<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 28, 1996
-----------------
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. 0-11271
-------
WALL STREET DELI, INC.
(Exact name of registrant as specified in its Charter)
<TABLE>
<S> <C>
Delaware 63-0514240
(State of Incorporation) (IRS Employer I.D. No.)
</TABLE>
400 Century Park South, Suite 116
Birmingham, Alabama 35226
(Address of principal executive offices)
(205) 822-3960
(Registrant's telephone number)
________________________________________________________________
Indicate by check mark whether the registrant has (1) 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
------- -------
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class Outstanding at February 4, 1997
- ---------------------------- -------------------------------
Common Stock, $.05 Par Value 3,215,168
</TABLE>
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 7
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II: OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 16
ITEM 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
The financial statements listed below are included on the following
pages of this Report on Form 10-Q:
Consolidated Balance Sheets at December 28, 1996 (unaudited)
and June 29, 1996.
Consolidated Statements of Income (unaudited) for the three
month and six month periods ended December 28, 1996 and
December 30, 1995.
Consolidated Statements of Stockholders' Equity (unaudited)
for the three and six month periods ended December 28, 1996
Consolidated Statements of Cash Flows (unaudited) for the six
month periods ended December 28, 1996 and December 30, 1995.
Notes to Consolidated Financial Statements (unaudited).
____________________________________________________________
[The remainder of this page intentionally left blank]
1
<PAGE> 4
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
December 28, 1996 June 29, 1996
----------------- -------------
<S> <C> <C>
ASSETS
Current:
Cash and equivalents $ 241,081 $ 1,882,844
Accounts and notes receivable - net (note 3) 1,001,145 1,636,230
Inventories (note 4) 705,626 686,809
Prepaid expenses and other 439,102 278,732
Refundable income taxes 239,670 239,670
Deferred tax benefit 953,000 1,043,000
------------ ------------
Total current assets 3,579,624 5,767,285
------------ ------------
Equipment and improvements:
Equipment and fixtures 17,627,408 18,114,226
Leasehold improvements 15,289,471 14,672,885
------------ ------------
32,916,879 32,787,111
Less accumulated depreciation and amortization (16,533,998) (16,190,946)
------------ ------------
Net equipment and improvements 16,382,881 16,596,165
------------ ------------
Other:
Long-term portion of notes receivable 728,798 743,103
Cash surrender value of officers'
life insurance 647,211 607,341
Deferred tax benefit 1,835,000 1,955,000
------------ ------------
Total other assets 3,211,009 3,305,444
------------ ------------
$ 23,173,514 $ 25,668,894
============ ============
</TABLE>
See accompanying notes to consolidated financial statements (Unaudited)
2
<PAGE> 5
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
December 28, 1996 June 29, 1996
----------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,344,515 $ 2,500,000
Accounts payable 1,335,667 1,718,621
Accruals 2,925,411 3,220,683
----------- -----------
Total current liabilities 5,605,593 7,439,304
----------- -----------
Stockholders' equity:
Common stock, $.05 par value, shares
authorized 20,000,000; issued 3,411,743
and 3,411,043 170,587 170,552
Additional paid-in capital 10,771,834 10,766,896
Retained earnings 7,673,148 7,302,690
----------- -----------
18,615,569 18,240,138
Less treasury stock, at cost, 196,575 shares
and 1,075 shares (1,047,648) (10,548)
----------- -----------
Total stockholders' equity 17,567,921 18,229,590
----------- -----------
$23,173,514 $25,668,894
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements (Unaudited).
3
<PAGE> 6
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended Months Ended
December 28, 1996 December 30, 1995 December 28, 1996 December 30, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 16,179,494 $17,195,352 $ 33,507,327 $34,744,271
Costs and expenses (income):
Costs of sales 14,654,852 15,692,398 30,087,812 31,684,182
Administrative and general expense 1,447,878 1,357,478 2,943,095 2,915,777
Interest expense - net 9,109 58,364 28,218 114,142
Expense (income) related to units
sold or closed (note 6) (168,456) 9,966 (168,456) (64,434)
------------ --------------- ------------- -------------
Total costs and expenses: 15,943,383 17,118,206 32,890,669 34,649,667
------------ --------------- ------------ -------------
Income before taxes on income 236,111 77,146 616,658 94,604
Taxes on income 94,000 25,000 246,200 25,000
------------ --------------- ------------ -------------
Net Income $ 142,111 $ 52,146 $ 370,458 $ 69,604
============ =============== ============ =============
Earnings per share (note 7) $ .04 $ .01 $ .11 $ .02
============ =============== ============ =============
Weighted average number of common
and common equivalent shares
outstanding (note 7) 3,327,722 3,411,491 3,372,118 3,417,614
============ =============== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements (Unaudited).
