<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES ACT OF 1934
For the fiscal year ended June 27, 1998 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- --------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
Common Stock, $.05 par value
----------------------------
(Title of Class)
Indicate whether the registrant has 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, and has been subject to such filing requirements for the past 90
days.
Yes X No
--------- ----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X ]
The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $7,114,806 on September
15, 1998 based on the NASDAQ National Market System closing price on that date.
As of September 15, 1998 there were 2,966,077 shares of the registrant's
Common Stock, $.05 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Registrant's 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Item No Page
------- ----
<S> <C> <C> <C>
PART I
1. Business..................................................................................... 3
2. Properties.................................................................................. 10
3. Legal Proceedings........................................................................... 11
4. Submission of Matters to a Vote of Security Holders......................................... 11
4.1 Executive Officers.......................................................................... 12
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................................................... 13
6. Selected Consolidated Financial Data........................................................ 14
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 15
8. Financial Statements........................................................................ 27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................................ 53
PART III
10. Directors and Executive Officers *
11. Executive Compensation *
12. Security Ownership of Certain Beneficial Owners and Management *
13. Certain Relationships and Related Transactions *
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 54
Index to Financial Statements........................................................ 26
Index to Schedules and Exhibits...................................................... 55
Signatures........................................................................... 57
</TABLE>
* Portions of the Proxy Statement for the Registrant's 1998 Annual
Meeting of Shareholders are incorporated by reference in Part III
of this Form 10-K.
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WALL STREET DELI, INC.
PART I
ITEM 1: BUSINESS
GENERAL
The executive headquarters and principal office of Wall Street Deli, Inc.
(the "Company") are located at One Independence Plaza, Suite 100, Birmingham,
Alabama 35209, telephone (205)870-0020. The Company operates a chain of quick
service, delicatessen style restaurants, presently located in sixteen cities:
Atlanta, Birmingham, Chicago, Cincinnati, Cleveland, Dallas, Denver, Houston,
Indianapolis, Los Angeles, Louisville, Minneapolis, Newark, Philadelphia, St.
Louis, and Washington, D.C. Most of the Company's 112 stores are located in
large suburban and downtown office buildings and are designed to serve the
population in and around those buildings.
1998 OPERATING RESULTS
Wall Street reported net loss of approximately $3,842,000, or $1.24 per
share, in fiscal 1998 compared with a net income of approximately $63,000, or
$0.02 per share, for fiscal 1997. The fiscal 1998 loss included a non-cash
charge of $3.0 million related to a SFAS 121 write down. The fiscal 1997
results include a $700,000 ($500,000 or $0.15 per share, after tax) charge for
corporate office relocation. Excluding SFAS 121 charges and the relocation in
fiscal 1998 and 1997, respectively, earnings (loss) per share were a loss of
($0.97) in fiscal 1998 compared with earnings of $0.17 in fiscal 1997.
Fiscal 1998 revenues were approximately $63.8 million compared with $65.5
million in fiscal 1997. The decline in revenues was primarily due to the sale
of the Memphis units effective during the second quarter of fiscal 1997,
combined with a 1.7 percent decline in same store sales, reflecting continuing
increased competition in the Company's markets. Store management and
operational difficulties in several primary markets, principally Chicago,
Dallas, Denver and Los Angeles, also contributed to this decline.
Four new stores were opened during fiscal 1998, three were converted from
R.C. Cooper's stores, and eight other stores that did not meet the Company's
performance goals were sold or closed. At the end of fiscal 1998, 112 Wall
Street Deli stores were in operation.
The Company converted to a new food distributor late in the third quarter
this year. While this change has not occasioned any significant difference in
costs, the Company believes it will
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provide additional flexibility for introducing new products, as well as better
pricing control and improved service.
The Company launched its national franchise program for the Wall Street
Deli concept during fiscal 1998. During this first full year after the initial
roll-out in late fiscal 1997, five franchise units were opened and six
agreements had been signed for development in fiscal 1999. Since fiscal year
end agreements for seven additional units have been signed.
During fiscal 1998, the "Street Wraps" program, a tortilla-wrapped
sandwich, was rolled out in 80 stores. These seven new menu items combine
steak, chicken and/or vegetables in a warm, easy-to-hold plain or
spinach-flavored flour tortilla, wrapped into a roll. Breakfast versions with
steak, egg and cheese and smoked sausage, egg and cheese are also offered. Late
in the fourth quarter, a "Cool Wraps" program was introduced. These three new
cold wraps combine turkey, roast beef and chicken with bacon, cheese, lettuce,
corn, vegetables, salsa and dressings.
During the fourth quarter of 1998, the Company's Board of Directors
approved the repurchase of up to 100,000 shares of the Company's common stock.
The Company purchased 94,000 shares at an average cost of $3.65 per share under
the fiscal 1997 fourth quarter program while 10,500 shares have been acquired
under the current fiscal 1998 repurchase as of June 27, 1998, at an average of
$3.76 per share under the current year program.
A number of management and management structure changes occurred during
the year, and the Company completed the process of relocating the Memphis
operations center and consolidating it with the Birmingham headquarters.
RESTAURANT OPERATIONS AND MANAGEMENT
Fiscal 1998 financial results were below expectations. However, the
Company made progress toward improving operations in a number of areas,
including the launch of the national franchise program, introduction of new
products, improvements in corporate cost structure, completion of the store
support center, and continued improvements in management information systems.
Management believes the investments of financial and human resources in these
programs is beginning to show positive benefits, and will enhance operating
results in the future.
Following over two years of initial pilot projects and testing, the
Company embarked on a franchise program in late fiscal 1997. This year the
national franchise program was officially launched. Though there have not yet
been any earnings from this program, as of fiscal year-end, five franchised
Wall Street Deli units were in operation, and franchise agreements for six more
units had been signed. Following the end of the fiscal year, agreements for
seven additional units were signed.
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Preparation for the franchise program has been undertaken with a strategy
of positioning the Company for growth through franchised operations. Franchise
sales and support systems were strengthened during the year with focus on
design and construction, training and operations support areas. Franchise
advertising targeted to operators already familiar with the restaurant industry
was run in trade publications such as Nation's Restaurant News. Listings in
various franchise handbooks and directories, as well as articles in trade
publications about Wall Street Deli's franchise program also generated interest
and inquiries.
During the year the Company entered into an agreement with Host Marriott
Services that allows Wall Street Deli franchise units to be developed in
airports, travel plazas and mall locations, both in the United States and
internationally, operated by Host Marriott Services. The initial unit to be
developed under this agreement is in the Palm Beach International Airport in
West Palm Beach, Florida. Several additional airport locations are being
reviewed by Wall Street Deli and Host Marriott Services for development in
fiscal 1999.
The Company considers a major advantage of its franchise program to be
the flexibility of its restaurant format to fit the requirements of a wide
range of locations. Several prototypes of the Wall Street Deli "Express" unit
were developed during this fiscal year. These unit designs range in size from
200 square feet to almost 2000 square feet and are suitable for the industry's
"alternative" sites such as airports, hospitals, universities, malls, food
courts, strip shopping centers, C-stores and selected gas stations. The first
franchised Wall Street Deli unit, located in Atlanta's Hartsfield airport, is
an example of an Express unit and is the highest sales volume unit in the
system. Two new Wall Street Deli Express franchise units were opened during the
fiscal year, one in the student union at North Texas State University in
Denton, Texas and in a Texaco unit in Lake Jackson, Texas. The suburban-style
unit, more like the Company's flagship Wall Street Deli units, is also capable
of design flexibility for both free-standing and strip installations. In
addition, the Company continues working with co-branded partners, with the Wall
Street Deli concept added to date to TCBY and Taco Bell franchised operations.
Strong emphasis on expansion through franchising is planned for the 1999
fiscal year, with a goal of 20-25 Wall Street Deli franchise units to be opened
during the year. The Company has identified several key markets where there are
Company-owned stores that could be sold to franchisees to support the
development of multi-unit operations. A primary objective of this plan is to
attract experienced multi-unit restaurant operations experience that will
enhance development potential.
Management's primary focus continues to be improvements in overall
operations, both in support of Company-owned stores and in support of
franchised units.
At the very end of fiscal 1997, the Memphis corporate offices were
consolidated with and relocated to Birmingham. Direct cost savings attributable
to the move have been minimal, and
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while this undertaking certainly involved some adjustments and unavoidable
disruption, the Company believes overall management efficiency has been
significantly improved. Centralization of the offices has, among other things,
facilitated the strengthening of the management team to more effectively
address the challenges of our business today. Considerable effort has been
spent under Louis Henderson's, and now Jeff Kaufman's, leadership in building a
teamwork approach, based upon a clear mission and strategic goals.
New information systems were installed during the year to provide
improved store-level information to the Company's central office. The new
system is expected to be an important part of managing future growth and
includes significant upgrades for the Company's catering operations, especially
in order entry. In fiscal 1998 the Company also began conducting several pilot
tests of point of sale information systems, and will be evaluating the
potential of such systems during fiscal 1999.
Development and refinement of menus, always an important element in this
business, was another principal focus in fiscal 1998. The new Street Wraps
sandwich program unveiled in fiscal 1997 was introduced in 80 stores during
this fiscal year, at a cost of approximately $450,000. The program has been
expanded to include Cool Wraps, which is a smaller version of our Street Wraps
and is served cold with cold deli meat items. The chicken specialty sandwiches
introduced over the past two years, on the other hand, have yielded generally
disappointing results, and may be phased out in the near future. One of the
reasons for the Company's change to a new food vendor in late fiscal 1998 is
the expectation that this change will provide additional flexibility for the
ongoing process of testing and introducing new menu offerings. With the help of
this and other initiatives, the rate of same store sales decline was reduced
from 4.3% last year to 1.7% this year.
Marketing efforts have also been stepped up. During the last quarter of
fiscal 1998, a separate budget cost category for marketing was created for the
first time, reflecting management's commitment to marketing as an integral
element of increasing sales. Plans were made for implementation in fiscal 1999
to introduce new sandwich offerings, new breads, new soup choices and to rework
the salad bar concept, with all new products to be supported with professional
point of sale materials and aggressive marketing. Plans also include
enhancement of the Frequent Diner program in order to track customer
preferences as well as encourage repeat customers.
During fiscal 1998, there were several management and management
structure changes. In January 1998, Gary Fields, a nineteen-year veteran with
the Company, was promoted to Senior Vice President, National Operations. The
former structure of regional managers who reported to this senior vice
president was eliminated. Instead, three very capable and experienced former
store managers were promoted and now function as a team to provide direct
hands-on inspection, training, trouble-shooting and problem-solving to the
entire system. David Thomas also became a Senior Vice President, in charge of
marketing and corporate development, with the Company's construction and design
and purchasing functions also reporting to him; his experience as a former
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regional manager gives him the ability to better blend all these functions with
store operations. On June 1, 1998, Jeff Kaufman, who was formerly Chief
Operating Officer, was promoted to President and Chief Executive Officer. He
replaced Louis Henderson, who held that position from February 1997 through
June 1998, and guided the Company through its successful corporate office
relocation and consolidation. In its letter accepting Mr. Henderson's
resignation, the Board of Directors noted with gratitude his accomplishment not
only of the consolidation, but also of significant progress toward
profitability during this demanding transition period. The Company considers
itself to have an experienced management team that with these changes will have
a positive impact on profitability.
The strategic vision today is focused primarily on growing the franchise
part of our business, increasing same store sales and controlling margins. To
do this, the Company continues to look at ways to be both customer and employee
driven.
Typical staffing for a flagship Wall Street Deli store includes a manager
and assistant manager, and 6 to 15 other employees. Most store employees work
at least 35 hours each week, which the Company considers full-time, but some
part-time employees are used as appropriate.
Store managers, as well as division and district managers are compensated
on a salary plus bonus basis, with bonuses based on gross profits. Adjustments
were made in this bonus program near the end of fiscal 1998, to become
effective in fiscal 1999, that will include in the computation of bonuses more
items that are subject to the respective individuals' and groups'
responsibilities. This is one of the ways in which the Company is continuing to
empower its managers to succeed and holding them accountable for results. Since
most of the stores are geared to office environments, and thus to office
working hours, the Company also believes that it enjoys a competitive advantage
by its ability to attract and recruit employees, especially store managers,
because of the absence of night and weekend store hours.
