<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended January 1, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from__________ to___________
Commission File No. 0-11271
-------
WALL STREET DELI, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 63-0514240
(State of Incorporation) (IRS Employer I.D. No.)
One Independence Plaza, Suite 100
Birmingham, Alabama 35209
(Address of principal executive offices)
(205) 870-0020
(Registrant's telephone number)
--------------------------------------
Indicate by check mark whether the registrant has (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at February 9, 2000
- ------------------------------ --------------------------------
Common Stock, $.05 Par Value 2,896,477
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements........................................................ 1
Consolidated Balance Sheets......................................... 2
Consolidated Statements of Operations............................... 4
Consolidated Statements of Stockholders' Equity..................... 5
Consolidated Statements of Cash Flows............................... 6
Notes to Consolidated Financial Statements.................................. 7
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 10
PART II: OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders........................ 15
ITEM 6: Exhibits and Reports on Form 8-K .......................................... 16
SIGNATURES........................................................................... 17
</TABLE>
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
The financial statements listed below are included on the following
pages of this Report on Form 10-Q:
Consolidated Balance Sheets at January 1, 2000 (unaudited)
and July 3, 1999.
Consolidated Statements of Operations (unaudited) for the
thirteen week and twenty-six week periods ended January 1,
2000 and December 26, 1998.
Consolidated Statements of Stockholders' Equity (unaudited)
for the thirteen week and twenty-six week periods ended
January 1, 2000 and December 26, 1998.
Consolidated Statements of Cash Flows (unaudited) for the
twenty-six week periods ended January 1, 2000 and December
26, 1998.
Notes to Consolidated Financial Statements (unaudited).
1
<PAGE> 4
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
(unaudited)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 1,214,942 $ 1,305,652
Accounts and notes receivable, net 1,407,380 982,975
Inventories 523,834 564,061
Refundable income taxes 349,303 346,140
Deferred tax assets 495,000 495,000
Prepaid rent 26,548 676,166
Other 323,130 202,557
--------------- ------------
Total current assets 4,340,137 4,572,551
--------------- ------------
Equipment and improvements
Equipment and fixtures 15,594,206 15,554,760
Leasehold improvements 12,796,480 12,793,819
--------------- ------------
28,390,686 28,348,579
Less accumulated depreciation and amortization (20,142,993) (19,132,868)
--------------- ------------
Net equipment and improvements 8,247,693 9,215,711
--------------- ------------
Other assets
Long-term portion of notes receivable 901,792 1,004,196
Deferred tax assets 2,381,000 2,381,000
--------------- ------------
Total other assets 3,282,792 3,385,196
--------------- ------------
$ 15,870,622 $ 17,173,458
=============== ============
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
2
<PAGE> 5
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
(unaudited)
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Bank overdrafts $ -- $ 1,441,444
Notes payable 750,208 398,004
Accounts payable 2,029,838 1,509,329
Accruals:
Taxes other than income 1,587,703 592,053
Compensation 748,189 798,868
Rent 751,203 925,072
Workers' compensation 385,547 972,101
Other insurance 330,019 459,079
Miscellaneous 38,286 176,550
------------ ------------
Total current liabilities 6,621,293 7,272,500
------------ ------------
Stockholders' equity
Common stock, $.05 par - shares authorized
20,000,000; issued 3,414,802 170,740 170,740
Additional paid-in capital 10,787,369 10,787,369
Retained earnings 538,611 1,189,940
------------ ------------
11,496,720 12,148,049
Treasury stock, at cost, 518,325 shares (2,247,091) (2,247,091)
------------ ------------
Total stockholders' equity 9,249,629 9,900,958
------------ ------------
$ 15,870,622 $ 17,173,458
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
3
<PAGE> 6
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the thirteen week For the twenty-six week
periods ended periods ended
