<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES ACT OF 1934
For the fiscal year ended July 1, 2000 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. [ ]
The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $1,437,526 on September 25,
2000 based on the NASDAQ closing price on that date.
As of September 26, 2000 there were 2,908,477shares of the registrant's Common
Stock, $.05 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No Page
------- ----
<S> <C> <C>
PART I
1. Business.................................................................................. 3
2. Properties................................................................................ 6
3. Legal Proceedings......................................................................... 8
4. Submission of Matters to a Vote of Security Holders....................................... 8
4.1 Executive Officers........................................................................ 9
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters....................................................................... 10
6. Selected Financial Data................................................................... 11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 12
7A. Quantative and Qualitative Disclosures about Market Risk.................................. 22
8. Financial Statements...................................................................... 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................................... 44
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........................... 46
Index to Schedules and Exhibits.................................................... 47
Signatures......................................................................... 49
</TABLE>
* Portions of the Proxy Statement for the Registrant's 2000
Annual Meeting of Shareholders are incorporated by reference
in Part III of this Form 10-K.
2
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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. 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 fourteen cities: Atlanta,
Birmingham, Chicago, Cincinnati, Cleveland, Dallas, Denver, Houston,
Indianapolis, Los Angeles, Louisville, Philadelphia, St. Louis, and Washington,
D.C. Most of the Company's 97 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 19 franchised locations. (See Item
2 for specific locations for company operated and franchised restaurants.)
OVERVIEW OF FISCAL 2000
Wall Street Deli reported a loss of $1,881,662 or $.65 per share
compared to a loss of $2,333,142 or $.79 per share in fiscal 1999.
Revenues declined from $58.3 million to $50.1 million primarily due to
a decline in same store sales of 8.1% and a decrease in the number of
company-operated restaurants from 104 at the end of 1999 to 97 at the end of
fiscal 2000. Comparable sales per restaurant dropped 8.1% for the year and is
attributable to increased competition and also reflects the negative impact of
economic conditions during the fourth quarter.
During the year, the Company opened one company-operated restaurant and
closed eight. Four franchised restaurants opened and two closed. Management
presently anticipates that one company-owned and one franchise owned restaurant
will close during the first quarter of fiscal 2001.
Operating profits from franchising were approximately $79,000 in fiscal
2000 compared to a loss of approximately $25,000 in fiscal 1999 and a loss of
$168,000 in fiscal 1998. Management has a specific program to franchise a number
of geographically disparate company-owned markets to experienced restauranteurs
during fiscal 2001. We believe this will help build the overall strength of the
Wall Street Deli system and allow Company operations to focus on markets closer
to our home base. This strategy has shown exceptional promise in our California
market with the reported sales growing double-digit for the past twelve months.
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In addition, our Board of Directors has approved the capital allocation
to install a point-of-sale computer system ("POS") equipment in each of our
company-operated restaurants, subject to financing. The installation of POS
equipment will be the most significant capital investment project in the history
of the Company and is the cornerstone of our strategy to bring Wall Street Deli
into the 21st Century.
RESTAURANT OPERATIONS
The Wall Street Deli typical store consists of a made to order deli
sandwich station, a soup express line and a 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 further develop the Express concept for future growth.
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 options include 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 deemed necessary.
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, due
to the absence of night and weekend store hours.
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 in large
cities that have high pedestrian traffic and dense office populations in prime
downtown sites. 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.
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,
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including local market demographics, site visibility and accessibility and
proximity to significant generators of potential customers within 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 and more specialty concepts enter the market, 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 many national chains and national branded concepts that have
established brand recognition through marketing and have the financial resources
to increase market share through advertising and new locations, as well as many
new and growing competitors. The competition for employees is also a growing
problem. With the ever-increasing number of new concepts and restaurants,
attracting and retaining qualified store 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
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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.
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 and the Company's trade name "STREET WRAPS" and its
design were registered in 1999.
EMPLOYEES
As of July 1, 2000, the Company employed approximately 929 persons, including
159 managerial, 25 administrative, and 745 store employees. None of the
Company's employees are represented by labor unions. The Company considers its
relationship with its employees to be good.
INFORMATION AS TO CLASSES OF SIMILAR PRODUCTS OR SERVICES
The Company operates in only one industry segment. All significant
revenues and earnings relate to retail sales of food to the general public
through company-owned and company-operated stores. The Company 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.
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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 1, 2000:
<TABLE>
<CAPTION>
Number of
City Restaurants
-------------------- -----------
<S> <C>
Atlanta, Georgia 5
Birmingham, Alabama 9
Chicago, Illinois 15
Cincinnati, Ohio 4
Cleveland, Ohio 3
Dallas, Texas 11
Denver, Colorado 7
Houston, Texas 11
Indianapolis, Indiana 1
Louisville, Kentucky 1
Philadelphia, Pennsylvania 5
St. Louis, Missouri 2
Washington, D.C. 23
-----------
TOTALS 97
===========
</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 nontraditional sites 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 1, 2000, were located in the following
cities:
<TABLE>
<CAPTION>
Number of
City Restaurants
--------------------- -----------
<S> <C>
Atlanta, Georgia 1
Auburn, Alabama 1
</TABLE>
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<TABLE>
<CAPTION>
Number of
City Restaurants
-------------------------------- -----------
<S> <C>
Birmingham, Alabama 4
Columbus (Ohio State Univ.) 1
Denton (North Texas State Univ.) 1
Lake Jackson, Texas 1
Los Angeles, California 5
Nashville, Tennessee 1
Odenton, Maryland 1
Salt Lake City, Utah 1
Tampa, Florida 2
-----------
TOTALS 19
===========
</TABLE>
Mr. Alan Kaufman, Chairman of the Board, Mr. Robert Barrow, Vice
Chairman of the Board, and Mr. Jeffrey Kaufman, President and Chief Executive
Officer are general partners in Rex Associates, which leased to the Company its
former administrative offices in Memphis, Tennessee. 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. Pursuant to the relocation of the Company's administrative offices from
Memphis to Birmingham and the subsequent consolidation with the Company's
executive headquarters, the lease agreement terminated effective September 30,
1997. During the Company's 1998 fiscal year, rent paid to Rex Associates was
$18,500.
Management believes these transactions to have been on terms no less
favorable than could have been obtained from unaffiliated third parties.
