<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the quarterly period ended March 27, 1999
--------------
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the transition period from to
------- -------
Commission File No. 0-11271
WALL STREET DELI, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 63-0514240
(State of Incorporation) (IRS Employer I.D. No.)
One Independence Plaza, Suite 100
Birmingham, Alabama 35209
(Address of principal executive offices)
(205) 870-0020
(Registrant's telephone number)
--------------------
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at May 6, 1999
- ---------------------------- --------------------------
Common Stock, $.05 Par Value 3,414,802
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements.............................................. 1
Consolidated Balance Sheets............................... 2
Consolidated Statements of Operations..................... 4
Consolidated Statements of Stockholders' Equity............5
Consolidated Statements of Cash Flows..................... 6
Notes to Consolidated Financial Statements........................ 7
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K .................................18
SIGNATURES..................................................................19
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
The financial statements listed below are included on the following
pages of this Report on Form 10-Q:
Consolidated Balance Sheets at March 27, 1999 (unaudited) and
June 27, 1998.
Consolidated Statements of Operations (unaudited) for the
three and nine month periods ended March 27, 1999 and March
28, 1998.
Consolidated Statements of Stockholders' Equity (unaudited)
for the three and nine month periods ended March 27, 1999 and
March 28, 1998.
Consolidated Statements of Cash Flows (unaudited) for the nine
month periods ended March 27, 1999 and March 28, 1998.
Notes to Consolidated Financial Statements (unaudited).
-----------------------------
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1
<PAGE> 4
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 27, 1999 JUNE 27, 1998
-------------- -------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT
Cash and cash equivalents $ 1,155,918 $ 409,044
Accounts and notes receivable, net (Note 3) 863,409 1,319,436
Inventories (Note 4) 556,560 583,405
Refundable income taxes 333,411 333,411
Deferred tax assets 570,000 570,000
Prepaid income tax 338,116 --
Prepaid expenses and other 238,005 242,659
------------ ------------
TOTAL CURRENT ASSETS 4,055,419 3,457,955
------------ ------------
EQUIPMENT AND IMPROVEMENTS
Equipment and fixtures 18,747,687 19,674,714
Leasehold improvements 15,870,768 16,319,331
------------ ------------
34,618,455 35,994,045
Less accumulated depreciation and amortization (24,373,390) (22,973,956)
------------ ------------
NET EQUIPMENT AND IMPROVEMENTS 10,245,065 13,020,089
------------ ------------
OTHER
Cash surrender value of insurance on officers' lives 301,609 781,362
Long-term portion of notes receivable (Note 3) 393,943 211,402
Assets of business transferred under contractual
arrangement (Note 6) 638,000 --
Deferred tax assets 2,506,548 2,392,000
------------ ------------
TOTAL OTHER ASSETS 3,840,100 3,384,764
------------ ------------
$ 18,140,584 $ 19,862,808
============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
2
<PAGE> 5
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 27, 1999 JUNE 27, 1998
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
CURRENT LIABILITIES
<S> <C> <C>
Notes payable $ 1,769,791 $ 2,004,810
Accounts payable 1,488,654 1,582,901
Accruals:
Taxes other than income 545,432 572,800
Compensation 581,995 818,765
Rent 640,578 1,018,824
Workers' compensation 953,805 781,145
Miscellaneous 444,716 366,839
------------ ------------
TOTAL CURRENT LIABILITIES 6,424,971 7,146,084
------------ ------------
Commitments and contingencies (Notes 6 and 8)
STOCKHOLDERS' EQUITY
Common stock, $.05 par - shares authorized
20,000,000; issued 3,414,802 170,740 170,740
Additional paid-in capital 10,787,369 10,787,369
Retained earnings 3,004,595 3,523,082
------------ ------------
13,962,704 14,481,191
Treasury stock, at cost, 518,325 and 368,325 shares (2,247,091) (1,764,467)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 11,715,613 12,716,724
------------ ------------
$ 18,140,584 $ 19,862,808
============ ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE> 6
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended Period Ended
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET SALES $ 13,689,189 $ 15,665,723 $ 43,379,888 $ 47,640,411
Costs and expenses (income):
Costs of sales 12,360,013 14,111,689 39,111,852 43,238,761
Administrative and general expense 1,694,750 1,504,153 4,751,890 4,855,553
Interest expense - net 52,920 55,301 105,891 155,189
(Gain) loss on sale of leasehold
improvements and equipment 81,223 (18,611) 43,401 (54,011)
---------------------------------------------------------------------
TOTAL COSTS AND EXPENSES: 14,188,906 15,652,532 44,013,034 48,195,492
---------------------------------------------------------------------
Income (loss) before taxes (benefit) on income (499,717) 13,191 (633,146) (555,081)
