UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10K
(X) ANNUAL REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the fiscal year ended September 30, 2006
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number I-6836
Flanigan's Enterprises, Inc.
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(Exact name of registrant as specified in its charter)
Florida 59-0877638
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5059 N.E. 18th Avenue, Fort Lauderdale, FL 33334
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (954) 377-1961
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.10 Par Value American Stock Exchange
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Title of each class Name of each exchange
on which registered
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the
1
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) 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. [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) Yes [_] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act.) Yes [_] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $9,279,000 as of April 1, 2006, the last business day of the
registrant's most recently completed second fiscal quarter, at a price of $9.97
per share.
There were 1,884,365 shares of the Registrant's Common Stock $0.10 par value,
outstanding as of December 29, 2006
DOCUMENTS INCORPORATED BY REFERENCE
Information contained in the Registrant's 2007 definitive proxy material has
been incorporated by reference in Items 10, 11, 12 and 13 of Part III of this
Annual Report on Form 10-K.
Exhibit Index Begins on Page 47
PART I
Item 1. Business
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When used in this report, the words "anticipate", "believe",
"estimate", "will", "intend" and "expect" and similar expressions identify
forward-looking statements. Forward-looking statements in this report include,
but are not limited to, those relating to the general expansion of the Company's
business. Although we believe that our plans, intentions and expectations
reflected in these forward-looking statements are reasonable, we can give no
assurance that these plans, intentions or expectations will be achieved.
General
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Flanigan's Enterprises, Inc., (the "Company") owns and/or operates
restaurants with lounges, package liquor stores and an entertainment oriented
club (collectively the "units"). At September 30, 2006, the Company operated 21
units, and had equity interests in seven additional units which have been
2
franchised by the Company. The table below summarizes the type and number of
units being operated during each of the last three fiscal years.
FISCAL FISCAL FISCAL
YEAR YEAR YEAR NOTE
2006 2005 2004 NUMBER
TYPES OF UNITS
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Company Owned:
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Combination package
and restaurant 4 4 4
Restaurant only 2 2 2
Package store only 5 5 5
Company Managed
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Restaurants Only:
-----------------
Limited partnerships 7 6 5 (1)(2)(3)(4)
Franchise 1 1 1
Unrelated Third Party 1 -- -- (5)
Company Owned Club: 1 1 1
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TOTAL - Company
Owned/Operated Units: 21 19 18
FRANCHISED - units 7 7 7 (6)
-- -- --
Notes:
(1) During the third quarter of fiscal year 2003, the Company, as
general partner of the limited partnership, entered into a Sale of Business
Agreement for the purchase of an existing business in Pinecrest, Florida, which
transaction closed during the first quarter of fiscal year 2004. During the
third quarter of fiscal year 2006, the limited partnership raised funds through
a private offering to renovate the business premises for operation as a
"Flanigan's Seafood Bar and Grill" restaurant. The Company acts as general
partner and owns a thirty nine percent limited partnership interest. The
restaurant opened for business on August 14, 2006.
(2) During the fourth quarter of fiscal year 2004, a limited
partnership was formed with the Company as general partner, which limited
partnership entered into a lease agreement to own and operate a restaurant in
Wellington, Florida under the "Flanigan's Seafood Bar and Grill" service mark.
During the first quarter of fiscal year 2005, the limited partnership raised
funds through a private offering to renovate the business premises for operation
as a "Flanigan's Seafood Bar and Grill" restaurant. The Company acts as general
partner and owns a twenty six percent limited partnership interest. The
restaurant opened for business on May 27, 2005.
(3) During the first quarter of fiscal year 2006, the Company, as agent
for a limited partnership to be formed, entered into a contract to purchase an
existing restaurant location in Davie, Florida to renovate and operate a
restaurant under the "Flanigan's Seafood Bar and Grill" servicemark. Subsequent
to the end of fiscal year 2006, a limited partnership was formed, with the
Company as general partner, which limited
3
partnership expects to close on the purchase of the existing restaurant location
at the start of the second quarter of fiscal year 2007. The restaurant is
expected to open for business during the fourth quarter of fiscal year 2007,
provided the landlord's approval of building plans and all necessary zoning
approvals, variances and/or special use permits are timely received. This
restaurant is not included in the table of units.
(4) During the third quarter of fiscal year 2006, the Company, as agent
for a limited partnership to be formed, entered into a contract to purchase an
existing restaurant location in Pembroke Pines, Florida to renovate and operate
a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark.
Subsequent to the end of fiscal year 2006, a limited partnership was formed,
with the Company as general partner, which limited partnership closed on the
purchase of the existing restaurant location. The restaurant is expected to open
for business during the third quarter of fiscal year 2007. This restaurant is
not included in the table of units.
(5) During the second quarter of fiscal year 2006, the Company assumed
the management of an existing restaurant in Deerfield Beach, Florida under its
current format, "The Whale's Rib", pursuant to a management agreement. This
restaurant is included in the table of units.
(6) The Company manages the restaurant for one (1) franchisee with
respect to one (1) of the seven (7) franchised units. The franchised restaurant
is included in the table of units as a restaurant operated by the Company and
the franchise is also included as a unit franchised by the Company and in which
the Company has an interest.
With the exception of the combination package store and restaurant
located at 4 N. Federal Highway, Hallandale, Florida, (Store #31), which is
operated on property owned by the Company and a wholly owned subsidiary of the
Company, all of the Company's package liquor stores, restaurants and clubs are
operated on leased properties.
The Company was incorporated in Florida in 1959 and operated in South
Florida as a chain of small cocktail lounges and package liquor stores. By 1970,
the Company had established a chain of "Big Daddy's" lounges and package liquor
stores between Vero Beach and Homestead, Florida. From 1970 to 1979, the Company
expanded its package liquor store and lounge operations throughout Florida and
opened clubs in five other "Sun Belt" states. In 1975, the Company discontinued
most of its package store operations in Florida except in the South Florida
areas of Dade, Broward, Palm Beach and Monroe Counties. In 1982 the Company
expanded its club operations into the Philadelphia, Pennsylvania area as general
partner of several limited partnerships organized by the Company. In March 1985
the Company began franchising its package liquor stores and lounges in the South
Florida area. See Note 10 to the consolidated financial statements and the
discussion of franchised units on page 6.
During fiscal year 1987, the Company began renovating its lounges to
provide full restaurant food service, and subsequently renovated and added food
service to most of its lounges. The restaurant concept, as the Company offers
it, has been so well received by the public that food sales now represent
approximately 81% of total restaurant sales.
4
The Company's package liquor stores emphasize high volume business by
providing customers with a wide variety of brand name and private label
merchandise at discount prices. The Company's restaurants provide efficient
service of alcoholic beverages and full food service with abundant portions,
reasonably priced, served in a relaxed, friendly and casual atmosphere.
The Company's principal sources of revenue are the sale of food and
alcoholic beverages.
The Company conducts its operations directly and through a number of
limited partnerships and wholly owned subsidiaries. The limited partnerships and
operating subsidiaries are as follows:
STATE OF PERCENTAGE
ENTITY ORGANIZATION OWNED
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Flanigan's Management Services, Inc. Florida 100
Flanigan's Enterprises, Inc. of Georgia Georgia 100
Flanigan's Enterprises, Inc. of Pa. Pennsylvania 100
CIC Investors #13, Limited Partnership Florida 39
CIC Investors #60, Limited Partnership Florida 42
CIC Investors #65, Limited Partnership Florida 26
CIC Investors #70, Limited Partnership Florida 40
CIC Investors #75, Limited Partnership Florida 12
CIC Investors #80, Limited Partnership Florida 25
CIC Investors #95, Limited Partnership Florida 28
Josar Investments, LLC Florida 100
The income derived and expenses incurred by the Company relating to the
aforementioned limited partnerships and subsidiaries are consolidated for
accounting purposes with the income and expenses of the Company in the
consolidated financial statements in this Form 10-K.
The Company's executive offices, which are owned by the Company, are
located in a two story building at 5059 N.E. 18th Avenue, Fort Lauderdale,
Florida 33334 and its telephone number at such address is (954) 377-1961.
Financial Information Concerning Industry Segments
--------------------------------------------------
The Company's business is carried out principally in two segments: the
restaurant segment and the package liquor store segment.
5
Financial information broken into these two principal industry segments
for the three fiscal years ended September 30, 2006, October 1, 2005 and October
2, 2004 is set forth in the consolidated financial statements which are attached
hereto.
The Company's Package Liquor Stores and Restaurants
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The Company's package liquor stores are operated under the "Big Daddy's
Liquors" servicemark. The Company's package liquor stores emphasize high volume
business by providing customers with a wide selection of brand name and private
label liquors, beer and wines. The Company has a policy of meeting the published
sales prices of its competitors. The Company provides extensive sales training
to its package liquor store personnel. All package liquor stores are open six or
seven days a week from 9:00-10:00 a.m. to 9:00-10:00 p.m., depending upon demand
and local law. Approximately half of the Company's units have "night windows"
with extended evening hours.
The Company's restaurants offer full food and alcoholic beverage
service with approximately 81% of their sales being food items. These
restaurants are operated under the "Flanigan's Seafood Bar and Grill"
servicemark. Although these restaurants provide a neighborhood atmosphere, they
have the degree of standardization prevalent in casual dining restaurant chains,
including menu. The interior decor is nautical with numerous fishing and boating
pictures and decorations. Drink prices may vary between locations to meet local
conditions. Food prices are standardized. The restaurants' hours of operation
are from 11:00 a.m. to 1:00-5:00 a.m. The Company continues to develop strong
customer recognition of its "Flanigan's Seafood Bar and Grill" servicemark
through very competitive pricing and efficient and friendly service.
The Company's package liquor stores and restaurants were designed to
permit minor modifications without significant capital expenditures. However,
from time to time the Company is required to redesign and refurbish its units at
significant cost. See Item 2, Properties and Item 7 for further discussion.
Franchised Package Liquor Stores and Restaurants
------------------------------------------------
In March 1985, the Company's Board of Directors approved a plan to
sell, on a franchise basis, up to 26 of the Company's package liquor stores and
lounges in the South Florida area. The Company had limited response to its
franchise offering and suspended its franchise plan at the end of fiscal year
1986. Many of the units that were originally offered as franchises have been
sold outright and are no longer operated as Flanigan's or Big Daddy's stores. As
of the end of fiscal year 2006, seven units were franchised, of which five units
were franchised to members of the family of the Chairman of the Board and
Officers and Directors of the Company.
During fiscal year 1995, the Company completed its new franchise
agreement for a franchisee to operate a restaurant under the "Flanigan's Seafood
Bar and Grill" servicemark pursuant to a license from the Company.
6
The new franchise agreement provides the Company with the ability to maintain a
high level of food quality and service at its franchised restaurants, which are
essential to a successful operation. A franchisee is required to execute a new
franchise agreement for the balance of the term of its lease for the business
premises, extended by the franchisee's continued occupancy of the business
premises thereafter, whether by lease or ownership. The new franchise agreement
provides for a royalty to the Company in the amount of approximately 3% of gross
sales plus a contribution to advertising in an amount between 1-1/2% to 3% of
gross sales. All existing franchisees who operate restaurants under the
"Flanigan's Seafood Bar and Grill" or other authorized servicemarks have
executed new franchise agreements.
Franchise royalties are "earned" when sales are made by franchisees.
This applies to both restaurants and package liquor stores. Franchise royalties
are paid weekly, in arrears. The Company manages the books and records of all
franchises, including collecting funds generated by the same. As a result,
franchise royalties are paid to the Company by book entry on a weekly basis and
the franchise royalties are never delinquent.
The units that continue to be franchised are doing well and continue to
generate income for the Company.
Investment in Limited Partnerships
----------------------------------
The Company has determined that all but one (1) limited partnership
discussed below should be consolidated for accounting purposes by virtue of
control of the limited partnerships by the Company. The remaining limited
partnership in which the Company does not have control has been accounted for
utilizing the equity method.
Beginning with the limited partnership which owns the restaurant in
Surfside, Florida and for all limited partnerships formed subsequent thereto for
the purpose of owning and operating a restaurant under the "Flanigan's Seafood
Bar and Grill" servicemark, a standard financial arrangement has been used in
each limited partnership agreement. Under this financial arrangement, until the
limited partnership has received an aggregate sum equal to the initial
investment of all limited partners from the net profit from the operation of the
restaurant, the limited partnership receives an aggregate sum equal to 25% of
the initial investment of all limited partners first each year, with any
additional net profit divided equally between the Company, as manager of the
restaurant, and the limited partnership. Once the limited partnership has
received an aggregate sum equal to the initial investment of all limited
partners from the net profit from the operation of the restaurant, the net
profit is divided equally between the Company, as manager of the restaurant, and
the limited partnership. As of September 30, 2006, the limited partnerships
which own the restaurants in Kendall, Florida, West Miami, Florida and Surfside,
Florida have each received an aggregate sum equal to the initial investment of
their respective limited partners from the net profit from the operation of
their respective restaurants and the Company receives one-half (1/2) of the net
profit as manager of each restaurant. The Company plans to continue forming
limited partnerships to raise funds to own and operate restaurants under the
"Flanigan's Seafood Bar and Grill" servicemark using the same financial
arrangement.