SITE SELECTION CRITERIA AND LEASING
The Company continues to target major urban retail locations for its
stores. Wall Street Deli seeks for its company store locations that have high
pedestrian traffic and dense office populations in prime downtown sites in
large cities. The most desirable location for these restaurants is on the
ground floor of a large office building with both a lobby entrance and a street
entrance. The franchise emphasis is expected to be on suburban markets while
the company stores remain concentrated in urban areas. Four new stores were
opened in fiscal 1998, and four are presently planned for fiscal 1999.
The Company believes the site selection process is critical in
determining the potential success of a store. A variety of factors are
considered in the site selection process for Wall Street Deli stores, including
local market demographics, site visibility and accessibility and proximity to
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significant generators of potential customers in a two block radius. The
Company also reviews competition and attempts to analyze the sales of other
stores operating in the area.
The Company leases all of its store locations. The leases vary
significantly in their terms and provisions. Annual rents generally are based
on the greater of a fixed rate or a percentage of net sales or revenues and
generally provide for escalation of rents based on increases in the lessor's
annual operating expenses. The terms of the leases vary from five to ten years,
with most of the more recent leases being ten years, typically with one
five-year renewal option. See also "Item 2 - Properties."
COMPETITION
In a business long acknowledged as highly competitive, the Company
continues to face increasingly more competition for the quick service
restaurant customer. As more specialty concepts enter the market, such as the
coffees and bagels featured today at Wall Street Deli, customers have more
choices.
The Company also must compete for store locations and labor force.
Competitors include a large number of national chains and national branded
concepts that have established brand recognition through marketing and have the
financial resources to increase market share through new locations. The
competition for employees is a growing problem also. With the ever-increasing
number of new concepts and restaurants, attracting and retaining qualified
employees is more and more difficult, even though the Company believes it
enjoys a competitive advantage because of its generally more popular business
hours.
The quick service restaurant business also remains highly competitive
with respect to concept, price, location, food quality and service. While
competition has historically been affected by, among other things, changes in
customer taste, economic and real estate conditions, demographic trends,
traffic patterns, as well as national and local competitive factors, the number
of competitors is greater than ever, thus heightening the effect of all those
factors.
With the advent of its franchising program, the Company is also competing
for franchisees with franchisors of other restaurants and various concepts.
GOVERNMENT REGULATION
Each of the Company's stores is subject to inspection and regulation by
public health authorities. Most leasehold improvements made to the Company's
stores are subject to local and state building code requirements. The Company is
subject to the Fair Labor Standards Act which governs such matters as minimum
age requirements, overtime and other working conditions. The
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Company believes that its conduct of business is in substantial compliance with
these and other applicable government regulations.
A large number of the Company's store personnel are paid at or based upon
the federal minimum wage level. Accordingly, changes in such minimum wage
levels affect the Company's labor costs. In August 1996, legislation was
enacted to increase the minimum wage from $4.25 per hour to $4.75 per hour on
October 1, 1996, and further to $5.15 effective September 1, 1997.
Approximately 30 employees were affected by the October 1996 increase and 66
employees were affected by the September 1997 increase.
A significant number of the Company's employees are not covered by health
insurance. The Company is unable to predict the scope or effect, if any, of any
future government regulation or legislation affecting employee health care
benefits.
SERVICE MARKS
The Company's trade name "WALL STREET DELI" and its design were
registered as a service mark on the Principal Register of the United States
Patent and Trademark Office in 1993. In 1990, the Company's trade name "R.C.
COOPER'S" was registered as a service mark. The service mark "SANDWICH CHEF"
and design was registered on the Principal Register of the United States Patent
and Trademark Office in 1974. The application for the Company's trade name
"STREET WRAPS" and its design were filed in 1998, and the statutory notice
period for the filing of opposition has passed, with none being filed.
EMPLOYEES
As of June 27, 1998, the Company employed approximately 1188 persons,
including 43 managerial, 22 administrative and 1123 store employees. No labor
unions represent any of the Company's employees. The Company considers its
relationship with employees to be good.
INFORMATION AS TO CLASSES OF SIMILAR PRODUCTS OR SERVICES
The Company operates in only one industry segment. All significant
revenues and pre-tax earnings relate to retail sales of food to the general
public through company-owned and company-operated stores. The Company does not
yet have significant revenues from franchise operations, and has no operations
outside the continental United States.
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ITEM 2: PROPERTIES
CORPORATE HEADQUARTERS
The Company consolidated its corporate offices late in fiscal 1997,
relocating the Memphis operations center to Birmingham, Alabama. Corporate
headquarters is now housed in approximately 10,000 square feet of leased office
space which includes facilities for franchise training and support, as well as
for training and support for Company stores. Located near downtown Birmingham,
the corporate office is less than one block from a Wall Street Deli flagship
store. Management expects this facility to be adequate for the Company's
corporate headquarters and store support facility for the foreseeable future.
STORE LOCATIONS
The Company leases all of its division offices and stores. The following
table shows the locations of the Company's stores by city at June 27, 1998:
<TABLE>
<CAPTION>
Number of
City Restaurants
- -------------------- -----------
<S> <C>
Atlanta 5
Birmingham 10
Chicago 16
Cincinnati 4
Cleveland 3
Dallas 13
Denver 8
Houston 11
Indianapolis 1
Los Angeles 6
Louisville 1
Minneapolis 1
Newark 1
Philadelphia 6
St. Louis 2
Washington, D.C. 24
---
TOTALS 112
===
</TABLE>
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While the general economy in the various cities is an important element,
the Company's experience is that careful placement of stores in office
buildings and regional malls is in many respects unique to each situation. The
locations and character of the stores and their surroundings, and the effect of
those elements on their suitability, adequacy, productive capacity and
utilization is integral to the Company's business, and is discussed in Item 1
of this Report, particularly under the caption "Site Selection Criteria and
Leasing."
Mr. Alan Kaufman, Chairman of the Board, and Mr. Robert Barrow, Vice
Chairman of the Board, are general partners of WESCO Associates, which until
February 1996 leased to the Company its executive offices and commissary in
Birmingham, Alabama, and of CBK Associates, which until October 27, 1996 leased
to the Company its catering offices in Memphis, Tennessee. During the Company's
1998, 1997 and 1996 fiscal years, rents paid to WESCO Associates were $0, $0
and $24,036, respectively, and rents paid to CBK Associates were $0, $12,000
and $74,712, respectively.
Mr. Alan Kaufman, Mr. Robert Barrow, Mr. Jeffrey Kaufman, President and
Chief Executive Officer, and Mr. Steve Barrow, Secretary and Vice President, are
general partners in Rex Associates, which leased to the Company its former
administrative offices in Memphis, Tennessee. Pursuant to the relocation of the
Company's administrative offices from Memphis to Birmingham and the subsequent
consolidation with the Company's executive headquarters, the lease agreement
terminated effective September 30, 1997. The administrative office lease was
entered into May 1994 for a term of ten years beginning September 1, 1994, and
provided for an annual escalation of rents based on the consumer price index.
During the Company's 1998, 1997 and 1996 fiscal years, rents paid to Rex
Associates were $18,500, $69,672 and $62,690, respectively.
Management believes these transactions to have been on terms no less
favorable than could have been obtained from unaffiliated third parties.
ITEM 3: LEGAL PROCEEDINGS
The Company is party to several pending legal proceedings, all of which
are deemed by the management of the Company to be ordinary routine litigation
incidental to the business, and none of which is believed likely to have a
material adverse effect on the Company, its financial position or operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year covered by this
report, no matter has been submitted to a vote of security holders, through the
solicitation of proxies or otherwise.
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ITEM 4.1: EXECUTIVE OFFICERS
The executive officers of the Company as of the end of fiscal 1998
were as follows:
<TABLE>
<S> <C>
Alan V. Kaufman Chairman of the Board
Robert G. Barrow Vice Chairman of the Board and Chief Financial Officer
Jeffrey V. Kaufman President and Chief Executive Officer
Kevin D. Conaway Treasurer and Chief Accounting Officer
David A. Thomas Senior Vice President - National Operations
Kenneth M. Myres Vice President and Director of Franchising
Steven G. Barrow Vice President - Corporate Development and Secretary
</TABLE>
Alan V. Kaufman, age 61, was Chairman of the Board, Chief Executive
Officer and President of the Company from its formation in 1966 through 1995.
After the close of the 1995 fiscal year, Mr. Kaufman stepped down as President
and Chief Executive Officer, and continues as its Chairman. Mr. Kaufman is the
father of Jeffrey V. Kaufman.
Robert G. Barrow, age 62, served as President and Chief Executive
Officer from 1995 until February 1997, when he became Vice Chairman of the
Board. He also continues as Chief Financial Officer of the Company, and has
served in that capacity since 1981. Mr. Barrow was Executive Vice President
from 1981 to 1995, and has been a Director of the Company since 1967. Mr.
Barrow is the father of Steven G. Barrow.
Jeffrey V. Kaufman, age 37, has been employed by the Company since
1985 and has served in the position of Executive Vice President and Chief
Operating Officer since 1995. He served as Vice President-Central Region, from
1989 until his promotion to Senior Vice President-National Operations Manager
in August 1992, and became President in June, 1998. Mr. Kaufman has been a
Director of the Company since 1995. Mr. Kaufman is the son of Alan V. Kaufman.
Kevin D. Conaway, age 39, joined the Company as Treasurer and Chief
Accounting Officer in May, 1997. A Certified Public Accountant, Mr. Conaway was
employed by Coopers & Lybrand, LLP, from 1988 to 1995, and was an independent
accounting consultant prior to his employment by the Company. Mr. Conaway
resigned his position subsequent to the end of fiscal 1998.
David A. Thomas, age 39, joined the Company in 1983 and was promoted
to the position of Senior Vice President-National Operations effective June
1997. He served as the Company's division manager for Washington, D.C. from
1984 until his appointment in 1992 to Vice President-Eastern Region.
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Kenneth Myres, age 46, joined the Company as Vice President and
Director of Franchising in May of 1997. He was Vice President of Franchise
Development for Metromedia Restaurant Group, Inc. from 1985 to 1996. Mr. Myres
resigned his position subsequent to the end of fiscal 1998.
Steven G. Barrow, age 33, was the Company's Director of Information
Systems from 1993 until May 1997, when he was named Vice President-Corporate
Development. Mr. Barrow has also served as the Company's corporate Secretary
since 1993. Following the close of fiscal 1998 he became Vice President -
Information Systems. He was Senior Systems Analyst for M.S. Carriers from 1992
to 1993 and worked for the Company on a part-time basis in various capacities
related to information systems from 1988 until 1992. Mr. Barrow is the son of
Robert G. Barrow.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market
and is quoted in the NASDAQ National Market System under the symbol WSDI. The
following table sets forth, for the fiscal periods indicated, the high and low
sales prices as reported on the NASDAQ National Market System.
<TABLE>
<CAPTION>
FISCAL 1997 High Low
---- ---
<S> <C> <C>
Quarter Ended September 28, 1996 6 1/4 4 3/4
Quarter Ended December 28, 1996 5 7/8 4 3/4
Quarter Ended March 29, 1997 5 1/4 4 1/8
Quarter Ended June 28, 1997 4 3/8 3 7/8
<CAPTION>
FISCAL 1998 High Low
---- ---
<S> <C> <C>
Quarter Ended September 27, 1997 4 3 1/2
Quarter Ended December 27, 1997 3 5/8 3 1/4
Quarter Ended March 28, 1998 3 3/4 3 9/16
Quarter Ended June 27, 1998 5 1/4 4 1/16
</TABLE>
On September 15, 1998, there were approximately 355 record holders of
the Company's Common Stock, including shares held in "street name" by nominees
who are record holders.
The Company has never declared or paid a cash dividend, and it is the
present policy of the Board of Directors to retain all earnings for the
development of the Company's business. Any payment of dividends in the future
will depend upon the Company's earnings, capital requirements, financial
condition and such other factors as the Board of Directors may deem relevant.
In the past, the Company from time to time has effected stock splits in the
form of stock dividends, resulting in the issuance of additional shares of
Common Stock to the shareholders of
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the Company. No assurances are made that the Company will effect any stock
splits or declare any stock dividends in the future.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the Company for each of the five fiscal years in the period ended June 27, 1998
and as of June 27, 1998, June 28, 1997, June 29, 1996, July 1, 1995 and July 2,
1994. The selected consolidated financial data set forth below have been
derived from the consolidated financial statements of the Company, which have
been audited by BDO Seidman, LLP, independent Certified Public Accountants, as
indicated in their report included elsewhere herein. The selected financial
data should be read in conjunction with, and are qualified in their entirety
by, the consolidated financial statements of the Company and related notes and
other financial information included elsewhere in this report.
