-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ou1FGoK6yhdAfSZkji37CrsbYdDWWowKUR/ovWcLwjP4fkiOuynQC1oip+0q1dba 3gKHM53Hf+ndv3A+AAdbvg== 0000950148-98-001346.txt : 19980518 0000950148-98-001346.hdr.sgml : 19980518 ACCESSION NUMBER: 0000950148-98-001346 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: JERRYS FAMOUS DELI INC CENTRAL INDEX KEY: 0000948308 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 953302338 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26956 FILM NUMBER: 98625024 BUSINESS ADDRESS: STREET 1: 12711 VENTURA BLVD STREET 2: STE 400 CITY: STUDIO CITY STATE: CA ZIP: 91604 BUSINESS PHONE: 8187668311 MAIL ADDRESS: STREET 1: 12711 VENTURA BLVD STREET 2: STE 400 CITY: STUDIO CITY STATE: CA ZIP: 91604 10-Q 1 FORM 10-Q 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 March 31, 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 Identification No.) Incorporation or Organization) 12711 Ventura Boulevard, Suite 400, Studio City, California 91604 ----------------------------------------------------------------- (Address of Principal Executive Offices) (818) 766-8311 -------------------------------------------------- (Registrant's Telephone Number, Including Area Code) - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of May 1, 1998, outstanding common shares totaled 15,144,664. 2 JERRY'S FAMOUS DELI, INC. INDEX
Page Number ------ PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997........... 2 Consolidated Statements of Operations for the Three Months Ended March 31, 1998 and March 31, 1997................................................ 3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and March 31, 1997................................................ 4 Notes to Consolidated Financial Statements....................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 9 Liquidity and Capital Resources..................................................10 Item 3. Quantitative and Qualitative Disclosure About Market Risk........................10 PART II - OTHER INFORMATION Items 1. through 6......................................................................12 Signatures...............................................................................13
1 3 JERRY'S FAMOUS DELI, INC. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1998 1997 ----------- ----------- ASSETS Current assets Cash and cash equivalents $ 7,308,119 $ 2,264,308 Accounts receivable, net 213,206 272,511 Inventory 410,000 525,200 Prepaid expenses 1,322,526 1,729,687 Preopening costs 65,824 105,318 Deferred income taxes 63,063 63,063 Prepaid income taxes -- 24,605 ----------- ----------- Total current assets 9,382,738 4,984,692 Property and equipment, net 31,896,101 29,835,529 Organization costs 88,913 92,143 Deferred income taxes 725,983 725,983 Goodwill and covenants not to compete 1,690,550 1,757,342 Other assets 632,419 581,917 ----------- ----------- Total assets $44,416,704 $37,977,606 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 1,880,105 $ 2,195,980 Accrued expenses 1,238,184 1,426,073 Sales tax payable 368,360 402,220 Income taxes payable 23,778 -- Current portion of long-term debt 1,517,133 752,063 ----------- ----------- Total current liabilities 5,027,560 4,776,336 Long-term debt 13,701,872 7,690,219 Deferred rent 445,228 455,129 ----------- ----------- Total liabilities 19,174,660 12,921,684 Minority interest 483,086 480,379 Equity Preferred stock Series A, no par, 5,000,000 shares authorized; no shares issued or outstanding at March 31, 1998 or December 31, 1997 -- -- Common stock, no par value, 60,000,000 shares authorized, 14,210,155 issued and outstanding at March 31, 1998 and December 31, 1997, respectively 23,724,484 23,724,484 Equity 1,034,474 851,059 ----------- ----------- Total equity 24,758,958 24,575,543 ----------- ----------- Total liabilities and shareholders' equity $44,416,704 $37,977,606 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements 2 4 JERRY'S FAMOUS DELI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1998 1997 ------------ ------------ Revenues $ 14,264,685 $ 14,811,756 Cost of sales 4,384,184 4,378,917 ------------ ------------ Gross profit 9,880,501 10,432,839 Operating expenses Labor 5,152,587 5,518,866 Occupancy and other 2,058,298 1,800,136 Occupancy - related party 160,518 178,224 General and administrative expenses 1,096,654 1,202,689 Depreciation and amortization expenses 967,821 957,624 ------------ ------------ Total expenses 9,435,878 9,657,539 ------------ ------------ Income from operations 