<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 27, 1997
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)
Delaware 63-0514240
(State of Incorporation) (IRS Employer I.D. No.)
One Independence Plaza, Suite 100
Birmingham, Alabama 35209
(Address of principal executive offices)
(205) 870-0020
(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 February 2, 1998
- ---------------------------- -------------------------------
Common Stock, $.05 Par Value 3,080,577
<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 Operations................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.........................10
PART II: OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders.........17
ITEM 6: Exhibits and Reports on Form 8-K ...........................17
SIGNATURES..........................................................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:
Consolidated Balance Sheets at December 27, 1997 (unaudited)
and June 28, 1997.
Consolidated Statements of Operations (unaudited) for the
three and six month periods ended December 27, 1997 and
December 28, 1996.
Consolidated Statements of Stockholders' Equity (unaudited)
for the three and six month periods ended December 27, 1997
and December 28, 1996.
Consolidated Statements of Cash Flows (unaudited) for the six
month periods ended December 27, 1997 and December 28, 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>
DECEMBER 27, 1997 JUNE 28, 1997
----------------- -------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT
Cash and cash equivalents $ 664,183 $ 490,058
Accounts and notes receivable (Note 3) 1,516,998 1,055,924
Inventories (Note 4) 681,280 684,280
Prepaid expenses and other 347,526 263,129
Deferred tax benefit 624,000 624,000
------------ ------------
TOTAL CURRENT ASSETS 3,833,987 3,117,391
------------ ------------
EQUIPMENT AND IMPROVEMENTS
Equipment and fixtures 19,170,046 18,258,482
Leasehold improvements 16,577,698 15,905,021
------------ ------------
35,747,744 34,163,503
Less accumulated depreciation and amortization (19,640,986) (18,035,661)
------------ ------------
NET EQUIPMENT AND IMPROVEMENTS 16,106,758 16,127,842
------------ ------------
OTHER
Cash surrender value of insurance on officers' lives 746,542 718,165
Long-term portion of notes receivable (Note 3) 361,878 453,229
Deferred tax benefit 2,649,000 2,649,000
------------ ------------
TOTAL OTHER ASSETS 3,757,420 3,820,394
------------ ------------
$ 23,698,165 $ 23,065,627
============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
2
<PAGE> 5
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 27, 1997 JUNE 28, 1997
----------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 3,211,508 $ 1,005,400
Accounts payable 858,363 1,267,758
Accruals:
Taxes other than income 431,220 546,073
Compensation 665,399 755,240
Rent 661,516 781,545
Workers' compensation 701,234 742,242
Corporate relocation 96,250 532,121
Miscellaneous 730,808 498,740
------------ ------------
TOTAL CURRENT LIABILITIES 7,356,298 6,129,119
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $.05 par - shares authorized
20,000,000; issued 3,414,402 and 3,413,777 170,720 170,689
Additional paid-in capital 10,785,604 10,782,448
Retained earnings 7,024,510 7,365,512
------------ ------------
17,980,834 18,318,649
Treasury stock, at cost, 333,825 and 263,825 shares (1,638,967) (1,382,141)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,341,867 16,936,508
------------ ------------
$ 23,698,165 $ 23,065,627
============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE> 6
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Six Month
Period Ended Period Ended
DECEMBER 27, DECEMBER 28, DECEMBER 27, DECEMBER 28,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 15,805,254 $ 16,179,494 $ 31,974,688 $ 33,507,327
Costs and expenses (income):
Costs of sales 14,407,353 14,654,852 29,127,120 30,087,812
Administrative and general expense 1,583,727 1,447,878 3,351,415 2,943,095
Interest expense - net 78,949 9,109 99,887 28,218
(Gain)/loss on sale of equipment and
improvements 21,298 (168,456) (35,398) (168,456)
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES: 16,091,327 15,943,383 32,543,024 32,890,669
------------ ------------ ------------ ------------
Income (loss) before taxes (benefit) on income (286,073) 236,111 (568,336) 616,658
Taxes (benefit) on income (114,429) 94,000 (227,334) 246,200
------------ ------------ ------------ ------------
Net income (loss) $ (171,644) $ 142,111 $ (341,002) $ 370,458
============ ============ ============ ============
Earnings (loss) per share (basic and diluted)
(Note 6) $ (.06) $ .04 $ (.11) $ .11
============ ============ ============ ============
Weighted average number of common
shares outstanding (Note 6) 3,108,379 3,327,183 3,120,951 3,368,768
============ ============ ============ ============
