<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 28, 1998
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.)
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 May 7, 1998
---------------------------- ----------------------------
Common Stock, $.05 Par Value 3,060,977
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
PART I: FINANCIAL INFORMATION
<S> <C> <C>
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...........................................9
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K ............................................15
SIGNATURES.....................................................................................16
</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 28, 1998 (unaudited) and
June 28, 1997.
Consolidated Statements of Operations (unaudited) for the
three and nine month periods ended March 28, 1998 and March
29, 1997.
Consolidated Statements of Stockholders' Equity (unaudited)
for the three and nine month periods ended March 28, 1998 and
March 29, 1997.
Consolidated Statements of Cash Flows (unaudited) for the nine
month periods ended March 28, 1998 and March 29, 1997.
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>
MARCH 28, 1998 JUNE 28, 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 611,343 $ 490,058
Accounts and notes receivable (Note 3) 1,508,816 1,055,924
Inventories (Note 4) 683,852 684,280
Prepaid expenses and other 343,896 263,129
Deferred tax benefit 624,000 624,000
------------ ------------
TOTAL CURRENT ASSETS 3,771,907 3,117,391
------------ ------------
EQUIPMENT AND IMPROVEMENTS
Equipment and fixtures 19,268,393 18,258,482
Leasehold improvements 16,985,580 15,905,021
------------ ------------
36,253,973 34,163,503
Less accumulated depreciation and amortization (20,553,266) (18,035,661)
------------ ------------
NET EQUIPMENT AND IMPROVEMENTS 15,700,707 16,127,842
------------ ------------
OTHER
Cash surrender value of insurance on officers' lives 763,962 718,165
Long-term portion of notes receivable (Note 3) 328,171 453,229
Deferred tax benefit 2,649,000 2,649,000
------------ ------------
TOTAL OTHER ASSETS 3,741,133 3,820,394
------------ ------------
$ 23,213,747 $ 23,065,627
============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
2
<PAGE> 5
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 28, 1998 JUNE 28, 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,449,300 $ 1,005,400
Accounts payable 1,006,708 1,267,758
Accruals:
Taxes other than income 630,461 546,073
Compensation 689,667 755,240
Rent 694,724 781,545
Workers' compensation 680,256 742,242
Corporate relocation 53,433 532,121
Miscellaneous 692,474 498,740
------------- ------------
TOTAL CURRENT LIABILITIES 6,897,023 6,129,119
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, $.05 par - shares authorized
20,000,000; issued 3,414,802 and 3,413,777 170,740 170,689
Additional paid-in capital 10,787,369 10,782,448
Retained earnings 7,032,581 7,365,512
------------- ------------
17,990,690 18,318,649
Treasury stock, at cost, 343,825 and 263,825 shares (1,673,966) (1,382,141)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 16,316,724 16,936,508
------------- ------------
$ 23,213,747 $ 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 Nine Month
Period Ended Period Ended
MARCH 28, MARCH 29, MARCH 28, MARCH 29,
1998 1997 1998 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $15,665,723 $15,680,040 $47,640,411 $49,187,367
Costs and expenses (income):
Costs of sales 14,111,689 14,080,602 43,238,761 44,168,414
Administrative and general expense 1,504,153 1,416,046 4,855,553 4,359,141
Interest expense - net 55,301 20,193 155,189 48,411
(Gain)/loss on sale of equipment and
improvements (18,611) (3,387) (54,011) (171,843)
---------- ---------- ----------- -----------
TOTAL COSTS AND EXPENSES: 15,652,532 15,513,454 48,195,492 48,404,123
---------- ---------- ----------- -----------
Income (loss) before taxes (benefit) on income 13,191 166,586 (555,081) 783,244
Taxes (benefit) on income 5,278 66,000 (222,150) 312,200
---------- ---------- ----------- -----------
Net income (loss) $ 7,913 $ 100,586 $ (332,931) $ 471,044