----------------------------- -----------------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
- ---------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Net sales $ 12,187,934 $ 14,437,286 $ 25,026,341 $ 29,690,699
Franchise revenues 115,529 47,774 167,901 94,044
------------ ------------ ------------ ------------
Total revenues 12,303,463 14,485,060 25,194,242 29,784,743
------------ ------------ ------------ ------------
Costs of restaurant operations
Food and paper costs 4,429,344 5,297,351 8,958,020 10,858,044
Labor 3,339,157 3,339,140 6,317,569 6,745,328
Store expenses 3,377,688 3,885,777 6,906,147 7,782,809
Restaurant depreciation 620,299 757,368 1,251,339 1,536,967
Franchise expenses 38,361 78,308 77,968 168,968
------------ ------------ ------------ ------------
Total cost of restaurant operations 11,804,849 13,357,944 23,511,043 27,092,116
------------ ------------ ------------ ------------
Restaurant operating income 498,614 1,127,116 1,683,199 2,692,627
------------ ------------ ------------ ------------
Administrative expenses
Division level 237,351 292,960 671,149 752,590
Catering sales 179,026 193,014 334,326 376,334
Corporate 507,362 807,894 1,263,032 1,670,867
------------ ------------ ------------ ------------
Total general and administrative 923,729 1,293,868 2,268,507 2,799,791
------------ ------------ ------------ ------------
Other income (expense)
Interest (expense) (19,620) (26,143) (35,709) (63,977)
Gain (loss) from sale of assets (5,356) (86) (30,312) 37,822
------------ ------------ ------------ ------------
Total other income (expense) (24,976) (26,229) (66,021) (26,155)
------------ ------------ ------------ ------------
Income (loss) before taxes (450,101) (192,981) (651,329) (133,319)
Tax benefit 0 77,353 0 54,159
------------ ------------ ------------ ------------
Net (loss) $ (450,101) $ (115,628) $ (651,329) $ (79,160)
============ ============ ============ ============
Basic and diluted (loss) per share $ (0.15) $ (0.04) $ (0.22) $ (0.03)
============ ============ ============ ============
Weighted average number of common
shares outstanding 2,896,477 2,941,488 2,896,477 2,978,830
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
4
<PAGE> 7
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------ -----------------------
Number Additional Number
of Paid-in Retained of
Shares Amount Capital Earnings Shares Amount
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 27, 1998 3,414,802 170,740 10,787,369 3,523,082 368,325 (1,764,467)
Net income for the quarter -- -- -- 36,736 -- --
Treasury stock acquired -- -- -- -- 80,000 (253,124)
--------- -------- ----------- ----------- ------- -----------
Balance, September 26,
1998 (unaudited) 3,414,802 $170,740 $10,787,369 $ 3,559,818 448,325 $ 2,017,591
Net loss for the quarter (115,628)
Treasury stock acquired 70,000 229,500
--------- -------- ----------- ----------- ------- -----------
Balance, December 26,
1998 3,414,802 170,740 10,787,369 3,444,190 518,325 2,247,091
========= ======= =========== =========== ======= ===========
Balance, July 3, 1999 3,414,802 $170,740 $10,787,369 $ 1,189,940 518,325 $(2,247,091)
Net loss for the quarter -- -- -- (201,228) -- --
--------- -------- ----------- ----------- ------- -----------
Balance, October 2, 1999 3,414,802 $170,740 $10,787,369 $ 988,712 518,325 $(2,247,091)
Net loss for the quarter -- -- -- (450,101) -- --
--------- -------- ----------- ----------- ------- -----------
Balance, January 1, 2000 3,414,802 $170,740 $10,787,369 $ 538,611 518,325 $(2,247,091)
========= ======== =========== =========== ======= ===========
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE> 8
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the twenty-six week periods ended
-------------------------------------
January 1, December 26,
2000 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (651,329) $ (79,160)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,302,315 1,536,967
Loss (gain) on sale of property and equipment 30,312 (37,822)
Deferred income taxes 0 (54,159)
Changes in operating assets and liabilities:
Receivables - net (424,405) 82,246
Inventories 40,227 (14,309)
Prepaid expenses and other 271,789 (320,748)
Accounts payable and bank overdraft (920,935) 161,088
Accruals (82,776) (568,118)
----------- -----------
Cash provided by operating activities (434,802) 705,985
----------- -----------
INVESTING ACTIVITIES:
Payments for purchase of equipment and improvements (42,107) (119,111)
Proceeds from sale of equipment and improvements 1,591 19,199