Taxes (benefit) on income (loss) (60,500) 5,278 (114,659) (222,150)
---------------------------------------------------------------------
Net income (loss) $ (439,217) $ 7,913 $ (518,487) $ (332,931)
=====================================================================
Basic and diluted earnings (loss) per common
share (Note 5) $ (.15) $ .00 $ (.18) $ (.11)
=====================================================================
Weighted average number of common
shares outstanding (Note 5) 2,896,477 3,072,771 2,951,481 3,108,903
=====================================================================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
<PAGE> 7
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- ----------------------
Additional
Number paid-in Retained Number
of shares Amount capital earnings of shares Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 28, 1997 3,413,777 $170,689 $10,782,448 $7,365,512 263,825 $1,382,141
Net loss for the quarter (169,358)
Exercise of stock options 625 31 3,156
Purchase of treasury stock 35,000 132,138
-------------------------------------------------------------------------------
Balance, September 27, 1997 3,414,402 170,720 10,785,604 7,196,154 298,825 1,514,279
Net loss for the quarter (171,644)
Purchase of treasury stock 35,000 124,688
-------------------------------------------------------------------------------
Balance, December 27, 1997 3,414,402 170,720 10,785,604 7,024,510 333,825 1,638,967
Net income for the quarter 7,916
Exercise of stock options 400 20 1,765
Purchase of treasury stock 10,000 35,000
-------------------------------------------------------------------------------
Balance, March 28, 1998 3,414,802 170,740 10,787,369 7,032,426 343,825 1,673,967
===============================================================================
Balance, June 27, 1998 3,414,802 $ 170,740 $10,787,369 $3,523,082 368,325 $1,764,467
Net income for the quarter 36,358
Purchase of treasury stock 80,000 253,124
-------------------------------------------------------------------------------
Balance, September 26, 1998 3,414,802 170,740 10,787,369 3,559,440 448,325 2,017,591
Net loss for the quarter (115,628)
Purchase of treasury stock 70,000 229,500
-------------------------------------------------------------------------------
Balance, December 26, 1998 3,414,802 170,740 $10,787,369 3,443,812 518,325 2,247,091
Net loss for the quarter (439,217)
-------------------------------------------------------------------------------
Balance, March 27, 1999 3,414,802 $170,740 $10,787,369 $3,004,595 518,325 $2,247,091
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE> 8
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the Nine Month
Period Ended
-----------------------------
MARCH 27, MARCH 28,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (518,487) $ (332,931)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,320,164 2,705,704
(Gain) loss on sale of leasehold improvements and equipment 81,223 (54,011)
Deferred income taxes (benefits) (114,548) --
Changes in operating assets and liabilities:
Receivables - net (Note 3) 654,028 (461,081)
Inventories 26,845 428
Prepaid expenses and other (333,462) (80,767)
Accounts payable (94,247) (261,050)
Accruals (391,847) (414,946)
----------- -----------
CASH PROVIDED BY OPERATING ACTIVITIES 1,629,669 1,101,346
----------- -----------
INVESTING ACTIVITIES
Payments for purchase of leasehold improvements and equipment (749,164) (2,349,003)
Proceeds from sale of leasehold improvements and equipment 62,627 124,444
Collections on notes receivable 41,632 133,248
Decrease (increase) in cash surrender value of insurance on
officers' lives 479,753 (45,797)
----------- -----------
CASH PROVIDED (USED) BY INVESTING ACTIVITIES (165,152) (2,137,108)
----------- -----------
FINANCING ACTIVITIES
Net borrowings (payments) under line of credit (235,019) 1,443,900
Proceeds from exercise of stock options -- 4,972
Acquisition of treasury stock (482,624) (291,825)
----------- -----------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES (717,643) 1,157,047
----------- -----------
NET INCREASE IN CASH FOR THE PERIOD 746,874 121,285
Cash and cash equivalents, beginning of period 409,044 490,058
----------- -----------
Cash and cash equivalents, end of period $ 1,155,918 $ 611,343
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 94,430 $ 137,689
Income taxes $ 221,364 $ 324,800
Notes received from sale of leasehold improvements and
equipment and assets of business transferred under
contractual arrangement, net $ 1,222,620 $ 445,857
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
6
<PAGE> 9
WALL STREET DELI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial position as of March 27, 1999 and the results of operations
and changes in stockholders' equity for the three and nine month
periods ended March 27, 1999 and March 28, 1998, and cash flows for the
nine month periods ended March 27, 1999 and March 28, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. The results of operations for the nine month periods ended March 27,
1999 and March 28, 1998 are not necessarily indicative of the results
to be expected for the full year.