<TABLE>
<CAPTION>
1998(1) 1997(2) 1996(3) 1995(4) 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $63,780,406 $65,453,642 $69,399,058 $68,228,119 $58,858,043
Net income (loss) $(3,842,430) $ 62,822 $(2,457,706) $ (921,011) $ 1,956,807
Basic and Diluted
earnings (loss) per
common share $ (1.24) $ .02 $ (.72) $ (.27) $ .58
Average shares outstanding 3,094,762 3,254,908 3,407,874 3,422,701 3,381,892
Total assets $19,862,808 $23,065,627 $25,668,894 $29,163,709 $26,669,807
Stockholders' equity $12,716,924 $16,936,508 $18,229,590 $20,653,157 $21,485,457
Return on average
stockholders' equity (25.9)% 0.4% (12.6)% (4.4)% 9.6%
Return on average assets (17.9)% 0.3% (9.0)% (3.3)% 8.0%
Stores in operation at
year-end 112 116 124 128 122
</TABLE>
1. Net loss included a non-cash charge of $3.0 million taken as an operating
expense related to the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of."
2. In June 1997, the Company relocated its administrative offices from
Memphis, Tennessee to Birmingham, Alabama and consolidated them with its
executive headquarters in order to centralize the marketing and franchise
operations and establish a store support center. In connection therewith
a charge of $0.7 million was taken as an operating expense.
3. Net loss included a non-cash charge of $4.7 million taken as an operating
expense related to the adoption of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of."
14
<PAGE> 15
4. During the fourth quarter of fiscal 1995, the Company formally adopted a
plan to close 11 existing stores and its commissary locations. In
connection therewith a charge of $3.2 million to implement the plan was
recognized as an operating expense.
ITEM 7: 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-K that are not
historical fact are forward looking statements. Such statements are subject to
a number of 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>
Fiscal Year Ended
------------------------------------
JUNE 27, JUNE 28, JUNE 29,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.3 88.9 89.3
-------- -------- --------
Gross profit 9.7 11.1 10.7
Administrative and general 10.8 11.6 10.1
Impairment of long-lived assets 4.7 -- 6.8
Operating income (loss) (5.8) (.5) (6.2)
Other income (expenses)
(Interest expense) and other income, net (0.2) .6 .4
-------- -------- --------
Income (loss) before taxes (benefit) on income (6.0) .1 (5.8)
Taxes (benefit) on income -- -- (2.2)
-------- -------- --------
Net income (loss) (6.0)% .1% (3.6)%
======== ======== ========
</TABLE>
15
<PAGE> 16
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales
Net sales decreased approximately $1,673,000 or 2.6 percent from fiscal
1997, primarily due to an approximate 1.7 percent decline in same store sales
and the sale of the Memphis division during the second quarter of fiscal 1997.
Net sales from the Memphis division were approximately $1,551,000 in fiscal
1997. During fiscal 1998, the Company opened four new stores, and sold or
closed eight stores that were not meeting performance goals.
At June 27, 1998, the Company had 95 Wall Street Deli "flagship"
restaurants and 17 other stores, compared to 93 and 23, respectively, at June
28, 1997. Stores categorized as "other" do not meet the criteria of flagship
restaurants generally due to location and store size. Through fiscal 1997, the
Company recorded net sales from the "other" group (which included the few
remaining R.C. Cooper's units and off-premises catering sales) separately from
its flagship restaurants, primarily because of the significant variance in
sales volume between the two groups. The number of stores in the "other" group
continues to decrease and the Company now considers these groupings to have
lost any material significance and no longer records separate financial
information based on store concept.
Average annual sales per store for all stores were approximately $565,000
and $551,000 in fiscal year 1998 and 1997, respectively. The increase in
average annual sales per store reflects primarily the continuing change in the
mix of store types from other concepts to flagship restaurants.
Same store sales in fiscal 1998 declined 1.7 percent as compared to
fiscal 1997. Although management believes "Street Wraps" did not have a
significant effect on net sales, it serves as an alternative product.
Management believes this negative effect on same store sales is generally
attributable to the continuing pressures of competition in expansion and
marketing by competitors, combined with management and operating difficulties
in some cities.
As in prior years, the Company continued during fiscal 1998 to implement
pricing adjustments and price changes that were not significant on an overall
basis, and considers price changes in products sold to have had, in the
aggregate, an immaterial effect on sales in the current year.
During the fourth quarter of fiscal 1997 the Company announced the
initiation of a franchise program for both stand-alone Wall Street Deli stores
and the Wall Street Deli stores co-branded with TCBY yogurt products. Five
franchised stores were opened and operating at June 27, 1998. Franchise
agreements for six additional units were also signed prior to fiscal year end.
Subsequent to year end, agreements for seven additional units have been signed.
Initial franchise fees and royalty payments were not significant in 1998.
16
<PAGE> 17
The Company historically has experienced lower sales in the second fiscal
quarter of each year due to the number of holidays in the months of October,
November and December. This seasonal effect has a negative impact on sales
because the Company's stores are generally located in or near office buildings.
Cost of Sales
Cost of sales as a percent of net sales increased in fiscal 1998 to 90.3
percent from 88.9 percent in fiscal 1997. The major components of cost of sales
are set out below:
<TABLE>
<CAPTION>
Fiscal 1998 % of Sales Fiscal 1997 % of Sales
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Food/Paper $ 22,414,460 35.1% $ 23,020,494 35.2%
Labor 14,496,226 22.7 14,917,950 22.8
Store Expenses 20,663,103 32.4 20,219,542 30.9
------------- ---- ------------- ----
$ 57,573,789 90.3% $ 58,157,986 88.9%
============= ==== ============= ====
</TABLE>
The modest decrease in total food/paper cost of 0.1 percent as a
percentage of net sales reflects continued efforts toward improving operational
efficiencies. Late in the third fiscal quarter of 1998, the Company changed its
single source food vendor; this change has not resulted in any significant
effect on cost, but is expected over the longer term to further the objectives
of improvements in service, additional new product flexibility, and pricing and
inventory control.
Labor costs as a percent of net sales decreased 0.1 percent due to a 0.6
percent decrease in average store manager salaries, offset by a 0.5 percent
increase in aggregate hourly wages. The federal minimum wage increase,
effective September 1, 1997, has not had a material effect on fiscal 1998 labor
costs.
Store expenses as a percent of net sales increased 1.5 percent.
Significant store expenses are fixed costs and, on a percentage basis, are
adversely affected by the decrease in same store sales. Restaurant supplies and
promotional expenses increased 0.1 and 0.4 percent, respectively, primarily due
to the implementation of new products, particularly the "Street Wraps" program.
Other store expenses that increased as compared to the previous annual period
included rent- operating expenses (0.1 percent), percentage rent (0.3 percent),
taxes and licenses (0.1 percent), depreciation (0.1 percent), amortization (0.2
percent) and register rental (0.1 percent).
Administrative and General Expenses
Administrative and general expenses decreased approximately $683,000, or
9.0 percent to approximately $6,904,000 for fiscal 1998 from approximately
$7,587,000 in fiscal 1997. In June 1997, the Company recorded a charge of
approximately $700,000 related to the relocation of its administrative offices
from Memphis to Birmingham and the subsequent consolidation with the Company's
executive headquarters. This move established a store support center and
centralized
17
<PAGE> 18
the operations and administrative functions. Excluding the non-recurring cost
related to this relocation and consolidation, administrative and general
expenses increased approximately $17,000 in fiscal 1998 as compared to the
prior fiscal year.
Impairment of Long-Lived Assets
As discussed in Note 4 of the Notes to the Consolidated Financial
Statements, the Company recorded an initial, non-cash charge upon adoption of
SFAS No. 121 in 1996. Historically, the Company had evaluated and measured its
store properties for impairment by groups on a regional basis to determine if
the region was operating at a loss or was expected to operate at a loss in the
future. As a result of adopting SFAS No. 121, the Company now evaluates and
measures for impairment on an individual store basis. During 1998, events and
circumstances indicated that certain equipment, fixtures and leasehold
improvements associated with ten under-performing stores, accounting for
approximately 9 percent of all Company stores, were impaired. Accordingly, the
Company recorded a pre-tax charge in the fourth quarter of 1998 amounting to
approximately $3.0 million to adjust the carrying value of these assets to
their estimated fair market value and to provide for associated disposal
liabilities. While management believes that estimates used in evaluation of
impairment were reasonable, actual results could vary significantly. The charge
represented approximately 19 percent of the total carrying amount of long-lived
assets. The reduced carrying amount of assets was then expected to reduce 1999
depreciation and amortization by approximately $450,000. Also, because the
Company now evaluates each store for impairment, future charges are reasonably
possible as estimates of future cash flows change. These charges will generally
arise as estimates used in the evaluation and measurement of impairment upon
adoption of SFAS No. 121 are refined based on new information or as a result of
future events or changes in circumstances that cause other stores to be
impaired. Also, any future expenditures for impaired stores that would
otherwise be capitalized will have to be immediately evaluated for
recoverability.
The adoption of SFAS No. 121, as well as its ongoing application, has and
will generally result in lower closure costs or increased gains for impaired
stores that are closed or sold, respectively.
Sale of Memphis Division
Effective October 27, 1996, the Company sold the operating assets of its
Memphis division. This sale decreased net sales approximately $1,551,000 as
compared to fiscal 1997.
Interest Expense, Net
In fiscal 1998, the Company had net interest expense of approximately
$227,000 compared to net interest expense of approximately $47,000 in fiscal
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 (7.41 percent at June 27, 1998) or the bank's
18
<PAGE> 19
quoted cost of funds plus 175 basis points (8.4 percent at June 27, 1998). The
Company had approximately $2,005,000 outstanding against this line at June 27,
1998 as compared to approximately $983,000 at June 28, 1997. The Company also
paid approximately $51,000 in interest due to amended tax return filings in
1998. The interest expense for fiscal 1998 of approximately $227,000 was offset
by $30,000 of interest earned by the Company on notes receivable from prior
sales of fixtures and equipment in various stores.
Taxes (Benefit) on Income
The Company did not recognize an income tax benefit from losses incurred
in fiscal 1998. A valuation allowance of $1,437,000 was established against
deferred tax assets created by the impairment charge recognized in the fourth
quarter and from tax benefits generated from current year losses, reducing the
Company's effective tax to 0.0 percent. Realization of deferred tax assets
associated with equipment and improvements and with net operating loss and
credit carryforwards is dependent upon generating sufficient taxable income to
utilize depreciation deductions on impaired long-lived assets and net operating
loss and credits carryforwards prior to their expirations. Management believes
there is risk that certain of these deferred tax assets may not be realized
and, accordingly, has established a valuation allowance against them. Although
realization is not assured for the remaining deferred tax assets, management
believes it is more likely than not that they will be realized through future
taxable earnings or alternative tax strategies. The Company provided for income
taxes of $26,000 for fiscal 1997 with an effective tax rate of 29.3 percent.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales
Net sales decreased approximately $3,945,000 or 5.7 percent over the
prior year primarily due to the sale of the Memphis division and a 4.3 percent
decline in same store sales. 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 $3,414,000 as compared to fiscal
1996, and accounted for 86.5% of the sales decrease. During fiscal 1997, the
Company opened four new stores and, in addition to the ten Memphis stores, sold
or closed three other stores that no longer met performance goals.
Components of the Company's net sales and the respective percentages of
total sales for those components for the fiscal years 1997 and 1996, in the
categories used by the Company for the past several years, are shown in the
schedule below:
19
<PAGE> 20
<TABLE>
<CAPTION>
Total Sales Total Sales
Concept Fiscal 1997 % of Total Fiscal 1996 % of Total
- ----------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Wall Street Deli $61,913,503 94.6% $58,962,226 85.0%
R. C. Cooper's 2,370,367 3.6 7,114,922 10.3
Catering 1,169,772 1.8 3,321,910 4.7
----------- ----- ----------- -----
Total $65,453,642 100.0% $69,399,058 100.0%
=========== ===== =========== =====
</TABLE>
Fiscal 1997 was the last year in which the Company separately tracked
sales information for the R.C. Cooper's concept and catering. The Company has
been closing or converting R.C. Cooper's restaurants for several years, and at
the end of fiscal 1997 had only five R.C. Cooper's restaurants remaining. The
catering sales reported above as a separate component of sales consists only of
the off premises catering operations from the Memphis division, which accounted
for the majority of such sales and which was sold in the second quarter of
fiscal 1997, and the off premises operation in the Washington, D.C. division.
All other catering sales are made from the restaurants and are not separately
reported but included in the Wall Street Deli and R.C. Cooper's sales
information above.