4
<PAGE> 7
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- ---------------------
Additional
Number paid-in Retained Number
of shares Amount capital earnings of shares Amount
----------- -------- ----------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995 3,405,354 $170,168 $10,733,141 $9,760,396 1,075 $ 10,548
Net income for the quarter 17,456
Exercise of stock options 5,038 252 14,346
--------- -------- ----------- ---------- --------- ----------
Balance, September 30, 1995 (unaudited) 3,410,392 170,420 10,747,487 9,777,852 1,075 10,548
Net income for the quarter 52,146
--------- -------- ----------- ---------- --------- ----------
Balance, December 30, 1995 (unaudited) 3,410,392 $170,420 $10,747,487 $9,829,998 1,075 $ 10,548
========= ======== =========== ========== ========= ==========
Balance, June 30, 1996 3,411,043 $170,552 $10,766,896 $7,302,690 1,075 $ 10,548
Net income for the quarter 228,347
Exercise of stock options 700 35 4,938
--------- -------- ----------- ---------- --------- ----------
Balance, September 28, 1996 (unaudited) 3,411,743 $170,587 10,771,834 $7,531,037 1,075 $ 10,548
Net income for the quarter 142,111
Purchase of treasury stock 170,500 898,350
Stock received from sale of
Memphis operation 25,000 138,750
--------- -------- ----------- ---------- --------- ----------
Balance, December 28, 1996 (unaudited) 3,411,743 $170,587 $10,771,834 $7,673,148 196,575 $1,047,648
========= ======== =========== ========== ========= ==========
</TABLE>
5
<PAGE> 8
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
December 28, 1996 December 30, 1995
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 370,458 $ 69,604
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 1,693,801 1,912,863
Gain on sale of property and equipment (168,456) (64,434)
Deferred income taxes 210,000 25,000
Decrease (increase) in operating assets:
Accounts receivable - net 108,134 531,449
Inventories (18,817) (72,610)
Prepaid expenses and other (160,370) 677,279
Increase (decrease) in operating liabilities:
Accounts payable (382,954) (341,818)
Accruals (295,272) (105,481)
----------- ------------
Net cash provided by operating activities 1,356,524 2,631,852
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (1,977,104) (2,497,418)
Proceeds from sale of property and equipment 514,075 234,500
Payments received on notes receivable 412,764 134,300
Increase in cash surrender value of life insurance 39,870 --
----------- ------------
Net cash used by investing activities (1,010,395) (2,128,618)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under line of credit (1,094,515) --
Purchase of treasury stock (898,350) --
Exercise of employee stock options 4,973 14,598
----------- ------------
Net cash provided (used) by financing activities (1,987,892) 14,598
----------- ------------
NET INCREASE (DECREASE) IN CASH FOR THE PERIOD (1,641,763) 517,832
CASH, beginning of period 1,882,844 921,616
----------- ------------
CASH, end of period $ 241,081 $ 1,439,448
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 66,817 $ 107,046
Income taxes $ 194,470 $ 93,500
</TABLE>
See accompanying notes to consolidated financial statements (Unaudited).
6
<PAGE> 9
WALL STREET DELI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary to present fairly the financial
position as of December 28, 1996 and the results of operations, changes in
stockholders' equity and cash flows for the three and six month periods
ended December 28, 1996 and December 30, 1995.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. The results of operations for the six month periods ended December 28, 1996
and December 30, 1995 are not necessarily indicative of the results to be
expected for the full year.