7
Each limited partnership agreement, excluding only the limited
partnership agreement for the franchised restaurant in Fort Lauderdale, Florida
which is governed by a franchise agreement, gives the limited partnership the
right to use the "Flanigan's Seafood Bar and Grill" servicemark for a fee equal
to 3% of the gross sales from the operation of the restaurant, while the Company
acts as general partner only. This 3% fee is "earned" when sales are made by the
limited partnerships and is paid weekly, in arrears. The Company manages the
books and records of all limited partnerships, including collecting funds
generated by the same. As a result, the 3% fee is paid to the Company by book
entry on a weekly basis and is never delinquent.
Pinecrest, Florida
During the fourth quarter of fiscal year 2006, the limited partnership
completed the structural repairs and its interior build-out of the business
premises in Pinecrest, Florida for the operation of a restaurant under the
"Flanigan's Seafood Bar and Grill" servicemark. During the third quarter of
fiscal year 2006, the limited partnership completed its private offering,
raising the sum of $3,300,000 to reimburse the Company for advances of
$1,506,000 made to the limited partnership in excess of its investment in the
same, to complete the renovations to the business premises and to provide
working capital. The Company continues to act as general partner and is also the
owner of a thirty nine percent limited partnership interest, as are other
related parties, including, but not limited to officers and directors of the
Company and their families. This restaurant opened for business on August 14,
2006. As of the end of fiscal year 2006, this limited partnership had not yet
received a return of the initial investment of all limited partners from the net
profit from the operation of the restaurant.
Fort Lauderdale, Florida
A related third party acts as general partner of a limited partnership
which owns and operates a franchised restaurant in Fort Lauderdale, Florida
under the "Flanigan's Seafood Bar and Grill" service mark. The Company is a
twenty five percent owner of the limited partnership as are other related
parties, including, but not limited to officers and directors of the Company and
their families. This joint venture is not consolidated in the accompanying
consolidated financial statements of the Company.
Surfside, Florida
The Company acts as general partner of a limited partnership which owns
and operates a restaurant in Surfside, Florida under the "Flanigan's Seafood Bar
and Grill" service mark. The Company is also a forty two percent owner of the
limited partnership as are other related parties, including, but not limited to
officers and directors of the Company and their families. This restaurant opened
for business in the second quarter of fiscal year 1998. As of the end of fiscal
year 2006, this limited partnership has received an aggregate sum equal to the
initial investment of all limited partners from the net profit from the
operation of the restaurant.
8
Kendall, Florida
The Company acts as general partner of a limited partnership which owns
and operates a restaurant in Kendall, Florida under the "Flanigan's Seafood Bar
and Grill" service mark. The Company is also a forty percent owner of the
limited partnership as are other related parties, including, but not limited to
officers and directors of the Company and their families. This restaurant opened
for business on April 9, 2000. This limited partnership has received an
aggregate sum equal to the initial investment of all limited partners from the
net profit from the operation of the restaurant.
West Miami, Florida
The Company acts as general partner of a limited partnership which owns
and operates a restaurant in West Miami, Florida under the "Flanigan's Seafood
Bar and Grill" service mark. The Company is also a twenty five percent owner of
the limited partnership as are other related parties, including, but not limited
to officers and directors of the Company and their families. This restaurant
opened for business on October 11, 2001. As of the end of fiscal year 2006, this
limited partnership has received an aggregate sum equal to the initial
investment of all limited partners from the net profit from the operation of the
restaurant.
Weston, Florida
The Company acts as general partner of a limited partnership, which
owns and operates a restaurant in Weston, Florida under the "Flanigan's Seafood
Bar and Grill" service mark. The Company is also the owner of twenty eight
percent of the limited partnership, as are other related parties, including but
not limited to officers and directors of the Company and their families. The
restaurant opened for business, as a "Flanigan's Seafood Bar and Grill"
restaurant on January 20, 2003. As of the end of fiscal year 2006, this limited
partnership has received an aggregate sum equal to 55% of the initial investment
of all limited partners from the net profit from the operation of the
restaurant.
Stuart, Florida
The Company acts as general partner of a limited partnership, which
owns and operates a restaurant in a Howard Johnson's Hotel in Stuart, Florida
under the "Flanigan's Seafood Bar and Grill" service mark. The Company is also
the owner of a twelve percent limited partnership interest, as are other related
parties, including but not limited to officers and directors of the Company and
their families. The renovated restaurant opened for business on January 11,
2004. During fiscal year 2006, this limited partnership only received three (3)
quarterly distributions due to the limited cash flow generated by the
restaurant. As of the end of fiscal year 2006, this limited partnership has
received an aggregate sum equal to 22.5% of the initial investment of all
limited partners from the net profit from the operation of the restaurant.
Wellington, Florida
The Company acts as general partner of a limited partnership, which
owns and operates a restaurant in Wellington, Florida under the "Flanigan's
9
Seafood Bar and Grill" service mark. The Company is also the owner of a twenty
six percent limited partnership interest, as are other related parties,
including but not limited to officers and directors of the Company and their
families. The restaurant opened for business on May 27, 2005. As of the end of
fiscal year 2006, this limited partnership has received an aggregate sum equal
to 30% of the initial investment of all limited partners from the net profit
from the operation of the restaurant.
Davie, Florida
During the first quarter of fiscal year 2006, the Company, as agent for
a Florida limited partnership to be formed, entered into a contract to purchase
the furniture, fixtures, equipment and leasehold interest of an existing
restaurant in Davie, Florida for a purchase price of $650,000. The Company
intends to renovate and operate a restaurant under the "Flanigan's Seafood Bar
and Grill" servicemark. During the third quarter of fiscal year 2006, the
Company received landlord approval of its preliminary building plans, including
an outdoor seating area and submitted the same for site plan approval to the
Town of Davie, Florida. During the fourth quarter of fiscal year 2006, the
application for site plan approval was heard by the Planning and Zoning Board of
the Town of Davie, Florida and the Company is modifying its building plans in
accordance with the comments from the same. Subsequent to the end of fiscal year
2006, a limited partnership was formed with the Company as general partner,
which limited partnership expects to enter into a new lease for the business
premises and close on the purchase of the existing restaurant in Davie, Florida
at the start of the second quarter of fiscal year 2007 at the purchase price of
$650,000. The initial estimates for renovations and pre-opening expenses is an
additional $1,700,000. The funds necessary for this limited partnership will be
raised through a private offering. The Company will act as general partner and
own up to thirty percent of the limited partnership. The restaurant is expected
to open for business during the fourth quarter of fiscal year 2007.
Pembroke Pines, Florida
During the third quarter of fiscal year 2006, the Company, as agent for
a Florida limited partnership to be formed, entered into a contract to purchase
the liquor license and leasehold interest of an existing restaurant in Pembroke
Pines, Florida for a purchase price of $500,000. The Company intends to renovate
and operate a restaurant under the "Flanigan's Seafood Bar and Grill"
servicemark. Subsequent to the end of fiscal year 2006, a limited partnership
was formed with the Company as general partner, which limited partnership
entered into a new lease for the business premises and closed on the purchase of
the existing restaurant in Pembroke Pines, Florida. The purchase price was
reduced to approximately $305,000 due to the fact that site plan restrictions in
the plat where the business premises is located would not permit outdoor seating
and the liquor license owned by the seller was a restaurant liquor license, with
no market value, rather than a quota liquor license, with a market value of
$145,000, as contracted. The Company modified its building plans to limit its
renovations to the interior of the business premises, thereby avoiding the need
for site plan approval. The initial estimate for renovations and pre-opening
expenses is an additional $1,600,000. The funds necessary for this limited
partnership will be raised through a private offering. The Company acts as
general partner and will own
10
up to thirty percent of the limited partnership. The restaurant is expected to
open for business during the third quarter of fiscal year 2007.
Investment in Management Agreement
----------------------------------
Deerfield Beach, Florida
During the first quarter of fiscal year 2006, the Company entered into
a management agreement to operate an existing restaurant in Deerfield Beach,
Florida under its current format, "The Whale's Rib", and to be entitled to
one-half (1/2) of the net profit from the operation of the same. The term of the
management agreement is for ten (10) years, with four (4) five (5) year renewal
options. The Company paid $500,000 for the management rights to the restaurant.
The Company assumed the management of this restaurant on January 9, 2006. For
the nine (9) months of fiscal year 2006, the Company recognized income under the
management agreement of $108,000.
Clubs
-----
As of the end of fiscal year 2006, the Company owned one club in
Atlanta, Georgia, which was operated by an unaffiliated third party, as
discussed below.
Operation of Unit by Unaffiliated Third Party
----------------------------------------------
The Company has a Management Agreement with Mardi Gras Management, Inc.
for the operation of the Company's club in Atlanta, Georgia, under an adult
entertainment format doing business as "Mardi Gras". During the third quarter of
fiscal year 2004, Mardi Gras Management, Inc. entered into a new lease agreement
with the landlord, which new lease agreement commenced May 1, 2006 for a period
of ten (10) years, with one (1) ten (10) year renewal option. The Company did
not execute or guaranty the new lease and has no liability on the same. Since
Mardi Gras Management, Inc. still operates the club under the Management
Agreement, the Company continues to receive an owner's fee of $150,000 per year,
paid monthly, versus ten (10%) percent of gross sales from the club, whichever
is greater, subject to adjustment annually when rental increases under the new
lease take effect. The Company agreed that one-half (1/2) of the rental
increases will be credited against the owner's fee each year, provided the
owner's fee is never less than $150,000 per year.
Operations and Management
--------------------------
The Company emphasizes systematic operations and control of all units.
Each unit has its own manager who is responsible for monitoring inventory
levels, supervising sales personnel, food preparation and service in restaurants
and generally assuring that the unit is managed in accordance with Company
guidelines and procedures. The Company has in effect an
11
incentive cash bonus program for its managers and salespersons based upon
various performance criteria. The Company's operations are supervised by area
supervisors. Each area supervisor supervises the operations of the units within
his or her territory and visits those units to provide on-site management and
support. There are five area supervisors responsible for package store,
restaurant and club operations in specific geographic districts.
All of the Company's managers and salespersons receive extensive
training in sales techniques. The Company arranges for independent third
parties, or "shoppers", to inspect each unit in order to evaluate the unit's
operations, including the handling of cash transactions.
Purchasing and Inventory
------------------------
The package liquor business requires a constant substantial capital
investment in inventory in the units. The Company's inventory consists primarily
of liquor and wine products and as such, does not become excessive or obsolete
that would require identifying and recording of the same. Liquor inventory
purchased can normally be returned only if defective or broken.
All Company purchases of liquor inventory are made through its
purchasing department from the Company's corporate headquarters. The major
portion of inventory is purchased under individual purchase orders with licensed
wholesalers and distributors who deliver the merchandise within one or two days
of the placing of an order. Frequently there is only one wholesaler in the
immediate marketing area with an exclusive distributorship of certain liquor
product lines. Substantially all of the Company's liquor inventory is shipped by
the wholesalers or distributors directly to the Company's units. The Company
significantly increases its inventory prior to Christmas, New Year's Eve and
other holidays. Pursuant to Florida law, the Company pays for its liquor
purchases within ten days of delivery.
During fiscal year 2006, the Board of Directors approved the purchase
of a new point of sale computer system for all Company package liquor stores,
including the corporate office, at an estimated cost of $180,000. The approval
is subject to management testing and approving the system, prior to the
installation of the same, which testing should take place during the second
quarter of fiscal year 2007.
All negotiations with food suppliers are handled by the Company's
purchasing department at the Company's corporate headquarters. This ensures that
the best quality and prices will be available to each unit. Orders for food
products are prepared by each unit's kitchen manager and reviewed by the unit's
general manager before being placed with the approved vendor. Merchandise is
delivered by the supplier directly to each unit. Orders are placed several times
a week to ensure product freshness. Food inventory is primarily paid for
monthly.
12
Government Regulation
---------------------
The Company is subject to various federal, state and local laws
affecting its business. In particular, the units operated by the Company are
subject to licensing and regulation by alcoholic beverage control, health,
sanitation, safety and fire department agencies in the state or municipality
where located.
Alcoholic beverage control regulations require each of the Company's
units to apply to a state authority and, in certain locations, county and
municipal authorities, for a license or permit to sell alcoholic beverages on
and/or off premises.