The steadily decreasing sales attributable to the R.C. Cooper's units and
off premises catering, both in absolute dollars and as percentages of total
sales, reflects the change in the Company's store concept mix during the last
several years as the Wall Street Deli concept continued to predominate. The
Company considers these other groupings now to have lost any material
significance to an understanding of the Company's business.
Primarily because of the variation in sales volume between the Wall
Street Deli "flagship" restaurant style and the "other" Wall Street Delis, the
Company continued to record sales data separately for these two types or
groups. Beginning in fiscal 1998, the Company planned to include sales
information from the R.C. Cooper's units in the "other" category. The following
table sets forth the Company's average annual sales per store by current
concept group and for all stores, and the same store sales comparisons for
stores open the entire twelve months of fiscal 1997 and 1996, respectively.
<TABLE>
<CAPTION>
Average Annual Same Store Sales
Sales Per Store Change From Prior Year
------------------------ ----------------------
1997 1996 1997 1996
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Wall Street Deli Flagships $610,891 $642,824 (4.8)% (5.5)%
Wall Street Deli Other $319,843 $366,487 (0.1)% (3.6)%
R.C. Cooper's $387,979 $246,353 (3.2)% (3.3)%
All Stores $551,432 $532,395 (4.3)% (5.1)%
</TABLE>
Average annual sales per store as shown above were computed retroactively
on the basis of current concept grouping, reflecting in some instances
conversions of R.C. Cooper's stores to Wall Street Deli stores. The Memphis
division sale included one Wall Street Deli Flagship store, two Wall Street
Deli Other stores and seven R.C. Cooper's stores with approximate fiscal 1996
20
<PAGE> 21
average annual sales per store of $242,000, $282,000 and $139,000,
respectively. This transaction therefore created a significant increase in
average annual sales per store for the five R.C. Cooper's stores remaining at
fiscal 1997 year end.
Same store sales in fiscal 1997 declined 4.3 percent as compared to
fiscal 1996. Management believes this negative impact on same store sales is
generally attributable to continually more formidable competition in expansion
and marketing by competitors, combined with management and operational
difficulties in several cities.
During fiscal 1997, the Company again implemented pricing adjustments and
price changes that were insignificant on an overall basis, and therefore
considers price changes in products sold to have had, in the aggregate, an
immaterial effect on sales in the current year.
During the fourth quarter of fiscal 1997 the Company announced the
initiation of a franchise program for both stand-alone Wall Street Deli stores
and the Wall Street Deli stores co-branded with TCBY yogurt products. There
have not yet been any significant revenues from this early stage program.
The Company historically has experienced lower sales in the second fiscal
quarter of each year due to the greater number of holidays in the months of
October, November and December. This seasonal effect has a negative impact on
sales because most of the Company's stores are located in or near office
buildings.
Cost of Sales
Cost of sales as a percentage of net sales decreased in fiscal 1997 to
88.9 percent from 89.3 percent in fiscal 1996. The major components of cost of
sales for the last two years are set out below:
<TABLE>
<CAPTION>
Fiscal 1997 % of Sales Fiscal 1996 % of Sales
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Food/Paper $ 23,020,494 35.2% $ 24,160,921 34.9%
Commissary -- -- 789,190 1.1
------------- ---- ------------- ----
Total Food/Paper/Commissary 23,020,494 35.2 24,950,111 36.0
Labor 14,917,950 22.8 16,156,153 23.3
Store Expenses 20,219,542 30.9 20,852,569 30.0
------------- ---- ------------- ----
$ 58,157,986 88.9% $ 61,958,833 89.3%
============= ==== ============= ====
</TABLE>
The decrease in total food/paper and commissary expenses of 0.8 percent
as a percentage of sales reflects the completion of the Company's delivery
system conversion. Final stages of the commissary phase-out were completed
during fiscal 1996 and by June 1996 the single source vendor system was fully
implemented.
21
<PAGE> 22
Labor costs as a percentage of net sales decreased 0.5 percent due to a
1.5 percent decrease in aggregate hourly wages offset by a 1.0 percent increase
in store manager salaries. The minimum wage increase, effective October 1,
1996, has not had a material effect on labor costs.
Store expenses as a percentage of net sales increased 0.9 percent due
mainly to the fact that many store expenses are fixed and are therefore
adversely affected by a decrease in same store sales. There was also a 0.2
percent increase in equipment repairs and maintenance expense compared to the
prior year.
Administrative and General Expenses
Administrative and general expenses increased $581,556, or 8.3 percent,
to $7,586,774 for fiscal 1997 from $7,005,218 in fiscal 1996. In June 1997, the
Company took a $700,000 one-time charge related to the relocation of its
administrative offices from Memphis to Birmingham and the subsequent
consolidation with the Company's executive headquarters. This move established
a store support center and centralized the operations and administrative
functions. Excluding the $700,000 one-time charge, administrative and general
expenses decreased $118,444, or 1.7 percent, in fiscal 1997 as compared to the
prior fiscal year.
Sale of Memphis Division
Effective October 27, 1996, the Company sold the operating assets of its
Memphis division to Executive Chef Catering, L.L.C., which is owned by Mr.
Robert Barrow, current Vice Chairman of the Board and former President and
Chief Executive Officer of the Company, and Ms. Judy Gupton, former manager of
the Memphis division. Total sale price for the assets was $1,017,000,
consisting of $810,305 in cash and short-term notes, 25,000 shares of Company
stock valued at $5.55 per share, and $68,739 payable in two years, with
interest at the prime rate and paid quarterly. Prior to the close of fiscal
1997, one note in the amount of $47,990 was paid with 11,250 shares of Company
stock valued at $4.125 per share, with the balance paid in cash. The book value
of the assets sold was approximately $867,000.
The assets included in the sale were ten Memphis stores, three operating
under the Wall Street Deli trade name and seven operating as R.C. Cooper's
stores, and the Memphis catering operation conducted under the trade name
Executive Chef Catering. In fiscal 1996, average annual sales approximated
$178,000 for each of the ten Memphis stores while the catering operation had
annual sales of approximately $2,900,000. Operating income for the Memphis
division for fiscal 1996 was approximately $268,000. Management considers this
transaction to have been on terms at least as favorable as could have been
obtained from unaffiliated third parties.
Interest Expense, Net
In fiscal 1997, the Company had net interest expense of $47,089 compared
to net interest expense of $188,038 in fiscal 1996. Interest expense is related
primarily to the Company's
22
<PAGE> 23
$7,500,000 unsecured line of credit which bears interest at the lower of the
30-day LIBOR rate plus 175 basis points (7.47 percent at June 28, 1997) or the
bank's quoted cost of funds plus 175 basis points (6.64 percent at June 28,
1997). The Company had $982,936 outstanding against this line at June 28, 1997
as compared to $2,500,000 at June 29, 1996. The interest expense for fiscal
1997 of $129,075 was offset by $81,986 of interest earned by the Company on
notes receivable from prior sales of fixtures and equipment in various stores.
Taxes (Benefit) on Income
The Company incurred income taxes of $26,000 for fiscal 1997 as compared
to a tax benefit of $1,536,500 for fiscal 1996. The effective tax rate in
fiscal 1997 was 29.3 percent as compared to the effective tax benefit of 38.5
percent in fiscal 1996.
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 66 employees were affected by the September 1997 minimum wage
increase. 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.
In most cases, the Company has been able to increase prices sufficiently to
match increases in its operating costs, but there is no assurance that it will
be able to do so in the future.
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 1998 fiscal year end, the ratio of the Company's current assets to
current liabilities was .48 to 1.00, as compared to a current ratio of .51 to
1.00 at 1997 fiscal year end. This change reflects the Company's use in 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.
23
<PAGE> 24
The Company's principal capital requirement is for new equipment and
leasehold improvements for new and existing stores. Capital expenditures for
these purposes were approximately $3,283,000, $2,993,000 and $3,990,000 for
fiscal years 1998, 1997 and 1996, respectively. It is presently anticipated
that the Company's capital expenditures for fiscal 1999 will be approximately
$1,650,000. During the fourth quarter of 1998, the Company's Board of Directors
approved the repurchase of up to 100,000 shares of the Company's common stock.
The Company purchased 94,000 shares at an average cost of $3.65 per share under
the fiscal 1997 fourth quarter repurchase program while 10,500 shares had been
acquired as of June 27, 1998, at an average cost of $3.76 per share under the
fiscal 1998 fourth quarter program. During fiscal 1998, a total of 104,500
shares were purchased at an acquisition cost of approximately $382,000.
The Company has historically met its capital needs from short term bank
borrowings and internally generated funds. Cash generated from operations
totaled approximately $2,168,000, $3,426,000 and $4,944,000 for fiscal years
1998, 1997 and 1996, respectively. 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 to maintain a certain tangible net
worth and to limit the annual capital expenditures of the Company. As of the
end of the second quarter of fiscal 1998, the Company's debt service coverage
ratio was 1.21, which was less than the 1.30 then required by the Credit
Agreement. The lender waived compliance with the debt service coverage ratio
covenant for the 1998 second fiscal quarter and reduced the debt service
coverage ratio from 1.30 to 1.15 for the fiscal quarters ended March 28, 1998
and June 27, 1998. At June 27, 1998, the Company's debt service coverage ratio
was 1.29. The Company expects its future capital needs will be met primarily by
internally generated funds and supplemented as needed by additional bank
borrowings.
IMPACT OF YEAR 2000
The Company is in the process of conducting a comprehensive review of its
computer systems to identify the systems that could be affected by the Year
2000 issue. The problem is complex as virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00.
Systems that do not properly recognize date sensitive information could
generate erroneous data or cause a system to fail. The Company is utilizing
internal and external resources in an attempt to identify and correct, or
reprogram, all systems for year 2000 compliance. It is anticipated that all
reprogramming efforts will be completed by mid-1999, allowing adequate time for
testing. The Company's sales reporting and inventory system was developed
internally, and will need modifications which are scheduled for completion in
January 1999. Management considers these modifications to involve a moderate
effort and expects to use internal resources for completion. All computer
hardware and other electronic equipment is currently undergoing compliance
testing. The Company has budgeted $40,000 for installation and training of the
upgraded systems. Due to the fact that most of the Company's computer and
telecommunications equipment are relatively new, the costs to bring it into
compliance are not expected to result in
24
<PAGE> 25
material expenditures. The Company believes its Year 2000 plans are sufficient,
but will develop contingency plans as needed in the future.
NEW ACCOUNTING PRONOUNCEMENTS
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.
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.
In February 1998, the Financial Accounting Standards Board issued SFAS
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132"), which amends the disclosure requirements of the following FASB
Statements: SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting of Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS 132 does not
affect the recognition and measurement requirements of those Statements, but
standardizes disclosure requirements to the extent practicable and suggests
combined formats for presentation of pension and other postretirement benefit
disclosures.
SFAS 130, SFAS 131 and SFAS 132 are effective for financial statements
for periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Because of the recent issuance of
these standards, management has been unable to evaluate fully the impact, if
any, these standards may have on future financial statement disclosures.
Results of operations and financial position, however, will be unaffected by
implementation of these standards.
25
<PAGE> 26
In June 1998, the Financial Accounting Standards Board Issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS
133"). SFAS 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized in income in the period of change.
SFAS 133 amends the guidance in SFAS No. 52, "Foreign Currency Translation," to
permit special accounting for a hedge of a foreign currency forecasted
transaction with a derivative. It also supersedes SFAS No. 80, "Accounting for
Futures Contracts," SFAS No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," and SFAS No. 119, "Disclosure about Derivative
Financial Instruments." In addition, it amends SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments," to include in SFAS No. 107 the disclosure
provisions about concentrations of credit risk from SFAS No. 105.
SFAS 133 is effective for financial statements for periods beginning
after June 15, 1999. Historically, the Company has not entered into derivatives
contracts either to hedge existing risk or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard on July
2, 2000 to affect its financial statements.
ITEM 8: FINANCIAL STATEMENTS
The following financial statements are contained at pages 27 through 52
of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants..................................................... 27
Consolidated Financial Statements for Years ended June 27, 1998, June
28, 1997 and June 29, 1996:
Consolidated Balance Sheets - June 27, 1998 and June 28, 1997................................. 28
Consolidated Statements of Operations......................................................... 30
Consolidated Statements of Stockholders' Equity............................................... 31
Consolidated Statements of Cash Flows......................................................... 32
Summary of Accounting Policies......................................................................... 34
Notes to Consolidated Financial Statements............................................................. 40
Selected Quarterly Financial Data (unaudited) (appearing at Note 11
of the Notes to Consolidated Financial Statements)............................................ 52
</TABLE>
26
<PAGE> 27
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Wall Street Deli, Inc.
