Exhibit (a)(1)(I)
JERRY'S FAMOUS DELI, INC.
SUPPLEMENT TO OFFER TO PURCHASE FOR CASH
UP TO 600,000 SHARES
OF COMMON STOCK
AT $5.30 NET PER SHARE
The offer and withdrawl rights will expire at 5:00 p.m., California time,
on August 31, 2001, unless the offer is extended.
This Supplement to the Offer to Purchase (this "Supplement") of Jerry's
Famous Deli, Inc., a California corporation (the "Company") is designed to be
read in conjunction with the Company's Offer to Purchase dated April 27, 2001,
copies of which has been previously disseminated to the Company's shareholders.
Unless otherwise indicated, capitalized terms set forth in this Supplement have
the same meanings attributed to them in the Offer to Purchase.
Extension of Expiration Date
The Company has extended the expiration date of the Offer to 5:00 p.m.,
California time, on August 31, 2001. The Company reserves the right, in its sole
discretion, to further extend the period of time for which the Offer is open.
Recommendation of the Company
As is indicated in the Offer to Purchase, the Company's Board of
Directors appointed an Independent Committee consisting of Paul Gray and Stanley
Schneider, its two independent directors, to negotiate, finalize and approve a
tender offer on behalf of the Company. The Independent Committee, in connection
with its decision to approve the self-tender offer by the Company, considered
the fairness of the Offer to the Public Shareholders of the Company. After
considering a number of factors discussed in both the Offer to Purchase and in
this Supplement, the Independent Committee determined that the Offer was fair to
the Public Shareholders of the Company.
The Company has not conducted its own independent analysis as to the
fairness of the Offer to the Public Shareholders but instead has relied upon the
findings of the Independent Committee. Based on the analyses and conclusions of
the Independent Committee, the Company believes that the Offer is both
substantively and procedurally fair to the Public Shareholders.
Fairness of the Offer
Substantive Factors. The Offer to Purchase describes those factors that
the Independent Committee considered relevant in reaching its determination that
the Offer is fair to the Public Shareholders. See, "Special Factors - Fairness
of the Offer." In addition to those factors set forth in the Offer to Purchase,
the Independent Committee considered a number of additional valuation factors
but ultimately concluded that those valuation factors were not relevant to the
Company's business or the nature of the Offer.
For example, the Independent Committee did not believe that a
determination of either the Company's net book value or liquidation value were
relevant to its conclusion that the Offer was fair to the Public Shareholders.
The value of a restaurant operating company includes certain intangibles, such
as the good will and reputation of the business, that generally are not
reflected in its tangible assets. Accordingly, factors such as the net book
value or liquidation value of the Company, which focus solely on its tangible
assets, do not adequately reflect the value of the Company.
In addition, the Independent Committee did not believe that the going
concern value of the Company was relevant to a determination of the fairness of
the Offer. As is indicated in the Offer to Purchase, the Company retained Banc
of America Securities as its investment banker to help it find potential buyers.
Over an eighteen month period after it retained Banc of America, the Company was
not successful in attracting a single serious offer to purchase, and received
only three preliminary indications of interest from potential buyers, none of
which presented sufficient value to shareholders to consider pursuing. Given the
Company's inability to attract a legitimate offer during this time period, the
Independent Committee did not believe that the going concern value of the
Company provided a realistic means of valuing the Company in connection with the
Offer.
Finally, the Independent Committee did review the previous purchases
the Company made of its own securities but did not consider these repurchases to
be relevant to its fairness determination. As is indicated in the Offer to
Purchase, from September 1998 through September 1999, in an effort to increase
its share price, the Company announced a Share Repurchase Program. In connection
with that Share Repurchase Program, the Company purchased approximately 365,154
shares of its Common Stock at prices ranging from $2.64 to $4.50 per share.
These purchases were made in the open market based on the then trading price of
the shares. (Both the share amounts and price per share are as adjusted for the
Company's three for one reverse split of its Common Stock effective as of
February 9, 2000.) However, the Share Repurchase Program ended over eighteen
months prior to the commencement of the Offer and, given this lapse of time, the
Independent Committee did not believe that the prices paid by the Company to
repurchase its own shares was relevant to its determination of the fairness of
the Offer. In addition, the Independent Committee does not believe that the
prices paid in these individual transactions reflect the value of the Company as
a whole.
For the reasons set forth herein and in the Offer to Purchase, the
Independent Committee determined that the Offer was substantively fair to the
Public Shareholders. The Company has adopted the findings of the Independent
Committee as to the substantive fairness of the Offer.