3. Accounts and notes receivable consists of:
<TABLE>
<CAPTION>
December 28, 1996 June 29, 1996
----------------- -------------
<S> <C> <C>
Accounts receivable $ 982,820 $ 1,562,011
Notes receivable 914,051 956,462
Due from landlords 0 26,030
Miscellaneous 0 2,458
----------- -------------
1,896,871 2,546,961
Allowance for doubtful accounts (166,928) (167,628)
----------- -------------
1,729,943 2,379,333
Less long-term portion of notes receivable (728,798) (743,103)
----------- -------------
$ 1,001,145 $ 1,636,230
=========== =============
</TABLE>
4. Inventories are valued at the lower of cost (first-in, first-out) or market.
5. The Company assesses at each balance sheet date whether there has been an
impairment of long-lived assets by determining whether projected
undiscounted future cash flow from operations for each store, as defined in
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," exceeds its net book value as of the assessment date.
6. Effective October 27, 1996, the Company sold the operating assets of its
Memphis division, consisting of ten stores and related catering operations,
to Executive Chef Catering, L.L.C., of which Ms. Judy M. Gupton, formerly
the manager of the Memphis division, and Mr.
7
<PAGE> 10
Barrow, president and chief executive officer of the Company, are the
owners. Total sale price for the assets was $1,017,000, consisting of
$810,305 in cash and short term notes, plus 25,000 shares of Wall Street
Deli stock valued at $5.55 per share, with the balance of $68,739 payable in
two years, with interest at the prime rate, paid quarterly. The fixed
assets included in the sale had a book value of approximately $867,000.
7. Earnings per common share and common share equivalent have been computed
based upon the weighted average number of shares outstanding during the
respective periods. Equivalent shares are those issuable upon assumed
exercise of stock options granted, net of shares which could have been
purchased from the proceeds based on the average market price. The
computation of earnings per common share assuming full dilution results in
less than 3% dilution during the period.
________________________________________________________________
8
<PAGE> 11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial condition and earnings
during the periods included in the accompanying consolidated balance sheets and
statements of income.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of net sales represented by certain items in the Company's consolidated
statements of income.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 28, 1996 December 30, 1995 December 28, 1996 December 30, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 90.6 91.3 89.8 91.2
----- ----- ----- -----
Gross profit 9.4 8.7 10.2 8.8
Administrative and general 8.9 7.9 8.8 8.4
----- ----- ----- -----
Operating income .5 .8 1.4 .4
Other income (expenses),net 1.0 (.4) .4 (.1)
----- ------ ----- ------
Income before taxes on income 1.5 .4 1.8 .3
Taxes on income .6 .1 .7 .1
----- ----- ----- -----
Net income .9% .3% 1.1% .2%
===== ===== ===== =====
</TABLE>
NET SALES
Net sales decreased during the quarter ended December 28, 1996 by $1,015,858
or 5.9% from the corresponding three months last year. Net sales also
decreased by $1,236,944 or 3.6% from the corresponding six months ended
December 30, 1995. Net sales includes a decrease in same store sales of 6.3%
from the second quarter of fiscal 1996. The sale of the Memphis division,
consisting of ten stores and related catering operations, which was effective
October 27, 1996 (during the second quarter), decreased net sales by $814,791
from the second quarter and corresponding six months of fiscal 1996. In the
second quarter, two new Wall Street Deli units were opened, one in Birmingham,
Alabama and one in Los Angeles, California, and one R.C. Coopers was converted
to a Wall Street Deli unit. In addition to the ten Memphis units, one other
unit was sold during the second quarter. For the six month period, a total of
three new Wall Street Deli flagship units were opened, two R.C. Coopers were
converted to Wall Street Deli units and eleven units were sold.
9
<PAGE> 12
Significant components of the Company's net sales and the percent of
total sales for the three months and six months ended December 28, 1996 and
December 30, 1995 are presented in the following schedule:
<TABLE>
<CAPTION>
For the Three Months Ended
December 28, 1996 December 30, 1995
--------------------------- --------------------------
Net Sales % of Total Net Sales % of Total
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Wall Street Deli $15,059,472 93.1% $14,596,525 84.9%
R.C. Coopers 690,413 4.3% 1,722,222 10.0%
Catering 429,609 2.6% 876,605 5.1%
----------- ------ ----------- ------
Total $16,179,494 100.0% $17,195,352 100.0%
=========== ====== =========== ======
<CAPTION>
For the Six Months Ended
December 28, 1996 December 30, 1995
-------------------------- -----------------------
Net Sales % of Total Net Sales % of Total
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Wall Street Deli $30,764,330 91.8% $29,101,725 83.8%
R.C. Coopers 1,573,208 4.7% 3,781,655 10.9%
Catering 1,169,789 3.5% 1,860,891 5.3%
----------- ------ ----------- ------
Total $33,507,327 100.0% $34,744,271 100.0%
=========== ====== =========== ======
</TABLE>
Management plans to open only Wall Street Delis in the foreseeable future
and to continue either disposing of the R.C. Coopers units or converting them
to Wall Street Delis.
