<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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 July 3, 1999 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 $4,339,940 on September 28,
1999 based on the NASDAQ National Market System closing price on that date.
As of September 28, 1999 there were 2,896,477 shares of the registrant's Common
Stock, $.05 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Registrant's 1999 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
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<S> <C>
PART I
1. Business......................................................................................3
2. Properties....................................................................................9
3. Legal Proceedings............................................................................11
4. Submission of Matters to a Vote of Security Holders..........................................11
4.1 Executive Officers...........................................................................11
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters..........................................................................12
6. Selected Consolidated Financial Data.........................................................13
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................14
8. Financial Statements.........................................................................27
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.........................................................................48
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..............................49
Index to Schedules and Exhibits.......................................................50
Signatures............................................................................52
</TABLE>
* Portions of the Proxy Statement for the Registrant's 1999 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
fifteen cities: Atlanta, Birmingham, Chicago, Cincinnati, Cleveland, Dallas,
Denver, Houston, Indianapolis, Los Angeles, Louisville, Newark, Philadelphia,
St. Louis, and Washington, D.C. Most of the Company's 104 company-owned stores
are located in large suburban and downtown office buildings and are designed to
serve the population in and around those buildings. The Company also has 17
franchised locations.
OVERVIEW OF FISCAL 1999
Wall Street Deli reported a net loss of approximately $2,333,000, or
$0.79 per share, in fiscal 1999 compared with a net loss of approximately
$3,842,000, or $1.24 per share, for fiscal 1998. The loss includes non-cash
charges of $0.9 million and $3 million for fiscal 1999 and 1998, respectively,
for impairment of assets under SFAS 121, and an increase of approximately
$989,000 and $1,437,000 for fiscal 1999 and 1998, respectively, in its valuation
reserve against deferred tax assets. In addition, the 1999 loss reflects
approximately $160,000 in expenses related to terminated discussions concerning
the potential sale or other business combination transaction involving the
Company.
Excluding the effect of the SFAS 121 charges and merger expenses in
fiscal 1999 and the SFAS 121 changes in 1998, the loss per share was $0.44 in
fiscal 1999 compared to $0.27 in fiscal 1998.
Fiscal 1999 revenues were approximately $58.3 million compared with
$63.8 million in fiscal 1998. The decline in revenues reflects the result of the
sale to a franchisee of five of the Company's six Los Angeles stores effective
January 1, 1999, combined with a same store sales decline of 5.0 percent. The
Los Angeles stores generated revenues of approximately $2,822,000 in fiscal
1998, and $1,226,000 during the first half of fiscal 1999, prior to the sale.
The same store sales decline is attributable to the adverse effects of
increased competition in several primary markets, as well as operational
difficulties. In particular, the Company
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experienced continued problems in its Dallas market, along with a significant
decline in Cleveland and Cincinnati due to operational and management issues.
In substantial measure these operational and management difficulties
were related to the considerable time and effort expended during the year in
discussions concerning the possibility of a business combination transaction.
Following several months of time-consuming and otherwise costly deliberation
and analysis with two different parties, the Company announced in early July
1999, just after the end of the 1999 fiscal year, that the last of those
discussions had terminated. After considering the status of its negotiations
regarding a possible transaction, as well as several other strategic
alternatives, the board of directors of Wall Street Deli concluded that a sale
of the Company would not be in the best interests of the stockholders at this
time. The board has stated that the Company is not for sale due to the low
valuation of the stock and the potential for rebuilding shareholder value.
While management believes it was clearly important for the Company to
have made every responsible effort in doing the work necessary for these
discussions, in an organization of this size the effect had a
disproportionately large cost, especially in terms of the drain on management
and administrative time and attention. The cost in employee confidence and
morale at all levels of headquarters and field operations was also
considerable. The inevitable disruptions and uncertainties attendant to
discussions and negotiations of a possible sale of the Company, including the
loss of several key personnel and the difficulty of recruiting replacements
under those circumstances, all contributed heavily to the managerial and
operational problems that are evidenced in fiscal 1999 sales declines.
However, as the Company also announced in July, the conclusion of
these discussions has afforded the Company the opportunity for a new strategic
plan to rebuild shareholder value. The Company has retained The Byrne Companies
to assist it in creating a business plan for future growth, including a
possible franchising strategy. The Byrne Companies, of Sioux Falls, South
Dakota, is a consulting firm specializing in human assessment and performance.
Its president and chief executive officer is William M. Byrne, who became a
member of Wall Street Deli's board of directors in September 1998. Mr. Byrne
has expertise in strategic and tactical planning in the restaurant business; he
is also president and chief executive officer of Taco John's of Iowa, which is
a franchisee of Taco John's International, operating 14 Taco John's units.
During 1999 the Company opened one new store and sold or closed a
total of nine stores, including the conversion in January 1999 of five stores
in the Los Angeles area to franchises. Net sales from these five stores
accounted for 29 percent of the decline in net sales reported by the Company.
Wall Street Deli's franchise program, still in early stages of growth,
also showed the effects of the Company sale discussions during the last half of
fiscal 1999, as both the Company and
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potential franchisees naturally were constrained by the uncertainties associated
with those discussions. As of the end of the year, 17 franchise units were open
and one agreement had been signed for development in fiscal 2000. Since fiscal
year end, one additional agreement has been signed. The Company's revenues for
franchising were below expectations for fiscal 1999. Franchise revenues included
$83,000 in franchise fees and $189,000 in continuing royalty income. The Company
has agreements in principle to open four new units with Host Marriott services.
These locations will consist of two units in the Tampa airport, one unit in Salt
Lake City and one unit in Memphis. The Company anticipates that the Salt Lake
City unit and one of the Tampa units will be opened during fiscal year 2000. The
Company will continue to market its brand with Host Marriott Services in the
future. In its revised strategic plan, the Company is looking at ways to enhance
its concept and will look to franchising to accelerate this growth vehicle. The
Company does not presently expect that a substantial number of new agreements
will be signed in fiscal 2000.
New menu offerings during fiscal 1999 included the Manhattan Melts
sandwich line, followed up at year-end by the Uptown Turkey sandwich line. The
three new Manhattan Melts were introduced into the concept on a new Italian
flat bread product. This high quality, high-end product was introduced to
include sandwiches such as the Midtown Melt, Times Square Trio and Empire Roast
Beef. The Midtown Melt includes ham, Genoa salami, provolone cheese, hoagie
sauce and lettuce. The Times Square Trio combines pastrami, turkey, salami,
pepper jack cheese, lettuce, tomato and honey mustard dressing. The Empire
Roast Beef introduces caramelized onions, pepper jack cheese, roast beef and
horseradish sauce. While the Company does not yet have the ability to measure
sales attributable to specific menu items, management's belief is that all
these sandwiches were very well received by our customers, as was an
introduction of the new Italian flat bread. The Company expects to develop and
offer new breads in the future.