Birmingham, Alabama
We have audited the accompanying consolidated balance sheets of Wall Street
Deli, Inc. and subsidiaries as of June 27, 1998 and June 28, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended June 27, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Wall Street Deli, Inc. and
subsidiaries at June 27, 1998 and June 28, 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
June 27, 1998, in conformity with generally accepted accounting principles.
Memphis, Tennessee
August 7, 1998
27
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 27, 1998 June 28, 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 409,044 $ 490,058
Accounts and notes receivable (Note 1) 1,319,436 1,055,924
Inventories 583,405 684,280
Refundable income taxes 333,411 --
Deferred tax assets (Note 5) 570,000 624,000
Prepaid expenses and other 242,659 263,129
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,457,955 3,117,391
- ---------------------------------------------------------------------------------------------------
EQUIPMENT AND IMPROVEMENTS (Note 4)
Equipment and fixtures 19,674,714 18,258,482
Leasehold improvements 16,319,331 15,905,021
- ---------------------------------------------------------------------------------------------------
35,994,045 34,163,503
Less accumulated depreciation and amortization (22,973,956) (18,035,661)
- ---------------------------------------------------------------------------------------------------
NET EQUIPMENT AND IMPROVEMENTS 13,020,089 16,127,842
- ---------------------------------------------------------------------------------------------------
OTHER
Cash surrender value of insurance ($3,174,495 and
$3,273,638 face amount) on officers' lives 781,362 718,165
Long-term portion of notes receivable (Note 1) 211,402 453,229
Deferred tax assets (Note 5) 2,392,000 2,649,000
- ---------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 3,384,764 3,820,394
- ---------------------------------------------------------------------------------------------------
$ 19,862,808 $ 23,065,627
===================================================================================================
</TABLE>
28
<PAGE> 29
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 27, 1998 June 28, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note 2) $ 2,004,810 $ 1,005,400
Accounts payable 1,582,901 1,267,758
Accruals:
Taxes other than income 572,800 546,073
Compensation 818,765 755,240
Rent 1,018,824 781,545
Workers' compensation 781,145 742,242
Corporate relocation (Note 10) -- 532,121
Miscellaneous 366,839 498,740
- -----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,146,084 6,129,119
- -----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Note 3)
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 3,523,082 7,365,512
- -----------------------------------------------------------------------------------------------------
14,481,191 18,318,649
Treasury stock, at cost, 368,325 and 263,825 shares (1,764,467) (1,382,141)
- -----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 12,716,724 16,936,508
- -----------------------------------------------------------------------------------------------------
$ 19,862,808 $ 23,065,627
=====================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
29
<PAGE> 30
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended
---------------------------------------------------
JUNE 27, 1998 June 28, 1997 June 29, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 63,780,406 $ 65,453,642 $ 69,399,058
- ---------------------------------------------------------------------------------------------------------
COST OF SALES
Food and paper costs 22,414,460 23,020,494 24,160,921
Direct labor 14,496,226 14,917,950 16,156,153
Other operating expenses 20,663,103 20,219,542 21,641,759
- ---------------------------------------------------------------------------------------------------------
TOTAL COST OF SALES 57,573,789 58,157,986 61,958,833
- ---------------------------------------------------------------------------------------------------------
GROSS PROFIT 6,206,617 7,295,656 7,440,225
ADMINISTRATIVE AND GENERAL 6,904,235 7,586,774 7,005,218
IMPAIRMENT OF LONG-LIVED ASSETS (Note 4) 2,999,642 -- 4,712,562
- ---------------------------------------------------------------------------------------------------------
OPERATING LOSS (3,697,260) (291,118) (4,277,555)
- ---------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSES)
Gain on disposal of leasehold improvements
and equipment 14,127 204,361 369,573
Interest expense (226,795) (129,075) (245,752)
Interest income 30,218 81,986 57,714
Other income - net 37,280 222,668 101,814
- ---------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (145,170) 379,940 283,349
- ---------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES (BENEFIT) ON INCOME (3,842,430) 88,822 (3,994,206)
TAXES (BENEFIT) ON INCOME (Note 5) -- 26,000 (1,536,500)
- ---------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (3,842,430) 62,822 (2,457,706)
=========================================================================================================
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON
SHARE (NOTES 2 AND 6) $ (1.24) $ .02 $ (.72)
=========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- -----------------------
Number Additional Number
of Paid-in Retained of
Shares Amount Capital Earnings 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 loss for the year -- -- -- (2,457,706) -- --
Exercise of stock options 7,689 384 33,755 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 29, 1996 3,411,043 170,552 10,766,896 7,302,690 1,075 10,548
Net income for the year -- -- -- 62,822 -- --
Exercise of stock options 2,734 137 15,552 -- -- --
Treasury stock acquired -- -- -- -- 262,750 1,371,593
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 28, 1997 3,413,777 170,689 10,782,448 7,365,512 263,825 1,382,141
Net loss for the year -- -- -- (3,842,430) -- --
Exercise of stock options 1,025 51 4,921 -- -- --
Treasury stock acquired -- -- -- -- 104,500 382,326
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 27, 1998 3,414,802 $170,740 $ 10,787,369 $ 3,523,082 368,325 $ 1,764,467
==============================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
31
<PAGE> 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended
-------------------------------------------------------
JUNE 27, 1998 June 28, 1997 June 29, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(3,842,430) $ 62,822 $(2,457,706)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Impairment of long-lived assets 2,999,642 -- 4,712,562
Depreciation and amortization 3,647,079 3,464,330 3,490,447
Gain on sale of property and
equipment (14,127) (369,182) (369,573)
Deferred income taxes 311,000 (275,000) (1,343,500)
Provision for loss on accounts and
notes receivable 114,022 1,950 167,193
Changes in operating assets and liabilities:
Receivables (582,880) 579,508 137,498
Inventories 100,875 (46,483) 373,694
Refundable income taxes (333,411) 239,670 (118,941)
Prepaid expenses and other 20,470 15,603 774,062
Accounts payable 315,143 (450,863) (154,808)
Accruals (567,588) 203,502 (266,440)
- -----------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 2,167,795 3,425,857 4,944,488
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Payments for purchase of equipment
and improvements (3,282,982) (2,992,719) (3,990,107)
Proceeds from sale of equipment
and improvements 308,141 599,193 338,101
Net collections on notes receivable 167,173 397,461 296,394
Increase in cash surrender value of insurance
on officers' lives (63,197) (110,824) (11,787)
- -----------------------------------------------------------------------------------------------------------------
Cash used by investing activities (2,870,865) (2,106,889) (3,367,399)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended
-------------------------------------------------------
JUNE 27, 1998 June 28, 1997 June 29, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net borrowings (payments) under line of
credit $ 999,410 $(1,494,600) $ (650,000)
Proceeds from exercise of stock options 4,972 15,689 34,139
Acquisition of treasury stock (382,326) (1,232,843) --
- ----------------------------------------------------------------------------------------------------------------
Cash provided (used) by financing activities 622,056 (2,711,754) (615,861)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH FOR THE
PERIOD (Note 7) (81,014) (1,392,786) 961,228
CASH AND CASH EQUIVALENTS, beginning of period 490,058 1,882,844 921,616
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 409,044 $ 490,058 $ 1,882,844
================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
33
<PAGE> 34
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NATURE OF BUSINESS The Company owns and operates delicatessen-style
restaurants which are located primarily in office
buildings or in high foot traffic retail or business
complexes, primarily in central business districts
of large metropolitan cities throughout the United
States. The Company also provides limited catering
services in those cities in which its restaurants
are located.
PRINCIPLES OF The consolidated financial statements include the
CONSOLIDATION accounts of the Company and its wholly-owned
subsidiaries. All material intercompany accounts and
transactions are eliminated.
USE OF ESTIMATES Certain estimates used by management are particularly
susceptible to significant changes in the economic
environment. These include estimates of the
realization of long-lived assets and deferred tax
assets. Each of these estimates, as well as the
related amounts reported in the financial statements,
are sensitive to near term changes in the factors
used to determine them. A significant change in any
one of those factors could result in the
determination of amounts different from those
reported in the consolidated financial statements and
the effect of such differences could be material.
Management believes that, as of August 7, 1998, the
estimates used in the consolidated financial
statements are adequate based on the information
currently available. 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.
FISCAL YEAR The Company operates on a 52-53 week fiscal
year ending on the Saturday closest to June 30 of
each year. All fiscal year periods presented include
52 weeks.
FAIR VALUE OF The carrying amounts of the Company's financial
FINANCIAL instruments, consisting of cash and cash
INSTRUMENTS equivalents, notes and accounts receivable, cash
surrender value of life insurance, accounts payable
and notes payable approximate their respective fair
values.
INVENTORIES Inventories of food and restaurant supplies are
valued at the lower of cost (first-in, first-out) or
market. Maintenance and office supplies are not
inventoried.
34
<PAGE> 35
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
EQUIPMENT, Equipment and improvements are stated at cost.
IMPROVEMENTS, Depreciation of equipment is computed using the
DEPRECIATION AND straight-line method for financial reporting
AMORTIZATION purposes over a seven year estimated useful life.
Leasehold improvements are amortized using the
straight-line method for financial reporting
purposes over the lesser of the useful life of the
improvements or the term of the applicable lease.
As discussed in Note 4, the Company adopted
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long- Lived Assets
and for Long-Lived Assets to Be Disposed Of" ("SFAS
121"), in 1996 for purposes of determining and
measuring impairment of certain long-lived assets.
The Company reviews long-lived assets to be held and
used in the business for impairment whenever events
or changes in circumstances indicate that the
carrying amount of an asset or a group of assets may
not be recoverable. The Company considers a history
of operating losses to be its primary indicator of
potential impairment. Assets are grouped and
evaluated for impairment at the lowest level for
which there are identifiable cash flows. The Company
has identified the appropriate grouping of assets to
be individual restaurants. The Company deems a
restaurant's assets to be impaired if a forecast of
undiscounted future operating cash flows directly
related to the assets, including disposal value, if
any, is less than their carrying amount. If a
restaurant's assets are determined to be impaired,
the loss is measured as the amount by which the
carrying amount of the assets exceeds their fair
value. Fair value is based on quoted market prices
in active markets, if available. If quoted market
prices are not available, an estimate of fair value
is based on the best information available,
including prices for similar assets or the results
of valuation techniques such as discounting
estimated future cash flows as if the decision to
continue to use the impaired assets was a new
investment decision.
The Company generally measures fair value based on
the Company's experience in disposing of similar
under-performing properties.
35
<PAGE> 36
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Management judgment is necessary to estimate fair
value. Accordingly, actual results could vary
significantly from such estimates.
REVENUE RECOGNITION In connection with its business activity of selling
individual and area franchises, the Company has no
significant commitments or obligations resulting
from the franchise agreements. The Company
recognizes income from area franchise sales in
accordance with Statement of Financial Accounting
Standards No. 45. Franchise agreements with
franchisees provide for initial franchise fees and
continuing royalty payments to the company based on
a percent of sales. The Company generally charges an
initial franchise fee for each new franchised store
that is added. These fees are recognized ratably
when substantially all the services required of the
Company are complete and the stores covered by such
agreements commence operations.
TAXES ON INCOME Income taxes are calculated using the liability
method specified by Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, the Company
provides for estimated income taxes payable or
refundable on current year income tax returns as
well as the estimated future tax effects
attributable to temporary differences and
carryforwards. Measurement of deferred income taxes
is based upon enacted tax laws and tax rates, with
the measurement of deferred income tax assets
reduced by estimated amounts of tax benefits not
likely to be realized.
EMPLOYEE BENEFITS The Company provides a defined contribution
retirement plan for substantially all of its
full-time employees which meets the requirements of
Section 401(k) of the Internal Revenue Code. The
Company's policy is to fund the retirement plan
costs accrued.
STOCK OPTIONS Stock options are granted, under the Company's
Incentive Stock Option Plan, to certain officers and
key employees at the prevailing market price on the
date of the grant. Proceeds from the sale of common
stock issued under these options are credited to
common stock or treasury stock and additional
paid-in capital at the time the options are
exercised. The Company maintains an Employee Stock
Purchase Plan, which allows eligible employees to
receive grants of stock purchase rights at generally
36
<PAGE> 37
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
85% of the prevailing market rate on the offering
date. The Company makes no charge to earnings with
respect to these options.