444,623 775,300 Other income (expense) Interest income 17,082 31,860 Interest expense (192,572) (153,741) Other income, net -- 415 ------------ ------------ Income before provision for income taxes and minority interest 269,133 653,834 Provision for income taxes 58,383 200,200 Minority interest 25,872 47,150 ------------ ------------ Net income $ 184,878 $ 406,484 ============ ============ Net income per share: Basic $ 0.01 $ 0.04 ============ ============ Diluted $ 0.01 $ 0.04 ============ ============ Weighted average common shares outstanding - Basic 14,210,155 10,386,250 ============ ============ Weighted average common shares outstanding - Diluted 14,344,741 10,492,591 ============ ============
The accompanying notes are an integral part of these consolidated financial statements 3 5 JERRY'S FAMOUS DELI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1998 1997 ----------- ----------- Cash flows from operating activities: Net income $ 184,878 $ 406,484 ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 967,821 957,624 Gain on sale of assets -- (631) Minority interest 25,872 47,150 Deferred income taxes -- (3,925) Deferred income -- 91,667 Changes in assets and liabilities Accounts Receivable 59,305 (141,759) Inventory 115,200 43,819 Prepaid expenses 407,161 (204,185) Preopening costs -- (4,230) Prepaid income tax 24,605 -- Other assets (56,395) (40,986) Accounts payable (315,875) (1,314,563) Accrued expenses (187,889) (146,796) Sales tax payable (33,860) (46,971) Income taxes payable 23,778 201,979 Deferred credits -- (15,976) ----------- ----------- Total adjustments 1,029,723 (577,783) ----------- ----------- Net cash provided by (used in) operating activities 1,214,601 (171,299) ----------- ----------- Cash flows from investing activities: Additions to equipment (256,340) (554,791) Additions to improvements - land, building and leasehold (242,379) (349,860) Additions to construction-in-progress (2,426,629) (356,440) Proceeds from sale of fixed assets -- 4,000 ----------- ----------- Net cash used in investing activities (2,925,348) (1,257,091) ----------- ----------- Cash flows from financing activities: Borrowings from credit facility 6,965,000 -- Payments on long-term debt (188,278) (144,685) Capital lease payments -- (9,472) Dividends paid to minority shareholders (22,164) (23,185) Proceeds from exercise of 65,000 warrants, net of related costs -- 57,047 ----------- ----------- Net cash provided by (used in) financing activities 6,754,558 (120,295) ----------- ----------- Net increase (decrease) in cash and cash equivalents 5,043,811 (1,548,685) Cash and cash equivalents, beginning of period 2,264,308 4,145,265 ----------- ----------- Cash and cash equivalents, end of period $ 7,308,119 $ 2,596,580 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements 4 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 months ended March 31, 1998 and March 31, 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 financial statement is derived from 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 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 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 and Woodland Hills, Costa Mesa and Rascal House, which is located in Florida. An eleventh restaurant in Boca Raton, Florida, is under renovation and is scheduled to open in the summer of 1998 as another Rascal House. On April 1, 1998, the Company acquired The Epicure Market, Inc., a specialty gourmet food store located in Miami, Florida. Reclassification Certain amounts in the previously presented financial statements have been reclassified to conform with current period presentation. 2. SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended March 31, 1998 1997 ---- ---- Supplemental cash flow information: Cash paid for: Interest.......................................................$218,000 $ 155,000 Income taxes...................................................$ 10,000 $ 3,500 Supplemental information on noncash investing and financing activities: Preferred Stock converted into common stock....................$ -- $9,153,078 Write off of fully depreciated capital leases..................$ -- $ 124,062