During the year there were several changes in senior personnel,
particularly in the accounting and finance area. Kevin Conaway, treasurer and
chief accounting officer, resigned his position at the beginning of fiscal
1999. Julie Christian was promoted to vice president-controller at that time;
she resigned at the beginning of the third quarter. Jeff Pate was hired early
in the fourth quarter as chief financial officer. Mr. Pate was employed in
connection with the Company's discussions concerning a possible business
combination, and with the Company's agreement that if the business combination
did not transpire, he would have the option of resigning with an agreed
severance arrangement. Subsequent to the end of the fiscal year, Mr. Pate
resigned from the Company in accordance with that agreement. A national search
is underway to fill the position of chief financial and accounting officer.
Robert G. Barrow, the Company's vice chairman of the board, continues to serve
in the capacity of chief financial officer until the position is filled.
Additional senior management changes had occurred as of the date of this
report, and more are expected as the Company works toward attracting new talent
and making other changes to improve operations.
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During fiscal 1999, the Company continued to work on upgrading its
management information systems. The Company installed order entry capabilities
in the Washington, DC catering office and continued to refine this as a point
of sale (POS) test system. The Company has identified the need for a much more
sophisticated POS system. Management anticipates beginning installation of this
system during fiscal 2000, though the timing will be dependent upon, among
other things, the availability of equipment leasing opportunities as well as
technical personnel. The investment in POS will provide management with much
needed specific information at the store level, particularly the ability to
measure sales attributable to its various menu items. It is also expected to
provide management with more timely information that will be used for faster
and more precise evaluation of store performance. The Company's management
information department was one of the functional areas adversely affected by
the potential sale discussions, and its progress during the year was slowed.
This area is one in which substantial effort is expected to be focused during
fiscal 2000. The Company is also working on its remaining year 2000 compliance
issues; as discussed later in this report, all systems are now scheduled to be
year 2000 compliant by October 31, 1999.
RESTAURANT OPERATIONS
The Wall Street Deli typical store consists of a made to order deli
sandwich station, a soup express and salad bar. Store sizes range from 800
square feet to 5,000 square feet. The smaller stores, known as Express units,
typically have the same menu but do not have a salad bar. The Company expects
to refine the Express concept for future growth.
A hallmark of Wall Street Deli menu offerings is fresh ingredients of
very high quality. Restaurants feature set items as part of a core menu.
Gourmet sandwiches are made to order at the time the customer places the order,
ensuring both freshness and accuracy. In addition to traditional deli-style
sandwiches and salad bars, most store locations serve breakfast items early in
the morning. Breakfast fare includes an assortment of bagels, muffins and fresh
fruit, as well as coffee and juices. Store hours center around customer
traffic, which in many office buildings translates to early morning until
mid-afternoon.
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.
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.
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SITE SELECTION CRITERIA AND LEASING
The majority of the Company's stores are located in major urban retail
locations. Wall Street Deli seeks locations for its company stores 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. One new company store
was opened in fiscal 1999, and one is presently planned for fiscal 2000.
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
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 ever increasing 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 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.
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, as well as
many new and growing competitors. The competition for employees is a growing
problem also. With the ever-increasing number of new concepts and restaurants,
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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.
With the advent of its franchising program, the Company is also
competing for franchisees with franchisors of other restaurants and various
concepts.
GOVERNMENT REGULATION
All of the Company's stores are 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 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 levels
based upon the federal minimum wage level. Accordingly, changes in such minimum
wage levels affect the Company's labor costs.
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 July 3, 1999, the Company employed approximately 779 persons,
including 32 managerial, 20 administrative, and 727 store employees. None of the
Company's employees are represented by labor unions. The Company considers its
relationship with its employees to be good.
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INFORMATION AS TO CLASSES OF SIMILAR PRODUCTS OR SERVICES
The Company operates in only one industry segment. All significant
revenues and 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.
ITEM 2: PROPERTIES
CORPORATE HEADQUARTERS
The Company maintains its corporate headquarters in Birmingham,
Alabama, in leased office space which includes facilities for franchisee
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 (exclusive of
franchised locations) by city at July 3, 1999:
<TABLE>
<CAPTION>
Number of
City Restaurants
- -------------------- -----------
<S> <C>
Atlanta 5
Birmingham 10
Chicago 16
Cincinnati 4
Cleveland 3
Dallas 12
Denver 8
Houston 11
Indianapolis 1
Los Angeles 1
Louisville 1
Newark 1
Philadelphia 5
</TABLE>
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<TABLE>
<CAPTION>
Number of
City Restaurants
- -------------------- -----------
<S> <C>
St. Louis 2
Washington, D.C. 24
---
TOTALS 104
===
</TABLE>
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."
Franchised stores as of July 3, 1999, were located in the following
cities:
<TABLE>
<CAPTION>
Number of
City Restaurants
- -------------------- -----------
<S> <C>
Atlanta 1
Birmingham 4
Columbus (Ohio State Univ.) 1
Denton (North Texas State Univ.) 1
Houston 1
Lake Jackson, Texas 1
Los Angeles 5
Nashville 1
Orlando 1
Tampa 1
--
TOTALS 17
==
</TABLE>
Mr. Alan Kaufman, Chairman of the Board, and Mr. Robert Barrow, Vice
Chairman of the Board, are general partners of CBK Associates, which until
October 27, 1996 leased to the Company its catering offices in Memphis,
Tennessee. During the Company's 1997 fiscal year rents paid to CBK Associates
were $12,000.
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
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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 and 1997 fiscal years, rents
paid to Rex Associates were $18,500 and $69,672, 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.
ITEM 4.1: EXECUTIVE OFFICERS
The executive officers of the Company are 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
David A. Thomas Senior Vice President - Marketing
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 serves as Chief Financial Officer of the Company, and has served
in that capacity since 1981, except during a portion of fiscal 1999 (as
discussed in more detail on page 5 of this report). Mr. Barrow was Executive
Vice
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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 as its President and Chief Executive Officer since June,
1998. He was Vice President-Central Region, from 1989 until his promotion to
Senior Vice President-National Operations Manager in August 1992. He then
served as Executive Vice President and Chief Operating Officer from 1995 until
becoming President in June, 1998. Mr. Kaufman has been a Director of the
Company since 1995. Mr. Kaufman is the son of Alan V. Kaufman.
David A. Thomas, age 39, joined the Company in 1983 and was promoted
to the position of Senior Vice President-National Operations in June 1997, then
to Senior Vice President-Marketing in February 1998. He served as the Company's
division manager for Washington, D.C. from 1984 until his appointment in 1992
to Vice President-Eastern Region.
