
off certain existing debt with the proceeds from the term loan. The term loan
and revolver mature five years from inception and bear interest at the
Eurodollar rate plus a variable percentage margin totaling 8.00% at September
30, 1998. The debt is secured by assets of the Company and includes certain
financial covenants.
Item 6. Exhibits and Reports on Form 8-k
Exhibit
Number
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10.44 Credit agreement, dated as of September 11, 1998, by and
between Jerry's Famous Deli, Inc. and BankBoston, N.A.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JERRY'S FAMOUS DELI, INC.
Date: November 11, 1998 By: /s/ Isaac Starkman
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Isaac Starkman
Chief Executive Officer and
Chairman of the Board of
Directors
By: /s/ Christina Sterling
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Christina Sterling
Chief Financial Officer
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