<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 and
Exchange Act of 1934
For the quarterly period ended March 29, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
and 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)
DELAWARE 63-0514240
(State of Incorporation) (IRS Employer I.D. No.)
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.
Class Outstanding at May 7, 1997
- ---------------------------- --------------------------
Common Stock, $.05 Par Value 3,167,202
<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 6: Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBITS:
Exhibit 11: Computation of Earnings
Per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</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 (unaudited):
Consolidated Balance Sheets at March 29, 1997 (unaudited) and
June 29, 1996.
Consolidated Statements of Income (unaudited) for the three
and nine month periods ended March 29, 1997 and March 30,
1996.
Consolidated Statements of Stockholders' Equity (unaudited)
for the three and nine month periods ended March 29, 1997 and
March 30, 1996.
Consolidated Statements of Cash Flows (unaudited) for the nine
month periods ended March 29, 1997, and March 30, 1996.
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)
March 29, 1997 June 29, 1996
-------------- -------------
<S> <C> <C>
ASSETS
Current:
Cash and equivalents $ 417,786 $ 1,882,844
Accounts and notes receivable - net (note 3) 977,855 1,636,230
Inventories (note 4) 674,635 686,809
Prepaid expenses and other 204,565 278,732
Refundable income taxes 239,450 239,670
Deferred tax benefit 932,800 1,043,000
------------ ------------
Total current assets 3,447,091 5,767,285
------------ ------------
Equipment and improvements:
Equipment and fixtures 18,020,562 18,114,226
Leasehold improvements 15,593,470 14,672,885
------------ ------------
33,614,032 32,787,111
Less accumulated depreciation and amortization (17,373,554) (16,190,946)
------------ ------------
Net equipment and improvements 16,240,478 16,596,165
------------ ------------
Other:
Long-term portion of notes receivable 676,914 743,103
Cash surrender value of officers'
life insurance 674,211 607,341
Deferred tax benefit 1,775,000 1,955,000
------------ ------------
Total other assets 3,126,125 3,305,444
------------ ------------
$ 22,813,694 $ 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)
March 29, 1997 June 29, 1996
-------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 1,508,121 $ 2,500,000
Accounts payable 1,297,160 1,718,621
Accruals 2,593,567 3,220,683
------------ ------------
Total current liabilities 5,398,848 7,439,304
------------ ------------
Stockholders' equity:
Common stock, $.05 par value, shares
authorized 20,000,000; issued 3,413,777
and 3,411,043 170,689 170,552
Additional paid-in capital 10,782,448 10,766,896
Retained earnings 7,773,734 7,302,690
------------ ------------
18,726,871 18,240,138
Less treasury stock, at cost, 246,575 shares
and 1,075 shares (1,312,025) (10,548)
------------ ------------
Total stockholders' equity 17,414,846 18,229,590
------------ ------------
$ 22,813,694 $ 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 Nine
Months Ended Months Ended
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $15,680,040 $16,975,001 $49,187,367 $51,719,272
Costs and expenses (income):
Costs of sales 14,080,602 15,278,399 44,168,414 46,962,583
Administrative and general expense 1,416,046 1,585,855 4,359,141 4,524,785
Interest expense - net 20,193 47,678 48,411 138,665
Income related to units
sold or closed (note 6) (3,387) (14,685) (171,843) (79,120)
----------- ----------- ----------- -----------
Total costs and expenses: 15,513,454 16,897,247 48,404,123 51,546,913
----------- ----------- ----------- -----------
Income before taxes on income 166,586 77,754 783,244 172,359
Taxes on income 66,000 20,000 312,200 45,000
----------- ----------- ----------- -----------
NET INCOME $ 100,586 $ 57,754 $ 471,044 $ 127,359
=========== =========== =========== ===========
Earnings per share (note 7): $ .03 $ .02 $ .14 $ .04
=========== =========== =========== ===========
Weighted average number of common
and common equivalent shares
outstanding (note 7) 3,167,436 3,416,607 3,302,648 3,431,298
=========== ============ =========== ===========
</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 3,403,354 $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) 3,408,392 $170,420 $10,747,487 $9,777,852 1,075 $ 10,548