ITEM 3: LEGAL PROCEEDINGS
The Company is party to several pending legal proceedings, all of which
are deemed by the management of the Company to be ordinary routine litigation
incidental to the business, and none of which is believed likely to have a
material adverse effect on the Company, its financial position or operations.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year covered by this
report, no matter has been submitted to a vote of security holders, through the
solicitation of proxies or otherwise.
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ITEM 4.1: EXECUTIVE OFFICERS
The executive officers of the Company are as follows:
<TABLE>
<S> <C>
Alan V. Kaufman Chairman of the Board
Robert G. Barrow Vice Chairman of the Board
Jeffrey V. Kaufman President and Chief Executive Officer
Howard J. Cannon Chief Operating Officer
Thomas J. Sandeman Chief Financial Officer and Secretary
Paul M. Hazlinger Vice President - Business Development
</TABLE>
Alan V. Kaufman, age 62, is one of the two co-founders, and 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 resigned as president and chief executive officer, and has continued as
its chairman since that time. Mr. Kaufman is the father of Jeffrey V. Kaufman.
Robert G. Barrow, age 63, is one of the two co-founders, and served as
president and chief executive officer from 1995 until February 1997, when he
became vice chairman of the board. He also served as chief financial officer of
the Company from 1981 to 1999. Mr. Barrow was executive vice president from 1981
to 1995, and has been a director of the Company since 1967.
Jeffrey V. Kaufman, age 38, 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.
Howard J. Cannon, age 36, joined the Company in October 1999 as its
vice president of operations, and was named chief operating officer in May 2000.
Mr. Cannon served as a regional vice president with Compass Group PLC from May
of 1999 to October 1999 and previously as regional vice president of RTM
Restaurant Group from February 1994 to April of 1999.
Thomas J. Sandeman, age 52, joined the Company as its chief financial
officer in October 1999. Mr. Sandeman served as vice president, finance and
accounting, of Entergy Integrated Solutions, Inc., a subsidiary of Entergy
Corporation, from 1996 until the company was sold in September 1998. He then led
several special project teams for the successor company, Efficient Solutions,
Inc., until July 1999. In June 1999, Efficient Solutions, Inc. filed for
reorganization under Chapter 11 of the Bankruptcy Code while Mr. Sandeman was
fulfilling the terms of his employment contract. From
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1983 to 1996, Mr. Sandeman served as chief financial officer of Cucos, Inc., a
publicly held Mexican food restaurant company. Mr. Sandeman is a certified
public accountant.
Paul Hazlinger, age 51, joined the Company as vice president, business
development in June of 2000. Previously Mr. Hazlinger served as president and
chief executive officer from May 1993 to June 2000 of Southern Convenience,
Inc., an international development company.
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 Smallcap System under the symbol WSDI. The Company's
stock began trading on the Nasdaq Smallcap System March 1, 2000, after trading
on the Nasdaq National Market System since 1982. 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 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
<CAPTION>
FISCAL 2000 High Low
-------- ---------
<S> <C> <C>
Quarter Ended October 2, 1999 $ 3 3/16 $ 1 19/32
Quarter Ended January 1, 2000 2 1/4 1
Quarter Ended April 1, 2000 3 1 1/32
Quarter Ended July 1, 2000 1 3/4 1
</TABLE>
On September 26, 2000, 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. Under the
Company's line of credit agreement, dividends are prohibited.
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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 1, 2000
and as of July 1, 2000, July 3, 1999, June 27, 1998, June 28, 1997 and June 29,
1996. 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. 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.
<TABLE>
<CAPTION>
2000 1999(1) 1998(2) 1997(3) 1996(4)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 50,090,297 $ 58,257,249 $ 63,780,405 $ 65,453,642 $ 69,399,058
Net income (loss) $ (1,881,662) $ (2,333,142) $ (3,842,430) $ 62,822 $ (2,457,706)
Basic and diluted earnings
(loss) per common share $ (.65) $ (.79) $ (1.24) $ .02 $ (.72)
Weighted average shares
outstanding 2,904,103 2,937,221 3,094,762 3,254,908 3,407,874
Total assets $ 13,945,030 $ 17,173,458 $ 19,862,808 $ 23,065,627 $ 25,668,894
Stockholders' equity $ 8,037,850 $ 9,900,958 $ 12,716,724 $ 16,936,508 $ 18,229,590
Company-owned stores in
operation at year-end
(unaudited) 97 104 112 116 124
</TABLE>
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 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."
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."
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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, financing arrangements, 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, the availability and terms of financing, the
ability of the Company to dispose of less profitable units, 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.
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 total revenues represented by certain items in the Company's
consolidated statements of operation.
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<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------
JULY 1, JULY 3, JUNE 27,
2000 1999 1998
------- ------- --------
<S> <C> <C> <C>
Net sales 99.4% 99.5% 99.8%
Franchise revenues .6 .5 .2
------ ------ ------
Total revenues 100.0 100.0 100.0
Cost of restaurant operations 93.5 90.4 91.7
------ ------ ------
Restaurant operating income 6.5 9.6 8.3
General and administrative 9.8 11.8 9.3
Impairment of long-lived assets .1 1.4 4.7
------ ------ ------
Operating income (loss) (3.4) (3.6) (5.7)
Other income (expense) (.4) (.2) (.3)
------ ------ ------
Income (loss) before taxes (3.8) (3.8) (6.0)
------ ------ ------
Taxes (benefit) -- .2 --
------ ------ ------
Net income (loss) (3.8)% (4.0)% (6.0)%
====== ====== ======
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales
Net sales declined 14.1% from approximately $57,986,000 in fiscal 1999
to $49,797,000 in fiscal 2000 primarily due to a 8.1% decrease in comparable
sales per restaurant and seven fewer restaurants. This decrease is due primarily
to increasing national competition and significant expansion into the Company's
current markets by direct competitors such as Atlanta Bread, Panera and
Schlotzsky's and indirect competitors such as Starbucks. During the year the
Company opened one restaurant in Houston and closed eight restaurants in a
number of different markets.
Cost of Restaurant Operations
Food and paper as a percent of net sales declined by 1.6% from 36.2% to
34.6% due to improved purchasing methods, improved controls at the restaurant
level and a small sales price increase. These savings in food were reinvested in
labor to rebuild service levels in the restaurants. As a result, labor as a
percent of net sales increased to 25.5% in fiscal 2000 from 22.7% in fiscal 1999
due to an increase in labor hours to improve customer service. Store expenses
increased as a percent of sales to 28.7% from 26.4% previously, due to the
semi-fixed nature of the components of this expense category, which include
rent, utilities, and property taxes. These expense categories do not decrease
proportionately with a decline in comparable sales per restaurant. The decline
in restaurant depreciation is due to seven fewer stores being in operation
during the year ended July 1, 2000 and an approximate $871,000 impairment charge
in fiscal 1999.