The Company presently tracks its sales records for the Wall Street Deli
concepts by two sub-concepts: "flagship" and "other". The Company's average
sales per unit by concept for the three months and six months ended December
28, 1996 and December 30, 1995 are as follows:
<TABLE>
<CAPTION>
Average Sales Per Unit*
------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
December 28, 1996 December 30, 1995 December 28, 1996 December 30, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Wall Street Deli Flagships $149,490 $157,577 $302,976 $318,987
Wall Street Deli Other 84,773 103,013 169,704 204,150
R.C. Coopers 88,302 64,803 182,511 132,325
All Units 134,082 129,537 271,580 261,322
</TABLE>
*Average sales per unit are computed retroactively on the basis of current
grouping, reflecting in some instances conversion of R.C. Coopers units to Wall
Street Deli units.
Same store sales for the three and six months periods ended December 28,
1996 and December 30, 1995 are as follows:
<TABLE>
<CAPTION>
Same Store Sales
---------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
December 28, 1996 December 30, 1995 December 28, 1996 December 30, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Wall Street Deli Flagships (7.2)% (5.9)% (5.9)% (7.8)%
Wall Street Deli Other (2.2)% (4.6)% (2.7)% (5.6)%
R.C. Coopers (0.6)% (4.3)% (0.3)% (3.8)%
All Units (6.3)% (5.5)% (5.2)% (7.1)%
</TABLE>
10
<PAGE> 13
Overall same store sales decreased 6.3% for the second quarter, versus a
5.5% decrease for this quarter last year. Management believes increased
competition in both established markets and newer markets is the main factor
adversely affecting same store sales, though the position of the December
holidays compared with the prior year accounts for some of the effect during
this quarter. The sales component of the Company's business is dependent on
many factors, including the number and proximity of competitors, the occupancy
of office buildings in which units are located and those nearby, weather and
seasonal effects, as well as local and national economic conditions generally.
COST OF SALES
Cost of sales as a percentage of net sales decreased to 90.6% during the
three months ended December 28, 1996 from 91.3% in the corresponding periods in
the previous year. For the six months ended December 28, 1996, cost of sales
decreased to 89.8% from 91.2% for the corresponding period in the prior year.
Cost of sales consists of the following significant components:
<TABLE>
<CAPTION>
For the Three Months Ended (in thousands) For the Six Months Ended (in thousands)
December 28, 1996 December 30, 1995 December 28, 1996 December 30, 1995
-------------------- --------------------- -------------------- --------------------
Amount % of Sales Amount % of Sales Amount % of Sales Amount % of Sales
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Food/Paper $ 5,858 36.2% $ 6,006 35.0% $ 12,184 36.4% $ 12,423 35.8%
Commissary Expenses -0- .0% 254 1.5% -0- .0% 570 1.6%
-------- ------- -------- ------ --------- -------- -------- -------
5,858 36.2% 6,260 36.5% 12,184 36.4% 12,993 37.4%
Labor 3,735 23.1% 4,083 23.7% 7,711 23.0% 8,268 23.8%
Store Expenses 5,062 31.3% 5,350 31.1% 10,193 30.4% 10,423 30.0%
-------- ------- -------- ------ ---------- -------- -------- -------
$ 14,655 90.6% $ 15,693 91.3% $ 30,088 89.8% $ 31,684 91.2%
======== ======= ======== ====== ========== ======== ======== =======
</TABLE>
The Company completed the process of phasing out its commissaries during
fiscal 1996 and a single source vendor system was fully implemented. The
decreases in food/paper and commissary expenses as a percentage of sales of 0.3
percentage points and 1.0 percentage points for the three and six month
periods, respectively, is the result of these changes.
Labor costs as a percentage of sales also decreased 0.6 percentage points
and 0.8 percentage points for the three and six months, respectively, over the
corresponding periods of the previous year. Shortly before the end of fiscal
1995 management changed the compensation structure for store managers by
raising the base pay and reducing certain incentive pay plans. The Company's
intention in making this change has been to be more competitive in hiring
managers, and these managers have helped reduce labor costs from the same
quarter and six months last year. The recent increase in the minimum wage
rate, effective October 1, 1996, has not had a material effect on labor costs.