3. Accounts and notes receivable consists of:
<TABLE>
<CAPTION>
March 27, June 27,
1999 1998
----------- -----------
<S> <C> <C>
Accounts receivable $ 774,495 $ 1,262,505
Notes receivable 454,706 333,530
Other receivables 488,804 420,001
----------- -----------
1,718,005 2,016,036
Less allowance for doubtful accounts (460,653) (485,198)
----------- -----------
1,257,352 1,530,838
Less long-term portion of notes receivable (393,943) (211,402)
----------- -----------
$ 863,409 $ 1,319,436
=========== ===========
</TABLE>
4. Inventories are valued at the lower of cost (first-in, first-out) or
market.
5. Earnings per share ("EPS") have been computed in accordance with the
provisions of SFAS 128. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted
average number of shares outstanding during the respective periods.
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.
7
<PAGE> 10
The effect of shares issuable under the Company's stock option plan are
excluded for the nine month periods ended March 27, 1999 and March 28,
1998 and the three month period ended March 27, 1999 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 the three month period ended March 28, 1998 because the significant
majority of common options outstanding were prices which exceed the
common stock market price.
Earnings per share has been calculated using the following:
<TABLE>
<CAPTION>
For the Three For the Nine
Month Period Ended Month Period Ended
------------------------ ------------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number of common
shares used for basic EPS 2,896,477 3,072,771 2,951,481 3,108,903
Effect of dilutive stock options - - - -
--------- --------- --------- ---------
Weighted average number of common
shares and dilutive potential common
stock used in diluted EPS 2,896,477 3,072,771 2,951,481 3,108,903
========= ========= ========= =========
</TABLE>
6. Effective December 31, 1998, the Company transferred leasehold
improvements and equipment and subleased five stores in the Los
Angeles, California area to California Fresh Deli, Inc. ("CFD"). CFD
entered into a franchise agreement with the Company to operate the five
stores and a management agreement to manage for the Company a sixth
store also in the Los Angeles area for the remainder of the current
lease term.
The Company received approximately $40,500 in cash and a $800,000
non-interest bearing note, payable in monthly installments at $12,000
from June 1999 through November 2000, and at the greater of $13,333 or
eight percent of monthly revenues thereafter until the note is repaid.
The realization of the note is dependent on future operations of the
five stores and has been reported as "Assets of business transferred
under contractual arrangement" net of a valuation allowance of
$162,000. Franchise fees payable by CFD under the franchise agreement
have been deferred until the note has been paid in full.
7. The effective tax rate for the third quarter and for the nine months
ended March 27, 1999 was 12 percent and 18 percent, respectively.
Estimated amounts of tax benefits not considered more likely than not
to be realized result in decreases from the effective tax rate of 40
percent for each of the third quarter and nine month period ended March
28, 1998.