Procedural Safeguards. As is indicated in the Offer to Purchase, the
Independent Committee believes that the Offer is procedurally fair to the
shareholders of the Company based on the factors set forth therein. See,
"Special Factors - Fairness of the Offer." In reaching its conclusion, the
Independent Committee recognizes that neither the Offer nor any Short-Form
Merger or Long-Form Merger that may follow the completion of the Offer is or
will be structured in such a manner as to require the approval of at least a
majority of the Public Shareholders of the Company. The Independent Committee
believes, however, that the other procedural safeguards that do exist both in
connection with the Offer and in connection with any subsequent going private
transaction offer sufficient protection for the Company's unaffiliated
shareholders.
In connection with the Offer, each Public Shareholder of the Company
can determine individually whether to tender Shares in the Offer and,
accordingly, those Public Shareholders that do not believe in the fairness of
the Offer are not required to tender their Shares. In addition, the Public
Shareholders that do not believe in the fairness of any Short-Form Merger or
Long-Form Merger that may occur subsequent to the termination of this Offer can
pursue appraisal rights under the California Corporation Law, as described in
the Offer to Purchase under the heading "Special Factors - Rights of
Shareholders in the Offer and Any Merger."
In addition, as is indicated in the Offer to Purchase, to avoid any
potential conflict of interest of the Board of Directors by virtue of the
Control Shareholders' substantial ownership interest in the Company, the
Company's Board established the Independent Committee and gave it the sole and
exclusive authority to set the terms of the Offer. The Independent Committee did
not appoint an independent representative to act exclusively as the agent of the
unaffiliated shareholders for the purpose of negotiating the terms of the Offer
or any subsequent Short-Form Merger or Long-Form Merger or preparing a report
concerning the fairness of the transaction. However, the Independent Committee
retained an independent financial advisor to render a fairness opinion, and the
Independent Committee established a price for the Offer which was higher than
the value determined by the independent financial advisor. The Independent
Committee believes that its decision to establish an offer price in excess of
that determined by the independent financial adviser, together with the
voluntary nature of the Offer which may be accepted or rejected independently by
each Shareholder, mitigates the need for a separate independent representative
of the unaffiliated shareholders. The Company has adopted the findings of the
Independent Committee with respect to the procedural fairness of the Offer.
Report of Financial Advisor.
As is indicated in the Offer to Purchase and in this Supplement, the
Independent Committee retained The Mentor Group to assist in its determination
as to the fairness of the Offer to the Public Shareholders. The Independent
Committee selected The Mentor Group after interviewing three independent
valuation firms. The Mentor Group is a national, full-service valuation and
appraisal firm that specializes in the valuation and appraisal of public,
private and closely-held companies. The Mentor Group has experience in the
valuation of restaurant companies, having performed such services in connection
with numerous other transactions, including public offerings, mergers and
acquisitions, corporate dissolutions, fairness opinions and similar matters.
Members of the Independent Committee, in connection with their employment
outside of the Company, had previously worked with The Mentor Group in
connection with valuation projects unrelated to the Company. Based on these
prior dealings and The Mentor Group's qualifications, the Independent Committee
selected The Mentor Group to prepare an opinion as to the fairness of this
transaction. Except for the preparation of its report, no material relationship
exists or has existed between the Company and The Mentor Group. The Mentor Group
was compensated by the Company for rendering its report; however, as is
indicated in the report, the fee for its engagement was not contingent upon any
particular outcome reported.
In its report, The Mentor Group expressed the opinion that the Offer
Price was fair to the current shareholders of the Company from a financial point
of view. In arriving at this opinion, The Mentor Group reviewed the historical
stock prices and trading volume for the Company's common stock as well as the
audited annual financial statements as of December 31, 1996 to December 31, 2000
and the four quarterly financial statements as of December 31, 2000. The Mentor
Group also visited the business office and certain restaurants of the Company
and met with certain members of management to discuss operations, financial
conditions, future prospects and projected operations and performance of the
Company.
In accordance with customary practice, The Mentor Group employed
generally accepted valuation methods in reaching its opinion, as summarized
below:
Market Valuation Analysis. Under this approach, The Mentor Group
compared the market value of the publicly traded stock of other operating
companies that The Mentor Group deemed comparable to the Company relative to the
market value of the Company's common stock and the Offer Price. The comparable
public companies analyzed by The Mentor Group included six restaurant companies
and four grocery companies. The financial data for these comparable companies
included their revenues, earnings, earnings before interest and taxes ("EBIT"),
earnings before interest, taxes, depreciation and amortization ("EBITDA"),
earnings before taxes ("EBT"), total assets and other financial data. In
performing its analysis, The Mentor Group calculated a number of multiples based
on the market price for these companies' securities (i.e.: price to revenues,
price to EBITDA, price to EBT, etc.) The Mentor Group then reconciled these
multiples by making certain adjustments based on factors such as the
diversification of product lines for each comparable company, earnings risk,
operations risk and size of market capitalization. The Mentor Group then applied
this range of multiples against the same factors for the Company (sales,
earnings, EBIT, etc.), which resulted in a range of values for the Company. The
value of the Company at the Offer Price exceeded this range.