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Cost of restaurant operations (excluding franchise group expenses) as a
percent of net sales increased in fiscal 2000 to 93.6 percent from 90.3 percent
in fiscal 1999. The major components of cost of restaurant operations are set
out below:
<TABLE>
<CAPTION>
% of Net % of Net
Fiscal 2000 Sales Fiscal 1999 Sales
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Food and paper $17,226,262 34.6% $20,978,419 36.2%
Labor 12,689,561 25.5 13,143,141 22.7
Store expenses 14,303,127 28.7 15,293,650 26.4
Restaurant Depreciation 2,401,390 4.8 2,927,677 5.0
----------- ---- ----------- ----
Total $46,620,340 93.6% $52,342,887 90.3%
=========== ==== =========== ====
</TABLE>
General and Administrative Expenses
General and administrative expenses consist of three categories:
Division level, catering and corporate. Division level administrative expenses
were virtually flat between the fiscal 2000 and 1999 years while catering
administration declined due to the consolidation of catering operations and the
continued installation of our new order entry system which will enhance controls
at the store level. Catering administration declined by approximately $157,000
(21.2%) to approximately $581,000 in fiscal 2000 compared to approximately
$738,000 in fiscal 1999.
Corporate expenses declined approximately $1,841,000 from $4,585,000 to
$2,744,000 due to a number of factors. Corporate administration expenses were
offset by nonrecurring income primarily from adjustments in insurance reserves
of about $900,000 compared to $267,000 of expenses in fiscal 1999 for additional
workers compensation and medical reserves associated with the Company's
self-insurance program. Most of these adjustments were due to lower workers
compensation claims and the closing of two of the past five years of exposure
due to settlements. In addition, during 1999 the Company incurred $160,000 of
expenses associated with terminated discussions of a possible sale of the
Company in 1999 as well as $200,000 of severance related costs. The balance of
the reduction relates to lower expense levels due to reduced levels of staffing
and associated expenses at the corporate level during the first and second
quarter of fiscal 2000.
Franchise Operations
Franchise revenues increased from approximately $271,000 in fiscal 1999
to approximately $293,000 in fiscal 2000. An increase in royalties of 18.0% from
approximately $189,000 to approximately $223,000 offset a decline in initial
franchise fees from fewer openings in fiscal 2000. During fiscal 2000 four
franchised restaurants opened compared to thirteen openings in fiscal 1999.
During fiscal 2000 two franchised restaurants closed.
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Franchise expenses declined from approximately $296,000 during fiscal
1999 to approximately $214,000 during fiscal 2000 primarily due to a reduction
in franchise administration personnel. As a result, Wall Street Deli reported
its first profitable year for franchising in fiscal 2000. Profits were
approximately $79,000 in fiscal 2000 compared to a loss of approximately $25,000
in fiscal 1999 and a loss of approximately $168,000 in fiscal 1998.
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Royalty income $ 223,195 $ 188,742 $ 124,138
Initial franchise fees 70,000 82,500 13,000
---------- ---------- ----------
Total franchise revenues 293,195 271,242 137,138
Franchise expenses 214,482 296,397 305,538
---------- ---------- ----------
Franchise operating income (loss) $ 78,713 $ (25,155) $ (168,400)
========== ========== ==========
</TABLE>
Impairment of Long-Lived Assets
Impairment charges on long-lived assets were approximately $77,400 and
$871,000 in fiscal 2000 and 1999, respectively.
Interest Expense, Net
In fiscal 2000, the Company had interest expense of approximately
$101,000 compared to interest expense of approximately $140,000 in fiscal 1999.
Interest expense is related primarily to the Company's unsecured line of credit
which bears interest at the lender's prime rate plus 2.0%, which was 11.5
percent at July 1, 2000. The Company had approximately $1,427,000 outstanding
against this line at July 1, 2000 as compared to approximately $398,000 at July
3, 1999. The average borrowings in fiscal 2000 were approximately $953,000
compared to approximately $1,648,000 in the prior year and the weighted average
interest rate increased from 7.76% to 10.57% in 2000. See Note 2 (Notes Payable)
of the Notes to the Consolidated Financial Statements for details.
Taxes on Income
The Company reported a tax provision of approximately $106,000 for 1999
although losses were incurred, and did not recognize an income tax benefit from
losses incurred in fiscal 2000. The valuation allowance was increased by
$660,000 in 2000 and $989,000 in 1999 and is against deferred tax assets created
by the impairment charges recognized in each year and from tax benefits
generated from each year's operating losses. 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,
15
<PAGE> 16
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.
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales
Net sales decreased in fiscal 1999 by approximately $5,660,000, or 8.9
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 revenue 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.
As in prior years, the Company continued 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 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 continued 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.
16
<PAGE> 17
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. There were seventeen franchised units
open as of July 3, 1999, and revenues from franchise fees and royalties were
$272,000 in fiscal 1999 compared to $137,000 in fiscal 1998.
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.
Cost of Restaurant Operations
Cost of restaurant operations (excluding franchise) as a percent of net
sales decreased in fiscal 1999 to 90.3 percent from 91.4 percent in fiscal 1998.
The major components of cost of restaurant operations are set out below:
<TABLE>
<CAPTION>
% of Net % of Net
Fiscal 1999 Sales Fiscal 1998 Sales
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Food and paper $20,978,419 36.2% $23,006,823 36.1%
Labor 13,143,141 22.7 14,555,719 22.9
Store expenses 15,293,650 26.4 17,086,788 26.9
Restaurant Depreciation 2,927,677 5.0 3,520,400 5.5
----------- ---- ----------- ----
Total $52,342,887 90.3% $58,169,730 91.4%
=========== ==== =========== ====
</TABLE>
Food costs as a percentage of net sales increased 0.1 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.
17
<PAGE> 18
Labor costs as a percent of net sales also decreased by 0.2 percent due
to the implementation of new products that require less production time and
continued efforts at cost containment.
Store expenses as a percent of net sales decreased 0.5 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,
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.
General and Administrative Expenses
Administrative and general expenses increased $931,000, or 15.7 percent
to approximately $6,866,000 for fiscal 1999 from $5,935,000 in fiscal 1998. A
significant portion of the 1999 increase results from approximately $200,000 in
charges taken in the fourth quarter of 1999 for severance and related costs
incurred in connection with corporate level management changes. 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 and $267,000 for additional workers compensation and medical reserves
associated with the Company's self insurance program.