8. During the third quarter, the Company entered into an Amended and
Restated Credit Agreement, effective as of February 1, 1999 with
AmSouth Bank (the "Amended Credit Agreement"). The Amended Credit
Agreement reduced the amount of the maximum borrowings from $7,500,000
to $4,000,000, changed the interest rate from a LIBOR-based
8
<PAGE> 11
floating rate to prime and modified certain financial covenants. The
Amended Credit Agreement contains 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 third quarter of fiscal 1999, the Company's net worth was $11.7
million, which was less than the $12.0 million required by the Amended
Credit Agreement. Also, as of March 27, 1999, the Company's debt
service coverage ratio was 1.28, which was less than the 1.30 required
by the Amended Credit Agreement. Subsequent to the end of the quarter,
however, the note payable balance was significantly reduced, which
brought the Company into compliance with the debt service ratio
covenant. The lender granted a temporary waiver of compliance with
these covenants, and the Company anticipates full compliance with the
existing covenants by the end of fiscal 1999.
9. In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which establishes standards for reporting and
display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as
other financial statements.
SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997, but not for interim periods in the initial
year of adoption, and requires comparative information for earlier
years to be restated. Management believes that adoption of this
statement will not have a significant impact on the Company's 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.
SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997, but not for interim periods in the initial
year of adoption, and requires comparative information for earlier
years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, it may
have
9
<PAGE> 12
on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of
this standard.
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 materially affect its financial statements.
10
<PAGE> 13
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial condition and
earnings during the periods included in the accompanying consolidated balance
sheets and statements of operations.
Forward Looking Statements. The statements in this Form 10-Q that are
not historical fact are forward looking statements. Such statements appear in a
number of places in this report and include statements regarding the intent,
belief or expectations of the Company and its management with respect to, among
other things, the Company's operating performance, anticipated growth
strategies, trends in the food service industry and other trends that may affect
the Company's financial condition or results of operations. Such statements are
subject to numerous risks and uncertainties which could cause actual results to
differ materially from those anticipated or projected, including, among others,
new franchising programs and other new products and programs, recent changes in
management, competition for customers, labor force and store sites, the effects
of changes in the economy such as inflation and unemployment rates, and weather
conditions and seasonal effects.
In addition, a significant element of uncertainty is occasioned by the
Company's recent announcements that it is in discussions with third parties
concerning the possibility that the Company may be acquired, as detailed in its
filings on Form 8-K dated February 23, 1999, April 15, 1999 and April 22, 1999.
Readers are cautioned not to place undue reliance on these forward
looking statements which speak only as of the date hereof and reflect only
management's belief and expectations based upon presently available information.
Readers are also urged to carefully review and consider the various
disclosures made by the Company which attempt to advise interested parties of
the factors which affect the Company's business, including the disclosures made
in other periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages of net sales represented by certain items in the Company's
consolidated statements of income.
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Nine Month Period Ended
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
--------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 90.3 90.1 90.2 90.7
--------------- -------------- ------------- ---------------
Gross profit 9.7 9.9 9.8 9.3
Administrative and general 12.4 9.6 11.0 10.2
--------------- -------------- ------------- ---------------
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
For the Three Month Period Ended For the Nine Month Period Ended
March 27, March 28, March 27, March 28,
1999 1998 1999 1998
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Operating income (loss) (2.7) 0.3 (1.2) (0.9)
Other income (expense), net (0.9) 0.2 (0.3) (0.2)
------------- -------------- ------------- --------------
Income (loss) before taxes (benefit)
on income (loss) (3.6) 0.1 (1.5) (1.1)
Tax (benefit) on income (loss) (0.4) 0.0 (0.3) (0.4)
------------- -------------- ------------- --------------
Net income (loss) (3.2) 0.1% (1.2) (0.7)%
============= ============== ============= ==============
</TABLE>
NET SALES
Net sales for the third quarter ended March 27, 1999 totaled
$13,689,189 as compared to net sales of $15,665,723 for the third quarter ended
March 28, 1998, for a decrease in net sales of $1,976,534, or 12.6 percent. The
decrease is principally the result of the $1,271,210 in sales from stores in
operation during the third quarter of 1998 that had been sold or closed by the
end of the third quarter of fiscal 1999. A 6.4% decrease in same store sales
accounted for the remainder of the net sales decrease. During the third quarter
1999, a total of seven company stores were sold or closed, including the five
Los Angeles stores converted to franchises.