Net collections on notes receivable 102,404 25,526
Decrease (increase) in cash surrender value
of insurance on officers' lives (70,000) 465,624
----------- -----------
Cash provided (used) by investing activities (8,112) 391,238
----------- -----------
FINANCING ACTIVITIES
Net borrowings (payments) under line of credit 352,204 (696,773)
Proceeds from exercise of stock options -- --
Acquisition of treasury stock -- (482,624)
----------- -----------
Cash provided (used) by financing activities 352,204 (1,179,397)
----------- -----------
NET INCREASE (DECREASE) IN CASH FOR
THE PERIOD (90,710) (82,174)
Cash and cash equivalents, beginning of period 1,305,652 409,044
----------- -----------
Cash and cash equivalents, end of period $ 1,214,942 $ 326,870
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 63,977 $ 35,708
Income taxes $ -- $ 192,000
</TABLE>
See accompanying notes to consolidated financial statements (unaudited)
6
<PAGE> 9
WALL STREET DELI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of January 1, 2000, and the results
of operations, changes in stockholders' equity and cash flows for the
thirteen week periods and twenty-six week periods ended January 1,
2000 and December 26, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Estimates also affect the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. The results of operations for the twenty-six week periods ended
January 1, 2000 and December 26, 1998 are not necessarily indicative
of the results to be expected for the full year. Certain amounts
during the first two quarters of fiscal 1999 have been reclassified to
conform to the current year presentation.
3. Accounts and notes receivable consists of:
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
--------------- ------------
<S> <C> <C>
Accounts and royalties receivable $ 757,531 $ 637,496
Notes receivable 421,828 461,242
Assets of business transferred under contractual
arrangement 728,000 791,000
Other receivables 828,804 758,804
----------- -----------
2,736,163 2,648,542
Less allowance for doubtful accounts (427,001) (661,371)
----------- -----------
2,309,162 1,987,171
Less non-current portion of notes receivable (901,782) (1,004,196)
----------- -----------
$ 1,407,380 $ 982,975
=========== ===========
</TABLE>
7
<PAGE> 10
4. Inventories are valued at the lower of cost (first-in, first-out) or
market.
5. Earnings per share ("EPS") have been computed in accordance with the
provisions of SFAS 128. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted
average number of shares outstanding during the respective periods.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock are exercised or
converted into common stock or result in the issuance of common stock
that then shares in the earnings of the Company.
The effect of shares issuable under the Company's stock option plan
are excluded for the thirteen week periods and twenty-six week periods
ended January 1, 2000 and December 26, 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 the
thirteen week period and twenty-six week period ended January 1, 2000
because the significant majority of common options outstanding were at
prices which exceed the common stock market price.
Earnings per share has been calculated using the following:
<TABLE>
<CAPTION>
For the Thirteen
Week Periods Ended
--------------------------
January 1, December 26,
2000 1998
---------- ------------
<S> <C> <C>
Weighted average number of common
shares used for basic EPS 2,896,477 2,941,488
Effect of dilutive stock options -- --
Weighted average number of common shares and
dilutive potential common stock used in
diluted EPS
--------- ---------
2,896,477 2,941,488
========= =========
</TABLE>
<TABLE>
<CAPTION>
For the Twenty-Six
Week Periods Ended
--------------------------
January 1, December 26,
2000 1998
---------- ------------
<S> <C> <C>
Weighted average number of common
shares used for basic EPS 2,896,477 2,978,830
Effect of dilutive stock options -- --
Weighted average number of common shares and
dilutive potential common stock used in
diluted EPS
--------- ---------
2,896,477 2,978,830
========= =========
</TABLE>
8
<PAGE> 11
6 Effective December 31, 1998, the Company transferred leasehold
improvements and equipment and subleased five stores in the Los
Angeles, California area to California Fresh Deli, Inc. ("CFD"). CFD
entered into a franchise agreement with the Company to operate the
five stores and a management agreement to manage for the Company a
sixth store also in the Los Angeles area for the remainder of the
current lease term.