</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, 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
========== =========== =========== =========== ======= ===========
Balance, June 28, 1997 3,413,777 $ 170,689 $10,782,448 $ 7,365,512 263,825 $ 1,382,141
Net loss for the quarter (169,358)
Exercise of stock options 625 31 3,156
Purchase of treasury stock 35,000 132,138
--------- ----------- ----------- ----------- ------- -----------
Balance, September 27, 1997 (unaudited) 3,414,402 170,720 10,785,604 7,196,154 298,825 1,514,279
Net loss for the quarter (171,644)
Purchase of treasury stock 35,000 124,688
--------- ----------- ----------- ----------- ------- -----------
Balance, December 27, 1997 (unaudited) 3,414,402 $ 170,720 $10,785,604 $ 7,024,510 333,825 $ 1,638,967
========== =========== =========== =========== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE> 8
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Six Month Period Ended
DECEMBER 27, DECEMBER 28,
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (341,002) $ 370,458
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,751,737 1,693,801
Gain on sale of equipment and improvements (35,398) (168,456)
Deferred income taxes -- 210,000
Decrease (increase) in assets:
Accounts receivable - net (453,180) 108,134
Inventories 3,000 (18,817)
Prepaid expenses and other (84,397) (160,370)
Decrease in operating liabilities:
Accounts payable (409,395) (382,954)
Accruals (569,534) (295,272)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (138,169) 1,356,524
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of equipment and improvements (1,823,259) (1,977,104)
Proceeds from sale of equipment and improvements 71,250 514,075
Payments received on notes receivable 83,457 412,764
Increase in cash surrender value of life
insurance on officers' lives 28,377 39,870
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (1,640,175) (1,010,395)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under line of credit 2,206,108 (1,094,515)
Purchase of treasury stock (256,826) (898,350)
Exercise of employee stock options 3,187 4,973
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,952,469 (1,987,892)
----------- -----------
NET INCREASE (DECREASE) IN CASH FOR THE PERIOD 174,125 (1,641,763)
CASH, beginning of period 490,058 1,882,844
----------- -----------
CASH, end of period $ 664,183 $ 241,081
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 74,949 $ 66,817
Income taxes $ 307,145 $ 194,470
</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 27, 1997 and the results of
operations and changes in stockholders' equity for the three and six
month periods ended December 27, 1997 and December 28, 1996 and cash
flows for the six month periods ended December 27, 1997 and December
28, 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 six month periods ended December 27,
1997 and December 28, 1996 are not necessarily indicative of the
results to be expected for the full year.
3. Accounts and notes receivable consists of:
<TABLE>
<CAPTION>
December 27, 1997 June 28, 1997
----------------- -------------
<S> <C> <C>
Accounts receivable $ 1,026,655 $ 749,625
Notes receivable 614,383 579,105
Other receivables 420,001 350,001
----------- -----------
2,061,039 1,678,731
Allowance for doubtful accounts (182,163) (169,578)
----------- -----------
1,878,876 1,509,153
Less long-term portion of notes receivable (361,878) (453,229)
----------- -----------
$ 1,516,998 $ 1,055,924
=========== ===========
</TABLE>
4. Inventories are valued at the lower of cost (first-in, first-out) or
market.
5. 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 manager of the Memphis division, and Mr. Robert G.
Barrow, former President and Chief Executive Officer and current Vice
Chairman of the Board 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 Company 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. Prior to the close of the 1997
fiscal year, one note in the amount of $47,990 was paid with 11,250
shares of
7
<PAGE> 10
Company stock valued at $4.125 per share, and $1,584 in cash. The
assets included in the sale had a book value of approximately $867,000.
6. 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 and was adopted by the Company in its financial
statements issued for the quarter ending December 27, 1997. Basic and
Diluted EPS are the same for the three and six month periods presented
because the significant majority of common stock options outstanding
during each of those periods were exerciseable at prices which exceeded
the common stock market price in existence at that time.
7. In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and
display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements.
SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this
standard, management has been unable to fully evaluate the impact, if
any, the standard may have on future financial statement disclosures.