Net income for the quarter 52,146
--------- --------- ----------- ----------- --------- ----------
Balance, December 30, 1995 (unaudited) 3,408,392 $170,420 $10,747,487 $9,829,998 1,075 $ 10,548
Net income for the quarter 57,754
Exercise of stock options 2,651 132 19,409
--------- --------- ----------- ----------- --------- ----------
Balance, March 30, 1996 (unaudited) 3,411,043 $170,552 $10,766,896 $9,887,752 1,075 $ 10,548
========= ========= =========== =========== ========= ==========
Balance, June 29, 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
Net income for the quarter 100,586
Exercise of stock options 2,034 102 10,614
Purchase of treasury stock 50,000 264,377
--------- --------- ----------- ----------- --------- ----------
Balance, March 29, 1997 (unaudited) 3,413,777 $170,689 $10,782,448 $7,773,734 246,575 $1,312,025
========= ========= =========== =========== ========= ==========
</TABLE>
5
<PAGE> 8
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
March 29, 1997 March 30,1996
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 471,044 $ 127,359
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 2,533,357 2,961,199
Gain on sale of property and equipment (168,456) (256,973)
Deferred income taxes 290,200 45,000
Decrease in operating assets:
Accounts receivable - net 262,437 396,364
Inventories 12,174 172,125
Prepaid expenses and other 74,167 687,841
Refundable income taxes 220 --
Decrease in operating liabilities:
Accounts payable (421,461) (821,252)
Accruals (627,116) (717,997)
---------- -----------
Net cash provided by operating activities 2,426,566 2,593,666
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property and equipment (2,674,257) (3,169,600)
Proceeds from sale of property and equipment 514,075 244,500
Payments received on notes receivable 479,355 180,539
Increase in cash surrender value of life insurance 66,870 --
---------- -----------
Net cash used by investing activities (1,613,957) (2,744,561)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net [repayments] borrowings under line of credit (991,879) 650,000
Purchase of treasury stock (1,301,477) (2,131)
Exercise of employee stock options 15,689 36,269
---------- -----------
Net cash provided (used) by financing activities (2,277,667) 684,138
---------- -----------
NET INCREASE (DECREASE) IN CASH FOR THE PERIOD (1,465,058) 533,243
CASH, beginning of period 1,882,844 921,616
---------- -----------
CASH, end of period $ 417,786 $ 1,454,859
---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 100,932 $ 170,454
Income taxes $ 199,080 $ 116,546
</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 March 29, 1997 and the results of operations, changes in
stockholders' equity and cash flows for the three and nine month periods
ended March 29, 1997 and March 30, 1996.
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 nine month periods ended March 29, 1997
and March 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
3. Accounts and notes receivable consists of:
<TABLE>
<CAPTION>
March 29, 1997 June 29, 1996
-------------- -------------
<S> <C> <C>
Accounts receivable $ 954,351 $1,562,011
Notes receivable 854,559 956,462
Due from landlords 0 26,030
Miscellaneous 0 2,458
--------- ----------
1,808,910 2,546,961
Allowance for doubtful accounts (154,141) (167,628)
--------- ----------
1,654,769 2,379,333
Less long-term portion of notes receivable (676,914) (743,103)
--------- ----------
$ 977,855 $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.
7
<PAGE> 10
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. Barrow, former president and chief
executive officer and current Vice Chairman 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. In February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128").
This statement simplifies the standards for computing earnings per share
("EPS") previously found in APB Opinion No. 15, "Earnings Per Share," as
the presentation of primary and fully-diluted EPS is replaced with Basic
and Diluted EPS. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity.
FAS 128 is effective for financial statements issued for periods ending
after December 15, 1997. The Company will adopt FAS 128 in financial
statements issued for the quarter ending December 27, 1997. If the
provisions of FAS 128 had been applied to the quarter ended March 29,
1997, estimated Basic EPS and Diluted EPS would have been $.03.