The Company received approximately $40,500 in cash and a $800,000
non-interest bearing note, payable in monthly installments at $12,000
from June 1999 through November 2000, and at the greater of $13,333 or
eight percent of monthly revenues thereafter until the note is repaid.
The realization of the note is dependent on future operations of the
five stores and has been reported as "Assets of business transferred
under contractual arrangement" net of a valuation allowance of
$162,000. Franchise fees payable by CFD under the franchise agreement
have been deferred until the note has been paid in full.
7. The effective tax rate for the thirteen weeks and twenty-six weeks
ended January 1, 2000 was -0- percent.
8. At July 3, 1999, the Company was not in compliance with the debt
service coverage ratio covenant and the tangible net worth ratio under
its existing short-term bank line of credit (the "Credit Agreement")
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%. At September 20, 1999 the interest rate was 10.25%. 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.
Effective as of January 31, 2000, the expiration date of the Credit
Agreement was extended to February 29, 2000. Management expects that
the expiration date will be extended from February 29, 2000 to October
31, 2000. However, if negotiations with the lender should not proceed
as expected, management believes there are a number of viable
refinancing alternatives, though there can be no assurance that any
such alternatives would be on terms as favorable as the present
arrangements.
9. 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
9
<PAGE> 12
(ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 amends the
guidance in SFAS No. 52, "Foreign Currency Translation," to permit
special accounting for a hedge of a foreign currency forecasted
transaction with a derivative. It also supersedes SFAS No. 80,
"Accounting for Futures Contracts," SFAS No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentrations of Credit Risk," and
SFAS No. 119, "Disclosure about Derivative Financial Instruments." In
addition, it amends SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," to include in SFAS No. 107 the disclosure
provisions about concentrations of credit risk from SFAS No. 105.
SFAS 133 is effective for financial statements for periods beginning
after June 15, 1999. Historically, the Company has not entered into
derivatives contracts either to hedge existing risk or for speculative
purposes. Accordingly, the Company does not expect adoption of the new
standard on July 2, 2000 to materially affect its financial
statements.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial condition and
earnings during the periods included in the accompanying consolidated balance
sheets and statements of operations.
Forward Looking Statements. The statements in this Form 10-Q that are
not historical fact are forward looking statements. Such statements appear in a
number of places in this report and include statements regarding the intent,
belief or expectations of the Company and its management with respect to, among
other things, the Company's operating performance, anticipated growth
strategies, trends in the food service industry and other trends that may
affect the Company's financial condition or results of operations. Such
statements are subject to numerous risks and uncertainties which could cause
actual results to differ materially from those anticipated or projected,
including, among others, recent changes in management, the availability of
financing, 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.
10
<PAGE> 13
Readers are cautioned not to place undue reliance on these forward
looking statements which speak only as of the date hereof and reflect only
management's belief and expectations based upon presently available
information.
Readers are also urged to carefully review and consider the various
disclosures made by the Company which attempt to advise interested parties of
the factors which affect the Company's business, including the disclosures made
in other periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages of revenues represented by certain items in the Company's
consolidated statements of operations.
<TABLE>
<CAPTION>
Thirteen week period ended Twenty-Six week period ended
-----------------------------------------------------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 99.0% 99.6% 99.3% 99.6%
Franchise revenues 1.0 0.4 0.7 0.4
-------- -------- -------- --------
Total revenues 100.0 100.0 100.0 100.0
Cost of restaurant operations 96.0 92.2 93.4 90.9
-------- -------- -------- --------
Restaurant operating income 4.0 7.8 6.6 9.1
General and administrative 7.4 8.9 8.9 9.4
-------- -------- -------- --------
Operating income (loss) (3.4) (1.1) (2.3) (0.3)
Other income (expense) (0.2) (0.2) (0.2) (0.1)
-------- -------- -------- --------
Income (loss) before (3.6) (1.3) (2.5) (0.4)
taxes
-------- -------- -------- --------
Taxes -- 0.6 -- 0.2
-------- -------- -------- --------
Net income (loss) (3.6)% (0.7)% 2.5% (0.2)%
======== ======== ======== ========
</TABLE>
NET SALES
Net sales for company-owned restaurants for the thirteen weeks ended
January 1, 2000 declined 15.5% to $12,187,934 from $14,437,286 recorded during
the comparable prior year period. Comparable sales per restaurant declined by
9.4% due to increased competition and lower catering sales. In addition, the
number of company-owned restaurants declined from 111 at the end of the second
quarter of fiscal 1999 to 99 at the end of the second quarter of fiscal 2000. A
number of the company-owned restaurants that were open in the first quarter of
fiscal 1999 were sold to franchisees during the past 12 months. See "Franchise
Operations" later in this report for additional details concerning franchised
operations.