Results of operations and financial position, however, will be
unaffected by implementation of this standard.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information," ("SFAS 131") which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS 131 establishes
standards for the way that public companies report information about
operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes
standards for disclosures regarding products and services, geographic
areas and major customers. SFAS 131 defines operating segments as
components of a company about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing
performance.
8
<PAGE> 11
SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this
standard, management has been unable to fully evaluate the impact, if
any, it may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of this standard.
----------------------------------------
9
<PAGE> 12
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 operations.
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, including, among others, competition for
customers, labor force and store sites, the effects of changes in the economy
such as inflation and unemployment rates, weather conditions and seasonal
effects, the uncertainties of new products and programs, and recent changes in
management. Readers are cautioned not to place undue reliance on these forward
looking statements which speak only as of the date hereof and reflect only
management's belief and expectations based upon presently available information.
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 operations.
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Six Month Period Ended
December 27, 1997 December 28, 1996 December 27, 1997 December 28, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 91.2 90.6 91.1 89.8
----- ----- ----- -----
Gross profit 8.8 9.4 8.9 10.2
Administrative and general 10.0 8.9 10.5 8.8
----- ----- ----- -----
Operating income (loss) (1.2) 0.5 (1.6) 1.4
Other income (expense),net (0.6) 1.0 (0.2) 0.4
----- ----- ----- -----
Income (loss) before taxes
(benefit) on income (loss) (1.8) 1.5 (1.8) 1.8
Taxes (benefit) on income (loss) (0.7) 0.6 (0.7) 0.7
----- ----- ----- -----
Net income (loss) (1.1)% 0.9% (1.1)% 1.1%
===== ===== ===== =====
</TABLE>
10
<PAGE> 13
NET SALES
Net sales decreased by $374,240 or 2.3 percent over the corresponding
three month period last year, primarily due to the sale of the Memphis division
in the second quarter of fiscal 1997. The sale of the Memphis division,
consisting of ten stores and related catering operations, which was effective
October 27, 1996, decreased net sales by approximately $467,000 for the fiscal
1998 second quarter as compared to the second quarter last year. Excluding this
decrease, net sales for the second quarter of 1998 increased 0.6% from the prior
year's second quarter.
Net sales for the six month period ended December 27, 1997 totaled
$31,974,689 as compared to net sales of $33,507,327 for the corresponding six
month period ended December 28, 1996. The decrease in net sales of $1,532,638,
or 4.6 percent resulted from the sale of the Memphis division which had
generated net sales of $1,551,251 in the six month period ended December 28,
1996.
Same store sales in the three month period ended December 27, 1997
increased 0.2 percent as compared to the three month period ended December 28,
1996. This marked the fifth consecutive quarterly improvement in same store
sales from a low of a 6.3 percent decline in the second quarter of last fiscal
year, and signified the first quarter of positive same store sales in three
years. Management will continue its focus on same store sales improvement as it
addresses management and operational difficulties in several cities as well as
overall competitive pressures.
During the second quarter of 1998, the Company closed one store and
sold one store which no longer met performance goals.
Significant components of the Company's net sales and the percent of
total sales for the three and six month periods ended December 27, 1997 and
December 28, 1996 are presented in the following schedule:
<TABLE>
<CAPTION>
For the Three Month Period Ended
December 27, 1997 December 28, 1996
------------------------------- --------------------------------
Wall Street Deli Net Sales % of Total Net Sales % of Total
- ---------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Flagship Stores $14,245,800 90.1% $15,059,472 93.1%
Other Stores 1,559,454 9.9% 1,120,022 6.9%
----------- ------- ----------- ----------
Total $15,805,254 100.0% $16,179,494 100.0%
=========== ======= =========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the Six Month Period Ended
December 27, 1997 December 28, 1996
------------------------------- -------------------------------
Wall Street Deli Net Sales % of Total Net Sales % of Total
- ---------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Flagship Stores $28,793,597 90.1% $30,764,330 91.8%
Other Stores 3,181,091 9.9% 2,742,997 8.2%
----------- ---------- ----------- -----------
Total $31,974,688 100.0% $33,507,327 100.0%
=========== ========== =========== ===========
</TABLE>
11
<PAGE> 14
At December 27, 1997 the Company had 95 Flagship stores and 21 stores
in the Other group. For some years the Company has recorded sales data
separately for these two types of groups, primarily because of the variation in
sales volume between them. As the store type mix continues to change so that
there are fewer stores in the Other group, and as the volume differences on a
group basis become less, the Company believes that the distinction between the
groups has and will continue to have declining significance.