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.
Forward Looking Statements. The statements in this Form 10-Q that are not
historical fact are forward looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward looking statements which speak only as of the date
hereof. Readers are also urged to carefully review and consider the various
disclosures made by the Company which attempt to advise interested parties of
the factors which affect the Company's business, including the disclosures made
in other periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission.
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 Nine Months Ended
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.8 90.0 89.8 90.8
-------- --------- ------- --------
Gross profit 10.2 10.0 10.2 9.2
Administrative and general expense 9.0 9.6 8.9 8.8
-------- --------- ------- --------
Operating income 1.2 .4 1.3 .4
Other income (expenses),net (.1) - .3 (.1)
-------- --------- ------- --------
Income before taxes on income 1.1 .4 1.6 .3
Taxes on income .4 .1 .6 .1
-------- --------- ------- --------
Net income .7% .3% 1.0% .2%
======== ========= ======= ========
</TABLE>
NET SALES
Net sales decreased during the quarter ended March 29, 1997 by $1,294,961
or 7.6% from the corresponding three months last year. Net sales also
decreased by $2,531,905 or 4.9% from the corresponding nine months ended March
30, 1996. Net sales includes a decrease in same store sales of 5.5% from the
third 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 Company's
9
<PAGE> 12
fiscal 1997 second quarter), decreased net sales by $931,624 in the third
quarter, and $1,746,415 in the corresponding nine months of fiscal 1996. In
the third quarter, one new Wall Street Deli unit was opened in Los Angeles,
California, and two R.C. Coopers were converted to Wall Street Deli units. One
Wall Street Deli unit was closed during the third quarter. For the nine month
period, a total of four new Wall Street Deli flagship units were opened, five
R.C. Coopers were converted to Wall Street Deli units and twelve units were
sold or closed.
Significant components of the Company's net sales and the percent of total
sales for the three months and nine months ended March 29, 1997 and March 30,
1996 are presented in the following schedule:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
-------------- -------------- -------------- --------------
Net Sales % of Total Net Sales % of Total Net Sales % of Total Net Sales % of Total
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wall Street Deli $15,291,429 97.5% $14,707,766 86.6% $46,055,759 93.6% $43,809,491 84.7%
R.C. Coopers 388,611 2.5% 1,782,458 10.5% 1,961,819 4.0% 5,564,113 10.8%
Catering 0 0.0% 484,777 2.9% 1,169,789 2.4% 2,345,668 4.5%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total $15,680,040 100.0% $16,975,001 100.0% $49,187,367 100.0% $51,719,272 100.0%
=========== ========= =========== ========= =========== ========= =========== =========
</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. At the end of this quarter, only five R.C. Coopers units
remained. Following the sale during the second quarter of fiscal 1997 of its
Memphis division, which accounted for the majority of its separately-tracked
catering sales, the Company no longer will treat off-site catering as a
separate component of its sales. See the discussion under "Sale of Memphis
Division."
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 nine months ended March 29,
1997 and March 30, 1996 are as follows:
<TABLE>
<CAPTION>
Average Sales Per Unit*
--------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Wall Street Deli Flagships $147,780 $153,272 $448,630 $482,897
Wall Street Deli Other 84,011 97,541 257,828 301,691
R.C. Coopers 77,244 68,556 251,015 200,881
All Units 139,996 127,180 407,500 392,348
</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.