=========== =========== =========== ===========
Earnings (loss) per share (basic and diluted)
(Note 6) $ .00 $ .03 $ (.11) $ .14
=========== =========== =========== ===========
Weighted average number of common
shares outstanding (Note 6) 3,072,771 3,167,436 3,108,903 3,302,648
=========== =========== =========== ===========
</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
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
========= ======== =========== ========== ======= ==========
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
Net income for the quarter 7,916
Exercise of stock options 400 20 1,765
Purchase of treasury stock 10,000 35,000
--------- -------- ---------- ---------- ------- -----------
Balance, March 28, 1998 (unaudited) 3,414,802 $170,740 $10,787,369 $7,032,426 343,825 $1,673,967
========= ======== =========== ========== ======= ==========
</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 Nine Month Period Ended
MARCH 28, MARCH 29,
1998 1997
-------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (332,931) $ 471,044
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 2,705,704 2,533,357
Gain on sale of equipment and improvements (54,011) (168,456)
Deferred income taxes -- 290,200
Decrease (increase) in assets:
Accounts receivable - net (461,081) 262,437
Inventories 428 12,174
Prepaid expenses and other (80,767) 74,167
Refundable income taxes -- 220
Decrease in operating liabilities:
Accounts payable (261,050) (421,461)
Accruals (414,946) (627,116)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,101,346 2,426,566
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for purchase of equipment and improvements (2,349,003) (2,540,517)
Proceeds from sale of equipment and improvements 124,444 514,075
Payments received on notes receivable 133,248 479,355
Increase in cash surrender value of life insurance on officers' lives (45,797) (66,870)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (2,137,108) (1,613,957)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments) borrowings under line of credit 1,443,900 (991,879)
Purchase of treasury stock (291,825) (1,301,477)
Exercise of employee stock options 4,972 15,689
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,157,047 (2,277,667)
----------- -----------
NET INCREASE (DECREASE) IN CASH FOR THE PERIOD 121,285 (1,465,058)
CASH, beginning of period 490,058 1,882,844
----------- -----------
CASH, end of period $ 611,343 $ 417,786
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 137,689 $ 100,932
Income taxes $ 324,800 $ 199,080
</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 28, 1998 and the results of operations
and changes in stockholders' equity for the three and nine month
periods ended March 28, 1998 and March 29, 1997 and cash flows for the
nine month periods ended March 28, 1998 and March 29, 1997.
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 28,
1998 and March 29, 1997 are not necessarily indicative of the results
to be expected for the full year.
3. Accounts and notes receivable consists of:
<TABLE>
<CAPTION>
March 28, 1998 June 28, 1997
-------------- -------------
<S> <C> <C>
Accounts receivable $1,075,035 $ 749,625
Notes receivable 560,022 579,105
Other receivables 420,001 350,001
---------- ----------
2,055,058 1,678,731
Allowance for doubtful accounts (218,071) (169,578)
---------- ----------
1,836,987 1,509,153
Less long-term portion of notes receivable (328,171) (453,229)
---------- ----------
$1,508,816 $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 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.
7
<PAGE> 10
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 retroactively by the Company in
its financial statements issued for the quarter ending December 27,
1997. The impact on prior period EPS was not material. Basic and
Diluted EPS are the same for the three and nine month periods presented
because the significant majority of common stock options outstanding
during each of those periods were exercisable 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.
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, 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 income.