In the State of Florida, which represents all but one of the total
liquor licenses held by the Company, most of the Company's liquor licenses are
issued on a "quota license" basis. Quota licenses are issued on the basis of a
population count established from time to time under the latest applicable
census. Because the total number of liquor licenses available under a quota
license system is limited and restrictions placed upon their transfer, the
licenses have purchase and resale value based upon supply and demand in the
particular areas in which they are issued. The quota licenses held by the
Company allow the sale of liquor for on and off premises consumption. In
Florida, the other liquor licenses held by the Company or limited partnerships
of which the Company is the general partner are restaurant liquor licenses,
which do not have quota restrictions and no purchase or resale value. A
restaurant liquor license is issued to every applicant who meets all of the
state and local licensing requirements, including, but not limited to zoning and
minimum restaurant size, seating and menu. The restaurant liquor licenses held
by the Company allow the sale of liquor for on premises consumption only.
In the State of Georgia, the other state in which the Company operates,
licensed establishments also do not have quota restrictions for on-premises
consumption and such licenses are issued to any applicant who meets all of the
state and local licensing requirements based upon extensive license application
filings and investigations of the applicant.
All licenses must be renewed annually and may be revoked or suspended
for cause at any time. Suspension or revocation may result from violation by the
licensee or its employees of any federal, state or local law regulation
pertaining to alcoholic beverage control. Alcoholic beverage control regulations
relate to numerous aspects of the daily operations of the Company's units,
including, minimum age of patrons and employees, hours of operations,
advertising, wholesale purchasing, inventory control, handling, storage and
dispensing of alcoholic beverages, internal control and accounting and
collection of state alcoholic beverage taxes.
As the sale of alcoholic beverages constitutes a large share of the
Company's revenue, the failure to receive or retain, or a delay in obtaining a
liquor license in a particular location could adversely affect the Company's
operations in that location and could impair the Company's ability to obtain
licenses elsewhere.
During fiscal years 2004, 2005 and 2006 and through the present time,
no significant pending matters have been initiated by the Department of Alcohol,
Beverages and Tobacco concerning any of the Company's licenses which
13
might be expected to result in a revocation of a liquor license or other
significant actions against the Company.
The Company is not aware of any statute, ordinance, rule or regulation
under present consideration which would significantly limit or restrict its
business as now conducted. However, in view of the number of jurisdictions in
which the Company does business, and the highly regulated nature of the liquor
business, there can be no assurance that additional limitations may not be
imposed in the future, even though none are presently anticipated.
Federal and state environmental regulations have not had a material
effect on the Company's operation.
General Liability Insurance
---------------------------
The Company has general liability insurance which incorporates a
semi-self-insured plan under which the Company assumes the full risk of the
first $50,000 of exposure per occurrence, while the limited partnerships assume
the full risk of the first $10,000 of exposure per occurrence. The Company's
insurance carrier is responsible for $1,000,000 coverage per occurrence above
the Company's self-insured deductible, up to a maximum aggregate of $2,000,000
per year. During fiscal year 2004, fiscal year 2005, and again in fiscal year
2006 the Company was able to purchase excess liability insurance at a reasonable
premium, whereby the Company's excess insurance carrier is responsible for
$6,000,000 coverage above the Company's primary general liability insurance
coverage. With the exception of one (1) limited partnership which has higher
general liability insurance coverage to comply with the terms of its lease for
the business premises, the Company is un-insured against liability claims in
excess of $7,000,000 per occurrence and in the aggregate.
The Company's general policy is to settle only those legitimate and
reasonable claims asserted and to aggressively defend and go to trial, if
necessary, on frivolous and unreasonable claims. The Company has established a
select group of defense attorneys which it uses in conjunction with this
program. Under the Company's current liability insurance policy, any expense
incurred by the Company in defending a claim, including adjusters and attorney's
fees, are a part of the $50,000 retention.
An accrual for the Company's estimated liability claims is included in
the consolidated balance sheets in the caption "Accounts payable and accrued
expenses". A significant unfavorable judgment or settlement against the Company
in excess of its liability insurance coverage could have a materially adverse
effect on the Company.
Property Insurance; Windstorm Insurance; Deductibles
----------------------------------------------------
For the policy year commencing December 30, 2006, the Company's
property insurance provides for full insurance coverage for property losses,
other than those caused by windstorm, such as a hurricane. The losses caused by
hurricanes during the 2004 and 2005 hurricane seasons in South Florida
14
have made windstorm insurance coverage difficult to get and where available
expensive to the point that full windstorm coverage for all locations is
economically prohibitive. For those locations east of I-95, windstorm insurance
coverage was only available through the State of Florida sponsored insurance
fund and then limited to $1,000,000 per building, including personal property,
but without business interruption insurance. The State of Florida sponsored
insurance fund has deductibles of 3% per location, per occurrence. Windstorm
coverage for locations west of I-95 was procured through a private insurance
carrier, including business interruption insurance, which provides coverage of
$10,000,000 per occurrence and in the aggregate, with "named storm deductibles"
of 5% per location per occurrence, with a minimum deductible of $100,000 per
occurrence, and "other windstorm deductibles" of $100,000 per occurrence. The
windstorm policy provided by the private insurance carrier contains a limitation
on recovery for roof replacement, with any roofs dating prior to 2001 being
covered for their actual replacement value, in lieu of their replacement cost.
The Company has determined that only two roofs at its locations west of I-95 for
which it and/or its limited partnerships are responsible, pre-date 2001 so the
exposure due to the roof replacement limitation is not significant. The private
insurance policy also provides business interruption insurance for locations
east of I-95, with a deductible of 5% per location, per occurrence, for business
interruption insurance, as well as windstorm insurance in excess of the primary
coverage provided through the State of Florida sponsored insurance fund.
Management believes that the windstorm insurance coverage effective December 30,
2006 will provide adequate insurance coverage for all locations in the event of
a hurricane, but in the event that more than four (4) locations are destroyed by
a hurricane, thereby requiring total reconstruction, the windstorm insurance
coverage may be inadequate and the Company and/or limited partnership may have
to bear the cost of any uninsured expenses, which may have a material adverse
effect upon the financial condition and/or results of operations of the Company.
The Company intends to build its cash balances during hurricane season, (June 1
- November 30 each year), to provide liquidity for the Company if it encounters
losses as a result of a hurricane or other casualty loss, as well as to maintain
a line of credit as additional protection against the same. The Company's
insurance expense for the policy year commencing December 30, 2006, including
insurance coverage for its consolidated limited partnerships, is expected to
increase by approximately $300,000 due primarily to increases in windstorm
insurance coverage.
For the policy year which commenced December 30, 2005, which included
windstorm insurance coverage and was the third and final year of the Company's
three (3) year property insurance policy with its insurance carrier, the
property insurance had a deductible of $25,000 - $50,000 per location, per
occurrence. In the event a casualty, such as a hurricane, had impacted every
location whereby property damage and business interruption claims reached or
exceeded every deductible, then the Company and its limited partnerships would
have faced a maximum deductible of $825,000. During the policy year commencing
December 30, 2005, neither the Company, nor any of its limited partnerships,
made a claim against its property insurance.
For the policy year which commenced December 30, 2004, which included
windstorm insurance coverage and was the second year of the Company's three (3)
year property insurance policy with its insurance carrier, the property
insurance had a deductible of $50,000 per occurrence, with no deductible per
15
location. In the event a casualty, such as Hurricane Wilma, the Company and its
limited partnerships faced a maximum deductible of $50,000 per occurrence.
During the policy year commencing December 30, 2004, the Company and its limited
partnerships made claims against its insurance carrier for damages and/or
business interruption caused by Hurricane Wilma.
Hurricane Wilma; Windstorm Claims
---------------------------------
During fiscal year 2006, the Company submitted claims totaling
$1,092,300 for damages and business interruption caused when Hurricane Wilma
impacted South Florida on October 24, 2005. Subsequent to the end of fiscal year
2006, the Company settled its claims against its insurance carrier for $929,000,
($979,000 less the $50,000 deductible). During fiscal year 2006, the Company
received advances in the aggregate amount of $700,000, ($750,000 less the
$50,000 deductible), from its insurance carrier and subsequent to the end of
fiscal year 2006 received a final payment of $229,000.
Competition and the Company's Market
------------------------------------
The liquor and hospitality industries are highly competitive and are
often affected by changes in taste and entertainment trends among the public, by
local, national and economic conditions affecting spending habits, and by
population and traffic patterns. The Company believes that the principal means
of competition among package liquor stores is price and that, in general, the
principal means of competition among restaurants include the location, type and
quality of facilities and the type, quality and price of beverage and food
served.
The Company's package liquor stores compete directly or indirectly with
local retailers and discount "superstores". Due to the competitive nature of the
liquor industry in South Florida, the Company has had to adjust its pricing to
stay competitive, including meeting all competitors' advertisements. Such
practices will continue in the package liquor business. It is the opinion of the
Company's management that the Company has a competitive position in its market
because of widespread consumer recognition of the "Big Daddy's" and "Flanigan's"
names.
As previously noted, at September 30, 2006 the Company owned and
operated six restaurants, all of which had formerly been lounges and were
renovated to provide full food service, operated one restaurant for a
franchisee, operated one restaurant for an unrelated third party and operated an
additional seven restaurants as general partner of limited partnerships. These
restaurants compete directly with other restaurants serving liquor in the area.
The Company's restaurants are competitive due to four factors: product quality,
portion size, moderate pricing and a standardization throughout the Company
owned and operated restaurants and the franchises.
The Company's business is subject to seasonal effects, including that
liquor purchases tend to increase during the holiday seasons.
16
Trade Names
-----------
The Company operates principally under two servicemarks; "Big Daddy's
Liquors" and "Flanigan's Seafood Bar and Grill", both of which are federally
registered trademarks owned by the Company. Throughout Florida the Company's
package liquor stores are operated under the "Big Daddy's Liquors" servicemark.
The Company's rights to the use of the "Big Daddy's" servicemark are set forth
under a consent decree of a Federal Court entered into by the Company in
settlement of federal trademark litigation. The consent decree and the
settlement agreement allow the Company to continue, and expand, its use of the
"Big Daddy's" servicemark in connection with limited food and liquor sales in
Florida. The consent decree further contained a restriction upon all future
sales of distilled spirits in Florida under the "Big Daddy's" name by the other
party who has a federally registered servicemark for "Big Daddy's" use in the
restaurant business. The Federal Court retained jurisdiction to enforce the
consent decree. The Company has acquired registered Federal trademarks on the
principal register for its "Flanigan's" and "Flanigan's Seafood Bar and Grill"
servicemarks.
The standard symbolic trademark associated with the Company and its
facilities is the bearded face and head of "Big Daddy" which is predominantly
displayed at all "Flanigan's" facilities and all "Big Daddy's" facilities
throughout the country. The face comprising this trademark is that of the
Company's founder, Joseph "Big Daddy" Flanigan, and is a federally registered
trademark owned by the Company.
Employees
---------
As of year end, the Company employed 927 employees, of which 690 were
full-time and 237 were part-time. Of these, 39 were employed at the corporate
offices and 5 were employed in maintenance. Of the remaining employees, 50 were
employed in package liquor stores and 833 in restaurants.
None of the Company's employees are represented by collective
bargaining organizations. The Company considers its labor relations to be
favorable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Positions and Offices Office or Position
Name Currently Held Age Held Since
---- --------------------- --- ------------------
James G. Flanigan Chairman of the Board 42 2002
of Directors, Chief
Executive Officer and
President
17
August Bucci Chief Operating Officer 62 2002
and Executive Vice
President
Jeffrey D. Kastner Chief Financial Officer 53 1995
General Counsel and
Secretary
Jean Picard Vice President of 68 2002
Package Store
Operations
Flanigan's 401(k) Plan
----------------------
Effective July 1, 2004, the Company began sponsoring a 401(k)
retirement plan covering substantially all employees who meet certain
eligibility requirements. Employees may contribute elective deferrals to the
plan up to amounts allowed under the Internal Revenue Code. The Company is not
required to contribute to the plan but may make discretionary profit sharing
and/or matching contributions. During the fiscal years ended September 30, 2006
and October 1, 2005, the Board of Directors approved discretionary matching
contributions totaling $12,000 and $37,500, respectively.
Subsequent Events
-----------------
(a) Closing of Purchase of New Restaurant Location, (Pembroke Pines, FL.):
Subsequent to the end of fiscal year 2006, a limited partnership was
formed with the Company as general partner, which limited partnership entered
into a new lease for the business premises and closed on the purchase of the
existing restaurant in Pembroke Pines, Florida. The purchase price was reduced
from $500,000 to $305,000 due to the fact that site plan restrictions in the
plat where the business premises is located would not permit outdoor seating and
the liquor license owned by the seller was a restaurant liquor license, with no
market value, rather than a quota liquor license, with a market value of
$145,000, as contracted. The Company modified its building plans to limit its
renovations to the interior of the business premises, thereby avoiding the need
for site plan approval.