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. Mr. Barrow has resigned his position with the
Company effective October 31, 1999.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK 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 1998 High Low
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<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>
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<TABLE>
<CAPTION>
FISCAL 1999 High Low
---- ---
<S> <C> <C>
Quarter Ended September 26, 1998 5 1/4 3
Quarter Ended December 26, 1998 4 1/8 3
Quarter Ended March 27, 1999 5 1/8 3
Quarter Ended July 3, 1999 4 7/8 2 11/16
</TABLE>
On September 28, 1999, there were approximately 330 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 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 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 July 3,
1999 and as of July 3, 1999, June 27, 1998, June 28, 1997, June 29, 1996 and
July 1, 1995. 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>
1999(1) 1998(2) 1997(3) 1996(4) 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 58,258,464 $ 63,780,406 $65,453,642 $ 69,399,058 $ 68,228,119
Net income (loss) $ (2,333,142) $ (3,842,430) $ 62,822 $ (2,457,706) $ (921,011)
Basic and diluted earnings
(loss) per common share $ (.79) $ (1.24) $ .02 $ (.72) $ (.27)
Average shares outstanding 2,937,221 3,094,762 3,254,908 3,407,874 3,422,701
Total assets $ 17,173,458 $ 19,862,808 $23,065,627 $ 25,668,894 $ 29,163,709
Stockholders' equity $ 9,900,958 $ 12,716,724 $16,936,508 $ 18,229,590 $ 20,653,157
Stores in operation at
year-end (unaudited) 104 112 116 124 128
</TABLE>
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1. Net loss included a non-cash charge of $.9 million taken as an
operating expense related to the application 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. 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."
3. 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.
4. 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."
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 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, recent changes in management, new franchising programs
and other new products and programs, 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 area of uncertainty and risk has been occasioned by
recently-terminated discussions concerning the possible sale of the Company and
subsequent new strategic planning.
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
14
<PAGE> 15
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
----------------------------------
JULY 3, JUNE 27, JUNE 28,
1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 89.9 90.3 88.9
----- ----- -----
Gross profit 10.1 9.7 11.1
Administrative and general 12.4 10.8 11.6
Impairment of long-lived assets 1.5 4.7 --
Operating income (loss) (3.8) (5.8) (0.5)
Other income (expenses)
(Interest expense) and other income, net (--) (0.2) 0.6
----- ----- -----
Income (loss) before taxes on income (loss) (3.8) (6.0) 0.1
Taxes on income (loss) 0.2 -- --
----- ----- -----
Net income (loss) (4.0)% (6.0)% 0.1%
===== ===== =====
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales
Net sales decreased in fiscal 1999 by approximately $5,522,000, or 8.7
percent, from fiscal 1998, primarily due to an approximate 5.0 percent decline
in same store sales and a reduction in the number of Company stores from 112 at
June 27, 1998 to 104 at July 3, 1999. Of the net sales decrease, approximately
$4,544,000 reflects sales from company owned stores in operation during fiscal
1998 that had been closed or sold by the end of fiscal 1999.
During fiscal 1999 the Company sold or closed a total of nine stores,
including the conversion in January 1999 of five stores in the Los Angeles area
to franchises. Net sales from these five stores were approximately $1,226,000
in fiscal 1999 compared to approximately $2,822,000 in fiscal 1998, accounting
for 29 percent of the decline in net sales reported by the Company.
Average annual sales per store were approximately $525,000 in fiscal
year 1999 and $565,000 in fiscal year 1998, a decline of approximately 7.1
percent. In addition, same store sales fell 5.0 percent over the same period.
15
<PAGE> 16
The Company continues to face intense competition in the quick serve
food industry and management believes this negative trend is largely
attributable to the expansion and marketing strategies of competitors. During
the last half of the fiscal year, the Company also sustained the adverse effect
of uncertainties and distractions created by the recently terminated
discussions concerning the potential sale of the Company. Management problems
and operational difficulties in certain markets, principally Dallas, Cleveland
and Cincinnati, had a significant adverse effect on net sales.
Management continues to combat the adverse effect of competitive
pressures, primarily through new product and promotional offerings designed to
add ongoing menu variety for customers. During fiscal 1999, the Company
launched its "Soho Spud" program followed by "Manhattan Melts" and "Uptown
Turkey" sandwich lines, as well as the introduction of "Italian Flat Bread."
The Company expects to introduce at least one promotional product each quarter
and to offer additional bread selections and other enhancements. Promotions
such as "Manhattan Melts" and "Italian Flat Bread" which have had the most
successful reception have been added to the permanent menu. The Company cannot
precisely measure the sales attributable to its various menu items, but
management's assessment is that the initial results of this promotion program
have been modestly favorable. 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.
Although the Company's franchise program, still in its early stage, was
adversely effected during the year by the focus of management's attention on
discussions regarding the sale of the Company, franchising continues to be
looked upon as a growth vehicle. The Company's franchising director resigned in
September 1998 and the search for a replacement was delayed while discussions
regarding the sale of the Company were taking place.
During fiscal 1999 the Company expanded its market presence through
franchising into Nashville, Tennessee and Orlando, Florida, and a unit was
opened in the Ohio State University student union. The Company continued to
expand the "Wall Street Deli" trade name to non-traditional venues such as
college campuses, stadiums and convenience stores.
Thirteen franchised stores, including the five formerly company-owned
Los Angeles stores, were opened during fiscal 1999 and a franchise agreement for
one additional unit was also signed prior to year-end. One franchised store in
Houston was closed when the lease expired. The Company also has commitments with
Host Marriott to open four airport units in Tampa (two), Memphis and Salt Lake
City. There were seventeen franchised units open as of July 3, 1999, and
revenues from franchise fees and royalties were $272,000 in fiscal 1999.
As in prior years, the Company continued 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 an immaterial effect
on sales in the current year.
16
<PAGE> 17
Cost of Sales
Cost of sales as a percent of net sales decreased in fiscal 1999 to
89.9 percent from 90.3 percent in fiscal 1998. The major components of cost of
sales are set out below:
<TABLE>
<CAPTION>
Fiscal 1999 % of Sales Fiscal 1998 % of Sales
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Food/Paper $20,568,673 35.3% $22,414,460 35.2%
Labor 13,381,761 22.9 14,496,226 22.7
Store Expenses 18,444,142 31.7 20,663,103 32.4
----------- ---- ----------- ----
$52,394,576 89.9% $57,573,789 90.3%
=========== ==== =========== ====
</TABLE>
Food costs as a percentage of net sales increased 0.2 percent. The
increase was primarily due to new product offerings and quality upgrades to the
salad bar. In the third quarter of fiscal 1998, the Company changed its single
source food vendor; this change has not resulted in any significant immediate
impact on cost, but is expected to further the objectives of improvements in
service, new product flexibility, and pricing and inventory control. The
Company continues to look at ways to lower food cost as a percent of sales
including a new pricing structure for the salad bar, either eliminating the
max-out program or by implementing a tossed salad concept currently being
tested.