The following table sets forth the Company's average sales per store by
current concept grouping and for all stores and the same store sales comparisons
for stores open the entire three and six month periods ended December 27, 1997
and December 28, 1996, respectively.
<TABLE>
<CAPTION>
Average Sales Per Store Same Store Sales Change
-------------------------------- --------------------------------
For the Three Month Period Ended
------------------------------------------------------------------------
December 27, December 28, December 27, December 28,
Wall Street Deli 1997 1996 1997 1996
- ---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Flagship Stores $145,195 $149,490 0.2 % (7.2)%
Other Stores $ 78,447 $ 85,655 (0.4)% (1.8)%
All Stores $133,785 $134,082 0.2 % (6.3)%
</TABLE>
<TABLE>
<CAPTION>
Average Sales Per Store Same Store Sales Change
-------------------------------- --------------------------------
For the Six Month Period Ended
------------------------------------------------------------------------
December 27, December 28, December 27, December 28,
Wall Street Deli 1997 1996 1997 1996
- ---------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Flagship Stores $294,600 $302,976 (1.5)% (5.9)%
Other Stores $158,610 $172,906 (0.7)% (2.0)%
All Stores $270,742 $271,580 (1.4)% (5.2)%
</TABLE>
Average sales per store as shown above are computed retroactively on
the basis of current concept grouping, reflecting in some instances conversions
of Other stores to Flagship stores.
The Company continued its "Street Wrap" product launch in the second
quarter as it upgraded 21 stores with the Street Wrap program. Street Wraps are
the Company's new line of flour tortilla wrapped sandwiches and were in 69
stores as of December 27, 1997.
The Company's entry into franchising for both stand-alone Wall Street
Deli stores and the Wall Street Deli stores co-branded with TCBY yogurt products
continued in the three month period ended December 27, 1997 with the signing of
five additional stores in two multi-unit agreements. The total number of
franchised stores stands at eleven, five of which are presently open. No
significant revenues have yet been realized from this developmental program.
12
<PAGE> 15
COST OF SALES
Cost of sales as a percentage of net sales increased to 91.2 percent
during the three month period ended December 27, 1997 from 90.6 percent in the
corresponding three month period in the previous year. For the six month period
ended December 27, 1997, cost of sales increased to 91.1 percent from 89.8
percent for the prior year's corresponding six month period.
Cost of sales consists of the following significant components:
<TABLE>
<CAPTION>
For the Three Month Period Ended
December 27, 1997 December 28, 1996
------------------------ -------------------------
Amount % of Sales Amount % of Sales
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Food/Paper $ 5,613,548 35.5% $ 5,858,417 36.2%
Labor 3,668,009 23.2% 3,735,804 23.1%
Store Expenses 5,125,796 32.5% 5,060,631 31.3%
----------- ---- ----------- ----
$14,407,353 91.2% $14,654,852 90.6%
=========== ==== =========== ====
</TABLE>
<TABLE>
<CAPTION>
For the Six Month Period Ended
December 27, 1997 December 28, 1996
------------------------ -------------------------
Amount % of Sales Amount % of Sales
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Food/Paper $11,284,990 35.3% $12,184,560 36.4%
Labor 7,418,528 23.2% 7,711,615 23.0%
Store Expenses 10,423,602 32.6% 10,191,637 30.4%
----------- ---- ----------- ----
$29,127,120 91.1% $30,087,812 89.8%
=========== ==== =========== ====
</TABLE>
The decrease in food/paper expense as a percentage of sales of 0.7 and
1.1 percent for the three and six month periods ended December 27, 1997,
respectively, primarily reflects the Company's delivery system conversion. While
the single source vendor system was fully implemented by June 1996 following
completion of the commissary system phase-out, the Company continued to
experience some positive effects from the changeover, as indicated by this cost
reduction.
Labor costs as a percentage of net sales increased 0.1 percent for the
three month period ended December 27, 1997. During the current fiscal quarter,
aggregate hourly wages increased 0.8 percent and holiday pay rose 0.1 percent.
Store manager salaries decreased 0.5 percent and contract labor decreased 0.3
percent due to the Memphis division sale.