11
<PAGE> 14
Net sales for company-owned restaurants for the twenty-six weeks ended
January 1, 2000 declined by 15.7% to $25,026,341 from $29,690,699 recorded
during the comparable prior year period. The decline reflects the same reasons
as noted above.
COST OF RESTAURANT OPERATIONS
The components of cost of restaurant operations for the thirteen week
periods ended January 1, 2000 and December 26, 1998, respectively, as a percent
of net sales are shown in the following table:
<TABLE>
<CAPTION>
For the thirteen week periods ended
-----------------------------------------------------------------
January 1, 2000 December 26, 1998
------------------------------- ------------------------------
Description Amount % of Net Sales Amount % of Net Sales
- --------------------------- ------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Food and Paper $ 4,429,344 36.3% $ 5,297,351 36.6%
Labor 3,339,157 27.3 3,339,140 23.1
Store Expenses 3,377,688 27.7 3,885,777 26.9
Restaurant Depreciation 620,299 5.2 757,368 5.3
----------- ------ ----------- ------
$11,766,488 96.5% $13,279,636 91.9%
----------- ------ ----------- ------
</TABLE>
Cost of restaurant operations declined 11.3% to $11,766,488 from
$13,279,636 incurred during the comparable prior year quarter. Cost of food and
paper as a percent of net sales declined from 36.6% to 36.3% due to improved
buying practices. Labor as a percent of net sales increased as a percent of net
sales to 27.3% from 23.1% during the prior year quarter primarily due to
increased staffing to enhance customer service at the restaurants. Store
expenses, which include mostly fixed expenses such as rent, taxes and
insurance, declined by 13.0% but increased as a percent of sales to 27.7%
compared to 26.9% during the comparable period. Depreciation and amortization
declined 18.0% to $620,299 from $757,368 primarily due to impairment
adjustments recorded in fiscal 1999 and twelve fewer company-owned restaurants
that were in operation at the end of the second quarter of fiscal 2000 compared
to the same time in fiscal 1999. All of these factors resulted in an increase
in the cost of restaurant operations as a percent of net sales to 96.5% for the
second quarter of fiscal 2000 compared to 91.9% for the comparable prior year
period.
The components of cost of restaurant operations for the twenty-six week
periods ended January 1, 2000 and December 26, 1998, respectively, as a percent
of net sales are shown in the following table.
<TABLE>
<CAPTION>
For the twenty-six week periods ended
-----------------------------------------------------------------
January 1, 2000 December 26, 1998
------------------------------- ------------------------------
Description Amount % of Net Sales Amount % of Net Sales
- --------------------------- ------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Food and Paper $ 8,958,020 35.7% $ 10,858,044 36.5%
Labor 6,317,569 25.2 6,745,328 22.7
Store Expenses 6,906,147 27.5 7,782,809 26.2
Restaurant Depreciation 1,251,339 5.2 1,536,967 5.2
------------ -------- ------------ --------
$ 23,433,075 93.6% $ 26,923,148 90.6%
------------ -------- ------------ --------
</TABLE>
12
<PAGE> 15
The cost trends were consistent overall between the first two quarters
of the year with the exception of increased labor to enhance service levels.