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No.
123") issued by the Financial Accounting Standards
Board is effective for transactions entered into in
fiscal years that begin after December 15, 1995. As
allowed under the provisions of SFAS No. 123, the
Company will continue to measure compensation cost
for employee stock-based compensation plans using
the intrinsic value based method of accounting
prescribed by the Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to
Employees," and has made pro forma disclosures of
net income and earnings per share as if the fair
value based method of accounting had been applied
(see Note 3).
EARNINGS PER SHARE Effective June 27, 1998, the Company adopted the
provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS
128"). This statement simplifies the standards for
computing earnings per share ("EPS") previously
found in APB Opinion NO. 15, "Earning Per Share", as
the presentation of "Primary" and "Fully-Diluted"
EPS under APB 15 is replaced by "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 are exercised or converted into common stock,
or result in the issuance of common stock that then
shares in the earnings of the Company.
In accordance with the provisions of SFAS 128,
earnings per share amounts for the years ended June
28, 1997 and June 29, 1996 have been recalculated to
give effect to the application of this new standard.
The effect of this restatement had no material
effect on either year.
37
<PAGE> 38
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
NEW ACCOUNTING In June 1997, the Financial Accounting Standards
PRONOUNCEMENTS 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.
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.
In February 1998, the Financial Accounting Standards
Board issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS
132"), which amends the disclosure requirements of
the following FASB Statements: SFAS No. 87,
"Employers' Accounting for Pensions, SFAS No. 88,
Employers' Accounting of Settlements and
Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits
Other Than Pensions." SFAS 132 does not affect the
recognition and measurement requirements of those
Statements, but standardizes disclosure requirements
to the extent practicable and suggests combined
formats for presentation of pension and other
postretirement benefit disclosures.
38
<PAGE> 39
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
SFAS 130, SFAS 131 and SFAS 132 are effective for
financial statements for periods beginning after
December 15, 1997 and require comparative
information for earlier years to be restated.
Because of the recent issuance of these standards,
management has been unable to evaluate fully the
impact, if any, these standards may have on future
financial statement disclosures. Results of
operations and financial position, however, will be
unaffected by the implementation of these standards.
In June 1998, the Financial Accounting Standards
Board Issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 requires companies to
recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure
them at fair value. If certain conditions are met, a
derivative may be specifically designated as a
hedge, the objective of which is to match the timing
of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability
that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted
transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized
in income in the period of change. SFAS 133 amends
the guidance in SFAS No. 52, "Foreign Currency
Translation," to permit special accounting for a
hedge of a foreign currency forecasted transaction
with a derivative. It also supersedes SFAS No. 80,
"Accounting for Futures Contracts," SFAS No. 105,
"Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit
Risk," and SFAS No. 119, "Disclosure about
Derivative Financial Instruments." In addition, it
amends SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments," to include in SFAS No.
107 the disclosure provisions about concentrations
of credit risk from SFAS No. 105.
SFAS 133 is effective for financial statements for
periods beginning after June 15, 1999. Historically,
the Company has not entered into derivatives
contracts either to hedge existing risk or for
speculative purposes. Accordingly, the Company does
not expect adoption of the new standard on July 4,
1999 to affect its financial statements.
39
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. ACCOUNTS AND Accounts and notes receivable consist of the following:
NOTES RECEIVABLE
<TABLE>
<CAPTION>
JUNE 27, June 28,
1998 1997
=============================================================
<S> <C> <C>
Accounts receivable $ 1,262,505 $ 749,625
Notes receivable 333,530 579,105
Other receivables 420,001 350,001
-------------------------------------------------------------
2,016,036 1,678,731
Less allowance for doubtful
accounts (485,198) (169,578)
-------------------------------------------------------------
1,530,838 1,509,153
Less non-current portion of
notes receivable (211,402) (453,229)
-------------------------------------------------------------
$ 1,319,436 $ 1,055,924
=============================================================
</TABLE>
The Company's notes receivable generally arise from sales
of equipment in connection with store closings, bear
interest at rates ranging from 7% to 12%, are repayable
monthly and are due at various dates through January 2003.
The notes are collateralized by store equipment.
Activity in the allowance for possible losses is
summarized as follows:
<TABLE>
<CAPTION>
JUNE 27, June 28, June 29,
Year ended 1998 1997 1996
===============================================================
<S> <C> <C> <C>
Balance, at beginning
of period $ 169,578 $ 167,628 $ 244,801
Charged to expense 428,927 106,892 167,193
Uncollected balances
written off, net of
recoveries (113,307) (104,942) (244,366)
---------------------------------------------------------------
Balance, at end of period $ 485,198 $ 169,578 $ 167,628
===============================================================
</TABLE>
40
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. NOTES PAYABLE Notes payable consists of:
<TABLE>
<CAPTION>
JUNE 27, June 28,
1998 1997
===============================================================================
<S> <C> <C>
$7,500,000 unsecured revolving line
of credit with bank, borrowings
payable on demand, bearing
interest at lower of either (i) the
30-day LIBOR rate plus 175 base
points (7.41% at June 30, 1998),
or (ii) the quoted cost of funds
rate plus 175 base points (8.4%
at June 30, 1998), maturing $ 2,004,810 $ 982,936
October 1998
Other, repaid in 1998 - 22,464
-------------------------------------------------------------------------------
Notes payable $ 2,004,810 $ 1,005,400
===============================================================================
</TABLE>
The maximum amount of short-term borrowings outstanding
during the years ended June 27, 1998, June 28, 1997 and
June 29, 1996 were $4,383,000, $2,878,000 and
$3,800,000, respectively. Such borrowings averaged
approximately $2,457,000 in 1998, $1,824,000 in 1997 and
$3,283,000 in 1996, with a weighted average interest
rate of 7.17%, 7.08% and 7.21%, respectively, for such
periods. The weighted average interest rate was
calculated by dividing the related interest expense by
the average short-term borrowings outstanding during the
respective periods.
The Company's unsecured line of credit contains
covenants that require, among other things, that the
Company maintain specified levels of adjusted tangible
net worth and debt service coverage ratios. The line of
credit agreement also restricts additional indebtedness,
capital expenditures and declaration and payment of
dividends.
On December 27, 1997, the Company was not in compliance
with its debt service coverage ratio covenant and
accordingly, had received
41
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
waivers and amendments to such covenant from its lender
for periods up to and including June 27, 1998.
Additionally, the Company is in the process of seeking
and expects to receive future relief from this covenant
covering periods through October 31, 1998, the date the
line of credit expires. There can be no assurance that
the Company will obtain such waiver or require
additional waivers in the future or if required, that
the lender will grant them.
Management expects, in accordance with the terms of the
line of credit agreement, to extend the expiration date
from October 31, 1998 to October 31, 1999. In the event
it is not extended, management believes there are a
number of viable refinancing alternatives.
3. STOCKHOLDERS' The Company maintains an incentive stock option plan
EQUITY under which officers, employees and directors may be
granted options to purchase shares of the Company's
common stock at the grant date fair market value.
Options are generally exercisable upon issuance and
expire up to five years from the date granted.
<TABLE>
<CAPTION>
JUNE 27, 1998 June 28, 1997 June 29, 1996
===================================================================
WEIGHTED- Weighted Weighted
AVERAGE average average
EXERCISE exercise exercise
SHARES PRICE Shares price Shares price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of 338,400 7.05 238,550 8.38 178,850 9.39
period
Options granted 75,100 3.92 133,200 4.55 72,600 5.99
Options exercised - - - - (5,400) 6.22
Options canceled (109,300) 7.89 (33,350) 6.50 (7,500) 11.02
-----------------------------------------------------------------------------------------------------
Options outstanding,
end of period 304,200 5.84 338,400 7.05 238,550 8.38
Option price range at $ 3.38 to $ 4.00 to $ 5.25 to
end of period $13.06 $13.06 $13.06
Options available for
grant at end of
period 68,950 34,750 134,600
-----------------------------------------------------------------------------------------------------
Weighted-average fair
value of options,
granted during
the period $ 1.17 $ 1.58 $ 1.90
=====================================================================================================
</TABLE>
42
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 27, 1998, 373,150 shares were reserved for
issuance under the plan.
The Company also maintains an Employee Stock Purchase
Plan which covers full-time employees which meet certain
defined employment requirements. A maximum of 142,500
shares may be issued under the plan, and the employees'
purchase price is the greater of 85 percent of the fair
market value of the stock on the date of grant or 85
percent of the Company's cost to acquire stock for
issuance under the plan. Rights to acquire shares expire
within 12 months from date of grant if not exercised.
Rights to acquire 9,425, 1,650 and 6,334 shares remained
outstanding as of June 27, 1998, June 28, 1997 and June
29, 1996, respectively. A total of 64,277 shares were
reserved under this plan as of June 27, 1998.
STOCK-BASED COMPENSATION
All stock options issued to employees have an exercise
price not less than the fair market value of the
Company's common stock on the date of grant, and in
accordance with accounting for such options utilizing
the intrinsic value method there is no related
compensation expense recorded in the Company's financial
statements. Had compensation cost for stock-based
compensation been determined based on the fair value at
the grant dates consistent with the method of SFAS 123,
the Company's net income and earnings per share would
have been reduced to the pro forma amounts presented
below for the years ended:
<TABLE>
<CAPTION>
JUNE 27, June 28, June 29,
1998 1997 1996
===========================================================================
<S> <C> <C> <C>
Net income (loss):
As reported $ (3,842,430) $ 62,822 $ (2,457,706)
Pro forma $ (3,942,717) $ (84,275) $ (2,554,288)
Earnings (loss) per share
of common stock:
As reported $ (1.24) $ 0.02 $ (0.72)
Pro forma $ (1.27) $ (0.03) $ (0.75)
============================================================================
</TABLE>
43
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The fair value of option grants is estimated on the date
of grant utilizing the Black-Scholes option-pricing
model with the following weighted average assumptions
for grants in 1998, 1997 and 1996; expected life of
option of 5 years for all years, expected volatility of
25% for 1998, 24.7% for 1997 and 22.8% for 1996 risk
free interest rate of 5.99% for 1998, 6.45% for 1997 and
5.5% for 1996 and a 0% dividend yield for all years. The
weighted average fair value at date of grants range from
$1.11 to $1.37 per option for 1998, $1.43 to $1.77 per
option for 1997 and $1.65 to $2.97 per option for 1996.
Additional information relating to stock options
outstanding and exercisable at June 27, 1998 summarized
by exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Weighted Average
and --------------------------
Exercise price exercisable Life Exercise
per share shares (years) price
---------------------------------------------------------
<S> <C> <C> <C>
$3.38-4.10 147,300 3.6 $ 4.00
5.25 95,200 2.9 5.25
8.63 4,000 2.1 8.63
10.00-11.50 6,500 .4 10.58
11.88-13.06 51,200 1.2 12.36
----------------------------------------
3.38 to 13.06 304,200 2.9 5.85
=========================================================
</TABLE>
4. IMPAIRMENT OF In March 1995, the FASB issued SFAS 121, "Accounting for
LONG-LIVED the Impairment of Long-Lived Assets and for Long-Lived
ASSETS Assets to Be Disposed Of," which requires the evaluation
of certain assets based upon estimated future cash
flows. The Company elected to adopt SFAS 121 in the
fourth quarter of 1996.
Adoption of SFAS 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 1996 noncash pre-tax charge of
approximately $4.7 million. Previously, long-lived
assets were evaluated as a group, on a regional basis,
for impairment if the region was operating at a loss or
was expected to operate at a loss in the future. The
Company now evaluates and measures for impairment on an
individual
44
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
During 1998, events and circumstances indicated that
certain equipment, fixtures and leasehold improvements
associated with under-performing stores were impaired.
Accordingly, the Company recorded a pre-tax charge in
the fourth quarter of 1998 amounting to approximately
$3.0 million to adjust the carrying value of these
assets to their estimated fair market value and to
provide for associated disposal liabilities. While
management believes that estimates used in evaluation of
impairment were reasonable, actual results could vary
significantly.