11
<PAGE> 14
Store expenses as a percentage of sales increased 0.2 percentage points and
0.4 percentage points for the three and six months over the corresponding
periods of the previous year. These increases were due largely to the fact
that many store expenses are fixed, and the percentages are thus adversely
affected by a decrease in sales. Store expenses were reduced, however, by
decreases in depreciation and amortization expense of approximately $150,000
for the second quarter and $300,000 for the six month period, as a result of
the reduced carrying value of impaired assets, as discussed hereafter under
"Impairment of Long-Lived Assets."
ADMINISTRATIVE AND GENERAL EXPENSES
Administrative and general expenses for the three and six month periods
ended December 28, 1996 increased to $1,447,878 and $2,943,095, respectively,
an increase of $90,400 and $27,318 from the corresponding periods of the
previous year. These increases are due primarily to increases in corporate
administrative and general expenses, associated mainly with the new management
information systems.
INTEREST EXPENSE, NET
Interest expense, net, during the quarter ended December 28, 1996 decreased
$49,255 over the corresponding quarter in the prior year. Interest expense for
the six months ended December 28, 1996 was $55,605 compared to interest expense
of $114,142 for the three month period ended December 30, 1995. The interest
expense for the six months ended December 28, 1996 of $55,605 was offset by
$27,387 interest earned by the Company on notes receivable from prior sales of
fixtures and equipment in various stores.
The Company has a $7,500,000 unsecured bank line of credit, bearing interest
at the bank's cost of funds plus 175 basis points, which was 7.125% at December
28, 1996. The Company had $1,344,515 outstanding against the line at December
28, 1996, down from $2,500,000 at June 29, 1996 and from $3,150,000 at December
30, 1995.
TAXES ON INCOME
The effective tax rates for the second quarter and first six months ended
December 28, 1996 were 39.8% and 39.9%, respectively.
FACILITIES CLOSING COSTS
During the fourth quarter of fiscal 1995, the Company adopted a plan
designed to dispose of its remaining commissary locations and eleven
non-performing stores. In connection therewith, a provision of $1,147,950 was
recorded related to the anticipated lease cancellation payments and severance
payments to employees.
12
<PAGE> 15
As of June 29, 1996, the Company had closed all of the commissary locations
and had either closed or sold five of the eleven non-performing stores. Of the
remaining six stores, management closed one store in October 1996, has been
negotiating lease cancellation terms on three of the properties, and has
entered into negotiations to sell the remaining two stores. Payments of
$227,637 and $335,991 were charged against this provision in the six month
periods ended December 28, 1996 and December 30, 1995, respectively. It is
presently planned that the remaining targeted stores will either be closed or
sold during fiscal 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of," which requires the evaluation of certain assets based on
estimated future cash flows. The Company elected to adopt SFAS No. 121 in the
fourth quarter of 1996.
Adoption of SFAS No. 121 required that the Company group assets at a lower
level for evaluation and measurement of impairment than under its previous
accounting policy and resulted in a noncash charge of $4,712,562 in the fourth
quarter of 1996. As a result of the adoption of SFAS No. 121, the Company now
evaluates and measures for impairment on an individual store basis. The charge
in 1996 reduced the carrying amount of impaired assets associated with
individual restaurant properties to their estimated fair market values based on
the Company's experience in disposing of similar under-performing properties.
Depreciation and amortization expense for the second quarter and first six
months of fiscal 1997 decreased from 1996 periods by approximately $150,000 and
$300,000 as a result of the reduced carrying value of impaired assets. A
decrease of approximately $600,000 from 1996 levels is expected for fiscal 1997
depreciation and amortization expense.
SALE OF MEMPHIS DIVISION
The Company announced in September an agreement to sell the operating assets
of its Memphis division to a newly formed company. The transaction was closed
as of October 27, 1996. The assets included in the sale were ten sandwich
shops in Memphis, three operating under the Wall Street Deli trade name and
seven operating as R.C. Coopers Delis, and the Memphis catering operation
conducted under the trade name Executive Chef Catering. The sale price
totalled approximately $1,017,000, which was paid $810,305 in cash and short
term notes (which were paid during the quarter), plus 25,000 shares of Wall
Street Deli stock valued at $5.55 per share, with the balance of $68,739
payable in two years, with interest at the prime rate, paid quarterly. The
book value of the assets sold was approximately $867,000.