See "General and Administrative" for discussion of management changes and new
personnel.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist of overhead expenses
associated with each of the Company's operating divisions, expenses associated
with catering operations and corporate administration. Each of these expense
categories declined compared to the prior year due to fewer restaurants, lower
sales and certain cost savings actions. Total general and administrative
expenses declined 28.6% and 18.9% for the second quarter and first half,
respectively, compared to the comparable prior year period. Management expects
general and administrative expenses to continue to be below the prior year but
at a lesser rate in future quarters due to the filling of several key officer
positions during the second quarter of fiscal 2000. During the second quarter
Howard Cannon and Thomas J. Sandeman joined the Company as
Vice-President-Operations and Chief Financial Officer, respectively. These
industry veterans have initiated change in both restaurant operations, financial
controls and asset management in addition to bringing in three new regional
vice-presidents and a new controller to assist in achieving increased sales and
a return to profitability.
FRANCHISE OPERATIONS
A brief summary of franchise operations for the first quarter and
first half of fiscal 2000 compared to the comparable prior year period follows:
<TABLE>
<CAPTION>
For the thirteen weeks ended
----------------------------
January 1, December 26,
Description 2000 1998
------------------------------------ ---------- ------------
<S> <C> <C>
Royalty income $ 65,529 $ 47,774
Initial franchise fees 50,000 --
--------- ---------
Total franchise revenues 115,529 47,774
Franchise expenses 38,361 78,308
--------- ---------
Franchise income (loss) $ 77,168 $ (30,534)
========= =========
</TABLE>
<TABLE>
<CAPTION>
For the twenty-six weeks ended
------------------------------
January 1, December 26,
Description 2000 1998
------------------------------------ ---------- ------------
<S> <C> <C>
Royalty income $ 117,901 $ 84,044
Initial franchise fees 50,000 10,000
--------- ---------
Total franchise revenues 167,901 94,044
Franchise expenses 77,968 168,968
--------- ---------
Franchise income $ 89,933 $ (74,924)
========= =========
</TABLE>
13
<PAGE> 16
At the end of the second quarter of fiscal 2000 there were 19
franchised restaurants in operation compared to seven at the end of the second
quarter of fiscal 1999. As a result, royalty income increased 37.1% to $65,529,
compared to $47,754 recorded in the comparable prior year quarter. During the
current quarter, two franchised restaurants opened and one development
agreement defaulted, resulting in $50,000 of fees, compared to one opening and
$10,000 of fees in the prior year quarter. Franchise expenses were higher in
the prior year primarily due to a higher level of franchise administration
costs. Management expects franchise expenses to increase due to additional
store openings and the addition of a yet to be hired director of franchising
and real estate.
The increased level of fees and royalties in conjunction with lower
expenses resulted in a profit for both the first quarter and first half versus
losses in the comparable prior year periods.
TAXES ON INCOME
The effective tax rate for both the thirteen weeks and twenty-six
weeks ended January 1, 2000 was -0- percent, and 40.0 percent for the
comparable prior year periods.
INTEREST INCOME (EXPENSE), NET
Interest expense was $19,620 compared to $26,143 incurred during the
comparable prior year quarter primarily due to significantly lower average
daily balances on the line of credit. At the end of the second quarter of
fiscal 2000 there was a $750,208 balance on the line compared to $398,004, at
the end of fiscal 1999 and $1,308,087 at the end of the first quarter of fiscal
1999. See Note 8 of the Notes to Consolidated Financial Statements for
additional details.
IMPACT OF INFLATION
In most cases, management has been able to pass on the impact of wage
and food inflation through modest price increases, but there is no assurance
that it will be able to do so in the future.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has generated most of its cash from
operations, and to a lesser extent from bank borrowings on the Company's
short-term line of credit. Cash flow from operations, equity financings and
bank borrowings have historically funded expansion. The Company currently has
no long-term debt. In the future the Company anticipates that it may rely on
long-term debt or lease financing to fund the purchase of point-of-sale
management information systems, remodeling or Company expansion.
At the end of the second quarter liquidity improved. The current ratio
was .66 to 1.00, compared to .63 to 1.00 at the end of fiscal 1999 and .57 to
1.00 at the end of the second quarter of fiscal 1999.