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 June 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.
18
<PAGE> 19
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.
Also, 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
$140,000 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.
Taxes on Income
The Company did not recognize an income tax benefit from losses
incurred in fiscal 1998 and reported a tax provision of approximately $106,000
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
19
<PAGE> 20
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.
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. Construction
costs have also increased to developers who lease space to the Company.
Developers have in turn increased and may continue to increase rents for Company
stores. In addition, most of the leases for Company stores contain rent
escalation clauses based upon cost increases incurred by lessors. In most cases,
the Company has been able to increase prices sufficiently to match increases in
its operating costs, but there is no assurance that it will be able to do so in
the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to obtain the cash required for the conduct of
its business depends upon cash from operations and, to a lesser extent, bank
borrowings. Historically, cash flow from operations and periodic bank borrowings
generally have been sufficient to finance the expansion of the Company's
business. The Company does not maintain significant receivables or inventory and
it receives discounts in bulk purchasing of 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 2000 fiscal year end, the ratio of the Company's current assets to
current liabilities was .53 to 1.00, as compared to a current ratio of .63 to
1.00 at 1999 fiscal year end. The Company has no long term debt. During fiscal
2000 approximately $846,000 of cash was paid on outstanding reserves for
severance, workers compensation insurance and reserves for self-insurance for
health benefits from previous years. While these balances were accrued in
previous years, the Company's cash requirement was funded by the Company's line
of credit. There were also approximately $676,000 in prepayments of rent not
made prior to the year-end in fiscal 2000 that were made in prior year. In
addition, $200,000 of the current portion of the deferred tax asset was reduced.
20
<PAGE> 21
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 $766,000, $851,000 and $3,283,000 for fiscal
years 2000, 1999 and 1998, respectively. It is presently anticipated that the
Company's maintenance level capital expenditures for fiscal 2001 will be
approximately $375,000.
The Company has historically met its capital needs from short term
bank borrowings and internally generated funds. Cash used by operations was
approximately $506,000 in fiscal 2000 compared to cash provided by operations of
approximately $1,518,000 and $2,168,000 for fiscal years 1999 and 1998,
respectively. See previous discussion on payments in reserves for self-insurance
and severance accrued at the end of fiscal 1999.
During fiscal year 2000, the Company had a line of credit which
provided for borrowings up to $1,750,000 from AmSouth Bank of Alabama pursuant
to the terms of a Credit Agreement originally dated June 19, 1996. The Credit
Agreement had been amended and restated effective as of February 2, 1999. The
amendment reduced the then maximum amount of 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 debt service coverage ratio. As of the end of the fourth
quarter of fiscal 2000, the Company's net worth was approximately $8,020,000,
which was less than the $8,500,000 required by the Credit Agreement. Also, as of
July 1, 2000, the Company's debt service coverage ratio was 1.05, which was less
than the 2.0 required by the Amended Credit Agreement. The lender waived
compliance with these two covenants effective until the termination date of the
current Credit Agreement, which is October 31, 2000. The maximum borrowing
amount is currently $1,750,000, at an interest rate of prime plus 2 percent. The
Company expects its future capital needs will be met primarily by internally
generated funds and supplemented as needed by additional bank borrowings.
Despite the fact that the Company experienced negative operating cash
flows for fiscal 2000, management has prepared certain projections that result
in positive cash flows for fiscal 2001. It is the opinion of management that
this goal can be reached by a combination of several methods. One way to
accomplish this is to aggressively market the franchising program and franchise
a number of Company-owned stores. The Company has created and filled the
position of Vice President of Business Development, whose role is franchise
sales and real estate disposal. Currently, management is negotiating the sale of
certain under-performing restaurants, as well as several disparate company
operated markets as potential franchises.
In addition, new products are being introduced into a limited number
test markets and additional employees are being recruited to increase customer
service and satisfaction. The Company is also increasing its efforts with
co-branding and has a financing commitment to add co-brands in seven locations
during fiscal 2001.
21
<PAGE> 22
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, as amended by SFAS 137, is effective for financial statements
for fiscal years 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 on July 2, 2000 to materially affect its financial statements.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25." The Company was required
to adopt the Interpretation on July 1, 2000. The Interpretation requires that
stock options that have been modified to reduce the exercise price be accounted
for as variable. The Company has cancelled certain stock options and reissued
them at a lower price on December 15, 1999 and in accordance with generally
accepted accounting principles accounted for the repriced stock options as
fixed. As a result of adopting the Interpretation on July 1, 2000 the Company
was required to apply variable accounting to these options at year-end and for
each period going forward until they are exercised, forfeited or expire
unexercised.
ITEM 7A: QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company's primary market risk is related to fluctuations in
interest rates. The Company's outstanding debt at July 1, 2000 consists of a
short-term line of credit with AmSouth Bank. Interest on the outstanding balance
is charged based on a variable rate of two percent above the lender's prime
rate. Therefore, the interest rate charged to the Company is subject to market
risk in the form of fluctuations in interest rates. The effect of a hypothetical
one percentage point increase would result in a decrease of approximately
$17,000 in pre-tax net income (or an increase of approximately $17,000 in net
loss) for the year, assuming no further changes in the amount of borrowings
subject to variable rate interest from amounts at July 1, 2000. The Company does
not trade in derivative financial instruments.