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Nine Month Period Ended
March 28, 1998 March 29, 1997 March 28, 1998 March 29, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 90.1 89.8 90.7 89.8
------ ------- ----- ------
Gross profit 9.9 10.2 9.3 10.2
Administrative and general 9.6 9.0 10.2 8.9
------- ------- ----- ------
Operating income (loss) 0.3 1.2 (0.9) 1.3
Other income (expense), net 0.2 (0.1) (0.2) 0.3
------- ------- ----- ------
Income (loss) before taxes
(benefit) on income (loss) 0.1 1.1 (1.1) 1.6
Taxes (benefit) on income (loss) 0.0 0.4 (0.4) 0.6
------- ------- ----- ------
Net income (loss) 0.1% 0.7% (0.7)% 1.0%
======= ======= ===== ======
</TABLE>
9
<PAGE> 12
NET SALES
Net sales decreased by $14,317 or 0.1 percent over the corresponding
three month period last year primarily due to a decline of 0.4 percent in same
store sales. Management continues to focus on same store sales improvement while
addressing management and operational issues in several cities as well as
overall competitive pressures.
Net sales for the nine month period ended March 28, 1998 totaled
$47,640,411 as compared to net sales of $49,187,367 for the corresponding nine
month period ended March 29, 1997. The decrease in net sales of $1,546,956 or
3.1 percent resulted primarily from the sale of the Memphis division which had
generated net sales of $1,551,251 in the previous nine month period ended March
29, 1997.
During the third quarter of 1998, the Company sold two stores which no
longer met performance goals.
Significant components of the Company's net sales and the percent of
total sales for the three and nine month periods ended March 28, 1998 and March
29, 1997 are presented in the following schedule:
<TABLE>
<CAPTION>
For the Three Month Period Ended
----------------------------------------------------------------
March 28, 1998 March 29, 1997
---------------------------- ----------------------------
Wall Street Deli Net Sales % of Total Net Sales % of Total
- ------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Flagship Stores $14,182,755 90.5% $15,291,429 97.5%
Other Stores 1,482,968 9.5 388,611 2.5
----------- ------ ----------- -----
Total $15,665,723 100.0% $15,680,040 100.0%
=========== ===== =========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Month Period Ended
----------------------------------------------------------------
March 28, 1998 March 29, 1997
---------------------------- ----------------------------
Wall Street Deli Net Sales % of Total Net Sales % of Total
- ------------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Flagship Stores $42,902,635 90.1% $46,055,759 93.6%
Other Stores 4,737,776 9.9 3,131,608 6.4
----------- ----- ----------- -----
Total $47,640,411 100.0% $49,187,367 100.0%
=========== ===== =========== =====
</TABLE>
At March 28, 1998 the Company had 96 Flagship stores and 18 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.
10
<PAGE> 13
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 nine month periods ended March 28, 1998 and
March 29, 1997, respectively.
<TABLE>
<CAPTION>
Average Sales Per Store Same Store Sales Change
----------------------------------- -------------------------------
For the Three Month Period Ended
---------------------------------------------------------------------------
March 28, March 29, March 28, March 29,
Wall Street Deli 1998 1997 1998 1997
---------------- ---------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Flagship Stores $ 147,525 $ 147,780 0.3% (5.9)%
Other Stores $ 77,936 $ 82,883 (7.5)% (4.0)%
All Stores $ 136,571 $ 139,996 (0.4)% (5.5)%
</TABLE>
<TABLE>
<CAPTION>
Average Sales Per Store Same Store Sales Change
----------------------------------- -------------------------------
For the Nine Month Period Ended
---------------------------------------------------------------------------
March 28, March 29, March 28, March 29,
Wall Street Deli 1998 1997 1998 1997
---------------- ---------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Flagship Stores $ 446,694 $ 448,630 (0.9)% (5.5)%
Other Stores $ 237,112 $ 256,693 (3.3)% 1.3%
All Stores $ 413,396 $ 407,500 (1.1)% (5.1)%
</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 third
quarter as it upgraded eleven stores with the Street Wrap program. Street Wraps
are the Company's new line of flour tortilla wrapped sandwiches and are
currently in 80 stores.
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 March 28, 1998 with the signing of an
agreement with Host Marriott Services that allows Host to franchise units in
airports, tollroad plazas and mall locations operated by it throughout the
world. The total number of Wall Street Deli franchised stores stands at eleven,
five of which are presently open. No significant revenues have yet been realized
from this developmental program.