Net sales for the nine month period ended March 27, 1999 totaled
$43,379,888 as compared to net sales of $47,640,411 for the corresponding nine
month period ended March 28, 1998, for a decrease in net sales of $4,260,523, or
8.9 percent. Of the net sales decrease, $2,762,002 reflects sales from stores in
operation during the nine month period of 1998 that had been sold or closed by
the end of the nine month period of 1999. A 5.5% decrease in same store sales
accounted for the remainder of the net sales decrease. During the nine month
period of 1999, eight company stores were sold or closed.
As previously reported, at the beginning of the third fiscal quarter,
the Company transferred leasehold improvements and equipment and subleased five
stores in the Los Angeles area to California Fresh Deli, Inc. ("CFD"). CFD
entered into a franchise agreement with the Company to operate the five stores
and will manage a sixth store also in the Los Angeles area for the remainder of
the current lease term. See note 6 of the Notes to the Consolidated Financial
Statements in this report.
At March 27, 1999, there were 104 Wall Street Deli company-owned stores
in operation, as compared to 114 company-owned stores on March 28, 1998. Average
sales per store for all stores were approximately $399,229 and $413,396 for the
nine month periods ending March 27, 1999 and March 28, 1998, respectively.
The Company continues to face intense competition in the quick service
food industry, and management believes the negative trend in its same store
sales is largely attributable to this. Operational problems in certain markets
are, however, also a significant contributing factor. In addition, while store
catering sales represent only approximately 13% of overall sales, the amount
12
<PAGE> 15
of decrease in same store catering sales during the third quarter was greater
than the overall same store sales decreases. Management continues to seek
effective ways of combating the adverse effect that competitive pressures, both
in the quick service food industry generally and in certain of its markets, have
had on same store sales.
The Company also continues to refine and test new products and
promotional offerings. The Company tries to introduce at least one new
promotional product each quarter, as a way to add ongoing menu variety for
customers, as well as affording the Company the opportunity to test new
products. Promotions that have the most successful reception are added to the
permanent menu. During the third quarter this year a new series of sandwiches
called "Manhattan Melts" was introduced. This promotional includes three new
sandwiches which implement and showcase a new Italian flat bread, a high-quality
bread product that is perceived to have been well received by customers. The
Company also re-introduced pepper-jack cheese and a fat free honey mustard with
the Manhattan Melt program. Based on results to date, the Italian flat bread has
been added as a standard menu option, and future promotions are expected to use
this product. While results are not believed to have significantly increased
same store sales, management is pleased with this implementation and will look
to similar quality upgrades for other products as part of its ongoing menu
enhancement efforts. While the Company cannot precisely measure the sales
attributable to its various menu items, management's assessment is that the
initial results of this promotional program were moderately favorable.
During the three month period ended March 27, 1999, three additional
franchised stores were opened, plus the five Los Angeles stores that were
converted to franchises. The Company continues to look toward franchising as a
growth vehicle, and presently expects one unit to be opened in the fourth
quarter. There were sixteen franchised units open as of March 27, 1999. Revenues
from franchise fees and royalties were approximately $116,000 for the three
month period, and $210,000 for the nine month period ended March 27, 1999.
During the third quarter of fiscal 1999, the Company substantially reduced
marketing efforts for its franchise program, in view of the uncertainties
occasioned by the discussions concerning a possible sale of the Company.
COST OF SALES
Cost of sales as a percentage of net sales increased to 90.3 percent
during the three month period ended March 27, 1999 from 90.1 percent in the
corresponding three month period in the previous year. For the nine month period
ended March 27, 1999, cost of sales decreased to 90.2 percent from 90.7 percent
for the prior year's corresponding nine month period. Costs as a percentage of
sales are adversely affected by decreases in same store sales, as lower sales
are spread over costs that include fixed elements.