(b) Purchase of Real Property Subject to Ground Lease, (Hallandale, FL.):
Subsequent to the end of fiscal year 2006, the Company simultaneously
entered into a contract and closed on the purchase of the real property which is
subject to a ground lease owned by the Company at its combination restaurant and
package liquor store located at 4 North Federal Highway, Hallandale, Florida,
(Store #31). The purchase price for this property was $552,500, which was
partially financed with an advance of $250,000 on the mortgage procured by the
Company during the fourth quarter of fiscal year 2006 to purchase the limited
liability company which owns the real property and the ground lease at this
location.
18
(c) Purchase of Real Property Subject to Ground Lease, (North Miami, FL.):
Subsequent to the end of fiscal year 2006, the Company entered into a
contract and closed on the purchase of the real property which is subject to a
ground lease owned by the Company and subleased to an unrelated third party
located at 732 - 734 N.E. 125th Street, North Miami, Florida (Store #27). The
purchase price for this property was $250,000, which was paid in cash by the
Company at closing.
(d) Internal Revenue Service Audit of Company's Corporate Income Tax Return
for the Fiscal Year Ending October 1, 2005:
Subsequent to the end of fiscal year 2006, the Company received
notification from the Internal Revenue Service that its corporate income tax
return for the fiscal year ending October 1, 2005 was being audited. The audit
was completed prior to the end of the first quarter of fiscal year 2007, with
the Company agreeing that the sum of $107,000 was due as additional corporate
income tax for the fiscal year ending October 1, 2005. Of the deductions
disallowed by the Internal Revenue Service, only $12,000 represents a permanent
disallowance of deductions. The impact of the audit results is fully accounted
for in the fiscal year ended September 30, 2006.
(e) Re-Financing of Corporate Offices
Subsequent to the end of fiscal 2006, the Company re-financed the
mortgage note encumbering the Company's corporate offices. The new mortgage, in
the original principal amount of $1,000,000, bears interest at the rate of 7.25%
per annum, is amortized over twenty (20) years with equal monthly payments of
principal and interest, each in the amount of $8,000, with the entire principal
balance and all accrued interest due in seven (7) years. The pre-payment of the
original mortgage note, which otherwise matured in August, 2008, incurred a
prepayment penalty of approximately $17,000.
(f) Increase in Line of Credit
Subsequent to the end of fiscal 2006, the Company increased its line of
credit from $2,000,000 to $2,650,000, under the same terms and conditions as the
original line of credit. However, the Company granted its lender a second
mortgage on its corporate office as additional collateral for the increase in
the line of credit. The Company drew an additional $1,200,000, raising the total
balance outstanding to $1,962,000.
Item 1A Risk Factors
---------------------
An investment in the Company's common stock involves a degree of risk.
These risks should be considered carefully with the uncertainties described
below, and all other information included in this Annual Report on Form 10-K,
before deciding whether to purchase the Company's common stock. Additional risks
and uncertainties not currently known to management or that management currently
deems immaterial may also become important factors that may harm the Company's
business, financial condition or results or operations. The occurrence of any of
the following risks could harm the Company's business,
19
financial condition and results of operations. The trading price of the
Company's common stock could decline due to any of these risks and
uncertainties, and you may lose part or all of your investment.
Certain statements in this report contain forward-looking information.
In general, forward-looking statements include estimates of future revenues,
cash flows, capital expenditures, or other financial items and assumptions
underlying any of the foregoing. Forward-looking statements reflect management's
current expectations regarding future events and use words such as "anticipate",
"believe", "expect", "may", "will" and other similar terminology. These
statements speak only as of the date they were made and involve a number of
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements. Several factors, many
beyond the Company's control, could cause actual results to differ materially
from management's expectations.
Planned Expansion May Not Be Successful
---------------------------------------
The Company, as general partner of two limited partnerships, has
submitted its building plans to the appropriate governmental agencies for
building permits to build two (2) new restaurants in its existing South Florida
market and expects, at a minimum, to open these two (2) new restaurants in
fiscal year 2007. The Company's ability to open and profitably operate
restaurants and/or package liquor stores is subject to various risks such as
identification and availability of suitable and economically viable locations,
the negotiation of acceptable leases or the purchase terms of existing
locations, the availability of limited partner investors, the need to obtain all
required governmental permits (including zoning approvals) on a timely basis,
the need to comply with other regulatory requirements, the availability of
necessary contractors and subcontractors, the availability of construction
materials and labor, the ability to meet construction schedules and budgets,
variations in labor and building material costs, changes in weather or other
acts of God that could result in construction delays and adversely affect the
results of one or more restaurants and/or package liquor stores for an
indeterminate amount of time. If the Company is unable to unsuccessfully manage
these risks, it could face increased costs and lower than anticipated revenues
and earnings in future periods.
General Economic Factors May Adversely Affect Results of Operations
-------------------------------------------------------------------
National, regional and local economic conditions, such as recessionary
economic cycles, a protracted economic slowdown or a worsening economy, could
adversely affect disposable consumer income and consumer confidence. Unfavorable
changes in these factors or in other business and economic condition affecting
the Company's customers could reduce customer traffic in some or all of the
Company's restaurants and/or package liquor stores, impose practical limits on
pricing and increase costs, any of which could lower profit margins and have a
material effect on the Company's results of operations.
20
Changes in Customer Preferences for Casual Dining Styles Could Adversely Affect
Financial Performance
-------------------------------------------------------------------------------
Changing customer preferences, tastes and dietary habits can adversely
impact the Company's business and financial performance. The Company offers a
large variety of entrees, side dishes and desserts and its continued success
depends, in part, on the popularity of its cuisine and casual style of dining. A
change from this dining style may have an adverse effect on the Company's
business.
Labor Shortages, an Increase in Labor Costs, or Inability to Attract Employees
Could Harm Company Business
--------------------------------------------------------------------------------
The Company's employees are essential to the operation of the Company
restaurants and/or package liquor stores and the Company's ability to deliver an
enjoyable dining experience to its customers. If the Company is unable to
attract and retain enough qualified restaurant and/or package liquor store
personnel at a reasonable cost, and if they do not deliver an enjoyable dining
experience, the Company's results may be negatively affected. Additionally,
competition for qualified employees could require the Company to pay higher
wages, which could result in higher labor costs.
Increases in Employee Minimum Wages by the Federal or State Government Could
Adversely Affect Business
--------------------------------------------------------------------------------
Certain of the Company employees are paid wages that relate to federal
and state minimum wage rates. Increases in the minimum wage rates, such as
annual cost of living increases in the State of Florida minimum wage, may
significantly increase labor costs. In addition, since the Company's business is
labor-intensive, shortages in the labor pool or other inflationary pressure
could increase labor costs, which could harm the Company's financial
performance.
Fluctuations in Commodity Prices and Availability of Commodities Including Pork,
Beef, Fish, Poultry and Dairy Could Affect Company Business
--------------------------------------------------------------------------------
A significant component of the Company's costs are related to food
commodities including pork, beef, fish, poultry and dairy products. If there is
a substantial increase in prices for these products and the Company is unable to
offset the increases with changes in menu prices, the Company's results could be
negatively affected.
21
Due to the Company's Geographic Locations, Restaurants are Subject to Climate
Conditions that Could Affect Operations
--------------------------------------------------------------------------------
All but one (1) of the Company restaurants and package liquor stores
are located in South Florida, with the remaining restaurant located in Central
Florida. During hurricane season, (June 1st through November 30th each year),
the Company's restaurants and/or package liquor stores may face harsh weather
associated with hurricanes and tropical storms. These harsh weather conditions
may make it more difficult for customers to visit the Company's restaurants and
package liquor stores, or may necessitate the closure of the same for a period
of time. If customers are unable to visit the Company's restaurants and/or
package liquor stores, Company sales and operating results may be negatively
affected.
Due to the Company's Geographic Locations, the Company May Not be Able to Get
Windstorm Insurance Coverage or Adequate Windstorm Insurance Coverage at a
Reasonable Rate
--------------------------------------------------------------------------------
Due to the anticipated active hurricane seasons in South Florida in the
future, the Company may not be able to get windstorm insurance coverage for its
restaurant and package liquor store locations on a year-to-year basis or may not
be able to get adequate windstorm insurance coverage at reasonable rates. If the
Company is unable to get windstorm insurance coverage or adequate windstorm
insurance coverage at reasonable rates, then the Company will be self-insured
for all or a part of the exposure for damages caused by a hurricane impacting
South Florida, which may have a material adverse effect upon the financial
condition and/or results of operations of the Company.
Inability to Attract and Retain Customers Could Affect Results of Operations
----------------------------------------------------------------------------
The Company takes pride in its ability to attract and retain customers,
however, if the Company does not deliver an enjoyable dining experience for its
customers, they may not return and results may be negatively affected.
The Company Faces Competition in the Restaurant and Liquor Industries, and if
the Company is Unable to Compete Effectively, its Business and Financial
Performance will be Adversely Affected
--------------------------------------------------------------------------------
The restaurant and liquor industries are intensely competitive and are
affected by changes in customer tastes, dietary habits and by economic and
demographic trends. New menu items, concepts and trends are constantly merging.
The Company competes on quality, variety, value, service, price and location. If
the Company is unable to compete effectively, its business, financial condition
and results of operations will be materially adversely affected.
22
Item 2. Properties
------------------
The Company's operations are conducted primarily on leased property
with the exceptions including (i) the Corporate Headquarters Office Building
which was purchased in December, 1999 and has been occupied by the Company since
April 2001; (ii) the real property and improvements of the Company's combination
restaurant and liquor package store in Hallandale, Florida; and (iii) subsequent
to the end of fiscal year 2006, the real property and improvements in North
Miami, Florida subleased by the Company to an unrelated third party. Initially
most of these properties were leased by the Company on long-term ground and
building leases with the buildings either constructed by the lessors under
build-to-suit leases or constructed by the Company. A relatively small number of
business locations involve the lease or acquisition of existing buildings. In
almost every instance where the Company initially owned the land or building on
leased property, the Company entered into a sale and lease-back transaction with
investors to recover a substantial portion of its per unit investment.
All of the Company's units require periodic refurbishing in order to
remain competitive. The Company has budgeted $800,000 for its refurbishing
program for fiscal year 2007. See Item 7, "Liquidity and Capital Resources" for
discussion of the amounts spent in fiscal year 2006.
The following table summarizes the Company's properties as of September
30, 2006 including franchise locations, a club and Company managed locations.
Franchise/
Square License Lease
Name and Location Footage Seats Owned by Terms
----------------- ------- ----- -------- -----
Big Daddy's Liquors #4 1,978 N/A Company 3/1/02 to 2/28/27
Flanigan's Enterprises and Options to
Inc. (10) 2/28/37
7003 Taft Street
Hollywood, FL
Big Daddy's Liquors #7 1,450 N/A Company 11/1/00 to 10/31/07
Flanigan's Enterprises and Annual Options
Inc. to 10/31/15
1550 W. 84th Street
Hialeah, FL
Big Daddy's Liquors #8 1,800 N/A Company 5/1/99 to 4/30/14
Flanigan's Enterprises
Inc.