22
<PAGE> 23
ITEM 8: FINANCIAL STATEMENTS
The following financial statements are contained at pages 24 through
43 of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants.........................................24
Consolidated Financial Statements for Years ended July 1, 2000, July 3, 1999
and June 27, 1998:
Consolidated Balance Sheets - July 1, 2000 and July 3, 1999.......................25
Consolidated Statements of Operations.............................................27
Consolidated Statements of Stockholders' Equity...................................28
Consolidated Statements of Cash Flows.............................................29
Summary of Accounting Policies.............................................................31
Notes to Consolidated Financial Statements.................................................35
Selected Quarterly Financial Data (unaudited) (appearing at Note 9
of the Notes to Consolidated Financial Statements)................................44
</TABLE>
23
<PAGE> 24
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 1, 2000 and July 3, 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended July 1, 2000. 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 1, 2000 and July 3, 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended July 1, 2000, in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
Memphis, Tennessee
August 16, 2000
24
<PAGE> 25
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999
------------------------------------------------ ------------ ------------
<S> <C> <C>
Assets
Current
Cash and cash equivalents $ 761,380 $ 1,305,652
Accounts and notes receivable, net (Note 1) 1,341,829 1,079,028
Inventories 549,009 564,061
Refundable income taxes -- 346,140
Deferred tax assets (Note 5) 296,000 495,000
Prepaid rent 53,580 676,166
Other 153,328 106,504
------------ ------------
Total current assets 3,155,126 4,572,551
------------ ------------
Equipment and improvements (Note 4)
Equipment and fixtures 15,774,120 15,554,760
Leasehold improvements 12,462,075 12,793,819
------------ ------------
28,236,195 28,348,579
Less accumulated depreciation and amortization (20,918,060) (19,132,868)
------------ ------------
Net equipment and improvements 7,318,135 9,215,711
------------ ------------
Other
Long-term portion of notes receivable (Note 1) 891,769 1,004,196
Deferred tax assets (Note 5) 2,580,000 2,381,000
------------ ------------
Total other assets 3,471,769 3,385,196
------------ ------------
$ 13,945,030 $ 17,173,458
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
25
<PAGE> 26
WALL STREET DELI, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999
------------------------------------------------------------------------ ------------ ------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Bank overdrafts $ 1,075,620 $ 1,441,444
Notes payable (Note 2) 1,427,392 398,004
Accounts payable 1,405,267 1,509,329
Accruals:
Taxes other than income 672,405 592,053
Compensation 463,639 798,868
Rent 487,019 925,072
Workers' compensation 29,962 972,101
Other insurance 225,000 459,079
Miscellaneous 120,876 176,550
------------ ------------
Total current liabilities 5,907,180 7,272,500
------------ ------------
Commitments and contingencies (Note 8)
Stockholders' equity (Note 3)
Common stock, $.05 par - shares authorized 20,000,000;
issued 3,426,802 and 3,414,802 171,341 170,740
Additional paid-in capital 10,805,322 10,787,369
Retained earnings (deficit) (691,722) 1,189,940
------------ ------------
10,284,941 12,148,049
Treasury stock, at cost, 518,325 shares (2,247,091) (2,247,091)
------------ ------------
Total stockholders' equity 8,037,850 9,900,958
------------ ------------
$ 13,945,030 $ 17,173,458
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
26
<PAGE> 27
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
-------------------------------------------------
July 1, 2000 July 3, 1999 June 27, 1998
-------------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Revenues
Net sales $ 49,797,102 $ 57,986,007 $ 63,643,267
Franchise revenues 293,195 271,242 137,138
------------ ------------ ------------
Total revenues 50,090,297 58,257,249 63,780,405
------------ ------------ ------------
Costs of restaurant operations
Food and paper costs 17,226,262 20,978,419 23,006,823
Labor 12,689,561 13,143,141 14,555,719
Store expenses 14,303,127 15,293,650 17,086,788
Restaurant depreciation 2,401,390 2,927,677 3,520,400
Franchise expenses 214,482 296,397 305,538
------------ ------------ ------------
Total costs of restaurant operations 46,834,822 52,639,284 58,475,268
------------ ------------ ------------
Restaurant operating income 3,255,475 5,617,965 5,305,137
Administrative expenses
Division level 1,565,401 1,544,457 2,338,570
Catering sales 580,769 737,701 748,760
Corporate 2,743,651 4,584,265 2,847,927
------------ ------------ ------------
Total general and administrative 4,889,821 6,866,423 5,935,257
------------ ------------ ------------
Impairment of long-lived assets (Note 4) 77,378 870,700 2,999,642
------------ ------------ ------------
Operating loss (1,711,724) (2,119,158) (3,629,762)
Other income (expense)
Interest (expense) (100,733) (139,855) (226,795)
Gain (loss) from sale of assets (69,205) 32,237 14,127
------------ ------------ ------------
Total other income (expense) (169,938) (107,618) (212,668)
------------ ------------ ------------
Income (loss) before taxes on income (1,881,662) (2,226,776) (3,842,430)
Taxes on income (Note 5) -- 106,366 --
------------ ------------ ------------
Net income (loss) $ (1,881,662) $ (2,333,142) $ (3,842,430)
============ ============ ============
Basic and fully diluted income (loss) per common share
(Note 3) $ (.65) $ (.79) $ (1.24)
============ ============ ============
Weighted average number of common shares 2,904,103 2,937,221 3,094,762
outstanding (Note 6) ------------ ------------ ------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
27
<PAGE> 28
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------------------- --------------------------
Additional Retained
Number paid-in earnings Number
of shares Amount capital (deficit) of shares Amount
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 28, 1997 3,413,777 $ 170,689 $ 10,782,448 $ 7,365,512 263,825 $ (1,382,141)
Net loss for the 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)
Net loss for the year -- -- -- (1,881,662) -- --
Exercise of stock options 8,750 438 9,362 -- -- --
Shares issued under Stock
Purchase Plan 3,250 163 8,591 -- -- --
------------------------------------------------------------------------------------
Balance, July 1, 2000 3,426,802 $ 171,341 $ 10,805,322 $ (691,722) 518,325 $ (2,247,091)
====================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
28
<PAGE> 29
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
----------------------------------------------
July 1, 2000 July 3, 1999 June 27, 1998
-------------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Operating activities
Net loss $(1,881,662) $(2,333,142) $(3,842,430)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Provision for impairment of
long-lived assets 77,378 870,700 2,999,642
Depreciation and amortization 2,516,875 3,028,724 3,647,079
(Gain) loss on sale of equipment and
improvements 69,205 (32,237) (14,127)
Deferred income taxes -- 86,000 311,000
Net change in provision for losses on
accounts and notes receivable (100,022) 148,750 114,022
Changes in operating assets and
liabilities:
Receivables (96,259) 86,629 (582,880)
Inventories 15,052 19,344 100,875
Refundable income taxes 346,140 (12,729) (333,411)
Prepaid expenses and other 575,762 (636,064) 20,470
Accounts payable (104,062) (73,572) 315,143
Accruals (1,924,822) 365,350 (567,588)
----------- ----------- -----------
Cash provided (used) by operating activities (506,415) 1,517,753 2,167,795
----------- ----------- -----------
Investing activities
Payments for purchase of equipment and
improvements (765,882) (850,807) (3,282,982)
Proceeds from sale of equipment and
improvements -- 24,998 308,141
Collections on notes receivable 45,907 71,288 167,173
Decrease (increase) in officer loans for split-dollar
life insurance policies -- 781,362 (63,197)
----------- ----------- -----------
Cash provided (used) by investing activities (719,975) 26,841 (2,870,865)
----------- ----------- -----------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
29
<PAGE> 30
WALL STREET DELI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
---------------------------------------------
July 1, 2000 July 3, 1999 June 27, 1998
----------------------------------------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Financing activities
Increase (decrease) under line of credit $ 1,029,388 $(1,606,806) $ 999,410
Bank overdrafts (365,824) 1,441,444 --
Proceeds from exercise of stock options and stock
purchase plan 18,554 -- 4,972
Acquisition of treasury stock -- (482,624) (382,326)
----------- ----------- ---------
Cash provided (used) by financing activities 682,118 (647,986) 622,056
----------- ----------- ---------
Net increase (decrease) in cash for the year (Note 7) (544,272) 896,608 (81,014)
Cash and cash equivalents, beginning of year 1,305,652 409,044 490,058
----------- ----------- ---------
Cash and cash equivalents, end of year $ 761,380 $ 1,305,652 $ 409,044
----------- ----------- ---------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
30
<PAGE> 31
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 ending July 1,
2000 and June 27, 1998 include 52 weeks each and the fiscal year period ended
July 3, 1999 includes 53 weeks.