5 7 3. NET INCOME PER SHARE In February 1997, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 supersedes and simplifies the previous computational guidelines under Accounting Principles Board Opinion ("APB") No. 15, "Earnings Per Share." Among other changes, SFAS No. 128 eliminates the presentation of primary earnings per share ("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. Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per common 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. Net income per share and weighted average shares outstanding for all prior periods have been restated in accordance with SFAS No. 128. 4. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued two statements -- SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information, which are effective for the Company in the current fiscal year. In addition, in February 1998, the FASB issued SFAS No. 132, "Employers Disclosure About Pensions and Other Postretirement Benefits" which will also be effective for the Company in the current fiscal year. Presently, these standards have no impact on the Company's consolidated financial statements. 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 required 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 the beginning of the fiscal year of adoption. Total deferred preopening costs were approximately $66,000 at March 31, 1998. 5. BOCA RATON PROPERTY On January 21, 1998, the Company entered into an agreement to acquire a long-term ground lease on an 11,000 square foot restaurant property located in Boca Raton, Florida. The acquisition closed on February 18, 1998. Under the agreement, the Company acquired the restaurant equipment and other personal property located on the premises, and the seller's liquor license for the restaurant, for a total purchase price of approximately $1,800,000. The Company has closed the restaurant until the summer of 1998 for refurbishment and conversion to a Rascal House restaurant. 6. PURCHASE OF THE EPICURE MARKET, INC. In December 1997, the Company entered into an agreement to purchase The Epicure Market, Inc. of Miami Beach, Florida, a family-owned specialty gourmet food market which has been in operation for more than 50 years. The total purchase price was approximately $7,100,000 in cash and 934,509 shares of the Company's common stock (valued at approximately $2,500,000). Concurrently with the purchase, the Company entered into a 20-year term lease agreement with additional options to renew with affiliates of the seller and five-year term employment agreements with the two family members who, together with their family, have managed the market for over 50 years. The Company plans to increase the interior sales area of the market, install seating for in-house dining, increase store operating hours, and expand into delivery, catering and home meal replacement. The acquisition closed on April 1, 1998. The shares issued in conjunction with the purchase agreement have been registered for resale effective May 15, 1998. The Company has included unaudited pro forma financial statements related to this purchase in note seven below. 6 8 7. UNAUDITED PRO-FORMA FINANCIAL STATEMENTS The following table presents unaudited Pro Forma Statement of Operations as if the purchase of assets and operations of Epicure had occurred as of January 1, 1998. The unaudited Pro Forma Condensed Balance Sheet is presented as if the purchase of assets and operations of Epicure had occurred as of March 31, 1998. These financial statements 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 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.
Quarter ended March 31, 1998 ---------------------------- JFD Epicure Adjustments Pro-Forma --- ------- ----------- --------- (in thousands, except per share data) Revenues $14,265 $4,146 -- $18,411 Cost of Goods Sold 4,384 1,743 -- 6,127 ------- ------ ---- ------- Gross Profit 9,881 2,403 -- 12,284 Operating expenses 7,371 1,312 (19)(a) 8,664 General and administrative expenses 1,097 315 (55)(b) 1,357 Depreciation and amortization expenses 968 29 105 (c) 1,102 ------- ------ ---- ------- Total expenses 9,436 1,656 31 11,123 Income from operations 445 747 (31) 1,161 Interest income 17 17 -- 34 Interest expense (193) -- (170)(d) (363) Other income, net -- -- -- -- ------- ------ ---- ------- Income before provision for income taxes and minority interest 269 764 (201) 832 Provision for income taxes (58) -- (191)(e) (249) Minority interest (26) -- -- (26) ------- ------ ---- ------- Net income 185 764 (392) 557 Pro forma net income per share - Basic $ 0.01 $ 0.04 ------- ------- Pro forma net income per share - Diluted $ 0.01 $ 0.04 ------- ------- Pro forma weighted average shares outstanding - Basic 14,210,155(f) 15,144,664 (g) Pro forma weighted average shares outstanding - Diluted 14,344,741(f) 15,279,250 (g)