5. TAXES (BENEFIT) The components of taxes (benefit) on income are as
ON INCOME follows:
<TABLE>
<CAPTION>
Year ended
====================================
JUNE 27, June 28, June 29,
1998 1997 1996
=========================================================
<S> <C> <C> <C>
Current:
Federal $ (311,000) $ 252,000 $ (222,000)
State - 49,000 29,000
---------------------------------------------------------
Total current (311,000) 301,000 (193,000)
---------------------------------------------------------
Deferred:
Federal 262,000 (246,000) (1,202,300)
State 49,000 (29,000) (141,200)
---------------------------------------------------------
Total deferred 311,000 (275,000) (1,343,500)
---------------------------------------------------------
Taxes (benefit)
on income $ - $ 26,000 $(1,536,500)
=========================================================
</TABLE>
Significant components of the Company's deferred tax
assets are comprised of the following at:
45
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 27, June 28,
1998 1997
=====================================================================
<S> <C> <C>
Equipment and improvements $ 3,116,800 $2,611,200
Accrual for contingent losses 568,900 282,100
Accrual for relocation costs - 71,900
Bad debt allowance 193,000 43,900
Alternative minimum tax and other
credits 308,000 203,000
State net operating loss carryforward 157,000 36,200
Other 55,300 24,700
---------------------------------------------------------------------
Gross deferred tax asset 4,399,000 3,273,000
Valuation allowance (1,437,000) -
---------------------------------------------------------------------
Net deferred tax asset $ 2,962,000 $3,273,000
=====================================================================
</TABLE>
Realization of deferred tax assets associated with
equipment and improvements and with net operating loss
and credit carryforwards is dependent upon generating
sufficient taxable income to utilize depreciation
deductions on impaired long-lived assets (Note 4) and
net operating loss and credits carryforwards prior to
their expirations. Management believes that there is
risk that certain of these deferred tax assets may not
be realized and, accordingly has established a valuation
allowance against them. Although realization is not
assured for the remaining deferred tax assets,
management believes it is more likely than not that they
will be realized through future taxable earnings or
alternative tax strategies.
State net operating loss and other credit carryforwards
expire at various dates from 2005 through 2010.
Alternative minimum tax credits totaling approximately
$90,000 may be carried forward indefinitely.
46
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The effective tax rate on income before taxes on income
was different from the federal statutory tax rate. The
following summary reconciles taxes at the federal
statutory tax rate with actual taxes and the effective
rate:
<TABLE>
<CAPTION>
Year Ended
=======================================================================
JUNE 27, 1998 June 28, 1997 June 29, 1996
=====================================================================================================
$ % $ % $ %
<S> <C> <C> <C> <C> <C> <C>
Income taxes (benefit)
at statutory rate (1,306,000) (34.0) 30,200 34.0 (1,358,000) (34.0)
Increase (decrease) in
taxes resulting from:
state income taxes,
net of federal tax
benefit (154,000) (4.0) 3,600 4.1 (74,000) (1.9)
Meals and enter-
tainment 21,200 .6 7,900 8.8 7,700 0.2
Officer's life
insurance 2,800 0.0 (15,000) (16.8) 20,200 0.5
Other (1,000) (0.0) (700) (.8) (132,400) (3.3)
Increase in valuation
allowance 1,437,000 37.4 - - - -
-----------------------------------------------------------------------------------------------------
Taxes (benefit) on
income at effective
rate - - 26,000 29.3 (1,536,500) (38.5)
=====================================================================================================
</TABLE>
6. EARNINGS PER SHARE Earnings per share of common stock and common stock
equivalents have been computed using 3,094,762 shares in
1998, 3,254,908 shares in 1997 and 3,407,889 shares in
1996, which represent the weighted average number of
shares of common stock to be recognized during the
respective periods. The effect of shares issuable under
the stock option plan were excluded for 1998 and 1996 as
the effect would be anti-dilutive. The assumed exercise
of the common stock options is not included in the
computation of common stock equivalents for 1997 because
the significant majority of common options outstanding
were exercisable at prices which exceed the common stock
market price.
47
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Earnings per share has been calculated using the
following weighted average number of shares:
<TABLE>
<CAPTION>
1998 1997 1996
==================================================================
<S> <C> <C> <C>
Weighted average
number at common
shares used for basic
EPS 3,094,762 3,254,908 3,407,889
Effect of dilutive stock
options - - -
-------------------------------------------------------------------
Weighted average
number of common
shares and dilutive
potential common
stock used in diluted
EPS 3,094,762 3,254,908 3,407,889
===================================================================
</TABLE>
7. SUPPLEMENTAL For purposes of the statements of cash flows, the
CASH FLOW Company classifies cash on hand and in savings and
INFORMATION checking accounts and short-term investments with a
maturity of three months or less as cash equivalents.
Supplemental cash flow information:
<TABLE>
<CAPTION>
Year ended
====================================
JUNE 27, June 28, June 29,
1998 1997 1996
=================================================================================
<S> <C> <C> <C>
Cash paid for (received from):
Interest $226,795 $ 136,506 $ 241,567
Income taxes 189,025 (19,554) (76,588)
Non-cash financing and investing activities:
Notes received from
sale of property,
equipment and
accounts receivable - 454,031 445,159
Treasury stock acquired
from sale of
property, equipment
and accounts
receivable - 138,750 -
=================================================================================
</TABLE>
48
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. COMMITMENTS A. Leases
AND
CONTINGENCIES The Company and its subsidiaries lease various restaurant
facilities and computer equipment, under noncancellable
operating leases, which expire at various dates through
July 2007. At June 27, 1998, future minimum lease
payments required under operating leases that have
initial noncancellable terms in excess of one year are
as follows:
<TABLE>
<CAPTION>
Minimum lease
Fiscal year ending payments
====================================
<S> <C>
1999 $ 6,479,000
2000 6,490,000
2001 6,127,000
2002 6,347,000
2003 4,879,000
After 2003 7,354,000
------------------------------------
Total $37,676,000
====================================
</TABLE>
Rent expense for each of the three years in the period
ended June 27, 1998 is as follows:
<TABLE>
<CAPTION>
Year ended
====================================
JUNE 27, June 28, June 29,
1998 1997 1996
==============================================================
<S> <C> <C> <C>
Basic rentals:
Noncancellable
leases (net of
subleases) $6,167,078 $6,507,892 $6,932,203
Cancellable equip-
ment leases 310,846 417,269 466,360
--------------------------------------------------------------
6,477,924 6,925,161 7,398,563
Contingent rentals
based on sales 590,935 418,703 418,356
--------------------------------------------------------------
Total rent expense $7,068,859 $7,343,864 $7,816,919
==============================================================
</TABLE>
49
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has leased certain properties from three
partnerships in which certain officers of the Company
are partners. Rents paid to these partnerships for the
fiscal years ended 1998, 1997 and 1996 were
approximately $18,500, $83,000 and $161,000,
respectively. The Company and its subsidiaries remain
obligated, in the event of default by the current
lessee, on 34 facilities formerly operating under
long-term leases. Future minimum lease payments
remaining under these noncancellable operating leases
are as follows:
<TABLE>
<CAPTION>
Minimum
remaining
lease
Fiscal year ending payments
=====================================================
<S> <C>
1999 $ 134,000
2000 108,000
2001 48,000
2002 48,000
2003 48,000
After 2003 57,000
-----------------------------------------------------
Total $ 443,000
=====================================================
</TABLE>
B. Workers Compensation and Medical Claims
The Company is self-insured for workers compensation
claims up to $250,000 for each loss event. Provisions
for expected future payments are accrued based on the
Company's estimate of its aggregate liability for all
open claims.
C. Litigation
The Company is involved in various legal matters in the
ordinary course of its business. None of these matters
are expected to have a material adverse effect on the
Company's consolidated financial statements.
D. Retirement Plan
Effective January 1, 1996, the Company adopted a
tax-qualified employee
50
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
benefit plan ("Plan") which meets the criteria of
Section 401(k) of the Internal Revenue Code. Under the
Plan, participants may elect to defer from 2% to 15% of
their compensation, and the Company may make
discretionary contributions, as determined annually by
the Company's management, of up to 10% of the employee's
compensation. Each participant's contribution is fully
vested at all times. Participants become fully vested in
contributions made by the Company on a graduated scale
over a seven-year period. Operations were charged with
approximately $47,000, $51,000, and $27,000 related to
this plan for the years ended June 27, 1998, June 28,
1997, and June 29, 1996, respectively.
9. SALE OF MEMPHIS Effective October 27, 1996, the Company sold the
DIVISION 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. Barrow, former President and Chief Executive Officer
and current Vice-Chairman of the Board of the Company,
are the owners. Total sales 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 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, with
the balance paid in cash. The assets included in the
sale had a book value of approximately $867,000.
10. CORPORATE The corporate offices of the Company were consolidated
RELOCATION and relocated to Birmingham, Alabama on June 20, 1997.
Accordingly, the Company recorded a fourth-quarter 1997
charge of $700,000 related to the consolidation.
51
<PAGE> 52
11. SELECTED QUARTERLY
FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Thousands of dollars,
except per share data
===============================================
1st 2nd 3rd 4th
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended June 27, 1998:
Net sales $ 16,195 $ 15,852 $ 15,696 $ 16,037
Gross profit 1,449 1,398 1,554 1,806
Income (loss)
before taxes
(benefit) on
income (282) (286) 13 (3,287)
Net income (loss) (169) (172) 8 (3,509)(a)
Basic and diluted
earnings (loss) per
common share (.05) (.06) -- (1.15)
Year ended June 28, 1997:
Net sales $ 17,328 $ 16,179 $ 15,680 $ 16,267
Gross profit 1,895 1,525 1,599 2,277
Income (loss)
before taxes
(benefit) on
income 381 236 167 (695)
Net income (loss) 228 142 101 (408)(b)
Basic and diluted
earnings (loss)
per common share .07 .04 .03 (.12)
----------------------------------------------------------------------------
</TABLE>
(c) See Note 4 for discussion of the fourth quarter
pre-tax charge of $2,999,642 related to
impairment of long lived assets.
(b) See Note 10 for discussion of the fourth quarter
pre-tax charge of $700,000 related to the
consolidation and relocation of the corporate
offices of the Company to Birmingham, Alabama at
fiscal year-end.
52
<PAGE> 53
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the fiscal years 1998 and 1997 and through the date of this
report, there has been no change in the Company's independent accountants, nor
have any disagreements with such accountants or reportable events occurred.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
Information required by this item is incorporated by reference from
the sections entitled "Election of Directors" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement for the
Annual Meeting of Shareholders to be held November 5, 1998, as filed with the
Securities and Exchange Commission.
ITEM 11: EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from
the section entitled "Executive Compensation" in the Proxy Statement for the
Annual Meeting of Shareholders to be held November 5, 1998, as filed with the
Securities and Exchange Commission.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from
the sections entitled "Security Ownership of Management and Certain Beneficial
Owners" and "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders to be held November 5, 1998, as filed with the
Securities and Exchange Commission.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from
the section entitled "Executive Compensation" in the Proxy Statement for the
Annual Meeting of Shareholders to be held November 5, 1998, as filed with the
Securities and Exchange Commission.
53
<PAGE> 54
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The following financial statements are included in Part II of this
report (index at page 26):
Report of Independent Certified Public Accountants
Consolidated Financial Statements for Years ended June 27, 1998, June
28, 1997 and June 29, 1996:
Consolidated Balance Sheets - June 27, 1998 and June 28, 1997
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Summary of Accounting Policies
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data (unaudited) (appearing at Note 11 of
the Notes to Consolidated Financial Statements)
Financial Statement Schedules
All schedules have been omitted since the required information is not
applicable or the information required is included in the financial statements
or the notes thereto.
54
<PAGE> 55
EXHIBITS
The exhibits set forth in the following Index of Exhibits are filed as
a part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------
<S> <C> <C>
3.1(b) Restated Certificate of Incorporation page 60
3.2 Bylaws (incorporated by reference from the Company's Proxy
Statement for the Special Shareholders Meeting held on September
25, 1986).
4.4 Credit Agreement, dated June 19, 1996, between AmSouth Bank of
Alabama and the Company, incorporated by reference from the
Company's Form 10-K for the year ended June 29, 1996.
10.1 Commercial Lease dated April 16, 1979, between the Company and
WESCO Associates, as amended effective July 1, 1989 (incorporated
by reference from exhibits to the Company's Registration Statement
on Form S-2 under the Securities Act of 1933 Registration No.
33-61700, as filed on April 27, 1993).
10.1(a) Extension to Commercial Lease between the Company and WESCO
Associates, effective June 30, 1994 (incorporated by reference
from the Company's Annual Report on Form 10-K for the year ended
July 2, 1994).
10.2 Lease dated February 20, 1981, between the Company and CBK
Associates, as amended by Amendment Numbers 1, 2 and 3
(incorporated by reference from exhibits to the Company's
Registration Statement on Form S-2 under the Securities Act of
1933, Registration No. 33-61700, as filed on April 27, 1993).