Labor costs as a percent of net sales also increased by 0.2 percent.
An increase of approximately $267,000 for worker's compensation and medical
insurance reserves had the effect of increasing labor costs as a percent of
sales by 0.5 percent for the fiscal year. This was offset by the implementation
of new products that require less production time and continued efforts at cost
containment. The increase in insurance reserves was necessitated by an increase
in the Company's estimate of its aggregate liability for open claims, as actual
claims were higher than anticipated. There were no significant wage increases
during fiscal 1999.
Store expenses as a percent of net sales decreased 0.7 percent. The
decrease was primarily attributable to the closing of nine stores during the
year, and the concomitant decrease in the number of employees formerly staffing
those stores. A significant portion of fixed store expenses are comprised of
occupancy and employee costs. Occupancy costs include rent, percentage rent,
depreciation, utilities, general liability insurance and other fixed tenant
charges. These charges were lower by approximately $1,036,000 in fiscal 1999 as
compared to fiscal 1998. Employee charges include payroll taxes and fringe
benefits. The total effect of these employee costs was a decrease of
approximately $504,000.
Administrative and General Expenses
Administrative and general expenses increased approximately $290,000,
or 4.2 percent to approximately $7,194,000 for fiscal 1999 from approximately
$6,904,000 in fiscal 1998. A significant portion of the 1999 increase results
from approximately $200,000 in charges taken in
17
<PAGE> 18
the fourth quarter of 1999 for severance and related costs incurred in
connection with corporate level management changes. However, in fiscal 1998
management changes were made in certain cities with operating difficulties,
principally Denver and Dallas, the New York division office was closed,
divisional management in Houston and Dallas was consolidated and a catering
sales position was eliminated in Los Angeles, resulting in approximately
$335,000 in costs that were not incurred in fiscal 1999. In addition, the
Company incurred approximately $160,000 in expenses related to the terminated
discussions of a possible sale or other business combination involving the
Company.
Sale of Los Angeles Stores
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.
In this transaction, the Company received approximately $41,000 in
cash and an $800,000 non-interest bearing note. Under the original agreement
the note was payable in monthly installments of $12,000 from June 1999 through
November 2000, and the greater of $13,333 or eight percent of monthly revenues
thereafter until the note is repaid. In June 1999, the payment structure was
amended to specify payments of $9,000 from Jun 1, 1999 through September 30,
1999; $14,000 for October and November 1999; $12,000 for December 1999; $14,000
for January and February 2000; $16,000 in March 2000; and $12,000 each month
thereafter until November 2000. Beginning in December 2000, the payment
consists of 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 approximately $162,000 in the attached financial statements.
Franchise fees payable by CFD under the franchise agreement have been deferred
until the note has been paid in full.
Impairment of Long-Lived Assets
As discussed in the Notes to the Consolidated Financial Statements,
the Company evaluates and measures for impairment under SFAS No. 121 on an
individual store basis. During 1999, events and circumstances indicated that
certain equipment, fixtures and leasehold improvements associated with ten
under-performing stores were impaired. Accordingly, the Company recorded a
pre-tax charge in the fourth quarter of 1999 amounting to approximately $.9
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 nine percent of the total carrying amount of long-lived assets.
The reduced carrying amount of assets is expected to reduce 2000 depreciation
and amortization by approximately $263,000. Also,
18
<PAGE> 19
because the Company 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 in application 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.
Interest Expense, Net
In fiscal 1999, the Company had interest expense of approximately
$147,000 compared to interest expense of approximately $227,000 in fiscal 1998.
Interest expense is related primarily to the Company's unsecured line of credit
which bears interest at the institution's "prime rate," which was 8.0 percent at
July 3, 1999. The Company had approximately $398,000 outstanding against this
line at July 3, 1999 as compared to approximately $2,005,000 at June 27, 1998.
The interest expense for fiscal 1999 of approximately $147,000 was offset by
$24,000 of interest earned by the Company on notes receivable from prior sales
of fixtures and equipment in various stores.
Taxes on Income
The Company did not recognize an income tax benefit from losses
incurred in fiscal 1998 and reported a tax provision of $106,366 for 1999
although losses were incurred. A valuation allowance of $1,437,000 was
established in 1998 and increased by $989,000 in 1999 against the deferred tax
assets created by the impairment charges recognized in each year and from tax
benefits generated from each year's losses, contributing to the Company's
effective tax of 4.8 percent and 0.0 percent for fiscal 1999 and 1998,
respectively. Realization of deferred tax assets associated with equipment and
improvements and with net operating losses and credit carryforwards is
dependent upon generating sufficient taxable income to utilize depreciation
deductions on impaired long-lived assets and net operating loss and credit
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 taxable earnings or
alternative tax strategies.
19
<PAGE> 20
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 had been signed.
Initial franchise fees and royalty payments were not significant in 1998.
20
<PAGE> 21
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 35.2% $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
21
<PAGE> 22
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 the Notes to the Consolidated Financial Statements,
the Company 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 underperforming 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 interest expense of approximately
$227,000 compared to interest expense of approximately $129,000 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 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
22
<PAGE> 23
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.
SEASONALITY AND CYCLICALITY
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. In addition, the inherent cyclicality and seasonality of consumer
spending and dining out habits, as well as local real estate and general
economic conditions, have in the past and may in the future affect the
Company's future sales and earnings, particularly during periods of slow
economic growth or recession.
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.
23
<PAGE> 24
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 1999 fiscal year end, 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 1998 fiscal year end. This change reflects the Company's use of
approximately $1,600,000 in fiscal 1999 of available cash to reduce bank
borrowings, offset by an increase of $1,441,000 in bank overdrafts at July 3,
1999. 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 approximately $851,000, $3,283,000 and $2,993,000 for
fiscal years 1999, 1998 and 1997, respectively. Termination of officers' life
insurance policies provided $781,000 in cash during fiscal 1999. It is
presently anticipated that the Company's capital expenditures for fiscal 2000
will be approximately $900,000. In the second quarter of fiscal 1999, the
Company's Board of Directors approved the repurchase of up to 250,000 shares of
the Company's common stock. During 1999 a total of 150,000 shares were
purchased at an average acquisition cost of $3.22.
The Company has historically met its capital needs from short term
bank borrowings and internally generated funds. Cash generated from operations
totaled approximately $1,518,000, $2,168,000 and $3,426,000 for fiscal years
1999, 1998 and 1997, respectively.