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.
31
<PAGE> 32
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.
32
<PAGE> 33
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.
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 also
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments,
consisting of cash and cash equivalents, notes and accounts receivable, officer
loans for split-dollar life insurance policies, accounts payable and notes
payable approximate their respective fair values.
33
<PAGE> 34
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, as amended by FAS 137, is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25." The Company was
required to adopt the Interpretation on July 1, 2000. The Interpretation
requires that stock options that have been modified to reduce the exercise
price be accounted for as variable. The Company has cancelled certain stock
options and reissued them at a lower price on December 15, 1999 and in
accordance with generally accepted accounting principles accounted for the
repriced stock options as fixed. As a result of adopting the Interpretation on
July 1, 2000 the Company was required to apply variable accounting to these
options at year-end and for each period going forward until they are exercised,
forfeited or expire unexercised.
CLASSIFICATIONS
Certain items in the 1999 and 1998 financial statements have been
reclassified to conform to the current year presentation.
34
<PAGE> 35
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 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
Accounts receivable $ 559,097 $ 715,318
Notes receivable 498,566 479,473
Assets of business transferred under
contractual arrangement 656,000 791,000
Officer's loans for split-dollar life
insurance policies 828,804 758,804
----------- -----------
2,542,467 2,744,595
Less allowance for doubtful accounts (308,869) (661,371)
----------- -----------
2,233,598 2,083,224
Less non-current portion of notes receivable (891,769) (1,004,196)
----------- -----------
$ 1,341,829 $ 1,079,028
=========== ===========
</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 1, July 3, June 27,
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Balance, at beginning of period $ 661,371 $485,198 $ 169,578
Net amounts charged to (against) bad
debt expense (59,496) 148,750 428,927
Write-offs, recoveries and other changes (net) (293,006) 27,423 (113,307)
--------- -------- ---------
Balance, at end of period $ 308,869 $661,371 $ 485,198
========= ======== =========
</TABLE>
35
<PAGE> 36
2. NOTES PAYABLE
Notes payable consists of:
<TABLE>
<CAPTION>
July 1, 2000 July 3, 1999
------------- -------------
<S> <C> <C>
Unsecured revolving line of credit with bank,
borrowings payable on demand, bearing
interest at the prime rate plus 2% (11.5% at
July 1, 2000), maturing October 2000 $ 1,427,392 $ 398,004
------------- -------------
Notes payable $ 1,427,392 $ 398,004
============= =============
</TABLE>
The maximum amount of short-term borrowings outstanding during the
years ended July 1, 2000, July 3, 1999 and June 27, 1998 were
$1,650,000, $3,135,000 and $4,383,000, respectively. Such borrowings
averaged approximately $952,868 in 2000, $1,647,838 in 1999 and
$2,457,000 in 1998, with a weighted average interest rate of 10.57%,
7.67% and 7.17%, 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 1, 2000, 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, 2000. Additionally, on February 2, 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% (11.50% at
July 1, 2000). 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 with its lender the expiration date from
October 31, 2000 to October 31, 2001. However, should negotiations with
the lender not proceed as expected, management believes there are a
number of viable refinancing alternatives.
Despite the fact that the Company experienced negative operating cash
flows for fiscal 2000, management has prepared certain projections that
result in positive cash flows for fiscal 2001. It is the opinion of
management that this goal can be reached by a combination of several
methods. One way to accomplish this is to aggressively market the
franchising program and
36
<PAGE> 37
franchise a number of Company-owned stores. The Company has created and
filled the position of Vice President of Business Development, whose
role is franchise sales and real estate disposal. Currently, management
is negotiating the sale of certain under-performing restaurants, as
well as several disparate company operated markets as potential
franchises.
In addition, new products are being introduced into a limited number
test markets and additional employees are being recruited to increase
customer service and satisfaction. The Company is also increasing its
efforts with co-branding and has a financing commitment to add
co-brands in seven locations during fiscal 2001.
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 grant date fair market
value. Options granted before December 15, 1999 are generally
exercisable upon issuance and expire up to five years from the date
granted. Options granted after December 15, 1999 vest over four years.
<TABLE>
<CAPTION>
Year ended
-----------------------------------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
----------------------- -------------------- ---------------------
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 180,700 5.71 304,200 5.84 338,400 7.05
Options granted 611,250 1.21 2,000 3.88 75,100 3.92
Options cancelled or exercised (240,550) 4.48 (125,500) 6.34 (109,300) 7.89
---------------------- --------------------- ---------------------
Options outstanding, end of period 551,400 1.27 180,700 5.71 304,200 5.84
Option price range at end of period ($1.12 to $ 8.63) ($3.38 to $13.06) ($3.38 to $13.06)
Options available for grant at end of
period 273,600 192,450 68,950
Weighted-average fair value of options,
granted during the period $ .54 $ 1.21 $ 1.17
---------------------- --------------------- ---------------------
</TABLE>
On December 15, 1999 the Company's Board of Directors approved a plan
to offer certain stock option holders the option of accepting half of
the number of newly priced stock options for their currently vested
"out of the money" stock options. The newly issued stock options were
issued at the fair market value at the date of issuance. As of July 1,
2000, under the provisions of Interpretation No. 44, any options that
are considered cancelled and reissued are accounted for as variable
options from that date forward. Therefore, the option value will be
37
<PAGE> 38
re-measured on a quarterly basis using the July 1, 2000 fair market
value as the basis for determining any increase in the intrinsic value
of the options.