10
<PAGE> 13
Same store sales for the three and nine month periods ended March 29, 1997
and March 30, 1996 are as follows:
<TABLE>
<CAPTION>
Same Store Sales
--------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Wall Street Deli Flagships (5.9)% (5.1)% (5.5)% (7.1)%
Wall Street Deli Other (2.6)% (6.7)% (2.7)% (5.9)%
R.C. Coopers (5.3)% (1.0)% (4.5)% (3.6)%
All Units (5.5)% (4.8)% (5.1)% (6.6)%
</TABLE>
Overall same store sales decreased 5.5% for the third quarter, versus a
4.8% 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 Easter holiday
falling in the third quarter of 1997 versus in the fourth quarter in 1996
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 slightly to 89.8%
during the three months ended March 29, 1997 from 90.0% in the corresponding
period in the previous year. For the nine months ended March 29, 1997, cost of
sales decreased to 89.8% from 90.8% 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 Nine Months Ended (in thousands)
March 29, 1997 March 30, 1996 March 29, 1997 March 30, 1996
-------------- -------------- -------------- --------------
Amount % of Sales Amount % of Sales Amount % of Sales Amount % of Sales
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Food/Paper $ 5,566 35.5% $ 5,954 35.1% $17,751 36.1% $18,377 35.5%
Commissary Expenses -0- .0% 139 .8% -0- .0% 709 1.4%
------- ----- ------- ---- ------- ---- ------- -----
5,566 35.5% 6,093 35.9% 17,751 36.1% 19,086 36.9%
Labor 3,560 22.7% 3,854 22.7% 11,270 22.9% 12,122 23.4%
Store Expenses 4,955 31.6% 5,332 31.4% 15,147 30.8% 15,755 30.5%
------- ----- ------- ---- ------- ---- ------- -----
$14,081 89.8% $15,279 90.0% $44,168 89.8% $46,963 90.8%
------- ==== ======= ==== ======= ==== ======= =====
</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
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<PAGE> 14
commissary expenses as a percentage of sales of 0.4 percentage points and 0.8
percentage points for the three and nine month periods, respectively, are the
result of these changes.
Labor costs as a percentage of sales also decreased 0.5 percentage points
for the nine months over the corresponding period 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 the Company believes this has
resulted in the reduction in labor costs from the comparable nine months last
year. The recent increase in the minimum wage rate, effective October 1, 1996,
has not had a material effect on labor costs.
Store expenses as a percentage of sales increased 0.2 percentage points
and 0.3 percentage points for the three and nine 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 third quarter and $450,000 for the nine 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 nine month periods
ended March 29, 1997 decreased to $1,416,046 and $4,359,141, respectively, a
decrease of $169,809 and $165,644 from the corresponding periods of the
previous year. These decreases are due primarily to the reduced expenses
resulting from the sale of the Memphis Division in the second quarter of fiscal
1997.
INTEREST EXPENSE, NET
Interest expense, net, during the quarter ended March 29, 1997 decreased
$27,485 from the corresponding quarter in the prior year. Interest expense for
the three months ended March 29, 1997 was $34,915 compared to interest expense
of $63,204 for the three month period ended March 30, 1996. The interest
expense for the nine months ended March 29, 1997 of $90,520 was offset by
$42,109 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 7.375% at
March 29, 1997. The Company had $1,508,121 outstanding against the line at
March 29, 1997, down from $2,500,000 at June 29, 1996 and from $3,800,000 at
March 30, 1996.
12
<PAGE> 15
SUBSEQUENT EVENTS
Following the end of the third quarter, the Company announced that it will
consolidate its administrative and operations staff in Birmingham, Alabama.
Prior to this time, the Company's administrative offices were in Memphis and
operations were managed from Birmingham. The move is presently expected to
occur in June, 1997.
In April the Company also announced that it has launched a franchising
program that includes both stand-alone Wall Street Deli units and the Wall
Street Deli units co-branded with TCBY yogurt products. The Company has
recently conducted a joint pilot project for a co-branded Wall Street Deli-TCBY
unit, and has now signed a franchise agreement with the owner of that project
for an additional co-branded unit. As of the date of this report the Company
has not yet signed any other franchise agreements, but is reviewing franchise
opportunities with a number of potential candidates.
TAXES ON INCOME
The effective tax rates for the third quarter and first nine months ended
March 29, 1997 were 39.6% 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.