The purchaser of the Memphis division was Executive Chef Catering, L.L.C.
Judy M. Gupton, previously the manager of the Memphis division, is president
and chief executive officer of Executive Chef Catering, L.L.C., and Mr. Barrow,
president and chief executive officer of the
13
<PAGE> 16
Company, is an investor. In fiscal 1996, the ten Memphis sandwich shops had
average annual sales of approximately $178,000 each, and the catering operation
had sales of approximately $2.9 million. Memphis division operating income was
approximately $268,000 in fiscal 1996. The Board's decision to sell the
Memphis operation was based on a number of considerations including the small
size of the existing store units and the lack of compatibility of the catering
business with the Company's recent transition to a single source vendor system
for food and restaurant supplies and the recently installed store-level
management information system. The catering business previously operated as
part of the Company's commissary in Memphis. In fiscal 1996, Wall Street Deli
closed all of its regional commissaries and made the transition to a single
source vendor system. By divesting this operation, the Company believes it
will be able to further streamline its operations and focus on its primary
restaurant concept, Wall Street Deli.
IMPACT OF INFLATION
Many of the Company's employees are paid hourly rates related to the federal
minimum wage. Accordingly, inflation-related annual increases in the minimum
wage have historically increased the Company's labor costs. In August 1996,
legislation was enacted to increase the minimum wage from $4.25 per hour to
$4.75 on October 1, 1996, and further to $5.15 effective September 1, 1997.
Approximately 30 employees were affected by the October 1 increase. The
Company presently has approximately 130 employees who are paid less than $5.15
per hour.
Construction costs have also increased to developers who lease space to the
Company. They, in turn, have and may continue to increase rents for Company
restaurants. In addition, most of the leases for Company restaurants contain
rental escalation clauses based upon the building operating cost increases
incurred by lessors. In most cases, the Company has been able to increase
prices sufficiently to match increases in its operating costs, but there is no
assurance that it will be able to do so in the future.
COMMON STOCK REPURCHASE
During the second quarter of 1997 the Board of Directors approved a
repurchase of up to 250,000 shares of the Company's common stock. During the
second quarter of fiscal 1997 the Company purchased 170,500 shares at an
average cost of $5.27 per share, which was funded through the Company's bank
line of credit.
SUBSEQUENT EVENT
On February 4, 1996, the Company announced that Louis C. Henderson, Jr. had
been named president and chief executive officer, replacing Robert G. Barrow,
who was elevated to the newly created position of vice chairman of the Board.
Mr. Henderson has served as a director of the Company for the past 19 years.
Mr. Henderson was previously president of The Hackney Group, Inc., a privately
held business management company, where he served in that capacity since 1989.
Prior to joining The Hackney Group, Inc., he was senior vice president,
operations, of Protective Life
14
<PAGE> 17
Corporation, a life insurance holding company based in Birmingham, Alabama.
Mr. Henderson is a graduate of the University of Arkansas.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to obtain the cash required for the conduct of its
business depends upon cash flow from operations and, to a lesser extent, bank
borrowings. In general, cash flow from operations and periodic bank borrowings
have been sufficient to finance the expansion of the Company's business. The
Company does not have significant receivables or inventory and it receives
trade credit in purchasing food and supplies. Since funds are available from
cash sales, but are not required immediately to pay for food and supplies or to
finance receivables or inventory, such funds may be used for non-current
capital expenditures. In the process of refining the Company's production
units, stores not meeting the Company's performance criteria are closed and the
furniture and equipment sold. The terms of such sales sometimes require the
Company to take back notes, which are presented in accounts and notes
receivable-net on the balance sheet, for all or a portion of the sale price.
The Company's principal capital requirement is for new equipment and
leasehold improvements for new and existing restaurants. The Company currently
has in place a line of credit which provides for borrowings up to $7,500,000
from AmSouth Bank of Alabama pursuant to the terms of a Credit Agreement dated
June 19, 1996 (the "Credit Agreement"). The Credit Agreement contains certain
covenants that require, among other things, the Company maintain a certain
tangible net worth, to limit the annual capital expenditures of the Company and
certain other covenants. At December 28, 1996, the Company was in compliance
with these covenants. It is presently anticipated that the Company's capital
expenditures for fiscal 1997 will be approximately $3,000,000. As mentioned in
the discussion under "Interest Expense, Net," the borrowings under the Credit
Agreement were reduced to $1,344,515 for the six months ended December 28,
1996.