959 State Road 84
Fort Lauderdale, FL
Flanigan's Seafood 4,300 130 Company 10/1/71 to 12/31/09
Bar and Grill #9 New lease 1/1/10
Flanigan's Enterprises to 12/31/14
Inc. (1) Options to
23
Franchise/
Square License Lease
Name and Location Footage Seats Owned by Terms
----------------- ------- ----- -------- -----
1550 W. 84th Street 12/31/24
Hialeah, FL
Flanigan's Legends 5,000 150 Franchise 1/4/00 to 1/3/20
Seafood Bar and Grill Option to 1/3/25
#11, 11 Corporation (3)
330 Southern Blvd.
W. Palm Beach, FL
Flanigan's Legends 5,000 180 Franchise 11/15/92 to
Seafood Bar and Grill 11/15/07
#12 Galeon Tavern, Inc.(3) Option to
2401 Tenth Ave. North 11/15/12
Lake Worth, FL
Flanigan's Seafood 3,320 90 Franchise 6/1/79 to 6/1/09
Bar and Grill #14, Options to 6/1/19
Big Daddy's #14, Inc.(2)(3)(5)(9)
2041 NE Second St.
Deerfield Beach, FL
Piranha Pats II-#15 4,000 90 Franchise/ 3/2/76 to 8/31/11
CIC Investors #15 Ltd.(3)(5) Limited
1479 E. Commercial Blvd. Partnership
Ft. Lauderdale, FL
Flanigan's Seafood 4,300 100 Franchise 2/15/72 to 12/31/10
Bar and Grill #18 Options to
Twenty Seven Birds 12/31/20
Corp. (2) (3) (5)
2721 Bird Avenue
Miami, FL
Flanigan's Seafood 4,500 160 Company 3/1/72 to 12/31/10
Bar and Grill #19 Options to 12/31/20
Flanigan's Enterprises
Inc. (2)(4)
2505 N. University Dr.
Hollywood, FL
Flanigan's Seafood 5,100 140 Company 7/15/68 to 12/31/07
Bar and Grill #20 Annual options
Flanigan's Enterprises until the Company
Inc. (2) fails to exercise
13205 Biscayne Blvd. Additional Lease
North Miami, FL 5/1/69 to 12/31/07
Annual options
until the Company
fails to exercise
24
Franchise/
Square License Lease
Name and Location Footage Seats Owned by Terms
----------------- ------- ----- -------- -----
Flanigan's Seafood 4,100 200 Company 12/16/68 to
Bar and Grill #22 12/31/10
Flanigan's Enterprises Options to 12/31/20
Inc. (2)(4) Option to purchase
2600 W. Davie Blvd.
Ft. Lauderdale, FL
Flanigan's Enterprises 3,000 90 Company Company Owned
Inc. #27 (8)(11)
732-734 NE 125th St.
North Miami, FL
Flanigan's Seafood 4,600 150 Company Company Owned
Bar and Grill #31,
Flanigan's Enterprises
Inc. (2)(12)
4 N. Federal Highway
Hallandale, FL
Flanigan's Guppy's 4,620 130 Franchise 11/1/03 to 4/30/11
Seafood Bar and Grill #33
Guppies, Inc. (2)(3)(5)
45 S. Federal Highway
Boca Raton, FL
Big Daddy's Liquors 3,000 N/A Company 5/29/97 to 5/28/07
#34, Flanigan's Options to 5/28/17
Enterprises, Inc. (1)
9494 Harding Ave.
Surfside, FL
Flanigan's Seafood 4,600 140 Company 4/1/71 to 12/31/10
Bar and Grill #40 Options to 12/31/15
Flanigan's Enterprises
Inc. (2)
5450 N. State Road 7
Ft. Lauderdale, FL
Piranha Pat's #43 4,500 90 Franchise 12/1/72 to 11/30/07
BD 43 Corporation (2)(3)(5) Options to 11/30/19
2500 E. Atlantic Blvd.
Pompano Beach, FL
Big Daddy's Liquors 6,000 N/A Company 12/21/68 to 1/1/10
#47, Flanigan's Options to 1/1/60
Enterprises, Inc. (6)
8600 Biscayne Blvd.
Miami, FL
25
Franchise/
Square License Lease
Name and Location Footage Seats Owned by Terms
----------------- ------- ----- -------- -----
Flanigan's Seafood 8,000 200 Limited 06/01/91 to 5/31/11
Bar and Grill #13, Partnership Options to 5/31/21
CIC Investors #13, Ltd
11415 S. Dixie Highway
Pinecrest, FL
Flanigan's Seafood 4,000 200 Limited 10/24/06 to 10/24/11
Bar and Grill #50, Partnership Options to 10/24/26
CIC investors #50,
Ltd.(13)
17185 Pines Boulevard
Pembroke Pines, FL
Flanigan's Seafood 6,800 200 Limited 8/1/97 to 12/31/11
Bar and Grill #60, Partnership
CIC Investors #60 Ltd.
9516 Harding Avenue
Surfside, FL
Flanigan's Seafood 6,128 200 Limited 4/01/05 to 3/31/15
Bar and Grill #65 Partnership Options to 3/31/25
CIC Investors #65, Ltd
2335 State Road 7,Suite 100
Wellington, FL
Flanigan's Seafood 4,850 161 Limited 4/1/98 to 3/31/08
Bar and Grill #70 Partnership Options to 3/31/28
CIC Investors #70 Ltd.
12790 SW 88 St
Kendall, FL
Flanigan's Seafood 7,000 200 Limited 10/1/03 to 9/30/09
Bar and Grill #75 Partnership Options to 9/30/27
CIC Investors # 75 Ltd.
950 S. Federal Highway
Stuart, FL 34994
Flanigan's Seafood 5,000 165 Limited 6/15/01 to 12/14/19
Bar and Grill #80 Partnership Options to 12/14/39
CIC Investors #80 Ltd.
8695 N.W. 12th St
Miami, FL
Flanigan's Seafood 5,700 235 Limited 7/29/01 to 7/28/17
Bar and Grill #95 Partnership Options to 7/28/32
CIC Investors #95 Ltd.
2460 Weston Road
Weston, FL
26
Franchise/
Square License Lease
Name and Location Footage Seats Owned by Terms
----------------- ------- ----- -------- -----
Mardi Gras 10,000 400 Company 4/30/06 to 4/30/16
Flanigan's Enterprises, Option to 4/30/26
Inc., #600 (7)(14)
Powers Ferry Landing
Atlanta, GA
(1) License subject to chattel mortgage.
(2) License pledged to secure lease rental.
(3) Franchised by Company.
(4) Former franchised unit returned and now operated by Company.
(5) Lease assigned to franchisee.
(6) The Company owns 48% of the underlying leasehold from the unaffiliated
third parties to whom the lease had been assigned and subleased back.
(7) Location managed by an unaffiliated third party.
(8) Location was closed in May 1998. The Company entered into a five year
sublease agreement, with two five year options, with an unaffiliated
third party who is presently operating a restaurant at this location.
(9) Effective December 1, 1998, the Company purchased the Management
Agreement to operate the franchised restaurant for the franchisee.
(10) Ground lease executed by the Company on September 25, 2001. The Company
constructed a building of 4,120 square feet, 1,978 square feet is used
by the Company for the operation of a package liquor store and the
other 2,142 square feet is subleased as retail space. The package
liquor store opened for business on November 17, 2003.
(11) Subsequent to the end of fiscal year 2006, the Company purchased the
real property subject to the ground lease of this location.
(12) During the fourth quarter of fiscal year 2006, the Company purchased
the real property and for an assignment of a ground lease of this
location pursuant to an option to purchase contained in the Sublease
Agreement. Subsequent to the end of fiscal year 2006, the Company
purchased the real property subject to the ground lease.
(13) Location estimated to open for business during the third quarter of
fiscal year 2007.
(14) During the third quarter of fiscal year 2006, the Company's lease for
this location expired. The unaffiliated third party entered into a new
lease for the business premises effective May 1, 2006. The Company has
no liability on the new lease.
27
Exercise of Option to Purchase; Purchase of Limited Liability Company.
----------------------------------------------------------------------
During the fourth quarter of fiscal year 2006, the Company closed on
the purchase of 100% of the membership interest of the limited liability company
which owns the real property and ground lease for a small portion of the
property of the Company's combination restaurant and package liquor store
located at 4 North Federal Highway, Hallandale, Florida, (Store #31) for total
consideration of $3,876,000, including a purchase price of $3,862,500, pursuant
to a Mediation Settlement Agreement. The limited liability company became a
wholly owned subsidiary of the Company. The purchase was financed by a
$3,280,000 mortgage. As collateral for the mortgage, the limited liability
company granted the lender a first mortgage on its real property and a leasehold
mortgage on the ground lease, while the Company granted a first mortgage on its
parking lot adjacent to the above-described business location. The Company's
grant of a first mortgage on its parking lot included the satisfaction of the
purchase money mortgage on the same for $266,000. The new mortgage bears
interest at the rate of seven and one-half (7 1/2%) percent per annum, is
amortized over twenty (20) years with equal monthly payments of principal and
interest, each in the amount of $26,400, with the entire principal balance and
all accrued interest due in seven (7) years.
Item 3. Legal Proceedings.
--------------------------
The corporate offices consist of a two (2) story building, with space
initially set aside on the ground floor for a package liquor store. The Company
filed suit against the adjacent shopping center to determine the Company's right
to non-exclusive parking in the shopping center. During fiscal year 2005,
summary judgment was granted in favor of the adjacent shopping center denying
the Company non-exclusive parking rights in the shopping center. The Company
continued pursuing its claim against the seller of the building, its individual
partners and its attorney for damages for failing to disclose documents
pertaining to the release of the non-exclusive parking rights. During the first
quarter of fiscal year 2006, summary judgment was granted in favor of the
sellers' attorney, but denied as to the seller and its individual partners.
During the third quarter of fiscal year 2006, the summary judgment granted in
favor of the sellers' attorney was reversed by the court. The Company is
appealing the granting of the summary judgment in favor of the adjacent shopping
center, which appeal is necessary to proceed against the seller and its
individual partners even though the Company no longer plans to use the ground
floor for a package liquor store.
Subsequent to the end of fiscal year 2006, the Company filed suit
against the landlord of the limited partnership which owns the restaurant in
Pinecrest, Florida seeking to recover the cost of structural repairs to the
business premises which it contends were the responsibility of the landlord
pursuant to the terms of the lease and to recover rent paid while the structural
repairs delayed the renovation of the business premises. The complaint includes
a count by the limited partnership seeking a determination by the court that it
has the exclusive right to the use of the pylon sign in
28
front of the business premises. The landlord has denied liability for structural
repairs to the business premises, refused to reimburse the limited partnership
for any rent paid while structural repairs delayed its renovations and denied
the limited partnership the exclusive use of the pylon sign.
Certain states have liquor liability (dram shop) laws which allow a
person injured by an "obviously intoxicated person" to bring a civil suit
against the business (or social host) who had served intoxicating liquors to an
already "obviously intoxicated person". Dram shop claims normally involve
traffic accidents and the Company generally does not learn of dram shop claims
until after a claim is filed and then the Company vigorously defends these
claims on the grounds that its employee did not serve an "obviously intoxicated
person". Damages in most dram shop cases are substantial. At the present time,
there are no dram shop cases pending against the Company. The Company maintains
general liability insurance. See Item 1, "Insurance" on page 14 of this annual
report of Form 10-K for a discussion of general liability insurance.
There is no material pending legal proceedings, other than ordinary
routine litigation incident to the business, none of which the Company believes
is material.
Item 4. Submission of Matters to a Vote of Security Holders.
------------------------------------------------------------
During the fourth quarter of fiscal year 2006 the Company did not
submit any matter to a vote of the security holders.
PART II
-------
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
--------------------------------------------------------------------------------
Fiscal 2006 Fiscal 2005 Fiscal 2004
----------- ----------- -----------
High Low High Low High Low
---- --- ---- --- ---- ---
First quarter 10.55 9.38 7.35 6.20 6.85 6.00
Second quarter 10.40 9.09 9.35 6.97 6.90 6.13
Third quarter 11.29 9.45 9.40 7.16 6.70 7.16
Fourth quarter 12.30 7.86 9.90 8.90 6.65 6.21
On December 9, 2004, the Company declared a cash dividend of 32 cents
per share payable on January 28, 2005 to shareholders of record on January 14,
2005.
On January 13, 2006, the Company declared a cash dividend of 35 cents
per share payable on February 15, 2006 to shareholders of record on January 31,
2006.
29
Item 6. Selected Financial Data. (In thousands - except EPS)
--------------------------------
-----------------------------------------------------------------------------
2002 2003 2004 2005 2006
-----------------------------------------------------------------------------
Statement of Operations Data
-----------------------------------------------------------------------------
Revenue $39,124 $40,253 $45,933 $49,032 $55,014
-----------------------------------------------------------------------------
Income from Operations
$ 2,788 $ 2,024 $ 1,273 $ 2,166 $ 1,699
-----------------------------------------------------------------------------
Net income $1,383 $ 888 $ 440 $ 1,107 $ 1,250
-----------------------------------------------------------------------------
Earnings per share $ 0.71 $ 0.46 $ 0.23 $ 0.58 $ 0.66
-----------------------------------------------------------------------------
Balance Sheet Data
-----------------------------------------------------------------------------
Total assets $17,367 $18,733 $19,774 $21,099 $27,398
-----------------------------------------------------------------------------
Long term liabilities
$ 1,593 $ 1,314 $ 1,217 $ 1,383 $ 4,958
-----------------------------------------------------------------------------
Net working capital
$ 2,980 $ 2,093 $ 2,131 $ 2,137 $ 1,396
-----------------------------------------------------------------------------
Stockholders' equity
$ 9,957 $10,351 $10,101 $10,273 $10,792
-----------------------------------------------------------------------------
Dividends declared
$ 499 $ 520 $ 581 $ 609 $ 658
-----------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
---------
The Company owns and/or operates restaurants with lounges, package
liquor stores and an adult entertainment oriented club. As of September 30,
2006, the Company operated twenty one units. The Company had interests in an
additional seven units which were franchised by the Company, including the
franchised restaurant managed by the Company. Of the units operated by the
Company, four were combination package liquor store and restaurant, eleven were
restaurants only and five were package liquor stores only. There was one
restaurant operated by the Company for an unrelated third party under a
management agreement and one club operated by an unaffiliated third party for
the Company under a management agreement. During fiscal year 2001, the
30
Company entered into a ground lease and constructed a building in Hollywood,
Florida for the operation of a package liquor store from one half (1/2) of the
building and to sublease retail space from the other one half (1/2). The package
liquor store opened for business during the first quarter of fiscal year 2004
and the retail space was subleased during the second quarter of fiscal year
2004. At the start of the second quarter of fiscal year 2004, a restaurant
located in Stuart, Florida, owned by a limited partnership of which the Company
acts as general partner, opened for business. During the third quarter of fiscal
year 2005, a restaurant located in Wellington, Florida, owned by a limited
partnership of which the Company acts as general partner, opened for business.