13
<PAGE> 16
Cost of sales consists of the following significant components:
<TABLE>
<CAPTION>
For the Three Month Period Ended
MARCH 27, 1999 MARCH 28, 1998
------------------------------- ------------------------------
Amount % of Sales Amount % of Sales
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Food/Paper $ 4,860,729 35.5% $ 5,610,987 35.8%
Labor 3,070,834 22.4 3,536,702 22.6
Store Expenses 4,428,450 32.4 4,964,000 31.7
----------- ---- ----------- ----
$12,360,013 90.3% $14,111,689 90.1%
=========== ==== =========== ====
</TABLE>
<TABLE>
<CAPTION>
For the Nine Month Period Ended
MARCH 27, 1999 MARCH 28, 1998
------------------------------- ------------------------------
Amount % of Sales Amount % of Sales
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Food/Paper $15,586,001 35.9% $17,121,888 35.9%
Labor 9,777,622 22.5 10,955,230 23.0
Store Expenses 13,748,229 31.8 15,161,643 31.8
----------- ---- ----------- ----
$39,111,852 90.2% $43,238,761 90.7%
=========== ==== =========== ====
</TABLE>
Food costs as a percentage of sales decreased 0.3 percent for the three
month period ended March 27, 1999 as compared to the three month period ended
March 28, 1998. The decrease was primarily due to the one time start up costs
incurred by the Company in March of 1998 associated with changing its national
food distributor. The Company also continues to look at ways to lower food cost
including new ways of pricing the salad bar, either by eliminating the max-out
program or by installing a new tossed salad concept that is in test. Food costs
as a percentage of sales did not change for the nine month period ended March
27, 1999 as compared to the nine month period ended March 28, 1998.
Labor costs as a percentage of net sales decreased 0.2 percent compared
to the third quarter of fiscal 1998, and decreased 0.5 percent for the nine
month period this year compared to fiscal 1998. The decrease was primarily due
to the implementation of new products that require less production time, and to
continued management efforts at cost containment. There were no significant wage
increases during the first three quarters of fiscal 1999 as compared to fiscal
1998.
Store expenses as a percentage of net sales increased 0.7 percent for
the third quarter as compared to the same quarter last year. Occupancy costs
increased 1.1 percent, utilities increased 0.2 percent and cleaning and
janitorial expenses increased 0.2 percent, all primarily due to lower sales over
the same fixed costs. Miscellaneous supplies and services increased 0.3 percent.
These increases were offset by 0.6 percent lower depreciation, primarily as a
result of the FAS 121 write down in the fourth quarter of fiscal 1998. Other
decreases in the third quarter were a 0.1 percent decrease in payroll taxes and
fringe benefits as a result of lower labor costs, a 0.3 percent decrease in
restaurant supplies and a 0.1 percent decrease in computer lease payments.
14
<PAGE> 17
During the nine month period ended March 27, 1999, store expenses as a
percentage of sales were consistent from the nine month period the previous
year. There were decreases of 0.4 percent in depreciation mainly from FAS 121
write downs in 1998 and 0.3 percent in payroll taxes and fringe benefits as a
result of lower labor costs. These decreases were offset by an increase of 0.6
percent in occupancy costs.
ADMINISTRATIVE AND GENERAL EXPENSES
Administrative and general expenses for the three month period ended
March 27, 1999 increased $190,597, or 12.7 percent, as compared to the three
month period ended March 28, 1998. This increase is principally the result of a
$267,326 increase for insurance reserves caused by an increase in the Company's
estimate of its aggregate liability for all open claims. That increase was
offset by reductions from the prior year; in the third quarter of last year,
management changes undertaken in certain cities with operating difficulties,
principally Denver and Dallas, accounted for approximately $12,000 in additional
costs that were not incurred in this year's third quarter. The expense decline
during the third quarter this year also includes the effect of the sale in
fiscal 1998 of two of the Company's three metropolitan New York stores and
elimination of approximately $50,000 in related division overhead.
Administrative and general expenses for the nine month period ended
March 27, 1999 decreased by $103,663, or 2.1 percent, as compared to the nine
month period ended March 28, 1998. A significant portion of the fiscal 1999
decrease is from the effect of the fiscal 1998 costs incurred at the division
level, including approximately $40,000 in severance and other termination costs
booked in connection with the Dallas and Denver management changes,
approximately $190,000 from the closing of the division office in New York, and
approximately $45,000 associated with the elimination of a catering sales
position and other changes in Los Angeles. A divisional management consolidation
in Houston and Dallas during fiscal 1999 provided savings of approximately
$60,000 in administrative and general expenses for the nine month period ended
March 27, 1999 as compared to the nine month period ended March 28, 1998. These
decreases were offset by the increase for insurance reserves in the third
quarter.