COST OF SALES
Cost of sales as a percentage of net sales increased to 90.1 percent
during the three month period ended March 28, 1998 from 89.8 percent in the
corresponding three month period in the previous year. For the nine month period
ended March 28, 1998, cost of sales increased to 90.7 percent from 89.8 percent
for the prior year's corresponding nine month period.
11
<PAGE> 14
Cost of sales consists of the following significant components:
<TABLE>
<CAPTION>
For the Three Month Period Ended
March 28, 1998 March 29, 1997
------------------------- ---------------------------
Amount % of Sales Amount % of Sales
----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Food/Paper $ 5,502,579 35.1% $ 5,576,740 35.6%
Labor 3,536,702 22.6% 3,559,999 22.7%
Store Expenses 5,072,408 32.4% 4,943,863 31.5%
----------- ---- ----------- ----
$14,111,689 90.1% $14,080,602 89.8%
=========== ==== =========== ====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Month Period Ended
March 28, 1998 March 29, 1997
------------------------- ---------------------------
Amount % of Sales Amount % of Sales
----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Food/Paper $ 16,787,568 35.2% $17,761,300 36.1%
Labor 10,955,230 23.0% 11,271,614 22.9%
Store Expenses 15,495,963 32.5% 15,135,500 30.8%
------------ ---- ----------- ----
$ 43,238,761 90.7% $44,168,414 89.8%
============ ==== =========== ====
</TABLE>
Food/paper expense as a percentage of sales decreased 0.5 and 0.9
percent for the three and nine month periods ended March 28, 1998, respectively.
The Company attributes this cost reduction to its continued efforts toward
improving operational efficiencies. Late in this third fiscal quarter, the
Company completed a system-wide conversion to a new food distributor. The
Company's objective in making this change is to achieve better pricing control,
improved service and additional new product flexibility.
Labor costs as a percentage of net sales decreased 0.1 percent for the
three month period ended March 28, 1998. During the current fiscal quarter,
aggregate hourly wages increased 0.7 percent while store manager salaries
decreased 0.8 percent.
During the nine month period ended March 28, 1998, labor costs as a
percentage of net sales increased 0.1 percent. Aggregate hourly wages increased
0.6 percent, primarily as a consequence of implementing the Street Wrap program,
which requires a minimum of one additional hourly employee per store. Store
manager salaries decreased 0.3 percent, while contract labor decreased 0.2
percent due to the Memphis division sale.
Store expenses as a percentage of net sales increased 0.9 percent for
the three month period ended March 28, 1998. The implementation of the Street
Wrap program contributed to an increase of 0.5 in promotional expenses and 0.4
percent in amortization expenses. Other store
12
<PAGE> 15
expense increases as compared to the prior quarter included a 0.3 percent
increase in percentage rent.
During the nine month period ended March 28, 1998, store expenses as a
percentage of net sales increased 1.7 percent. Miscellaneous restaurant supplies
and promotional expenses increased 0.1 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 nine month period included
rent-operating expense (0.1%), percentage rent (0.3%), depreciation (0.1%) and
amortization (0.4%).
ADMINISTRATIVE AND GENERAL EXPENSES
Administrative and general expenses for the three month period ended
March 28, 1998 increased $88,107 to $1,504,153, or 6.2 percent, as compared to
the three month period ended March 29, 1997. Significant elements of the
increase included expenses related to catering sales operations (3.7%) and
franchise program start-up costs (4.9%). These cost increases were offset in
part by approximately $55,000 in cost reductions at the division level.