At July 1, 2000, 825,000 shares were reserved for issuance under the
plans. During the year options for 8,750 shares were exercised.
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 2,500, 1,350 and 9,425 shares remained outstanding as of July
1, 2000, July 3, 1999 and June 27, 1998, respectively. A total of
55,877 shares were reserved under this plan as of July 1, 2000.
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 for fixed awards. 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 loss and loss per share would have been reduced
to the pro forma amounts presented below for the years ended:
<TABLE>
<CAPTION>
July 1, July 3, June 27,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (1,881,662) $ (2,333,142) $ (3,842,430)
Pro forma $ (1,951,738) $ (2,394,512) $ (3,923,514)
Earnings (loss) per share of common stock:
As reported $ (.65) $ (.79) $ (1.24)
Pro forma $ (.67) $ (.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 2000, 1999 and 1998;
expected life of option of 5 years for all years, expected volatility
of 40% for 2000, 25% for 1999 and 25% for 1998; risk free interest rate
of 6.57% for 2000, 4.58% for 1999 and 5.99% for 1998 and a 0% dividend
yield for all years. The weighted average fair value at date of grants
is $.54 per option for 2000, $1.21 per option for 1999 and ranged from
$1.11 to $1.37 per option for 1998.
38
<PAGE> 39
Additional information relating to stock options outstanding at July 1,
2000 summarized by exercise price are as follows:
<TABLE>
<CAPTION>
Weighed Average
------------------------
Exercise price Outstanding Life Exercise
per share shares (years) Price
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1.12 - $2.99 539,400 4.4 $ 1.19
$3.00 - $4.00 8,000 3.8 3.55
$5.25 2,000 1.1 5.25
$8.63 2,000 .1 8.63
----------------------------------------------------------------------
$1.12 - $8.63 551,400 $ 1.27
======================================================================
</TABLE>
Exercisable shares were 75,400 and 180,700 at July 1, 2000 and July 3,
1999, respectively.
Stock Purchase Rights
On February 16, 2000, the Company's Board of Directors approved a
Stockholder Rights Plan, which took effect immediately. A dividend of
one Right per common share was distributed to stockholders March 1,
2000. Each Right expiring February 16, 2010, represents a right to buy
from the Company 1/100th of a share (a "unit") of Common Stock, $0.05
par value, at a price of $1.50 per unit. This dividend distribution of
the Rights was not taxable to Company or its stockholders.
These Rights are generally exercisable under certain conditions in
which a person or group acquires or announces an offer to acquire 15%
or more of the Company's common shares. In addition, the Company has
the right in specified time periods to redeem such rights under certain
conditions.
4. IMPAIRMENT OF LONG-LIVED ASSETS
In each of fiscal 2000, 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 amounting to
$77,400, $870,700 and $2,999,642 in 2000, 1999 and 1998, respectively,
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.
39
<PAGE> 40
5. TAXES (BENEFIT) ON INCOME
The components of taxes (benefit) on income are as follows:
<TABLE>
<CAPTION>
Year ended
------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Current:
Federal $ -- $ 17,266 $(311,000)
State -- 3,100 --
--------- -------- ---------
Total current -- 20,366 (311,000)
========= ======== =========
Deferred:
Federal -- 73,000 262,000
State -- 13,000 49,000
--------- -------- ---------
Total deferred -- 86,000 311,000
========= ======== =========
Taxes on income $ -- $106,366 $ --
--------- -------- ---------
</TABLE>
Significant components of the Company's deferred tax assets are
comprised of the following at:
<TABLE>
<CAPTION>
July 1, July 3,
2000 1999
----------- -----------
<S> <C> <C>
Equipment and improvements $ 3,307,500 $ 3,266,100
Accrual for contingent losses 257,600 608,400
Bad debt allowance 115,500 249,100
Alternative minimum tax and other credits 370,000 370,000
Net operating loss carryforwards 1,842,000 753,000
Other 69,400 55,400
----------- -----------
Gross deferred tax asset 5,962,000 5,302,000
Valuation allowance (3,086,000) (2,426,000)
----------- -----------
Net deferred tax asset $ 2,876,000 $ 2,876,000
=========== ===========
</TABLE>
Realization of deferred tax assets associated with equipment and
improvements and with net operating loss and credit carryforwards is
dependent upon generating sufficient taxable income to utilize
depreciation deductions on impaired long-lived assets (Note 4) and net
operating loss and credits carryforwards prior to their expirations.
Management believes that there is risk that certain of these deferred
tax assets may not be realized and, accordingly has established a
valuation allowance against them. Although realization is not assured
for the remaining
40
<PAGE> 41
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 2020. 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 1, 2000 July 3, 1999 June 27, 1998
------------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
$ % $ % $ %
Income taxes (benefit) at
statutory rate (640,000) (34.0) (757,000) (34.0) (1,306,000) (34.0)
Increase (decrease) in taxes
resulting from:
State income taxes, net
of federal tax benefit -- -- 11,100 .5 (154,000) (4.0)
Meals and entertainment 5,500 .3 5,000 .2 21,200 .6
Officers' life insurance 25,000 1.3 25,000 1.1 2,800 0.0
Tax credits -- -- (62,000) (2.7) -- --
Other (50,500) (2.7) (104,734) (4.7) (1,000) (0.0)
Increase in valuation
allowance 660,000 35.1 989,000 44.4 1,437,000 37.4
------------------- ------------------- ----------------------
Taxes (benefit) on income at
effective rate -- -- 106,366 4.8 -- --
------------------- ------------------- ----------------------
</TABLE>
6. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share of common stock and common stock equivalents
have been computed using 2,904,103 shares in 2000, 2,937,221 shares in
1999 and 3,094,762 shares in 1998, 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 2000, 1999 and 1998 as the effect would be anti-dilutive.
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.