During fiscal year 1999, the Company had a line of credit which
provided 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
was amended and restated effective as of February 1, 1999. The amendment
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 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 fourth quarter of fiscal 1999, the Company's net worth was $9.9
million, which was less than the $12.0 million required by the Credit
Agreement. Also, as of July 3, 1999, the Company's debt service coverage ratio
was 1.23, which was less than the 1.30 required by the Amended Credit
Agreement. The lender waived compliance on these two covenants effective until
the termination date of the current Credit Agreement, October 31, 1999. As a
condition of the waiver, the lender reduced the maximum borrowing amount from
24
<PAGE> 25
$4,000,000 to $1,750,000 and increased the interest rate to prime rate plus 2
percent effective September 20, 1999. 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 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 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 October 1999 including testing as needed. The Company's sales reporting and
inventory system was developed internally, and requires modifications.
Unexpected demands during the fiscal year on the Company's technical personnel,
related to the terminated discussions of a possible sale of the Company, delayed
the Company's schedule for completion of necessary modifications; they are now
expected to be completed in October, 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. Those components failing to meet year
2000 compliance requirements are in the process of being upgraded or replaced as
needed. The Company has spent approximately $33,000 during fiscal 1999 on
training for year 2000 compliance upgrades to the accounting and reporting
software systems. Additionally, the Company plans to spend approximately $60,000
over the first two quarters of fiscal 2000 to complete the year 2000 project.
The Company believes its year 2000 plans are sufficient, but will develop
contingency plans as needed in the future.
NEW ACCOUNTING PRONOUNCEMENTS
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 years beginning
after June 15, 2000. Historically, the Company has not entered into derivatives
contracts either to hedge existing risk
26
<PAGE> 27
or for speculative purposes. Accordingly, the Company does not expect adoption
of the new standard to materially affect its fiscal 2001 financial statements.
ITEM 8: FINANCIAL STATEMENTS
The following financial statements are contained at pages 28 through 47
of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants.........................................................28
Consolidated Financial Statements for Years ended July 3, 1999, June 27, 1998,
and June 28, 1997:
Consolidated Balance Sheets - July 3, 1999 and June 27, 1998........................................29
Consolidated Statements of Operations...............................................................31
Consolidated Statements of Stockholders' Equity.....................................................32
Consolidated Statements of Cash Flows...............................................................33
Summary of Accounting Policies.............................................................................35
Notes to Consolidated Financial Statements.................................................................39
Selected Quarterly Financial Data (unaudited) (appearing at Note 10
of the Notes to Consolidated Financial Statements)..................................................47
</TABLE>
27
<PAGE> 28
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 July 3, 1999 and June 27, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 3, 1999. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wall Street Deli,
Inc. and subsidiaries at July 3, 1999 and June 27, 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended July 3, 1999, in conformity with generally accepted accounting principles.
Memphis, Tennessee
August 26, 1999 (except as to Note 2,
which is as of September 20, 1999)
28
<PAGE> 29
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 1,305,652 $ 409,044
Accounts and notes receivable, net (Note 1) 982,975 1,319,436
Inventories 564,061 583,405
Refundable income taxes 346,140 333,411
Deferred tax assets (Note 5) 495,000 570,000
Prepaid rent 676,166 26,548
Other 202,557 216,111
------------ ------------
Total current assets 4,572,551 3,457,955
------------ ------------
Equipment and improvements (Note 4)
Equipment and fixtures 15,554,760 17,774,870
Leasehold improvements 12,793,819 14,328,565
------------ ------------
28,348,579 32,103,435
Less accumulated depreciation and amortization (19,132,868) (19,083,346)
------------ ------------
Net equipment and improvements 9,215,711 13,020,089
------------ ------------
Other
Cash surrender value of insurance ($3,174,495 face
amount at June 27, 1998) on officers' lives -- 781,362
Long-term portion of notes receivable (Note 1) 1,004,196 211,402
Deferred tax assets (Note 5) 2,381,000 2,392,000
------------ ------------
Total other assets 3,385,196 3,384,764
------------ ------------
$ 17,173,458 $ 19,862,808
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
29
<PAGE> 30
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Bank overdrafts $ 1,441,444 $ --
Notes payable (Note 2) 398,004 2,004,810
Accounts payable 1,509,329 1,582,901
Accruals:
Taxes other than income 592,053 572,800
Compensation 798,868 818,765
Rent 925,072 1,018,824
Workers' compensation 972,101 781,145
Other insurance 459,079 264,424
Miscellaneous 176,550 102,415
------------ ------------
Total current liabilities 7,272,500 7,146,084
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 3)
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 1,189,940 3,523,082
------------ ------------
12,148,049 14,481,191
Treasury stock, at cost, 518,325 and 368,325 shares (2,247,091) (1,764,467)
------------ ------------
Total stockholders' equity 9,900,958 12,716,724
------------ ------------
$ 17,173,458 $ 19,862,808
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
30
<PAGE> 31
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 58,258,464 $ 63,780,406 $ 65,453,642
------------ ------------ ------------
Cost of sales
Food and paper costs 20,568,673 22,414,460 23,020,494
Direct labor 13,381,761 14,496,226 14,917,950
Other operating expenses 18,444,142 20,663,103 20,219,542
------------ ------------ ------------
Total cost of sales 52,394,576 57,573,789 58,157,986
------------ ------------ ------------
Gross profit 5,863,888 6,206,617 7,295,656
Administrative and general (Note 9) 7,194,485 6,904,235 7,586,774
Impairment of long-lived assets (Note 4) 870,700 2,999,642 --
------------ ------------ ------------
Operating loss (2,201,297) (3,697,260) (291,118)
------------ ------------ ------------
Other income (expenses)
Gain on disposal of leasehold improvements
and equipment 32,237 14,127 204,361
Interest expense (146,750) (226,795) (129,075)
Interest income 24,282 30,218 81,986
Other income - net 64,752 37,280 222,668
------------ ------------ ------------
Total other income (expenses) (25,479) (145,170) 379,940
------------ ------------ ------------
Income (loss) before taxes on income (2,226,776) (3,842,430) 88,822
Taxes on income (Note 5) 106,366 -- 26,000
------------ ------------ ------------
Net income (loss) $ (2,333,142) $ (3,842,430) $ 62,822
============ ============ ============
Basic and diluted earnings (loss) per common share
(Note 3) $ (.79) $ (1.24) $ .02
============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
31
<PAGE> 32
WALL STREET DELI, INC.