TAXES ON INCOME
The effective tax rate for the third quarter and for the nine months
ended March 27, 1999 was 12 percent and 18 percent, respectively. Estimated
amounts of tax benefits not considered more likely than not to be realized
result in decreases from the effective tax rate of 40 percent for each of the
third quarter and nine month period ended March 28, 1998.
INTEREST EXPENSE, NET
In the three month period ended March 27, 1999, the Company had net
interest expense of $52,920 compared to net interest expense of $55,301 for the
three month period ended March 28, 1998. Interest expense is primarily related
to the Company's $4,000,000 unsecured line of
15
<PAGE> 18
credit which bears interest at prime. The Company had $1,769,791 at March 27,
1999 outstanding against this line compared to $2,449,300 at March 28, 1998. The
interest expense for the three month period March 27, 1999 of $60,456 was offset
by $7,536 of interest earned by the Company on notes receivable from prior sales
of fixtures and equipment in various stores.
In the nine month period ended March 27, 1999, net interest expense
declined $49,298 to $105,891, or 31.8 percent, from $155,189. The lower net
interest expense was primarily the result of lower average monthly borrowings
during the current year of $2,032,925 versus $2,432,983 for the same period last
year. Net interest for the nine months includes interest earned of $18,541 and
$22,183 in fiscal 1999 and 1998, respectively, from notes held by the Company.
IMPACT OF INFLATION
Many of the Company's employees are paid hourly rates related to the
federal minimum wage. The two minimum wage increases, effective October 1, 1996
and September 1, 1997, the latter of which took effect during the last half of
the Company's fiscal 1998 year, have not had a direct effect on the Company's
labor cost except to the extent that it has required ongoing efforts to improve
labor efficiency. The Company continues to look for ways of doing business with
fewer employees, as continued wage increases together with a generally tight
labor market put increasing pressures on costs. These and other inflationary
effects also are reflected over time in increased prices.
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. As the Company's franchise operations begin to move out of the
development stage, revenues from franchise operations as well as
franchisee-provided capital expenditures may contribute to expansion and growth
financing. The Company does not maintain significant trade 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 for all or a portion
of the sale price.
At March 27, 1999 the ratio of the Company's current assets to current
liabilities was .63 to 1.00, as compared to a current ratio of .48 to 1.00 at
June 27, 1998. This reflects the Company's continued use of available cash in
the second quarter of 1999 for the acquisition of treasury stock as well as for
continued investment in store facilities. The Company has no long-term debt.
The Company's principal capital requirement is for new equipment and
leasehold improvements for new and existing stores. Capital expenditures for
these purposes were
16
<PAGE> 19
approximately $661,000 and $2,349,000 for the nine month periods ended March 27,
1999 and March 28, 1998, respectively. It is presently anticipated that the
Company's capital expenditures for fiscal 1999 will be approximately $1,000,000.
During the second quarter of 1999, the Company's Board of Directors approved the
repurchase of up to 250,000 shares of the Company's common stock. During the
nine month period ended March 27, 1999, a total of 150,000 shares were purchased
at an acquisition cost of $482,624.
The Company has historically met its capital needs from short-term bank
borrowings and internally generated funds. Cash generated from operations
totaled $1,629,669 for the nine month period ended March 27, 1999. During the
third quarter, the Company entered into an Amended and Restated Credit
Agreement, effective as of February 1, 1999 with AmSouth Bank (the "Amended
Credit Agreement"). The Amended Credit Agreement reduced the amount of the
maximum borrowings from $7,500,000 to $4,000,000, changed the interest rate from
a LIBOR-based floating rate to prime and modified certain financial covenants.