During the six month period ended December 27, 1997, labor costs as a
percentage of net sales increased 0.2 percent. Aggregate hourly wages increased
0.5 percent, primarily as a
13
<PAGE> 16
consequence of implementing the Street Wrap program, which requires a minimum of
one additional hourly employee per store, while contract labor decreased 0.4
percent due to the Memphis division sale.
Store expenses as a percentage of net sales increased 1.2 percent for
the three month period ended December 27, 1997. The implementation of the Street
Wrap program contributed to an increase of 0.5 percent in promotional expenses
and 0.4 percent in amortization expenses. Other store expense increases as
compared to the prior quarter included a 0.3 percent increase in percentage
rent.
During the six month period ended December 27, 1997, store expenses as
a percentage of net sales increased 2.2 percent. Miscellaneous restaurant
supplies and promotional expenses increased 0.2 and 0.6 percent, respectively,
primarily due to the implementation of the Street Wrap program. Other store
expenses that increased as compared to the corresponding six month period
included common area maintenance expense (0.2%), utilities (0.2%), percentage
rent (0.3%), depreciation (0.2%) and amortization (0.3%).
ADMINISTRATIVE AND GENERAL EXPENSES
Administrative and general expenses for the three month period ended
December 27, 1997 increased $135,849 to $1,583,727, or 9.4 percent, as compared
to the three month period ended December 28, 1996. The expenses generated by the
Street Wrap program and other division level charges accounted for approximately
6.1 percent of the increase. Other significant elements of the increase included
expenses related to catering sales operations and franchise program start-up
costs. These cost increases were offset in part by approximately $45,000 in cost
reductions occasioned by the Memphis division sale.
Administrative and general expenses for the six month period ended
December 27, 1997 increased $408,320 to $3,351,415, or 13.9 percent, as compared
to the six month period ended December 28, 1996. The expenses generated by the
Street Wrap program in 69 stores accounted for approximately 6.0 percent of the
increase, and costs of management changes accounted for approximately 5.8
percent. The opening of two new catering sales offices, related catering sales
expenses and franchise program start-up costs were other significant elements of
the increase. These cost increases were offset in part by approximately $165,000
in cost reductions occasioned by the Memphis division sale.
INTEREST EXPENSE, NET
In the three month period ended December 27, 1997, the Company had net
interest expense of $78,949 compared to net interest expense of $9,109 for the
three month period ended December 28, 1996. Net interest expense for the six
month period ended December 27, 1997 increased $71,669 to $99,887 as compared to
the six month period ended December 28, 1996. Interest expense is related
primarily to the Company's $7,500,000 unsecured line of credit which
14
<PAGE> 17
bears interest at the lower of the 30-day LIBOR rate plus 175 basis points (7.75
and 7.41 percent at December 27, 1997 and September 27, 1997, respectively) or
the bank's quoted cost of funds plus 175 basis points (7.19 and 7.31 percent at
December 27, 1997 and September 27, 1997, respectively). In addition, interest
expense increased for the three and six month period ended December 27, 1997 due
to interest associated with a required tax payment. The Company had $3,211,508
outstanding against this line at December 27, 1997 as compared to $1,344,515 at
December 28, 1996. The interest expense for the three and six month period ended
December 27, 1997 of $85,972 and $114,632, respectively, was offset by $7,023
and $14,745, respectively, of interest earned by the Company on notes receivable
from prior sales of fixtures and equipment in various stores.
TAXES ON INCOME
The effective tax rate for the second quarter and first six months
ended December 27, 1997 was 40% as compared to the effective tax rates for the
second quarter and first six months ended December 28, 1996 of 39.8 percent and
39.9 percent, respectively .
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.
Construction costs have also increased to developers who lease space to the
Company. Developers have in turn increased and may continue to increase rents
for Company stores. In addition, most of the leases for Company stores contain
rent escalation clauses based upon cost increases incurred by lessors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to obtain the cash required for the conduct of
its business depends upon cash from operations and, to a lesser extent, bank
borrowings. Historically, cash flow from operations and periodic bank borrowings
generally have been sufficient to finance the expansion of the Company's
business. The Company does not maintain significant receivables or inventory and
it receives trade credit in purchasing food and supplies. Stores not meeting the
Company's performance criteria may be closed or sold. The terms of some such
sales require the Company to take back notes, which are contained in the
Company's notes receivable balance, for all or a portion of the sale price.