10.3 Commercial Lease dated May 31, 1994, between the Company and Rex
Associates (incorporated by reference from the Company's Annual
Report on Form 10-K for the year ended July 1, 1995).
10.7 Extract of Minutes of the Board of Directors (incorporated by
reference from exhibits to the Company's Registration Statement
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C> <C>
on Form S-l under the Securities Act of 1933 Registration No. 2-
78902, as filed on September 28, 1982).
10.8 1983 Incentive Stock Option Plan (incorporated by reference from
an exhibit to the Company's Annual Report on Form 10-K for the
year ended June 30, 1984).
10.9 1989 Incentive Stock Option Plan, as amended (incorporated by
reference from an exhibit to the Company's Annual Report on Form
10-K for the year ended June 30, 1984).
10.10 Asset Purchase Agreement dated as of October 27, 1996, by and
among Wall Street Deli, Inc., Downtown Food Services, Inc.,
Executive Chef Catering, L.L.C., Robert G. Barrow and Judy Gupton
(relating to sale of the Memphis division) (incorporated by
reference from an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 28, 1996).
11 Computation of Earnings Per Common Share, filed herewith. page 65
21 Subsidiaries of the Registrant, filed herewith. page 66
27 Financial Data Schedule, submitted to the Securities and Exchange
Commission in electronic format
</TABLE>
Reports on Form 8-K
During the quarter ended June 27, 1998, the Company filed no reports
on Form 8-K.
56
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
WALL STREET DELI, INC.
/s/ Jeffrey V. Kaufman
--------------------------------
By: JEFFREY V. KAUFMAN
President
September 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Jeffrey V. Kaufman President, Chief Executive September 23, 1998
- -------------------------- Officer and Director
JEFFREY V. KAUFMAN
/s/ Robert G. Barrow Vice Chairman, Chief Financial September 23, 1998
- -------------------------- Officer and Director
ROBERT G. BARROW
/s/ Alan V. Kaufman Chairman of the Board September 23, 1998
- --------------------------
ALAN V. KAUFMAN
/s/ William S. Atherton Director September 17, 1998
- --------------------------
WILLIAM S. ATHERTON
/s/ Jake L. Netterville Director September 23, 1998
- --------------------------
JAKE L. NETTERVILLE
</TABLE>
57
<PAGE> 58
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
EXHIBITS
AND
FINANCIAL STATEMENT SCHEDULES
TO
FORM 10-K
WALL STREET DELI, INC.
For the fiscal year ended June 27, 1998 Commission File No. 0-11271
58
<PAGE> 59
TABLE OF CONTENTS
FOR EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ----
<S> <C> <C>
3.1(b) Restated Certificate of Incorporation 60
11 Computation of Earnings Per Common Share 65
21 Subsidiaries of the Registrant 66
27 Financial Data Schedule, submitted to the
Securities and Exchange Commission in electronic
format
</TABLE>
59
<PAGE> 1
EXHIBIT 3.1(b)
RESTATED CERTIFICATE OF INCORPORATION
OF WALL STREET DELI, INC.
Originally Incorporated on
September 17, 1986
as Sandwich Chef, Inc.
In accordance with the provisions of section 245 (c) of the Delaware
General Corporation Law, the undersigned Corporation, pursuant to a Resolution
duly adopted by its Board of Directors, hereby adopts the following Restated
Certificate of Incorporation:
ARTICLE I
The name of the corporation is Wall Street Deli, Inc. The
Corporation was formerly known as Sandwich Chef, Inc., and its certificate of
incorporation was originally filed with the Delaware Secretary of State on the
17th day of September, 1986.
ARTICLE II
The address of its registered office in the State of Delaware
is 1209 Orange Street, Wilmington (19801), County of New Castle. The name of
its registered agent at such address is The Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
ARTICLE IV
The total number of shares of stock which the Corporation
shall have authority to issue is twenty million (20,000,000) shares of common
stock having a par value of five cents ($.05) per share, amounting in the
aggregate to $1,000,000 total par value for all shares.
60
<PAGE> 2
ARTICLE V
The period for the duration of the Corporation shall be
perpetual.
ARTICLE VI
This Corporation may from time to time issue its shares of
stock for such consideration as may be fixed from time to time by the Board of
Directors and may receive in payment thereof, in whole or in part, cash, labor
done, personal property, or real property, or leases thereof. In the absence of
actual fraud in the transaction, the judgment of the Board of Directors as to
the value of such labor, property, real estate or leases thereof, shall be
conclusive. Any and all shares so issued for which the consideration so fixed
shall have been paid or delivered shall be deemed fully paid stock and shall
not be liable to any further call or assessment thereon, and the holders of
such shares shall not be liable for any further payment in respect thereof.
ARTICLE VII
The corporate powers shall be exercised by the Board of
Directors, except as otherwise provided by statute or by the Certificate of
Incorporation. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
(a) To alter, amend and repeal the bylaws or adopt new bylaws of the
Corporation, provided, however, that the Board of Directors may not
alter, amend or repeal any bylaw establishing the number of directors,
or what constitutes a quorum at stockholders' meetings.
(b) To fix and determine and to vary the amount of working capital of
the Corporation; to determine whether any, and if any, what part of
any, accumulated profits shall be declared and paid as dividends; to
determine the date or dates for the declaration and payment of
dividends; and to direct and determine the use and disposition of any
surplus or net profits over and above the capital stock paid in.
The Corporation may, in its bylaws, confer powers upon its Board of
Directors in addition to the foregoing, and in addition to the powers and
authority expressly conferred upon directors by statute. Any action required or
permitted to be taken at any meeting of the Board of Directors or any committee
thereof may be taken without a meeting, if prior to such action, a written
consent thereto is signed by all members of the Board or of such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board or committee.
ARTICLE VIII
(a) The Corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed claim, action, suit or
61
<PAGE> 3
proceeding, whether civil, criminal, administrative or investigative, including
appeals (other than an action by or in the right of the Corporation) by reason
of the fact that he is or was a director, officer, employee or agent of this
Corporation, or is or was serving at the request of the Corporation as a
director, officer, partner, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
contenders or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed claim, action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that he is or was a
director, officer. employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, partner, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Corporation unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which such court shall deem proper.
(c) To the extent that a director, officer, employee or agent
of the Corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of this
Article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith, notwithstanding that he has
not been successful on any other claim, issue or matter in any such action,
suit or proceeding.
(d) An indemnification under subsections (a) and (b) of this
Article (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in subsections (a) and
(b). Such determination shall be made (1) by the Board of Directors by a
majority vote of
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<PAGE> 4
a quorum consisting of directors who were not parties to, or who have been
wholly successful on the merits or otherwise with respect to, such claim,
action, suit or proceeding, or (2) if such quorum is not obtainable, or even if
obtainable a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred in
defending a civil or criminal claim, action, suit or proceeding may be paid by
the Corporation in advance of the final disposition of such claim, action, suit
or proceeding as authorized in the manner provided in subsection (d) upon
receipt of an undertaking by or on behalf of the director, officer, employee or
agent to repay such amount if and to the extent that it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this section.
(f) The indemnification authorized by this Article shall not
be deemed exclusive of and shall be in addition to any other rights (whether
created prior or subsequent to the date of these Articles) to which those
indemnified may be entitled under any statute, rule of law, provision of
articles of incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(g) The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation or was serving at the request of the Corporation as
a director, officer, partner, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article.
(h) Should the scope of indemnity provided by the foregoing
be greater than the maximum scope of indemnity which the Corporation may
lawfully grant by means of an express declaration, this Article shall not be
invalid in its entirety but shall be construed to provide the maximum scope of
indemnity which the Corporation could have lawfully granted by this Article or
by any other authority.
ARTICLE IX
No contract or other transaction between this Corporation and
any person, firm, association or corporation and no other act of this
Corporation shall, in the absence of fraud, be invalidated or in any way
affected by the fact that any of the directors of the Corporation are, directly
or indirectly, pecuniarily or otherwise interested in such contract,
transaction, or other act, or related to or interested in (either as director,
stockholder, officer, employee, member or otherwise) such person, firm,
association or corporation. Any director of the Corporation
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<PAGE> 5
individually, or any firm or association of which any director may be a member,
may be a party to, or may be pecuniarily or otherwise interested in, any
contract or transaction of the Corporation, provided that the fact that he,
individually, or such firm or association is so interested, shall be disclosed
or known to the Board of Directors or a majority of the members thereof as
shall be present at any meeting of the Board of Directors, or of any committee
of directors having the powers of the full board, at which action upon any such
contract, transaction or other act is taken; and if such fact shall be so
disclosed or known, any director of this Corporation so related or otherwise
interested may be counted in determining the presence of a quorum at any
meeting of the Board of Directors, or of such committee, at which action upon
any such contract, transaction or act shall be taken, and may vote thereat with
respect to such action with like force and effect as if he were not so related
or interested. Any director of the Corporation may vote upon any contract or
other transaction between the Corporation any subsidiary or affiliated
corporation without regard to the fact that he is also a director of such
subsidiary of affiliated corporation.
ARTICLE X
Meetings of stockholders may be held within or without the
State of Delaware, as the bylaws may provide. The books of the Corporation may
be kept (subject to any provision contained in the statutes) outside the State
of Delaware at such place or places as may be designated from time to time by
the board of directors or in the bylaws of the Corporation.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this certificate of incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
The Foregoing Restated Certificate of Incorporation restates and
integrates and does not further amend the provisions of the Corporation's
Certificate of Incorporation as heretofore amended, correctly sets forth
without discrepancy the corresponding provisions of the Certificate of
Incorporation as heretofore amended, and supersedes the original Certificate of
Incorporation and all amendments thereto.
Dated: January 22, 1998
WALL STREET DELI, INC.
/s/ Alan V. Kaufman
---------------------------------------------------
Alan V. Kaufman, Chairman of the Board of Directors
/s/ Louis C. Henderson
---------------------------------------------------
Louis C. Henderson, Jr., President
/s/ Steven G. Barrow
---------------------------------------------------
Steven G. Barrow, Secretary
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<PAGE> 1
EXHIBIT (11)
WALL STREET DELI, INC.
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
For the Year Ended
-------------------------------------------
June 27, 1998 June 28, 1997 June 29, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Shares:
Weighted average number of common
shares outstanding 3,094,762 3,254,908 3,407,874
Effect of shares issuable under stock option
and stock purchase plans as determined by
the treasury stock method -0- -0- -0-
----------- ----------- -----------
Weighted average number of common
shares outstanding as adjusted 3,094,762 3,254,908 3,407,874
=========== =========== ===========
Per common share computations:
Net income (loss) $(3,842,430) $ 62,822 $(2,547,706)
=========== =========== ===========
Per common share $ (1.24) $ .02 $ (.72)
=========== =========== ===========
</TABLE>
65
<PAGE> 1
EXHIBIT (21)
WALL STREET DELI, INC.
AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage
State of of Voting
Incorporation Securities
Owned
- --------------------------------------------------------------------------------
<S> <C> <C>
Sandwich Chef of Alabama, Inc. Alabama 100%
Downtown Food Service, Inc. Tennessee 100%
Sandwich Chef of Colorado, Inc. Colorado 100%
Sandwich Chef of Texas, Inc. Texas 100%(a)
Sandwich Chef of D.C., Inc. Delaware 100%
Sandwich Chef of Illinois, Inc. Illinois 100%
Sandwich Chef of Louisiana, Inc. Louisiana 100%
</TABLE>
- ---------------
(a) Wholly-owned subsidiary of Sandwich Chef of Colorado, Inc.
66
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF WALL STREET DELI, INC. FOR THE YEAR ENDED JUNE 27, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JUN-27-1998
<CASH> 409,044
<SECURITIES> 0
<RECEIVABLES> 1,804,634
<ALLOWANCES> 485,198
<INVENTORY> 583,405
<CURRENT-ASSETS> 3,457,955
<PP&E> 35,994,045
<DEPRECIATION> 22,973,956
<TOTAL-ASSETS> 19,862,808
<CURRENT-LIABILITIES> 7,146,084
<BONDS> 0
0
0
<COMMON> 170,740
<OTHER-SE> 12,545,984
<TOTAL-LIABILITY-AND-EQUITY> 19,862,808
<SALES> 63,780,406
<TOTAL-REVENUES> 63,780,406
<CGS> 57,573,789
<TOTAL-COSTS> 57,573,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 485,198
<INTEREST-EXPENSE> 226,795
<INCOME-PRETAX> (3,842,430)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,842,430)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,842,430)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