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, 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 income 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)
Net loss for the year -- -- -- (2,333,142) -- --
Treasury stock acquired -- -- -- -- 150,000 (482,624)
---------- -------- ----------- ----------- -------- -----------
Balance, July 3, 1999 3,414,802 $170,740 $10,787,369 $ 1,189,940 518,325 $(2,247,091)
---------- -------- ----------- ----------- -------- -----------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
32
<PAGE> 33
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
------------------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $(2,333,142) $(3,842,430) $ 62,822
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for impairment of
long-lived assets 870,700 2,999,642 --
Depreciation and amortization 3,028,724 3,647,079 3,464,330
Gain on sale of property and equipment (32,237) (14,127) (369,182)
Deferred income taxes 86,000 311,000 (275,000)
Provision for loss on accounts and
notes receivable 148,750 114,022 1,950
Changes in operating assets and
liabilities:
Receivables 86,629 (582,880) 579,508
Inventories 19,344 100,875 (46,483)
Refundable income taxes (12,729) (333,411) 239,670
Prepaid expenses and other (636,064) 20,470 15,603
Accounts payable (73,572) 315,143 (450,863)
Accruals 365,350 (567,588) 203,502
----------- ----------- -----------
Cash provided by operating activities 1,517,753 2,167,795 3,425,857
----------- ----------- -----------
Investing activities
Payments for purchase of equipment and
improvements (850,807) (3,282,982) (2,992,719)
Proceeds from sale of equipment and
improvements 24,998 308,141 599,193
Collections on notes receivable 71,288 167,173 397,461
Decrease (increase) in cash surrender value
of insurance on officers' lives 781,362 (63,197) (110,824)
----------- ----------- -----------
Cash provided (used) by investing activities 26,841 (2,870,865) (2,106,889)
----------- ----------- -----------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
33
<PAGE> 34
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
------------------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing activities
Payments under line of credit $(36,359,226) $(35,346,977) $(34,429,677)
Borrowings under line of credit 34,752,420 36,346,387 32,935,077
Bank overdrafts 1,441,444 -- --
Proceeds from exercise of stock options -- 4,972 15,689
Acquisition of treasury stock (482,624) (382,326) (1,232,843)
------------ ------------ ------------
Cash provided (used) by financing activities (647,986) 622,056 (2,711,754)
------------ ------------ ------------
Net increase (decrease) in cash for the year (Note 7) 896,608 (81,014) (1,392,786)
Cash and cash equivalents, beginning of year 409,044 490,058 1,882,844
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,305,652 $ 409,044 $ 490,058
------------ ------------ ------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
34
<PAGE> 35
WALL STREET DELI, INC.
SUMMARY OF ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company owns, operates and franchises 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 CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All material intercompany accounts and
transactions are eliminated.
USE OF ESTIMATES
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.
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, as well as amounts
reserved for incurred claims under the workman's compensation policy. 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 the estimates used in the consolidated financial
statements are adequate based on the information currently available.
FISCAL YEAR
The Company operates on a 52-53 week fiscal year ending on the Saturday
closest to June 30 of each year. The fiscal year period ended July 3, 1999
includes 53 weeks and fiscal year periods June 27, 1998 and June 28, 1997
include 52 weeks each.
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.
35
<PAGE> 36
EQUIPMENT, IMPROVEMENTS, DEPRECIATION AND AMORTIZATION
Equipment and improvements are stated at cost. Depreciation of equipment
is computed using the straight-line method for financial reporting 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.
The Company has previously 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"), 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. 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.
36
<PAGE> 37
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 85% of the prevailing market rate on the offering
date. The Company makes no charge to earnings with respect to these options.
As allowed under the provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), the
Company continues 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 to provide pro forma disclosures of net income
(loss) and earnings (loss) per share as if the fair value based method of
accounting had been applied (see Note 3).
EARNINGS PER SHARE
The Company has previously adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). 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.
37
<PAGE> 38
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, consisting of
cash and cash equivalents, notes and accounts receivable, cash surrender value
of life insurance, accounts payable and notes payable approximate their
respective fair values.
NEW ACCOUNTING PRONOUNCEMENTS
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, 2000. 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 to
materially affect its fiscal 2001 financial statements.
38
<PAGE> 39
WALL STREET DELI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist of the following:
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
------------ -------------
<S> <C> <C>
Accounts receivable $ 637,496 $ 1,262,505
Notes receivable 461,242 333,530
Assets of business transferred under contractual
arrangement 791,000 0
Other receivables 758,804 420,001
----------- -----------
2,648,542 2,016,036
Less allowance for doubtful accounts (661,371) (485,198)
----------- -----------
1,987,171 1,530,838
Less non-current portion of notes receivable (1,004,196) (211,402)
----------- -----------
$ 982,975 $ 1,319,436
=========== ===========
</TABLE>
The Company's notes receivable generally arise from sales of equipment in
connection with store closings, bear interest at rates ranging from 8% to
10%, are repayable monthly in various amounts through July 2004. The notes
are collateralized by store equipment.
Activity in the allowance for possible losses is summarized as follows:
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------
July 3, June 27, June 28,
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Balance, at beginning of period $485,198 $ 169,578 $ 167,628
Charged to expense 148,750 428,927 106,892
Uncollected balances written off, net of
recoveries 27,423 (113,307) (104,942)
-------- --------- ---------
Balance, at end of period $661,371 $ 485,198 $ 169,578
======== ========= =========
</TABLE>
39
<PAGE> 40
2. NOTES PAYABLE
Notes payable consists of:
<TABLE>
<CAPTION>
July 3, 1999 June 27, 1998
------------ --------------
<S> <C> <C>
Unsecured revolving line of credit with bank,
borrowings payable on demand, bearing
interest at the prime rate plus 2% (10.25% at
September 20, 1999), maturing October 1999 $398,004 $2,004,810
-------- ----------
Notes payable $398,004 $2,004,810
-------- ----------
</TABLE>
The maximum amount of short-term borrowings outstanding during the years
ended July 3, 1999, June 27, 1998 and June 28, 1997 were $3,135,000,
$4,383,000 and $2,878,000, respectively. Such borrowings averaged
approximately $1,647,838 in 1999, $2,457,000 in 1998 and $1,824,000 in
1997, with a weighted average interest rate of 7.67%, 7.17% and 7.08%,
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.
At July 3, 1999, the Company was not in compliance with its debt service
coverage ratio covenant nor its tangible net worth ratio and accordingly,
had requested and was granted waivers and amendments to such covenants
from its lender for periods up to and including October 31, 1999.
Additionally, on February 1, 1999, the lender had lowered the available
line from $7,500,000 to $4,000,000 and changed the interest rate from a
LIBOR denominated rate to prime. On September 20, 1999, the lender again
lowered the available line from $4,000,000 to $1,750,000 and increased the
interest rate from prime to prime plus 2% (10.25% at September 20, 1999).
There can be no assurance that the Company will not require additional
waivers in the future or if required, that the lender will grant them.