Discounted Cash Flow Analysis. The Mentor Group performed a discounted
cash flow analysis to determine an estimate of the present value per share of
common stock, assuming the Company continued to operate as a going concern. The
Mentor Group performed this analysis because it provided additional insight into
the possible value of the Common Stock based on management's expectations of the
Company's fundamental financial performance and the cash flows such performance
could theoretically deliver to investors. This value was determined by
calculating the present value of the estimated future cash flows that the
Company could generate over the three-year period from 2001 to 2003, and then
adjusting these aggregate values to equity values by subtracting net debt. To
determine the cash flows, The Mentor Group utilized financial information
provided in the Company's management's financial forecasts, and then applied a
discount rate range to discount cash flows back to present value. This discount
rate was determined to be appropriate by The Mentor Group based on its estimates
of the Company's weighted average cost of capital, which is its average cost of
raising funds from both debt financings (estimated from market rates on
comparable securities) and of the Company's common equity (estimated using the
capital asset pricing model). The final discount rate range was determined by
weighting these individual inputs
according to their proportionate composition in the Company's total capital
structure. Based on the above analysis, The Mentor Group determined that the
value for the Company at the Offer Price exceeded the range of estimated market
values for the Company using the discounted cash flow approach.
Merger and Acquisition Multiples. The Mentor Group reviewed publicly
available information for selected completed or pending transactions to
determine the implied premiums payable in transactions over recent trading
prices. The Mentor Group performed this analysis because it believed that
examining premiums paid in mergers and acquisitions involving restaurant and
grocery companies, and comparing them to the Offer, provided a useful reference
point in determining whether the consideration offered in this merger was fair
from a financial point of view. The Mentor Group believed that these
transactions formed an appropriate basis for comparison to the Offer because
they all involved arms length negotiations with unaffiliated third parties in
the same industries as the Company. The Mentor Group concluded that the premium
over the market price represented by the Offer Price exceeded the range of
premiums paid in comparable merger and acquisition transactions.
The opinion of The Mentor Group is addressed to the Independent
Committee and should not be considered a recommendation to any shareholders
regarding whether a shareholder should tender shares in the Offer. The Mentor
Group did not establish the Offer Price. The Independent Committee determined
all terms of the Offer, including the Offer Price
Line of Credit
As is indicated in the Offer to Purchase, the Company intends to use
its retained cash flow from operations as well as its existing line of credit to
repurchase the shares sought in this Offer. The Company's existing line of
credit consists of a $15,000,000 credit facility with BankBoston, N.A. in the
form of a $9,000,000 term loan and $6,000,000 revolving line of credit. The term
loan and revolver mature in September 2003 and bear interest at the Eurodollar
rate plus a variable percentage margin totaling approximately 9.22% at December
31, 2000. The debt is collateralized by assets of the Company and includes
certain financial covenants. The Company intends to repay this loan using its
cash flow from operations.
In connection with this Supplement, the Company has filed with the
Commission an Amendment No. 2 to Tender Offer Statement on Schedule TO, pursuant
to Rule 13e-4 of the General Rules and Regulations under the Exchange Act,
furnishing certain additional information with respect to the Offer. Such
Schedule TO and any amendments thereto, including exhibits, may be examined and
copies may be obtained from the offices of the Commission in the same manner as
described in the Offer to Purchaser under the heading "The Tender Offer--Certain
Information Concerning the Company" with respect to information concerning the
Company, except that they will not be available at the regional offices of the
Commission.
Interest in Securities of the Company
The information regarding beneficial ownership of Common Stock by
Kenneth Abdalla as set forth in the Offer to Purchase has been corrected. Set
forth below is the correct information regarding Mr. Abdalla's beneficial
ownership of the Company's Common Stock.
Shares Beneficially Owned
-------------------------
Number of Shares Percentage of Class
---------------- -------------------
Kenneth J. Abdalla 426,720(4) 9.13%
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(1) Consists of 66,667 shares of Common Stock held of record by Kenneth
Abdalla, 35,899 shares of Common Stock held by Yucaipa Waterton Deli
Investors, LLC ("Yucaipa"), 324,154 shares of Common Stock held by
Jerry's Investors, LLC ("JILLC"). As a result of Waterton's status as
the manager of Yucaipa and JILLC, and Mr. Abdalla's status as the
manager of Waterton, Mr. Abdalla may be deemed to have shared
dispositive and voting power with respect to the shares held by
Yucaipa, JILLC and Waterton. However, Mr. Abdalla disclaims beneficial
ownership of such shares.
The Company has been advised that certain members of JILLC intend to
tender Shares in response to the Offer. As of the date of this Supplement, the
number of shares to be tendered by the members of JILLC has not been determined.
In addition, the Company has been advised that Guy Starkman, the President of
the Company, may tender up to 50,000 of his Shares in the Offering.
August 3, 2001 JERRY'S FAMOUS DELI, INC.