41
<PAGE> 42
Supplemental cash flow information:
<TABLE>
<CAPTION>
Year ended
----------------------------------------
July 1, July 3, June 27,
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Cash paid for (received from):
Interest $ 77,937 $ 161,458 $266,795
Income taxes (202,929) (81,366) 189,025
Non-cash financing and investing activities:
Notes received from sale of property and
equipment (net of reserve of $227,000) -- 763,000 --
</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 1, 2000, 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>
2001 $ 6,045,058
2002 5,715,369
2003 4,723,373
2004 3,385,395
2005 1,818,828
After 2005 2,058,868
--------------------------------------------------
Total $ 23,746,891
==================================================
</TABLE>
Rent expense for each of the three years in the period ended July 1,
2000 is as follows:
<TABLE>
<CAPTION>
Year ended
------------------------------------------
July 1, July 3, June 27,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Basic rentals:
Noncancellable leases (net of subleases) $5,868,168 $6,412,362 $6,167,078
Cancellable equipment leases 159,501 235,893 310,846
---------- ---------- ----------
6,027,669 6,648,255 6,477,924
Contingent rentals based on sales 529,120 560,558 590,935
---------- ---------- ----------
Total rent expense $6,556,789 $7,208,813 $7,068,859
========== ========== ==========
</TABLE>
42
<PAGE> 43
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>
2001 $ 380,778
2002 382,790
2003 384,964
2004 385,978
2005 324,279
After 2005 321,699
--------------------------------------------------
Total $ 2,180,488
==================================================
</TABLE>
B. Workers Compensation and Medical Claims
The Company is self-insured for workers compensation claims up to
$250,000 for each loss event and $750,000 in the aggregate. Provisions
for expected future payments are accrued based on the Company's
estimate of its aggregate liability for all open claims. Two previous
years out of the past five years claims have been either paid or
cancelled. This, in conjunction with significantly lower claims during
the last two years, resulted in a cumulative favorable adjustment of
$662,348 that was recorded against operating costs during the 2000
fiscal year.
C. Litigation
The Company is involved in various legal matters in the ordinary course
of its business. None of these matters are expected to have a material
adverse effect on the Company's consolidated financial statements.
D. Retirement Plan
Effective January 1, 1996, the Company adopted a tax-qualified employee
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 $31,000, $44,000 and $47,000 related to this plan for the
years ended July 1, 2000, July 3, 1999 and June 27, 1998, respectively.
43
<PAGE> 44
9. 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 1, 2000:
Revenues $ 12,891 $ 12,307 $ 12,600 $ 12,296
Restaurant operating income 1,185 499 772 800
Income (loss) before taxes (benefit) on
income (201) (450) (392) (838)
Net income (loss) (201) (450) (392) (838)(a)
Basic and diluted earnings (loss) per
common share (.07) (.16) (.14) (.29)
</TABLE>
<TABLE>
<CAPTION>
Thousands of dollars, except per share data
-----------------------------------------------------
1st 2nd 3rd 4th
-----------------------------------------------------
<S> <C> <C> <C> <C>
Year ended July 3, 1999:
Revenues $ 15,299 $ 14,485 $ 13,805 $ 14,699
Restaurant operating income 1,566 1,127 1,273 1,652
Income (loss) before taxes (benefit) on
income 60 (193) (500) (1,594)
Net income (loss) 37 (116) (439) (1,815)(b)
Basic and diluted earnings (loss) per
common share .01 (.04) (.15) (.63)
</TABLE>
(a) See Note 4 for discussion of the third quarter pre-tax charge
of $77,400 related to impairment of long-lived assets.
(b) See Note 4 for discussion of the fourth quarter pre-tax charge
of $870,700 related to impairment of long-lived assets.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the fiscal years 2000 and 1999 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.
44
<PAGE> 45
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the Proxy Statement for the Annual
Meeting of Shareholders to be held November 17, 2000, 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 November17, 2000, as filed with the
Securities and Exchange Commission.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information required by this item is incorporated by reference from the
sections entitled "Security Ownership of Management and Certain Beneficial
Owners" and "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders to be held November 17, 2000, as filed with the
Securities and Exchange Commission.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders to be held November 17, 2000, as filed with the
Securities and Exchange Commission.
45
<PAGE> 46
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 23):
Report of Independent Certified Public Accountants
Consolidated Financial Statements for Years ended July 1, 2000, July 3,
1999 and June 27, 1998:
Consolidated Balance Sheets - July 1, 2000
and July 3, 1999
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 9 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.
46
<PAGE> 47
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.
4.6 Modification to Credit Agreement dated the March 3, 2000 between Wall
Street Deli, Inc. and AmSouth Bank, filed herewith page 52
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.
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
</TABLE>
47
<PAGE> 48
<TABLE>
<S> <C>
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.
10.13 Rights Agreement, dated as of February 16, 2000 between Wall Street
Deli, Inc. and American Stock Transfer and Trust Company, As Rights
Agent (incorporated by reference from the Company's Form 8-K filed on
March 1, 2000).
10.14 Wall Street Deli, Inc. Incentive Award Plan, as amended, incorporated
by reference from Exhibit 99(a) to the Company's Registration Statement
on Form S-8, Registration no. 33-34150, as filed April 6, 2000.
21 Subsidiaries of the Registrant, filed herewith. page 57
27 Financial Data Schedule, submitted to the Securities and Exchange
Commission in electronic format (for SEC use only)
</TABLE>
Reports on Form 8-K
During the quarter ended July 1, 2000, the Company filed no reports on
Form 8-K.
48
<PAGE> 49
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
October 2, 2000
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 October 2, 2000
--------------------------------- Officer and Director
JEFFREY V. KAUFMAN
/s/ Robert G. Barrow Vice Chairman and Director October 2, 2000
---------------------------------
ROBERT G. BARROW
/s/ Alan V. Kaufman Chairman of the Board October 2, 2000
---------------------------------
ALAN V. KAUFMAN
/s/ Thomas J. Sandeman Chief Financial Officer October 2, 2000
---------------------------------
THOMAS J. SANDEMAN
/s/ Aaron Beam, Jr. Director October 2, 2000
---------------------------------
AARON BEAM, JR.
/s/ William M. Byrne Director October 2, 2000
---------------------------------
WILLIAM M. BYRNE
/s/ Jake L. Netterville Director October 2, 2000
---------------------------------
JAKE L. NETTERVILLE
</TABLE>
49
<PAGE> 50
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 1, 2000 Commission File No. 0-11271
50
<PAGE> 51
TABLE OF CONTENTS
FOR EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
4.6 Modification to Credit Agreement dated the March 3, 2000 between
Wall Street Deli, Inc. and AmSouth Bank, filed herewith 52
21 Subsidiaries of the Registrant 57
27 Financial Data Schedule, submitted to the Securities and
Exchange Commission in electronic format (for SEC use only)
</TABLE>
51