At the start of the second quarter of fiscal year 2006, the Company assumed
management of a restaurant owned by an unaffiliated third party. During the
fourth quarter of fiscal year 2006, a restaurant located in Pinecrest, Florida,
owned by a limited partnership of which the Company acts as general partner,
opened for business.
Results of Operations
---------------------
THE FISCAL YEARS ENDING SEPTEMBER 30, 2006, ("FISCAL 2006") and OCTOBER 1, 2005,
("FISCAL 2005"), WERE FIFTY TWO WEEK FISCAL YEARS. THE FISCAL YEAR ENDING
OCTOBER 2, 2004, ("FISCAL 2004"), WAS A FIFTY THREE WEEK FISCAL YEAR AND THE
EXTRA WEEK IN FISCAL YEAR 2004 CONTRIBUTED TO INCREASES IN REVENUES AND EXPENSES
FOR THE FISCAL YEAR WHEN COMPARING THEM TO REVENUES AND EXPENSES FOR THE FISCAL
YEARS 2006 and 2005, WITH THE EXCEPTION OF THE WEEKLY AVERAGE OF SAME STORE
SALES.
REVENUES (in thousands):
-----------------------------------------------------------------------------
Fifty Two Fifty Two Fifty Three
Weeks Ended Weeks Ended Weeks Ended
Sept. 30, 2006 Oct. 1, 2005 Oct. 2, 2004
Sales
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Restaurant, food $32,847 61.4% $29,219 61.3% $26,347 59.1%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Restaurant, bar 7,610 14.2% 6,610 13.9% 7,351 16.5%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Package goods 13,046 24.4% 11,810 24.8% 10,911 24.4%
-----------------------------------------------------------------------------
Total 53,503 100.0% 47,639 100.0% 44,609 100.0%
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Franchise revenues 1,114 984 958
-----------------------------------------------------------------------------
31
-----------------------------------------------------------------------------
Owners fee 224 261 265
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Other operating
income 173 148 101
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Total Revenues $55,014 $49,032 $45,933
-----------------------------------------------------------------------------
Comparison of Fiscal Years Ended September 30, 2006 and October 1, 2005
-----------------------------------------------------------------------
As the table above illustrates, total revenues for fiscal 2006
increased by 12.2% when compared to fiscal 2005. The increase in total revenues
for fiscal 2006 was primarily due to the restaurant in Pinecrest, Florida
opening during the fourth quarter of fiscal 2006, the restaurant in Wellington,
Florida being open for the entire fiscal 2006, increases in same store sales and
menu price increases. During fiscal year 2007, ("fiscal 2007"), total revenues
are expected to continue increasing primarily due to the restaurant in
Pinecrest, Florida being open for the entire fiscal year, the anticipated
opening of the restaurants in Pembroke Pines, Florida and Davie, Florida during
the third quarter of fiscal 2007, increased volume and menu price increases.
Restaurant food sales represented 61.4% of total sales for fiscal 2006
as compared to 61.3% of total sales for fiscal 2005. The weekly average of same
store restaurant food sales, which includes five (5) limited partnership
restaurants, was $568,000 for fiscal 2006 as compared to $540,000 for fiscal
2005, an increase of 5.2%. The weekly average of restaurant food sales increased
for fiscal 2006 as compared to fiscal 2005 due to increased volume and menu
price increases. The percentage of restaurant food sales to total sales is
expected to increase during fiscal 2007 due to the opening of the restaurant in
Pinecrest, Florida during the fourth quarter of fiscal 2006 and the anticipated
opening of the restaurants in Pembroke Pines, Florida and Davie, Florida during
the third and fourth quarters of fiscal 2007, respectively.
Restaurant bar sales represented 14.2% of total sales for fiscal 2006
as compared to 13.9% of total sales for fiscal 2005. The weekly average of same
store restaurant bar sales, which includes five (5) limited partnership
restaurants, was $131,000 for fiscal 2006 as compared to $122,000 for fiscal
2005, an increase of 7.4%. During fiscal 2006, the Company continued offering
promotions at the bars only, during limited hours, which promotions began during
fiscal 2005. With this promotion, the increase in the weekly average of same
store restaurant bar sales is expected to continue, but management is careful to
preserve and continue promoting the Company's perception as a family restaurant.
Package store sales represented 24.4% of total sales for fiscal 2006 as
compared to 24.8% of total sales for fiscal 2005. The weekly average of
32
same store package sales was $223,000 for fiscal 2006 as compared to $192,000
for fiscal 2005, an increase of 16.1%. The increase was primarily due to
increased volume. During fiscal 2007, package store sales are expected to remain
constant due to increased competition.
The gross profit margin for restaurant sales was 65.5% for fiscal 2006
as compared to 65.1% for fiscal 2005. The Company offset increased costs during
fiscal 2006 with menu price increases, which resulted in an increased gross
profit margin for restaurant sales when compared to fiscal 2005. Notwithstanding
the increased gross profit margin for restaurant sales during fiscal 2006 when
compared to fiscal 2005, during the fourth quarter of fiscal 2006 the gross
profit margin for restaurant sales was 64.1%, as compared to 66.0% for the
fourth quarter of fiscal 2005. The decline of 1.9% in gross profit margin
contributed to an operating loss of $135,000 for the fourth quarter of fiscal
2006. Due to the decline in gross profit margin for restaurant sales during the
fourth quarter of fiscal 2006 and the expectation that costs will continue
increasing during fiscal 2007, the Company instituted menu price increases
during the first quarter of fiscal 2007 to restore and maintain its gross profit
margin for restaurant sales.
The gross profit margin for package store sales was 28.6% for fiscal
2006 and fiscal 2005. The gross profit margin for package good sales is expected
to remain constant during fiscal 2007.
Operating Costs and Expenses
----------------------------
Operating costs and expenses for fiscal 2006 were $53,315,000 as
compared to $46,866,000 for fiscal 2005, an increase of 13.8%. Operating
expenses are comprised of the cost of merchandise sold, payroll and related
costs, occupancy costs and selling, general and administrative expenses. The
increase in operating costs and expenses for fiscal 2006 was primarily due to
the opening of the new restaurant in Pinecrest, Florida during the fourth
quarter of fiscal 2006, the restaurant in Wellington, Florida being open for the
entire fiscal year, increased payroll and related costs, as well as a general
increase in overall operating costs and expenses. During fiscal 2007, operating
costs and expenses are expected to continue increasing primarily due to the
restaurant in Pinecrest, Florida being open for the entire fiscal year, the
anticipated opening of the new restaurants in Pembroke Pines, Florida and Davie,
Florida during the third and fourth quarters of fiscal 2007, respectively and a
general increase in overall operating costs and expenses.
Payroll and related costs were $16,062,000 for fiscal 2006, as compared
to $13,636,000 for fiscal 2005, an increase of 17.8%. The increase in payroll
and related costs for fiscal 2006 was primarily due to the opening of the new
restaurant in Pinecrest, Florida during the fourth quarter of fiscal 2006, the
impact of the Florida minimum wage which went into effect during the third
quarter of fiscal 2005 and further impacted by its first annual cost of living
increase effective January 1, 2006 and the restaurant in Wellington, Florida
being open for the entire fiscal year. Payroll and related costs are expected to
increase during fiscal 2007 due to the restaurant in Pinecrest, Florida being
open for the entire fiscal year, the anticipated opening of the restaurants in
Pembroke Pines, Florida and Davie, Florida during the third and fourth quarters
of fiscal 2007, respectively and
33
the second annual increase in the Florida minimum wage by a cost of living
increase effective January 1, 2007.
Occupancy costs, which include rent, common area maintenance, repairs
and taxes were $3,189,000 for fiscal 2006 as compared to $2,853,000 for fiscal
2005, an increase of 11.8%. The increase in occupancy costs during fiscal 2006
was primarily due to increases in real property taxes and the payment of rent
for the restaurant in Wellington, Florida for the entire fiscal year.
Selling, general and administrative expenses were $10,800,000 for
fiscal 2006 as compared to $9,439,000 for fiscal 2005, an increase of 14.4%. The
increase in selling, general and administrative expenses during fiscal 2006 was
primarily due to the opening of the new restaurant in Pinecrest, Florida during
the fourth quarter of fiscal 2006, the restaurant in Wellington, Florida having
been open the entire fiscal year and a general increase in overall expenses,
including but not limited to utilities. Selling, general and administrative
expenses are expected to increase during fiscal 2007 due to the restaurant in
Pinecrest, Florida being open for the entire fiscal year; the anticipated
opening of the restaurants in Pembroke Pines, Florida and Davie, Florida;
increase in insurance costs and an overall increase in expenses.
Other Income and Expenses
-------------------------
Other income and expenses, which excludes minority interest in
consolidated limited partnerships, were income of $613,000 for fiscal 2006 as
compared to an expense of ($113,000) for fiscal 2005. Other income and expense
for fiscal 2006 includes insurance recovery, net of casualty loss, of $666,000
which includes the deletion of the net book value of property and equipment as a
result of Hurricane Wilma ($64,000), repair of damage ($138,000) and food waste
($61,000), caused by Hurricane Wilma, offset by insurance recoveries of
$929,000, ($979,000 less a $50,000 deductible), from the Company's insurance
carrier.
Comparison of Fiscal Years Ended October 1, 2005 and October 2, 2004
-----------------------------------------------------------------------
As the table above also illustrates, total revenues for fiscal 2005
increased by 6.7% when compared to fiscal 2004.
Restaurant food sales represented 61.3% of total sales for fiscal 2005
as compared to 59.1% of total sales for fiscal 2004. The weekly average of same
store restaurant food sales, which now includes three (3) limited partnership
restaurants instead of one (1), was $444,000 for fiscal 2005 as compared to
$404,000 for fiscal 2004, an increase of 9.9%. The weekly average of restaurant
food sales increased for fiscal 2005 as compared to fiscal 2004 due to increased
volume and menu price increases.
Restaurant bar sales represented 13.9% of total sales for fiscal 2005
as compared to 16.5% of total sales for fiscal 2004. The weekly average of same
store restaurant bar sales was $99,000 for fiscal 2005 as compared to $101,000
for fiscal 2004, a decrease of 2.0%. During fiscal 2005 the Company
34
began offering promotions at the bars only, during limited hours. With this
promotion, the increase in the weekly average of same store restaurant bar sales
is expected to continue, but management is careful to preserve and continue
promoting the Company's perception as a family restaurant.
Package store sales represented 24.8% of total sales for fiscal 2005 as
compared to 24.4% of total sales for fiscal 2004. The weekly average of same
store package sales was $192,000 for fiscal 2005 as compared to $180,000 for
fiscal 2004, an increase of 6.7%. The increase was primarily due to increased
volume.
The gross profit margin for restaurant sales was 65.1% for fiscal 2005
as compared to 64.4% for fiscal 2004. The Company offset increased costs during
fiscal 2005 with menu price increases, which resulted in an increased gross
profit margin for restaurant sales when compared to fiscal 2004.
The gross profit margin for package store sales was 28.6% for fiscal
2005 as compared to 27.9% for fiscal 2004. For fiscal 2005, the increase in
gross profit is attributed to the purchase of "close out" and inventory
reduction merchandise from wholesalers and the continued implementation of a
training program for package store employees.
Operating Costs and Expenses
----------------------------
Operating costs and expenses for fiscal 2005 were $46,866,000 as
compared to $44,660,000 for fiscal 2004. Operating expenses are comprised of the
cost of merchandise sold, payroll and related costs, occupancy costs and
selling, general and administrative expenses. Operating costs and expenses for
fiscal 2005 increased by 4.9% as compared to operating costs and expenses for
fiscal 2004. The increase in operating costs and expenses for fiscal 2005 was
primarily due to the opening of the new restaurant in Wellington, Florida during
the third quarter of fiscal 2005, the restaurant in Stuart, Florida and the
package store in Hollywood, Florida being open for the entire fiscal year, as
well as a general increase in overall operating costs and expenses.