Management expects, to extend the expiration date from October 31, 1999 to
October 31, 2000. However, should negotiations with the lender not proceed
as expected, management believes there are a number of viable refinancing
alternatives.
3. STOCKHOLDERS' EQUITY
The Company maintains an incentive stock option plan under which officers,
employees and directors may be granted options to purchase shares of the
Company's common stock at the
40
<PAGE> 41
grant date fair market value. Options are generally exercisable upon
issuance and expire up to five years from the date granted.
<TABLE>
<CAPTION>
Year ended
-------------------------------------------------------------------------------
July 3, June 27, June 28,
1999 1998 1997
--------------------------- ------------------------- ------------------------
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 period 304,200 5.84 338,400 7.05 238,550 8.38
Options granted 2,000 3.88 75,100 3.92 133,200 4.55
Options canceled (125,500) 6.34 (109,300) 7.89 (33,350) 6.50
Options outstanding, end of period 180,700 5.71 304,200 5.84 338,400 7.05
Option price range at end of period $3.38 to $3.38 to $4.00 to
$13.06 -- $13.06 $13.06
Options available for grant at end of
period 192,450 68,950 34,750
Weighted-average fair value of options,
granted during the period $ 1.21 $ 1.17 $ 1.58
========= ====== ========= ======= ========= ======
</TABLE>
At July 3, 1999, 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% of the fair market value of the stock
on the date of grant or 85% 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 1,350, 9,425 and
1,650 shares remained outstanding as of July 3, 1999, June 27, 1998 and
June 28, 1997, respectively. A total of 61,627 shares were reserved under
this plan as of July 3, 1999.
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 (loss)
and earnings (loss) per share would have been reduced to the pro forma
amounts presented below for the years ended:
41
<PAGE> 42
<TABLE>
<CAPTION>
July 3, June 27, June 28,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (2,333,142) $ (3,842,430) $ 62,822
Pro forma $ (2,394,512) $ (3,923,514) $ 10,163
Earnings (loss) per share of common stock:
As reported $ (.79) $ (1.24) $ 0.02
Pro forma $ (.82) $ (1.27) $ --
============= ============= =============
</TABLE>
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 1999, 1998 and 1997; expected
life of option of 5 years for all years, expected volatility of 25% for
1999, 25% for 1998 and 24.7% for 1997; risk free interest rate of 4.58%
for 1999, 5.99% for 1998 and 6.45% for 1997 and a 0% dividend yield for
all years. The weighted average fair value at date of grants is $1.21 per
option for 1999 and ranges from $1.11 to $1.37 per option for 1998 and
$1.43 to $1.77 per option for 1997.
Additional information relating to stock options outstanding and
exercisable at July 3, 1999 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Weighed Average
Outstanding -------------------
Exercise price and exercisable Life Exercise
per share shares (years) Price
- ----------------- --------------- ------- --------
<C> <C> <C> <C>
$3.38 - $ 4.00 74,000 2.4 $ 2.80
$ 5.25 78,800 1.9 5.25
$ 8.63 3,000 1.1 8.63
$11.88 - $13.06 24,900 .2 12.16
--------
$3.38 to $13.06 180,700 2.1 5.71
======== ==== ========
</TABLE>
4. IMPAIRMENT OF LONG-LIVED ASSETS
In each of fiscal 1999 and fiscal 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 quarters of 1999 and 1998
amounting to approximately $870,700 and $3,000,000, respectively, to
adjust the carrying value of these assets to their estimated fair market
value and to provide for associated
42
<PAGE> 43
disposal liabilities. While management believes that estimates used in
evaluation of impairment were reasonable, actual results could vary
significantly.
5. Taxes (Benefit) on Income
The components of taxes (benefit) on income are as follows:
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------
July 3, June 27, June 28,
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Current:
Federal $ 17,266 $(311,000) $ 252,000
State 3,100 -- 49,000
======== ========= =========
Total current 20,366 (311,000) 301,000
-------- --------- ---------
Deferred:
Federal 73,000 262,000 (246,000)
State 13,000 49,000 (29,000)
-------- --------- ---------
Total deferred 86,000 311,000 (275,000)
-------- --------- ---------
Taxes on income $106,366 $ -- $ 26,000
======== ========= =========
</TABLE>
Significant components of the Company's deferred tax assets are comprised
of the following at:
<TABLE>
<CAPTION>
July 3, June 27,
1999 1998
----------- -----------
<S> <C> <C>
Equipment and improvements $ 3,266,100 $ 3,116,800
Accrual for contingent losses 608,400 568,900
Bad debt allowance 249,100 193,000
Alternative minimum tax and other credits 370,000 308,000
Net operating loss carryforward 753,000 157,000
Other 55,400 55,300
----------- -----------
Gross deferred tax asset 5,302,000 4,399,000
Valuation allowance (2,426,000) (1,437,000)
----------- -----------
Net deferred tax asset $ 2,876,000 $ 2,962,000
=========== ===========
</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
43
<PAGE> 44
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.
Net operating loss and other credit carryforwards expire at various dates
from 2005 through 2019. Alternative minimum tax credits totaling
approximately $152,000 may be carried forward indefinitely.
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
----------------------------------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
------------------- ------------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
$ % $ % $ %
Income taxes (benefit) at statutory rate (757,000) (34.0) (1,306,000) (34.0) 30,200 34.0
Increase (decrease) in taxes resulting
from:
State income taxes, net of
federal tax benefit 11,100 .5 (154,000) (4.0) 3,600 4.1
Meals and entertainment 5,000 .2 21,200 .6 7,900 8.8
Officers' life insurance 25,000 1.1 2,800 0.0 (15,000) (16.8)
Tax credits (62,000) (2.7) -- -- -- --
Other (104,734) (4.7) (1,000) (0.0) (700) (.8)
Increase in valuation allowance 989,000 44.4 1,437,000 37.4 -- --
--------- ----- ----------- ----- -------- ------
Taxes (benefit) on income at
effective rate 106,366 4.8 -- -- 26,000 29.3
--------- ----- ----------- ----- -------- ------
</TABLE>
6. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share of common stock and common stock equivalents
have been computed using 2,937,221 shares in 1999, 3,094,762 shares in
1998 and 3,254,908 shares in 1997, 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 1999 and 1998 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.