The Amended Credit Agreement contains 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 third quarter
of fiscal 1999, the Company's net worth was $11.7 million, which was less than
the $12.0 million required by the Amended Credit Agreement. Also, as of March
27, 1999, the Company's debt service coverage ratio was 1.28, which was less
than the 1.30 required by the Amended Credit Agreement. Subsequent to the end of
the quarter, however, the note payable balance was significantly reduced, which
brought the Company into compliance with the debt service ratio covenant. The
lender granted a temporary waiver of compliance with these covenants, and the
Company anticipates full compliance with the existing covenants by the end of
fiscal 1999.
The Company expects its future capital needs will be met primarily by
internally generated funds and supplemented, as needed, by additional bank
borrowings.
YEAR 2000 ISSUES
The Company is continuing work on a comprehensive review of its
computer 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 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. The
Company's sales reporting and inventory systems were developed internally, and
necessary modifications are underway, and currently scheduled for completion in
May 1999. Management considers these modifications to involve a moderate effort
and is using internal resources for completion. The Company is also currently in
the process of implementing a Year 2000 compliant version of its financial
software. This work is scheduled for completion in June 1999. Portions of the
Company's communications
17
<PAGE> 20
software used to transmit information to and from stores are not Year 2000
compliant. Compliant versions of the software are now available from the
software vendor at no additional cost to the Company; the Company will use
internal resources for the implementation of this software and anticipates this
being completed by September 1999. The Company has reviewed its cash register
systems and found some minor compliance issues, involving the ability of the
registers to be operational during the actual changeover from December 31, 1999
to January 1, 2000. The Company believes this to be an immaterial issue. The
Company operates other register systems which have additional compliance issues.
These registers can be made compliant with a system software upgrade which can
be accomplished in the field. These upgrades are a minor effort and currently
not scheduled, but are expected to be completed in time for adequate testing.
Through the third quarter ending March 27, 1999, the Company had spent
approximately $24,000 on Year 2000 testing and training. An additional $14,000
has been spent subsequent to the third quarter. The Company expects to have no
additional expenditures during fiscal year 1999 related to Year 2000 compliance
matters. The Company will budget $20,000 that it expects to incur in the first
quarter of fiscal year 2000 in updating its communications software and an
additional $20,000 for expenses related to updating its store POS systems.
---------------------------------------
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule, submitted to the
Securities and Exchange Commission in electronic format
(b) Reports on Form 8-K:
During the quarter ended March 27, 1999, the Company
filed one report on Form 8-K dated February 23, 1999,
announcing an agreement in principle with Trinity Management
Company, Inc.
Subsequent to the end of the quarter ended March 27, 1999, the
Company also filed two additional reports on Form 8-K:
Report on Form 8-K dated April 15, 1999, reporting an
extension of the agreement in principle with Trinity
Management Company, Inc.; and
Report on Form 8-K dated April 22, 1999, reporting
the expiration of the agreement in principle with Trinity
Management Company, Inc., and the Company's discussions with
another party.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DATE: WALL STREET DELI, INC.
May 10, 1999 /s/ Jeffrey V. Kaufman
-------------------------------------------
JEFFREY V. KAUFMAN
President and Chief Executive Officer
May 10, 1999 /s/ Robert G. Barrow
-------------------------------------------
ROBERT G. BARROW
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 2-4 OF
THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 27, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> MAR-27-1999
<CASH> 1,155,918
<SECURITIES> 0
<RECEIVABLES> 1,718,005
<ALLOWANCES> 460,653
<INVENTORY> 556,560
<CURRENT-ASSETS> 4,055,419
<PP&E> 34,618,455
<DEPRECIATION> 24,373,390
<TOTAL-ASSETS> 18,140,584
<CURRENT-LIABILITIES> 6,424,971
<BONDS> 0
0
0
<COMMON> 170,740
<OTHER-SE> 11,544,873
<TOTAL-LIABILITY-AND-EQUITY> 18,140,584
<SALES> 43,379,888
<TOTAL-REVENUES> 43,379,888
<CGS> 39,111,852
<TOTAL-COSTS> 44,013,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 460,653
<INTEREST-EXPENSE> 105,891
<INCOME-PRETAX> (633,146)
<INCOME-TAX> (114,659)
<INCOME-CONTINUING> (518,487)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (518,487)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