14
<PAGE> 17
The Company's principal capital requirements are for the remodeling of
Company stores and to a lesser degree new restaurants. Capital expenditures for
these purposes during the fist half of fiscal 2000 were $42,107 compared to
$119,111 expended during the comparable half of the prior year. The Company has
one company-owned restaurant under construction which the Company anticipates
opening at the end of the third quarter.
The Company has historically met its capital need from short-term bank
borrowings and internally generated funds. Cash generated from operations for
the first half of fiscal 2000 was a negative $451,016 compared to a positive
$705,985 recorded for the comparable period in the prior year. The primary use
of funds for the first quarter was the reduction in bank overdrafts from year
end of $1,441,444 offset by an increase in accounts payable of $520,509. In
addition, the Company paid prior year accrued workers compensation claims of
approximately $600,000 during the first quarter. The balance on the line of
credit ($750,208) was seasonally up versus the previous quarter, but
substantially down from the balance at the end of the second quarter of fiscal
1999 of $1,308,037. See Note 8 to the Consolidated Financial Statements in this
report for additional details about the line of credit.
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's regular Annual Meeting of Shareholders was
held on December 8, 1999. Proxies for the Annual Meeting were
solicited pursuant to Regulation 14 under the Act.
(b) There was no solicitation in opposition to management's
nominees for directors as listed in the proxy statement, and
all of such nominees were elected.
(c) At the Annual Meeting the matters considered and voted upon
and the number of votes cast are as follows:
(i) Election of directors:
<TABLE>
<CAPTION>
Votes Votes
Name For Withheld*
-----------------------------------------------------------
<S> <C> <C>
Alan V. Kaufman 2,729,370 21,555
Robert G. Barrow 2,729,320 21,605
Jeffrey V. Kaufman 2,729,645 21,880
</TABLE>
15
<PAGE> 18
<TABLE>
<S> <C> <C>
William S. Atherton 2,729,370 21,555
Aaron Beam, Jr. 2,728,870 22,055
William M. Byrne 2,729,370 21,555
Jake L. Netterville 2,729,370 21,555
</TABLE>
(ii) Amendment of the Incentive Award Plan:
<TABLE>
<S> <C>
Votes For Votes Against*
1,330,410 140,993
</TABLE>
(iii) Ratification of independent auditors:
<TABLE>
<S> <C>
Votes For Votes Against*
2,680,524 61,765
</TABLE>
* Includes votes withheld and broker non-votes
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule, submitted to the
Securities and Exchange Commission in
electronic format
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter
ended January 1, 2000.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
DATE: WALL STREET DELI, INC.
February 14, 2000 /s/ Jeffrey V. Kaufman
--------------------------------------
JEFFREY V. KAUFMAN
President and Chief Executive Officer
February 14, 2000 /s/ Thomas J. Sandeman
--------------------------------------
THOMAS J. SANDEMAN
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-03-1999
<PERIOD-START> JUL-04-1999
<PERIOD-END> JAN-01-2000
<CASH> 1,214,942
<SECURITIES> 0
<RECEIVABLES> 1,834,381
<ALLOWANCES> 427,001
<INVENTORY> 523,834
<CURRENT-ASSETS> 4,340,137
<PP&E> 28,390,686
<DEPRECIATION> 20,142,993
<TOTAL-ASSETS> 15,870,622
<CURRENT-LIABILITIES> 6,621,293
<BONDS> 0
0
0
<COMMON> 170,740
<OTHER-SE> 9,078,889
<TOTAL-LIABILITY-AND-EQUITY> 15,870,622
<SALES> 25,026,341
<TOTAL-REVENUES> 25,194,242
<CGS> 8,958,020
<TOTAL-COSTS> 23,511,043
<OTHER-EXPENSES> 2,298,819
<LOSS-PROVISION> (127,146)
<INTEREST-EXPENSE> 35,709
<INCOME-PRETAX> (651,329)
<INCOME-TAX> 0
<INCOME-CONTINUING> (651,329)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (651,329)
<EPS-BASIC> (.22)
<EPS-DILUTED> (.22)
</TABLE>