The Company expects its future capital needs will be met primarily by
internally generated funds and supplemented, as needed, by additional bank
borrowings. The Company's present plans call for opening six to eight new
flagship Wall Street Deli units during fiscal 1997. Capital expenditures for
the six month period ended December 28, 1996 totalled $1,977,104, compared to
$2,497,418 for the corresponding six months of the prior year. Cash generated
from operations for the six month period ended December 28, 1996 totalled
$1,356,524 compared to $2,631,852 for the corresponding six months of the prior
year.
________________________________________________
15
<PAGE> 18
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's regular Annual Meeting of Shareholders was held on
November 7, 1996. Proxies for the Annual Meeting were solicited
pursuant to Regulation 14 under the Act.
(b) There was no solicitation in opposition to management's nominees for
directors as listed in the proxy statement, and all of such nominees
were elected.
(c) At the Annual Meeting the matters considered and voted upon (other
than procedural matters and ratification of auditors) and the number
of votes cast are as follows:
Election of directors:
<TABLE>
<CAPTION>
VOTES VOTES
NAME FOR WITHHELD*
<S> <C> <C>
Alan V. Kaufman 2,960,372 13,221
Robert G. Barrow 2,960,372 13,221
William S. Atherton 2,960,472 13,121
Joe Lee Griffin 2,960,472 13,121
Louis C. Henderson, Jr. 2,960,172 13,421
Jeffrey V. Kaufman 2,958,206 15,387
Jake L. Netterville 2,960,472 13,121
</TABLE>
* Includes votes withheld and broker non-votes
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Exhibits
Exhibit 11 - Computation of Earnings Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Exhibit 27 - Financial Data Schedule, submitted to the Securities
and Exchange Commission in electronic format (for SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended December 28, 1996.
</TABLE>
16
<PAGE> 19
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.
DATE: WALL STREET DELI, INC.
February 10, 1997 /s/ Robert G. Barrow
-------------------------------------
ROBERT G. BARROW
President and Chief Executive Officer
February 10, 1997 /s/ Arnold McGruder
-------------------------------------
ARNOLD MCGRUDER
Treasurer
(Principal Financial Officer)
17
<PAGE> 1
Exhibit (11)
WALL STREET DELI, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
December 28, 1996 December 30, 1995 December 28, 1996 December 30, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
SHARES:
Weighted average number of common shares
outstanding 3,326,353 3,407,317 3,368,356 3,406,960
Effect of shares issuable under stock option
plan as determined by the treasury stock method 1,369 4,174 3,762 10,654
---------- ---------- ---------- ----------
Weighted average number of common shares
outstanding as adjusted 3,327,722 3,411,491 3,372,118 3,417,614
PER COMMON SHARE COMPUTATIONS:
Net income $ 142,111 $ 52,146 $ 370,458 $ 69,605
========== ========== ========== ==========
Earnings per share $ .04 $ .01 $ .11 $ .02
========== ========== ========== ==========
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WALL STREET DELI, INC. FOR THE SIX MONTHS ENDED DECEMBER
28, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> DEC-28-1996
<CASH> 241,081
<SECURITIES> 0
<RECEIVABLES> 1,168,073
<ALLOWANCES> 166,928
<INVENTORY> 705,626
<CURRENT-ASSETS> 3,579,624
<PP&E> 32,916,879
<DEPRECIATION> 16,533,998
<TOTAL-ASSETS> 23,173,514
<CURRENT-LIABILITIES> 5,605,593
<BONDS> 0
0
0
<COMMON> 170,587
<OTHER-SE> 17,397,334
<TOTAL-LIABILITY-AND-EQUITY> 23,173,514
<SALES> 33,507,327
<TOTAL-REVENUES> 33,507,327
<CGS> 30,087,812
<TOTAL-COSTS> 30,087,812
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 33,516
<INTEREST-EXPENSE> 55,605
<INCOME-PRETAX> 616,658
<INCOME-TAX> 246,200
<INCOME-CONTINUING> 370,458
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 370,458
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