(a) Compensation to the owners of Epicure and certain other persons in the amount of $19,000 for the three months ended 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 $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 March 31, 1998 10-Q. (g) Includes 934,509 common shares issued in the purchase of Epicure which are treated as outstanding for the entire three months ended March 31, 1998. 7 9 7. UNAUDITED PRO-FORMA FINANCIAL STATEMENTS, CONTINUED. Pro Forma Condensed Balance Sheet
March 31, 1998 --------------- JFD Epicure Adjustments Pro Forma --- ------- ----------- --------- ASSETS Current Assets Cash and cash equivalents $ 7,308 $ -- $ --(1) $ 7,308 Inventory 410 -- 409(2) 819 Prepaid expenses 1,323 -- -- 1,323 Other current assets 342 -- -- 342 -------- ------- ------- -------- Total current assets 9,383 -- 409 $ 9,792 Property, plant and equipment, net 31,896 -- 1,925(2) 33,821 Covenants not to compete 301 -- 90(2) 391 Goodwill 1,390 -- 7,176(2) 8,566 Other assets 1,447 -- -- 1,447 -------- ------- -------- -------- Total assets $ 44,417 $ -- $ 9,600 $ 54,017 ======== ======= ======== ======== LIABILITIES AND EQUITY Current liabilities $ 5,028 $ -- $ -- $ 5,028 Long-term debt and other liabilities 14,147 -- 7,100(1) 21,247 Minority interest 483 -- -- 483 Equity: Preferred stock -- -- -- -- Common stock 23,725 -- 2,500(2) 26,225 Retained earnings 1,034 -- -- 1,034 -------- ------- -------- -------- Total liabilities and equity $ 44,417 $ -- $ 9,600 $ 54,017 ======== ======= ======== ========
(1) Records the net change in cash and cash equivalents as a result of net proceeds received from the utilization of lines of credit for $7,100,000 and subsequent payout of the funds to Epicure. (2) The purchase price of $7,100,000 in cash and 934,509 shares of the Company's common stock (valued at approximately $2,500,000) was allocated to the following: $600,000 to land (parking lot); $500,000 for leasehold improvements and $825,000 in fixtures and equipment which are depreciated on a straight line basis over 25 and 4 years, respectively; $408,801 in inventory; $90,000 for covenants not to compete, which are amortized on a straight line basis over 5 years; and the balance of approximately $7,176,200 to goodwill, which is amortized on a straight line basis over 25 years. Other than inventory, land and fixtures and equipment, no other assets were acquired. In addition, no debt or other liabilities were assumed from Epicure. 8 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following table presents for the three months ending March 31, 1998 and 1997, the Consolidated Statements of Operations of the Company expressed as percentages of total revenue. The results of operations for the first three 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 MARCH 31, ---------------------------- 1998 1997 ----- ----- Revenues 100.0% 100.0% Cost of sales Food 28.9 27.1 Other 1.8 2.5 ----- ----- Total cost of sales 30.7 29.6 ----- ----- Gross profit 69.3 70.4 Operating expenses Labor 36.1 37.3 Occupancy and other 15.6 13.3 ----- ----- Total operating expenses 51.7 50.6 General and administrative expenses 7.7 8.1 Depreciation and amortization expenses 6.8 6.5 ----- ----- Total expenses 66.2 65.2 ----- ----- Income from operations 3.1 5.2 Interest income 0.1 0.2 Interest expense (1.3) (1.0) Other income (loss), net -- -- ----- ----- Income before provision for income taxes and minority interest 1.9 4.4 Provision for income taxes 0.4 1.4 Minority interest 0.2 0.3 ----- ----- Net income 1.3% 2.7% ===== =====
RESULTS OF OPERATIONS Revenues decreased $547,000, or 3.7%, to approximately $14,265,000 for the 1998 three-month period from approximately $14,812,000 for the 1997 three-month period. The Costa Mesa restaurant, which opened in August 1997, contributed revenues of approximately $957,000 to the 1998 period. The Rascal House restaurant in Florida had increased revenues of approximately $59,000, or 2% for the three months ended March 31, 1998 as compared to the 1997 period. Same store sales for the other eight Southern California stores in operation since January 1, 1997 decreased approximately $1,500,000, or 12.9%, for the three months ended March 31, 1998 compared to the same period for 1997. Management attributes the majority of the revenue decrease in the Southern California restaurants to the extremely unusual rain produced by the "El Nino" weather condition. In the first three months of 1998, Southern California received twice the normal rainfall as compared to 1997. Furthermore, the Company attributes a portion of the decrease to the reduction in hours of operation from 24 hours a day in several locations in the fourth quarter of 1997 and first quarter of 1998. 