Payroll and related costs were $13,636,000 for fiscal 2005, as compared
to $12,523,000 for fiscal 2004, representing increases of 8.9%. The increase in
payroll and related costs for fiscal 2005 was primarily due to the opening of
the new restaurant in Wellington, Florida during the third quarter of fiscal
2005, the new Florida minimum wage which went into effect during the third
quarter of fiscal 2005 and the restaurant in Stuart, Florida and the package
store in Hollywood, Florida being open for the entire fiscal year.
Occupancy costs, which include rent, common area maintenance, repairs
and taxes were $2,853,000 for fiscal 2005 as compared to $2,740,000 for fiscal
2004. The increase in occupancy costs during fiscal 2005 was due primarily to
the payment of rent for the new restaurant in Wellington, Florida.
Selling, general and administrative expenses were $9,439,000 for fiscal
2005 as compared to $9,525,000 for fiscal 2004. Excluding non-recurring expenses
and/or adjustments in selling, general and administrative
35
expenses during fiscal 2004, which expenses and adjustments totaled $467,000,
the increase in selling, general and administrative expenses during fiscal 2005
was primarily due to the opening of the new restaurant in Wellington, Florida
during the third quarter of fiscal 2005 and the restaurant in Stuart, Florida
and the package store in Hollywood, Florida having been open the entire fiscal
year.
During fiscal 2004, the following non-recurring expenses and/or
adjustments in selling, general and administrative expense adversely effected
earnings:
First Quarter Fiscal Year 2004:
b. Adjustment for store supplies $104,000
Second Quarter Fiscal Year 2004:
a. Adjustment for allocations of insurance
premiums related to franchises: $178,000
b. Past Due Real Property Taxes $ 52,000
c. Excess opening costs of joint venture $ 74,000
restaurant in Stuart, Florida
Third Quarter Fiscal Year 2004:
a. Past Due Real Property Taxes $ 59,000
--------
Total: $467,000
Other Income and Expenses
-------------------------
Other income and expenses were an expense of ($113,000) for fiscal 2005
as compared to ($362,000) for fiscal 2004. Other income and expense of fiscal
2005 includes the expense of ($121,000) relating to the abandonment of fixed
assets, as compared to the expense of ($367,000) for fiscal 2004.
New Limited Partnership Restaurants
-----------------------------------
As the Company opens new limited partnership restaurants on a more
regular basis, the Company's profitability may be reduced by the higher costs
associated with the opening of the same for a period of up to 90 days. To insure
that a new restaurant opens with the high quality of service for which the
Company is known, the Company has a select group of employees, known as "new
restaurant openers", who travel to new restaurants for that purpose. "New
restaurant openers" may spend up to 90 days at a new restaurant. In the case of
a new limited partnership restaurant which is not local, lodging must be
provided for the "new restaurant openers", which may increase the opening cost
significantly over the opening cost of local restaurants. In addition,
36
immediately prior to the opening of a new restaurant and in order to provide a
"test run" for the same, the Company sponsors pre-opening parties for its
limited partners and the Company employees. By way of illustration, the opening
of the limited partnership restaurants in Pinecrest, Florida, Wellington,
Florida and Stuart, Florida during fiscal 2006, 2005 and 2004 respectively,
incurred the following pre-opening and opening expenses:
#13 - Pinecrest, Fl #65- Wellington, Fl #75- Stuart, Fl.
------------------- ------------------- ----------------
Pre-Opening Rent: $535,000* $18,000 $17,000
Pre-Opening Payroll: $ 80,000 $90,000** $22,000***
Post-Opening Increased
Payroll Costs (90 days): $ 55,000 $22,000** $42,000***
Promotional Costs: $ 6,000 $ 3,000 $ 7,000
--------- --------- ----------
Total: $676,000 $133,000 $88,000
* includes the payment of rent, ($204,000), while structural repairs were
being made.
** excludes lodging and per diem allowances, ($51,000), for new restaurant
openers incurred due to the location of this facility.
*** excludes lodging and per diem allowances, ($74,000), for new restaurant
openers incurred due to the location of this facility.
The pre-opening rent paid is generally less for new leases, rather than
the purchase of an existing location which includes the assumption of an
existing lease. In the negotiation of a new lease, there is normally a
construction period before which the rent payments begin. However, rent expense
is recognized on a straight line basis over the term of the lease for GAAP
purposes, which results in a deferred rent liability. In the case of the limited
partnership restaurant in Wellington, Florida, the lease agreement, as amended,
included a two hundred ten (210) day period for renovations, although the
restaurant did not open for seven and one half (7 1/2) months from the date
possession of the business premises was turned over to the limited partnership
to begin its build out. Since the opening of the limited partnership restaurant
in Surfside, Florida and with the exception of the limited partnership
restaurant in Pinecrest, Florida, the pre-opening rent expense for limited
partnership restaurants has ranged from $17,000 - $137,000. The pre-opening rent
expense for the limited partnership restaurant in Pinecrest, Florida is an
exception to the customary pre-opening rent expense due to structural repairs
which had to be made to the business premises prior to renovations beginning.
During fiscal 2006, the limited partnership restaurant in Pinecrest,
Florida reported a loss of $155,000 primarily due to pre-opening costs, thus
contributing to a reduction in the operating income for fiscal 2006. During
fiscal 2007, operating income will be adversely affected by opening costs of the
new limited partnership restaurants in Pembroke Pines, Florida and Davie,
Florida.
Trends
------
During the next twelve months, management expects continued increases
in restaurant sales due primarily to the restaurant in Pinecrest, Florida
37
being open for the entire fiscal year, the anticipated opening of the new
restaurants in Pembroke Pines, Florida and Davie, Florida, and continued
increases in same store sales. Package goods sales are expected to remain
constant due to increased competition. Franchise royalties are expected to
increase due to the new restaurant in Pinecrest, Florida, the anticipated
opening of the new restaurants in Pembroke Pines, Florida and Davie, Florida and
continued increases in same store sales for the limited partnerships and
franchises. At the same time, management also expects higher food costs and
overall expenses to increase, although the Company will continue to raise its
menu prices to offset the higher food costs and overall expenses wherever
competitively possible.
The Company intends to open additional restaurants as suitable
locations become available, using limited partnerships, of which it is the
general partner, to raise funds to own and operate the same.
The Company is not actively searching for locations for the operation
of a package store, but if an appropriate location for a package store becomes
available, the Company will consider the same.
Liquidity and Capital Resources
-------------------------------
Cash Flows
----------
The following table is a summary of the Company's cash flows for fiscal
years 2006, 2005 and 2004:
----------------------------------------------------------------------------
Fiscal Years
----------------------------------------------------------------------------
2006 2005 2004
----------------------------------------------------------------------------
(in thousands)
----------------------------------------------------------------------------
Net cash provided by
operating activities $2,080 $2,664 $3,411
----------------------------------------------------------------------------
Net cash used in
investing activities (3,594) (2,054) (1,289)
----------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 538 (872) (773)
----------------------------------------------------------------------------
Net increase (decrease)
in cash and equivalents (976) (262) 1,349
----------------------------------------------------------------------------
Cash and equivalents.
beginning of year 2,674 2,936 1,587
----------------------------------------------------------------------------
Cash and equivalents.
end of year $1,698 $2,674 $2,936
----------------------------------------------------------------------------
38
Capital Expenditures
--------------------
Capital expenditures were approximately $4,311,000, including $531,000
as a direct result of Hurricane Wilma and $601,000 for the acquisition of a
subsidiary, $2,095,000 and $1,532,000 during fiscal years 2006, 2005 and 2004,
respectively. During fiscal year 2006, the Company also purchased one (1)
vehicle, for a purchase price of $70,000, which vehicle was 100% financed. The
capital expenditures for each fiscal year included upgrading existing units
serving food and improvements to package liquor stores. The capital expenditures
for fiscal year 2006 included renovations to the business premises by the
limited partnership in Pinecrest, Florida, ($1,681,000).
Contractual Cash Obligations
----------------------------
Less Than 1-5 After
Total 1 Year Years 5 Years
----- ------ ----- -------
Long-term debt $ 5,181,000 $ 223,000 $ 2,132,000 $2,826,000
Operating leases 15,825,000 2,166,000 8,068,000 5,591,000
Rib Contract 2,800,000 2,800,000
----------- ---------- ----------- ----------
Total $23,806,000 $5,189,000 $10,200,000 $8,417,000
=========== ========== =========== ==========
All of the Company's units require periodic refurbishing in order
to remain competitive. The budget for fiscal 2007 includes approximately
$800,000 for this purpose, which is not included in the above table. The table
also does not include any lease guarantees for franchises, which guarantees
total approximately $1,570,000. The Company expects the funds for these
improvements to be provided from operations. In addition, it is anticipated that
during fiscal 2007, two new limited partnerships, (Pembroke Pines, Florida and
Davie, Florida), will require approximately $2,100,000 and $2,350,000,
respectively, in capital expenditures to close on the purchase of the restaurant
locations, complete their renovations and preparation for opening as a
"Flanigan's Seafood Bar and Grill" restaurant, which funds will be raised
through a private offering. The private offering will also raise funds to
reimburse the Company for any funds advanced in excess of its planned investment
in these limited partnerships. The table also does not include any lease
guarantees for franchisees.
Purchase Commitments
--------------------
Effective December 1, 2006, the Company entered into a purchase
agreement with its rib supplier. The terms of the agreement stipulate that the
Company will purchase approximately $2,800,000 of baby back ribs during calendar
year 2007 at a fixed cost. The Company contracts for the purchase of baby back
ribs on an annual basis to fix the cost and ensure adequate
39
supply for the calendar year. The Company purchases all of its rib supply from
this vendor, but management believes that several other alternative vendors are
available, if needed.
Purchase of Company Common Stock
--------------------------------
Pursuant to a discretionary plan approved by the Board of Directors,
during fiscal 2006, the Company purchased 14,350 shares of its common stock for
an aggregate purchase price of $139,000. Of the shares purchased, 7,500 shares
of its common stock were purchased from the Chief Operating Officer and Director
of the Company, during the second and third quarters of fiscal 2006, at an
aggregate purchase price of $77,000, which per share purchase price was less
than the closing per share market price on the date of each purchase.
Long Term Debt
--------------
As of the end of fiscal 2006, the Company had long term debt including
the line of credit of $5,181,000, as compared to $1,557,000 and $1,314,000 as of
the end of fiscal 2005 and 2004, respectively, increases of 232.8% and 294.3%,
respectively. The net increase in long term debt as of the end of fiscal 2006,
as compared to long term debt as of the end of fiscal 2005 and fiscal 2004,
includes the unsecured loan from Bank Atlantic ($762,000), one (1) secured auto
loan ($70,000) and the mortgage loan for the purchase of the membership interest
of the limited liability company ($3,280,000), reduced by the satisfaction of a
purchase money mortgage ($266,000).
The Company repaid long term debt, including the Bank of America note
payable, the Bank Atlantic note payable, auto loans, mortgages and capital lease
obligations in the amount of $489,000, $309,000 and $278,000 in fiscal 2006,
2005 and 2004 respectively.
During the fourth quarter of fiscal 2006, the Company financed the
purchase of the membership interest of the limited liability company which owns
the real property and ground lease for a small portion of the property of the
Company's combination restaurant and package liquor store located at 4 North
Federal Highway, Hallandale, Florida, (Store #31) with a $3,280,000 mortgage. As
collateral for the mortgage, the limited liability company granted the lender a
first mortgage on its real property and a leasehold mortgage on the ground
lease, while the Company granted a first mortgage on its parking lot adjacent to
the above-described business location. The Company's grant of a first mortgage
on its parking lot, included the satisfaction of the purchase money mortgage on
the same for $266,000. The new mortgage bears interest at the rate of seven and
one-half (7 1/2%) percent per annum, is amortized over twenty (20) years with
equal monthly payments of principal and interest, each in the amount of $26,400,
with the entire principal balance and all accrued interest due in seven (7)
years.
Subsequent to the end of fiscal 2006, the Company received an advance
of $250,000 on the new mortgage procured by the Company to purchase the
membership interest of the limited liability company which owns the real
property and ground lease at the Company's combination restaurant and package
40
liquor store located at 4 N. Federal Highway, Hallandale, Florida (Store #31).
The new mortgage still bears interest at the rate of seven and one-half (7 1/2%)
percent per annum, is amortized over twenty (20) years with equal monthly
payments of principal and interest, each in the amount of $28,600, with the
entire principal balance and all accrued interest still due on its original
maturity date in seven (7) years.