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. One additional store was closed in October 1996. Payments of $281,128
and $493,190 were charged against this provision in the nine month periods
ended March 29, 1997 and March 30, 1996, respectively. It is presently planned
that of the five remaining stores, two will continue to be held for sale, one
has been returned to operations after renegotiation of the lease, one will be
used as a training facility and deli and one will continue to operate until the
lease expires in March 1998. No additional closing costs are expected on these
facilities.
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.
13
<PAGE> 16
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 third quarter and first nine
months of fiscal 1997 decreased from 1996 periods by approximately $150,000 and
$450,000 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
In the second quarter of fiscal 1997, the Company sold 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 second 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.
of which Judy M. Gupton, previously the Company's manager of the Memphis
division, and Mr. Barrow, the former president and chief executive officer, and
current vice chairman of the Company are the owners. 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.
14
<PAGE> 17
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 143 employees who are paid less than $5.15
per hour.
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
third quarter of fiscal 1997 the Company purchased 50,000 shares at an average
cost of $5.29 per share, which was funded through the Company's bank line of
credit.
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 March 29, 1997, 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 $1,508,121 at March 29, 1997.
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 has opened four
15
<PAGE> 18
new flagship Wall Street Deli units and remodeled and converted five units to
the Wall Street Deli concept during the nine months ended March 29, 1997. The
Company does not plan to open any new units in the fourth quarter of fiscal
1997. Capital expenditures for the nine month period ended March 29, 1997
totalled $2,674,257, compared to $3,169,600 for the corresponding nine months
of the prior year. Cash generated from operations for the nine month period
ended March 29, 1997 totalled $2,426,566 compared to $2,593,666 for the
corresponding nine months of the prior year.
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit (11) - Computation of Earnings Per Common Shar..................18
Exhibit 27 - Financial Data Schedule, submitted to the Securities
and Exchange Commission in electronic format
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended March 29,
1997.
_______________________________________
[The remainder of this page intentionally left blank]
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and 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.
May 7, 1997 /s/ Louis C. Henderson, Jr.
----------------------------------------
LOUIS C. HENDERSON, JR.
President and Chief Executive Officer
May 7, 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 For the
Three Months Ended Nine Months Ended
SHARES: March 29,1997 March 30, 1996 March 29, 1997 March 30, 1996
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 3,167,436 3,407,608 3,300,801 3,407,176
Effect of shares issuable under stock option
plan as determined by the treasury stock
method -- 8,998 1,847 24,122
--------- --------- ---------- ---------
Weighted average number of common shares
outstanding as adjusted 3,167,436 3,416,607 3,302,648 3,431,298
PER COMMON SHARE COMPUTATIONS:
Net income $ 100,586 $ 57,754 $ 471,044 $ 127,359
========= ========== ========== ==========
Earnings per share: $ .03 $ .02 $ .14 $ .04
========= ========== ========== ==========
</TABLE>
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WALL STREET DELI FOR THE NINE MONTHS ENDED MARCH 29,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> MAR-29-1997
<EXCHANGE-RATE> 1
<CASH> 417,786
<SECURITIES> 0
<RECEIVABLES> 1,131,996
<ALLOWANCES> 154,141
<INVENTORY> 674,635
<CURRENT-ASSETS> 3,447,091
<PP&E> 33,614,032
<DEPRECIATION> 17,373,554
<TOTAL-ASSETS> 22,813,694
<CURRENT-LIABILITIES> 5,398,848
<BONDS> 0
0
0
<COMMON> 170,689
<OTHER-SE> 17,244,157
<TOTAL-LIABILITY-AND-EQUITY> 22,813,694
<SALES> 49,187,367
<TOTAL-REVENUES> 49,187,367
<CGS> 44,168,414
<TOTAL-COSTS> 44,168,414
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 54,227
<INTEREST-EXPENSE> 90,520
<INCOME-PRETAX> 783,244
<INCOME-TAX> 312,200
<INCOME-CONTINUING> 471,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 471,044
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