9 11 As a percentage of revenues, cost of sales increased 1.1 percentage points to 30.7% in 1998 from 29.6% in 1997. Of the 1.1 percentage point increase, the cost of food, which comprises over 90% of cost of sales, contributed a 1.2 percentage point increase. The major portion of this increase results from higher food costs on the Company's core products. The Company's other components of cost of sales decreased slightly, mainly as a result of more efficient buying and increased management monitoring of purchase costs. Total expenses, as a percentage of revenues, increased 1.0 percentage point to 66.2% for the three months ended March 31, 1998 from 65.2% for the three months ended March 31, 1997. One factor contributing to the difference was the increase in occupancy and other expenses, which increased 2.3 percentage points to 15.6% for the period as compared to 13.3% for the same 1997 period. The majority of this increase was related to maintenance and supplies expense, which combined contributed over $100,000 of the increase. The increases in these accounts were due mainly to the Company's expenditures to ensure continued compliance with the Los Angeles County Department of Public Health requirements for food preparation, food handling and food storage. As a result of these expenditures and many hours of diligent labor by both employees and management, the Company's restaurants which have been inspected by the Department have received an "A" rating, the highest rating possible. Another component of the increase was the approximately $183,000 increase in depreciation expense, to approximately $857,000 in 1998 from approximately $674,000 in 1997. Approximately $96,000 of the increase is due to the Costa Mesa restaurant, which opened in August 1997. In addition, the Company had numerous additions and betterments to the other nine restaurants in operation during 1997. Amortization expense decreased approximately $173,000 for the three months ended March 31, 1998 from approximately $284,000 in 1997 to approximately $111,000 in 1998. This decrease is primarily due to amortization expense incurred in 1997 related to preopening costs arising from the five restaurants opened in 1996. Preopening expense for the Costa Mesa restaurant opened in August 1997 and the five restaurants opened in 1996 are or were amortized over the twelve month period following their openings. Labor expense, as a percentage of revenues, decreased 1.2 percentage points to 36.1% for the 1998 quarter from 37.3 % for the 1997 quarter. Consistent with the Company's operating philosophy, newly-opened restaurants commonly incur relatively higher labor costs during the first several months after opening until predictable customer usage patterns are developed. As such, the Woodland Hills restaurant, which reopened after renovations in December 1996, had a decrease in labor costs of approximately $228,000, or 7.4 percentage points as a percentage of sales for the 1998 quarter as compared to the 1997 quarter. The five restaurants opened in 1996, including Woodland Hills, which contributed to an increase in labor expense for the three months ended March 31, 1997, had labor costs consistent with management expectations for more well established Jerry's restaurants for the three months ended March 31, 1998. The decrease in hours of operation from 24 hours for several of the restaurants also contributed to the decrease. General and administrative expenses, as a percentage of revenues, decreased 0.4 percentage point to 7.7% for the 1998 quarter from 8.1% for the 1997 quarter. The decrease was due mainly to the reduction in salaries for three executive officers effective October 1, 1997, and a change in the bonus calculation for those officers, which resulted in a reduction of bonus, accounting for a decrease of approximately $133,000. General and administrative expenses of approximately $334,000, representing approximately 30.5% of total general and administrative expenses in the 1998 quarter, relate directly to restaurant operations, including insurance, employee benefits and other expenses. This portion of general and administrative expenses is expected to increase as new restaurants are opened and/or acquired. The increase in interest expense of $39,000 to $193,000 for the 1998 three-month period from $154,000 for the same 1997 period, resulted primarily from interest expense on the Rascal House building purchased September 1997. 