44
<PAGE> 45
7. SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the statements of cash flows, the Company classifies cash
on hand and in savings and 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
---------------------------------------------
July 3, June 27, June 28,
1999 1998 1997
------------ ---------- -----------
<S> <C> <C> <C>
Cash paid for (received from):
Interest $ 161,458 $ 266,795 $ 136,506
Income taxes (81,366) 189,025 (19,554)
Non-cash financing and investing activities:
Notes received from sale of property and
equipment (net of reserve of $227,000) 763,000 -- 454,031
Treasury stock acquired from sale of
property, equipment and accounts
receivable -- -- 138,750
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
A. Leases
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 July 3, 1999, 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>
2000 $ 5,894,551
2001 5,601,178
2002 5,283,489
2003 4,291,493
2004 2,967,994
After 2004 3,279,789
------------
Total $ 27,318,494
============
</TABLE>
45
<PAGE> 46
Rent expense for each of the three years in the period ended July 3, 1999
is as follows:
<TABLE>
<CAPTION>
Year ended
--------------------------------------------------
July 3, June 27, June 28,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic rentals:
Noncancellable leases (net of subleases) $6,412,362 $6,167,078 $6,507,892
Cancellable equipment leases 235,893 310,846 417,269
---------- ---------- ----------
6,648,255 6,477,924 6,925,161
Contingent rentals based on sales 560,558 590,935 418,703
---------- ---------- ----------
Total rent expense $7,208,813 $7,068,859 $7,343,864
========== ========== ==========
</TABLE>
The Company and its subsidiaries remain obligated, in the event of default
by the current lessee, on 7 facilities formerly operating under long-term
leases. Future minimum lease payments remaining under these noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
Minimum remaining
Fiscal year ending lease payments
- ------------------ --------------
<S> <C>
2000 $ 481,944
2001 414,316
2002 414,316
2003 414,316
2004 405,282
After 2004 398,285
-------------
Total $ 2,528,459
=============
</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.
46
<PAGE> 47
D. Retirement Plan
Effective January 1, 1996, the Company adopted a tax-qualified employee
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
$44,000, $47,000 and $51,000 related to this plan for the years ended July
3, 1999, June 27, 1998 and June 28, 1997, respectively.
9. Corporate Relocation
The corporate offices of the Company were consolidated 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.
10. 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 July 3, 1999:
Net sales $ 15,299 $ 14,485 $ 13,805 $ 14,699
Gross profit 1,657 1,374 1,444 1,388
Income (loss) before taxes (benefit) on income 60 (193) (500) (1,594)
Net income (loss) 37 (116) (439) (1,815) (a)
Basic and diluted earnings (loss) per common share .01 (.04) (.15) (.63)
<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) (b)
Basic and diluted earnings (loss) per common share (.05) (.06) -- (1.15)
</TABLE>
(a) See Note 4 for discussion of the fourth quarter pre-tax charge of
$870,700 related to impairment of long-lived assets.
(b) See Note 4 for discussion of the fourth quarter pre-tax charge of
$2,999,642 related to impairment of long lived assets.
47
<PAGE> 48
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During the fiscal years 1999 and 1998 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 December 8, 1999, 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 December 8, 1999, 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 December 8, 1999, 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 December 8, 1999, as filed with the
Securities and Exchange Commission.
48
<PAGE> 49
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 27):
Report of Independent Certified Public Accountants
Consolidated Financial Statements for Years ended July 3, 1999,
June 27, 1998, and June 28, 1997:
Consolidated Balance Sheets - July 3, 1999 and June 27, 1998
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 10 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.
49
<PAGE> 50
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>
3.1(b) Restated Certificate of Incorporation, incorporated by reference from
the Company's Form 10-K for the year ended June 27, 1998.
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.
4.5 Amended and Restated Credit Agreement dated February 2, 1999, between
Wall Street Deli, Inc., and AmSouth Bank, incorporated by reference
from the Company's Form 10-Q for the quarter ended December 26, 1998.
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 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 Wall Street Deli, Inc.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.
</TABLE>
50
<PAGE> 51
<TABLE>
<S> <C>
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.
10.11 Wall Street Deli, Inc. Employee Stock Purchase Plan, incorporated by
reference from Exhibit 4(c) to the Company's Registration Statement on
Form S-8, Registration no. 333-69553, as filed December 23, 1998.
10.12 Wall Street Deli, Inc. 1997 Incentive Award Plan, incorporated by
reference from the Company's Proxy Statement for the Annual
Shareholders Meeting held November 6, 1997.
21 Subsidiaries of the Registrant, filed herewith. page 55
27 Financial Data Schedule, submitted to the Securities and Exchange
Commission in electronic format
</TABLE>
Reports on Form 8-K
During the quarter ended July 3, 1999, the Company filed two 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 23, 1999, reporting the
expiration of the agreement in principle with Trinity Management
Company, Inc., and the Company's additional discussions.
51
<PAGE> 52
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 30, 1999
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 30, 1999
- -------------------------------- Officer and Director
JEFFREY V. KAUFMAN
/s/ Robert G. Barrow Vice Chairman, Chief Financial September 30, 1999
- -------------------------------- Officer and Director
ROBERT G. BARROW
/s/ Alan V. Kaufman Chairman of the Board September 30, 1999
- --------------------------------
ALAN V. KAUFMAN
/s/ Aaron Beam, Jr. Director September 30, 1999
- --------------------------------
AARON BEAM, JR.
/s/ William M. Byrne Director September 30, 1999
- --------------------------------
WILLIAM M. BYRNE
/s/ Jake L. Netterville Director September 30, 1999
- --------------------------------
JAKE L. NETTERVILLE
/s/ William S. Atherton Director September 30, 1999
- --------------------------------
WILLIAM S. ATHERTON
</TABLE>
52
<PAGE> 53
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 July 3, 1999 Commission File No. 0-11271
53
<PAGE> 54
TABLE OF CONTENTS
FOR EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------- ----------- ----
<S> <C> <C>
21 Subsidiaries of the Registrant 55
27 Financial Data Schedule, submitted to the Securities and Exchange
Commission in electronic format
</TABLE>
54
<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.
55
<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 JULY 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUL-03-1999
<CASH> 1,305,652
<SECURITIES> 0
<RECEIVABLES> 2,648,542
<ALLOWANCES> 661,371
<INVENTORY> 564,061
<CURRENT-ASSETS> 4,572,551
<PP&E> 28,348,579
<DEPRECIATION> 19,132,868
<TOTAL-ASSETS> 17,173,458
<CURRENT-LIABILITIES> 7,272,500
<BONDS> 0
0
0
<COMMON> 170,740
<OTHER-SE> 9,730,218
<TOTAL-LIABILITY-AND-EQUITY> 17,173,458
<SALES> 58,258,464
<TOTAL-REVENUES> 58,258,464
<CGS> 52,394,576
<TOTAL-COSTS> 52,394,576
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 661,371
<INTEREST-EXPENSE> 146,750
<INCOME-PRETAX> (2,226,776)
<INCOME-TAX> 106,366
<INCOME-CONTINUING> (2,333,142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,333,142)
<EPS-BASIC> (.79)
<EPS-DILUTED> (.79)
</TABLE>