At December 27, 1997, the ratio of the Company's current assets to
current liabilities was .52 to 1.00, as compared to a current ratio of .51 to
1.00 at June 28, 1997. This reflects the Company's use in the six month period
ended December 27, 1997 of available cash for acquisition
15
<PAGE> 18
of treasury stock as well as for continued investment in store facilities. The
Company has no long term debt.
The Company's principal capital requirement is for new equipment and
leasehold improvements for new and existing stores. Capital expenditures for
these purposes were $1,823,259 and $1,977,104 for the six month period ended
December 27, 1997 and December 28, 1996, respectively. Approximately $210,000 in
capital expenditures during the current six month period were related to the
Street Wrap implementation. It is presently anticipated that the Company's
capital expenditures for fiscal 1998 will be approximately $3,200,000. During
the fourth quarter of 1997, the Company's Board of Directors approved the
repurchase of up to 100,000 shares of the Company's common stock. During the six
month period ended December 27, 1997, a total of 70,000 shares were purchased at
an acquisition cost of $256,826.
The Company has historically met its capital needs from short term bank
borrowings and internally generated funds. Cash used by and generated from
operations totaled $(138,169) and $1,356,524 for the six month period ended
December 27, 1997 and December 28, 1996, respectively. The Company currently has
in place a line of credit that provides for borrowings up to $7,500,000 from
AmSouth Bank of Alabama ("Lender") pursuant to the terms of a Credit Agreement
dated June 19, 1996 (the "Credit Agreement") and requires the maintenance of
various financial covenants. As of December 27, 1997, the Company's debt
service coverage ratio was 1.21, which is less than the 1.30 required by the
Credit Agreement. Management has received a written commitment from the Lender
waiving the debt service coverage ratio covenant for the fiscal quarter ended
December 27, 1997 and reducing the debt service coverage ratio from 1.30 to 1.15
for the fiscal quarters ended March 28, 1998 and June 27, 1998, respectively.
YEAR 2000 ISSUES
The Company is evaluating its computer systems to identify those, if
any, that could be adversely affected by the "Year 2000" issue. The Company's
primary software supplier has released a Year 2000 compliance software upgrade
program. The Company believes that the changes will be made in a timely manner
and that the Year 2000 problem will not pose significant operational problems.
16
<PAGE> 19
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 6, 1997. 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>
Louis C. Henderson, Jr. 2,435,692 53,663
Alan V. Kaufman 2,435,492 53,863
Robert G. Barrow 2,435,292 54,063
William S. Atherton 2,435,692 53,663
Joe Lee Griffin 2,434,870 54,485
Jeffrey V. Kaufman 2,435,167 54,188
Jake L. Netterville 2,435,692 53,663
</TABLE>
* Includes votes withheld and broker non-votes
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule, (for SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter
ended December 27, 1997.
17
<PAGE> 20
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 9, 1998 /s/ Louis C. Henderson, Jr.
-------------------------------------------
LOUIS C. HENDERSON, JR.
President and Chief Executive Officer
February 9, 1998 /s/ Robert G. Barrow
-------------------------------------------
ROBERT G. BARROW
Chief Financial Officer
February 9, 1998 /s/ Kevin D. Conaway
-------------------------------------------
KEVIN D. CONAWAY
Treasurer
(Principal Accounting Officer)
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 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> DEC-27-1997
<CASH> 664,183
<SECURITIES> 0
<RECEIVABLES> 1,699,161
<ALLOWANCES> 182,163
<INVENTORY> 681,280
<CURRENT-ASSETS> 3,833,987
<PP&E> 35,747,744
<DEPRECIATION> 19,640,986
<TOTAL-ASSETS> 23,698,165
<CURRENT-LIABILITIES> 7,356,298
<BONDS> 0
0
0
<COMMON> 170,720
<OTHER-SE> 16,171,147
<TOTAL-LIABILITY-AND-EQUITY> 23,698,165
<SALES> 31,974,688
<TOTAL-REVENUES> 31,974,688
<CGS> 29,127,120
<TOTAL-COSTS> 29,127,120
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 182,163
<INTEREST-EXPENSE> 114,632
<INCOME-PRETAX> (568,336)
<INCOME-TAX> (227,334)
<INCOME-CONTINUING> (341,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (341,002)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