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. Additional capital expenditures will be required as new locations are added. The cost of renovation will depend upon the style of restaurant being converted. Renovation of Jerry's Famous Deli restaurants have cost between $2.0 million and $3.0 million per location, or $267 to $400 per square foot. The Company will open its eleventh restaurant in Boca Raton, Florida, in the summer of 1998. Funds to complete the renovation of the Boca Raton building and conversion to a Rascal House restaurant will come primarily from cash flows from operations. The Company acquired The Epicure Market, Inc. on April 1, 1998, for approximately $7,100,00 in cash and 934,509 shares of the Company's common stock (valued at approximately $2,500,000). 10 12 The Company has a revolving line of credit in the aggregate amount of $965,000 from United Mizrahi Bank, which was fully utilized in conjunction with the purchase of The Epicure Market, Inc. on April 1, 1998. The line of credit agreement, which terminated in April 1998, was extended for a period of three years with essentially the same terms and conditions. The Company entered into a $4,000,000 revolving line of credit agreement with Bank Leumi USA in October 1997. The line bears interest at the bank's reference rate plus 1.25%. The Company fully utilized this line in March 1997 in conjunction with the purchase of The Epicure Market, Inc. on April 1, 1998. Such borrowing is subject to interest only through January 1, 1999, when it automatically converts to a term loan with principal and interest payable in monthly installments until maturity on September 1, 2002. The Company also entered into a $2,000,000 non-revolving line of credit with Bank of America, NT&SA in October 1997, collateralized by the machinery, equipment and inventory of the Company. The line bears interest at the bank's reference rate plus 1.25%, and was fully utilized in conjunction with the purchase of The Epicure Market, Inc. on April 1, 1998. Principal and interest are payable in monthly installments, ending October 1, 2002, with prepayments permitted at any time. Management believes that cash on hand, including cash drawn on the lines of credit, and cash flows from operations will be sufficient to finance the acquisition of The Epicure Market, Inc., renovation and conversion of the Boca Raton facility to a Rascal House and operation of the Company's existing restaurants. Future anticipated capital needs, primarily for development or acquisition of new restaurants, cannot be projected with certainty. Additional capital expenditures will be required as new locations are added. The Company generally intends to seek leased locations. The cost of renovation will depend upon the style of restaurant being converted. Renovation of Jerry's Famous Deli restaurants have cost between $2,000,000 and $3,000,000 million per location, or $267 to $400 per square foot. In June 1997, the FASB issued two statements -- SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information, which are effective for the Company in the current fiscal year. In addition, in February 1998, the FASB issued SFAS No. 132, "Employers Disclosure About Pensions and Other Postretirement Benefits" which will also be effective for the Company in the current fiscal year. Presently, these standards have no impact on the Company's consolidated financial statements. 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 required 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 the beginning of the fiscal year of adoption. Total deferred preopening costs were approximately $66,000 at March 31, 1998 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 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. Further information on these and other factors is contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 and its other reports filed with the Securities and Exchange Commission. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Not applicable. 11 13 PART II - OTHER INFORMATION Items 1 through 6. Not applicable. 12 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: May 15, 1998 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 7,308,119 0 221,731 8,525 410,000 9,832,738 41,300,023 9,403,922 44,416,704 5,027,560 13,701,872 0 0 23,724,484 1,034,474 44,416,704 14,264,685 14,264,685 4,384,184 4,384,184 9,435,878 0 192,572 243,261 58,383 184,878 0 0 0 184,878 .01 .01
-----END PRIVACY-ENHANCED MESSAGE-----