Administrative and general expenses for the nine month period ended
March 28, 1998 increased $496,412 to $4,855,553, or 11.4 percent, as compared to
the nine month period ended March 29, 1997. The expenses generated by the Street
Wrap program in 80 stores accounted for approximately 4.6 percent of the
increase, net franchise program start-up costs accounted for 4.5 percent of the
increase, and costs of management changes accounted for approximately 3.9
percent. The opening of two new catering sales offices and related catering
sales expenses 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 March 28, 1998, the Company had net
interest expense of $55,301 compared to net interest expense of $20,193 for the
three month period ended March 29, 1997. Net interest expense for the nine month
period ended March 28, 1998 increased $106,778 to $155,189 as compared to the
nine month period ended March 29, 1997. Interest expense is related primarily to
the Company's $7,500,000 unsecured line of credit which bears interest at the
lower of the 30-day LIBOR rate plus 175 basis points (7.44 percent at March 28,
1998) or the bank's quoted cost of funds plus 175 basis points (7.25 percent at
March 28, 1998). In addition, interest expense increased for the three and nine
month periods ended March 28, 1998 due to interest associated with a required
tax payment. The Company had $2,449,300 outstanding against this line at March
28, 1998 as compared to $1,508,121 at March 29, 1997. The interest expense for
the three and nine month periods ended March 28, 1998 of $62,740 and $177,372,
respectively, was offset by $7,439 and $22,183, respectively, of interest earned
by the Company on notes receivable from prior sales of fixtures and equipment in
various stores.
13
<PAGE> 16
TAXES ON INCOME
The effective tax rate for the third quarter and first nine months
ended March 28, 1998 was 40% as compared to the effective tax rates for the
third quarter and first nine months ended March 29, 1997 of 39.6 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 March 28, 1998, the ratio of the Company's current assets to current
liabilities was .55 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 nine month period ended
March 28, 1998 of available cash for acquisition 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 $2,349,003 and $2,540,517 for the nine month period ended
March 28, 1998 and March 29, 1997, respectively. Approximately $240,000 in
capital expenditures during the current nine 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 $2,350,000. 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
nine month period ended March 28, 1998, a total of 80,000 shares were purchased
at an acquisition cost of $291,826.
14
<PAGE> 17
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 $1,101,346 and $2,426,566 for the nine month periods ended
March 28, 1998 and March 29, 1997, 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. Management requested and received from the Lender a
reduction in the required debt service coverage ratio from 1.30 to 1.15 for the
fiscal quarters ended March 28, 1998 and June 27, 1998, respectively. As of
March 28, 1998, the Company's debt service coverage ratio was 1.22.
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.
-----------------------
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 28, 1998.
------------------------------
15
<PAGE> 18
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 11, 1998 /s/ Louis C. Henderson, Jr.
------------------------------------
LOUIS C. HENDERSON, JR.
President and Chief Executive Officer
May 11, 1998 /s/ Robert G. Barrow
------------------------------------
ROBERT G. BARROW
Chief Financial Officer
May 11, 1998 /s/ Kevin D. Conaway
------------------------------------
KEVIN D. CONAWAY
Treasurer
(Principal Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WALL STREET DELI, INC. FOR THE NINE MONTHS ENDED MARCH
28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> MAR-28-1998
<CASH> 611,343
<SECURITIES> 0
<RECEIVABLES> 1,726,887
<ALLOWANCES> 218,071
<INVENTORY> 683,852
<CURRENT-ASSETS> 3,771,907
<PP&E> 36,253,973
<DEPRECIATION> 20,553,266
<TOTAL-ASSETS> 23,213,747
<CURRENT-LIABILITIES> 6,897,023
<BONDS> 0
0
0
<COMMON> 170,740
<OTHER-SE> 16,145,984
<TOTAL-LIABILITY-AND-EQUITY> 23,213,747
<SALES> 47,640,411
<TOTAL-REVENUES> 47,640,411
<CGS> 43,238,761
<TOTAL-COSTS> 43,238,761
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 218,071
<INTEREST-EXPENSE> 155,189
<INCOME-PRETAX> (555,081)
<INCOME-TAX> (222,150)
<INCOME-CONTINUING> (332,931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (332,931)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
