Will Investors Bite When Jerry’s Deli Shares Go Public?

Plenty of Angelenos have eaten at Jerry’s Famous Deli. But how many of them have felt a compelling need to own Jerry’s?

We may find out as early as today: The Studio City-based restaurant chain is hoping to sell as many as 2.1 million shares to the public at $6 a piece. The deal is the first underwriting effort of a new Century City-based brokerage known as the Boston Group, an old-money-sounding firm that is anything but. (More on that later.)

As the prospectus for the deal clearly spells out, Jerry’s stock is an extremely high-risk issue. Three of the firm’s four Southland restaurants have been open just since 1989. Last year the company’s sales totaled $28.6 million and it earned a slim $754,000 according to the pro forma income statement, which adjusts for the stock offering.

With the 10.1 million shares that will be outstanding after the offering, Jerry’s 1994 earnings amounted to just 7 cents a share.

Why go public? Like any young restaurant chain, Jerry’s wants to expand. Of the 2.1 million shares to be offered, 1.7 million will be sold by the company itself, raising about $8.3 million after underwriting fees. Jerry’s plans to use about 30% of the funds to pay off debt and buy out limited-partner investors in its Encino restaurant.

The rest of the money, about $5.9 million, will be used to open new sites, including restaurants under development in Westwood and Pasadena.

Without expansion, Jerry’s faces a stagnant bottom line: Sales per site are high on a per-square-foot basis in part because of Jerry’s 24-hour operation, but the company has found that overall sales quickly plateau at each restaurant.

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Thus, the only way to make more money is to open more restaurants. Hopefully, Jerry’s shareholders will realize that the firm’s growth will be highly dependent on its access to fresh capital down the road. The cash raised in the initial offering will cover expansion costs for “at least the next 12 months,” Jerry’s estimates.

In the meantime, the stock offering also will give the chain’s current investors, including the founding Starkman family, a chance to cash out. Isaac Starkman, 57, and wife Carolyn will personally sell 400,000 of the 2.1 million offered shares, netting them about $2.2 million if the deal is priced at $6 a share. They will still control 65.5% of Jerry’s stock after the offering.

Another 1.1 million shares are being registered for sale by other current Jerry’s investors, a not-insignificant amount of stock that the prospectus dutifully notes could have an “adverse impact on [the] market price” of the stock should the owners attempt to exit in a hurry. They paid $4 a share for their stock last March, a third less than the $6 a share the public is being asked to pay now.

In one apparent concession to new shareholders, Isaac Starkman will take a pay cut. His cash salary in 1994, a hefty $500,000, will be reduced to a base of $390,000 annually, not including bonus. Starkman’s management team includes his two sons, 24-year-old Guy and 21-year-old Jason, who are vice presidents of operations and management information systems, respectively.

For whatever reasons, big institutional investors haven’t been clamoring for Jerry’s stock. The company’s underwriter, the Boston Group, concedes that most of the shares are expected to be purchased by individual investors.

Despite its name, the Boston Group’s only connection to that financial center is that Boston is the hometown of the firm’s 36-year-old chairman, Robert A. DiMinico. The brokerage was set up by DiMinico in March of this year, after DiMinico departed the Los Angeles office of A.S. Goldmen & Co., a firm active in the business of peddling low-priced, high-risk stocks.

Before joining Goldmen, DiMinico worked for D.H. Blair, a New York-based brokerage also well-known for its aggressive marketing of penny-stock underwritings.

DiMinico says his goal with Boston Group is to create a major investment banking and brokerage firm. In just six months, he has hired nearly 120 brokers, an expansion that has raised eyebrows in the local financial community. The fear, of course, is that Boston Group is just another high-sales-pressure peddler of risky stocks to ma and pa investors.

Not so, says DiMinico, who staunchly defends the integrity of his shop. “I’m absolutely ecstatic about the level of people we have here,” he says. He noted that he has hired Kye Hellmers, 45, a former officer of the National Assn. of Securities Dealers, to be compliance officer of Boston Group. “Kye,” DiMinico says, “is probably the most compliant individual I’ve ever met in my life.”

Build or Stagnate

Like many restaurant chains, Jerry’s Famous Deli finds that after opening a new location, its sales at that location rise to a certain level, then flatten out. That means the chain must continually open new restaurants or face stagnant earnings. Sales trends at Jerry’s four Southland sites:

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Sales (in millions) Site ’92 ’93 ’94 Studio City $8.4 $8.5 $8.7 Encino $5.9 $5.6 $5.7 Marina Del Rey $6.1 $6.0 $6.1 West Hollywood * * $7.6

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* site opened in January, 1994

Source: Jerry’s Famous Deli stock prospectus