Subsequent to the end of fiscal 2006, the Company re-financed the
mortgage note encumbering the Company's corporate offices. The new mortgage, in
the original principal amount of $1,000,000, bears interest at the rate of 7.25%
per annum, is amortized over twenty (20) years with equal monthly payments of
principal and interest, each in the amount of $8,000, with the entire principal
balance and all accrued interest due in seven (7) years. The pre-payment of the
mortgage note, which otherwise matured in August, 2008, incurred a prepayment
penalty of $17,000.
Subsequent to the end of fiscal 2006, the Company increased its line of
credit from $2,000,000 to $2,650,000. The Company granted its lender a second
mortgage on its corporate offices as additional collateral for the increase in
the line of credit, in addition to a security interest in substantially all of
the assets of the Company. The Company drew additional funds on the line of
credit in the aggregate amount of $1,200,000 raising the total balance
outstanding to $1,962,000.
As of September 30, 2006, the Company is in compliance with the
affirmative covenants contained in any of its loan documents.
Working capital
---------------
The table below summarizes the current assets, current liabilities and
working capital for the fiscal 2006, 2005 and 2004:
Sept. 30 Oct. 1 Oct. 1
2006 2005 2004
Current assets $6,315,000 $6,091,000 $5,889,000
Current liabilities 4,919,000 3,954,000 3,758,000
Working capital 1,396,000 2,137,000 2,131,000
Working capital for fiscal 2006 decreased by 34.7% and 34.5% from the
working capital for fiscal 2005 and 2004, respectively. The decrease in working
capital during fiscal 2006, which was supplemented by a draw of $762,000 against
the Company's line of credit, was due to the purchase of the management
agreement to operate the restaurant in Deerfield Beach, Florida ($500,000);
investment in the limited partnership restaurant which owns the restaurant in
Pinecrest, Florida ($1,295,000); and the purchase of the membership interest of
the limited liability company which owns the real property and ground lease to a
small portion of property of the Company's combination restaurant and package
liquor store located at 4 N. Federal Highway, Hallandale, Florida.
Management believes that positive cash flow from operations will
adequately fund operations and debt reductions, but not all of the planned
41
capital expenditures in fiscal 2007, which will have to be supplemented through
future advances on the Company's line of credit. It is also anticipated that
during fiscal 2007, working capital will be adversely affected by investments
and/or advances made by the Company to the limited partnerships in Pembroke
Pines, Florida and/or Davie, Florida pending reimbursement of advances made by
the Company in excess of its investment once the private offering by each
limited partnership is completed; payment of the balance due upon completion of
the installation for DSL service for all package liquor store and restaurant
locations, including on-line security ($65,000); payment of the balance of the
cost of improvements to two (2) existing Company restaurants ($168,000
estimated); purchase of a new point of sale system for Company package liquor
stores ($180,000 estimated); and the cash to close on the purchase of the real
property subject to ground leases of two locations currently leased by the
Company ($600,000 estimated).
Critical Accounting Policies
----------------------------
The Company's significant accounting policies are more fully described
in Note 1 to the Company's consolidated financial statements located in Item 8
of this Annual Report on Form 10-K. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, and expenses, and the related
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates under different assumptions or conditions. The Company
believes that the following critical accounting policies are subject to
estimates and judgments used in the preparation of its consolidated financial
statements:
Estimated Useful Lives of Property and Equipment
------------------------------------------------
The estimate of useful lives for property and equipment are significant
estimates. Expenditures for the leasehold improvements and equipment when a
restaurant is first constructed are material. In addition, periodic refurbishing
takes place and those expenditures can be material. Management estimates the
useful life of those assets by considering, among other things, expected use,
life of the lease on the building, and warranty period, if applicable. The
assets are then depreciated using a straight line method over those estimated
lives. These estimated lives are reviewed periodically and adjusted if
necessary. Any necessary adjustment to depreciation expense is made in the
income statement of the period in which the adjustment is determined to be
necessary.
Consolidation of Limited Partnerships
-------------------------------------
The Company operates seven (7) restaurants as general partner of the
limited partnerships that own the operations of these restaurants. Additionally,
the Company expects that any expansion which takes place in opening new
restaurants will also result in the Company operating the
42
restaurants as general partner. In addition to the general partnership interest
the Company also purchases limited partnership units ranging from 12% to 42% of
the total units outstanding. As a result of these controlling interests, the
Company consolidates the operations of these limited partnerships with those of
the Company despite the fact the Company does not own in excess of 50% of the
equity interests. All intercompany transactions are eliminated in consolidation.
The minority interests in the earnings of these limited partnerships are removed
from net income and are not included in the calculation of earnings per share.
Income Taxes
------------
Financial Accounting Standards Board Statement No. 109, Accounting for
Income Taxes requires, among other things, recognition of future tax benefits
measured at enacted rates attributable to deductible temporary differences
between financial statement and income tax bases of assets and liabilities and
to tax net operating loss and tip credit carryforwards to the extent that
realization of said benefits is more likely than not. For discussion regarding
the Company's carryforwards refer to Note 8 to the consolidated financial
statements for fiscal 2006.
Other Matters
-------------
Impact of Inflation
--------------------
The Company does not believe that inflation has had any material effect
during the past three fiscal years. To the extent allowed by competition, the
Company recovers increased costs by increasing prices.
43
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
The Company does not ordinarily hold market risk sensitive instruments
for trading purposes. During the fourth quarter of fiscal 2006, the Company sold
its one equity security, realizing a gain of $78,000. As of September 30, 2006,
the Company held no equity securities.
Interest Rate Risk
------------------
At September 30, 2006, the Company has two debt arrangements which have
a variable interest rate. For one of these instruments, a mortgage note, the
Company has entered into an interest rate swap agreement to hedge the interest
rate risk. The mortgage note has an outstanding principal balance at September
30, 2006 of $788,000. The other instrument, the secured $2,000,000 line of
credit, has a variable interest rate, which is at prime. During the second
quarter of fiscal 2006, the Company paid the unsecured promissory note which had
an original principal balance of $100,000 and a variable interest rate which was
at prime, in full, using funds from its secured line of credit. Increases in
interest rates may have a material affect upon results of operations, depending
upon the outstanding principal balance on the line of credit from time to time.
Subsequent to the end of fiscal 2006, the Company re-financed the
mortgage note for which the Company entered into an interest rate swap agreement
to hedge the interest rate risk, with a new mortgage, in the original principal
amount of $1,000,000, with a fixed interest rate of 7.25% per annum. The
pre-payment of the mortgage note, which otherwise matured in August, 2008,
incurred a prepayment penalty of $17,000.
At September 30, 2006, the Company's cash resources earn interest at
variable rates. Accordingly, the Company's return on these funds is affected by
fluctuations in interest rates. Any decrease in interest rates will have a
negative effect on the Company's earnings.
There is no assurance that interest rates will increase or decrease
over the next fiscal year.
Item 8. Financial Statements and Supplementary Data.
---------------------------------------------------
Financial statements of the Company at September 30, 2006 and October
1, 2005, which include each of the three years in the period ended September 30,
2006 and the independent certified public accountants' report thereon, are
included herein.
Item 9A. Controls and Procedures.
-------------------------------
(a) Evaluation of Disclosure Controls and Procedures
44
Our Chief Executive Officer and Chief Financial Officer have, with the
participation of management evaluated the effectiveness of the design and
operation of the Company's "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(e) or
15d-15(e)) as of September 30, 2006. It is the conclusion of our Chief Executive
Officer and Chief Financial Officer that such disclosure controls and procedures
operate such that important information flows to appropriate collection and
disclosure points in a timely manner and are effective in ensuring that material
information is accumulated and communicated to management and made known to the
Chief Executive Officer and Chief Financial Officer particularly during the
period in which this report was prepared, as appropriate, to allow timely
decisions regarding timely disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any system of
controls and procedures, no matter how well designed and operated, is subject to
limitations, including the exercise of our judgment in evaluating the same. As a
result, there can be no assurance that our disclosure controls and procedures
will prevent all errors.
(b) Change in Internal Control over Financial Reporting
During fiscal 2006, the Company continued to assess the effectiveness
of its "internal controls over financial reporting" on an account by account
basis as a part of our on-going accounting and financial reporting review
process. The assessments were made by management, under the supervision of our
Chief Financial Officer. During fiscal 2006, the Company made no changes in its
internal control over financial reporting that materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting. Notwithstanding, the effectiveness of our system of
internal control over financial reporting is subject to limitations, including
the exercise of our judgment in evaluating the same. As a result, there can be
no assurance that our internal control over financial reporting will prevent all
errors.
PART III
Item 10. Directors and Executive Officers of the Registrant.
------------------------------------------------------------
The information set forth under the caption "Election of Directors" in
the Company's definitive Proxy Statement for its 2007 Annual Meeting of
Shareholders, filed with the Securities and Exchange Commission pursuant to
regulation 14A under the Securities and Exchange Act of 1934, as amended (the
2006 Proxy Statement), is incorporated herein by reference. See also "Executive
Officers of the Registrant" included in Part I hereof.
Item 11. Executive Compensation.
--------------------------------
The information set forth in the 2007 Proxy Statement under the caption
"Executive Compensation" is incorporated by reference.
45
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.
---------------------------------------------------------------------------
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the 2007 Proxy Statement is
incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
--------------------------------------------------------
The information set forth under the caption "Election of Directors
-Certain Relationships and Related Transactions" in the 2007 Proxy Statement is
incorporated by reference.
Item 14. Principal Accountant Fees and Services.
-------------------------------------------------
The information set forth in the 2007 Proxy Statement under the caption
"Audit Fee" and "All Other Fees" is incorporated by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
-------------------------------------------------------------------------
(a) 1. Financial Statements
All the financial statements, financial statement schedule and
supplementary data listed in the accompanying Index to Exhibits are filed as
part of this Annual Report.
2. Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as
part of this Annual Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of fiscal
year 2006 or subsequent to year end.
46
Index to Exhibits
Item (14) (a) (2)
Description
-----------
(2) Plan of Reorganization, Amended Disclosure Statement, Amended Plan of
reorganization, Modification of Amended Plan of Reorganization, Second
Modification of Amended Plan of Reorganization, Order Confirming Plan of
Reorganization, (Item 7 (c) of Quarterly Report on Form 8-K filed May 5, 1987 is
incorporated herein by reference).
(3) Restated Articles of Incorporation (Part IV, Item 4 (a) (2) of Annual Report
on Form 10-K filed on December 29, 1982 is incorporated herein by reference).
(10)(a)(1) Employment Agreement with Joseph G. Flanigan (Exhibit A of the Proxy
Statement dated January 27, 1988 is incorporated herein by reference).
(10)(a)(2) Form of Employment Agreement between Joseph G. Flanigan and the
Company (as ratified and amended by the stockholders at the 1988 annual meeting
is incorporated herein by reference).
(10)(c) Consent Agreement regarding the Company's Trademark Litigation (Part
7(c)(19) of the Form 8-K dated April 10, 1985 is incorporated herein by
reference).
(10)(d) King of Prussia (#850) Partnership Agreement (Part 7 (c) (19) of the
Form 8-K dated April 10, 1985 is incorporated herein by reference).
(10)(o) Management Agreement for Atlanta, Georgia, (#600) (Item 14(a)(10)(o) of
the Form 10-K dated October 3, 1992 is incorporated herein by reference).
(10)(p) Settlement Agreement with Former Vice Chairman of the Board of Directors
(re #5) (Item 14 (a)(10)(p) of the Form 10-K dated October 3, 1992 is
incorporated herein by reference).
(10)(q) Hardware Purchase Agreement and Software License Agreement for
restaurant point of sale system. (Item 14(a)(10)(g) of Form 10-KSB dated October
2, 1993 is incorporated herein by reference).
(10)(a)(3) Key Employee Incentive Stock Option Plan (Exhibit A of the Proxy
Statement dated January 26, 1994 is incorporated herein by reference).
(10)(r) Limited Partnership Agreement of CIC Investors #13, Ltd,. between
Flanigan's Enterprises, Inc., as General Partner and fifty percent owner of the
limited partnership, and Hotel Properties, LTD. (Item 14 (a)(10)(r) of the Form
10-KSB dated September 30, 1995 is incorporated herein by reference).
(10)(s) Form of Franchise Agreement between Flanigan's Enterprises, Inc. and
Franchisees. (Item 14 (a)(10)(s) of the Form 10-KSB dated September 30, 1995 is
incorporated herein by reference).
47
(10)(t) Licensing Agreement between Flanigan's Enterprises, Inc. and James B.
Flanigan, dated November 4, 1996, for non-exclusive use of the servicemark
"Flanigan's" in the Commonwealth of Pennsylvania. (Item 14 (a)(10)(t) of the
Form 10-KSB dated September 28, 1996 is incorporated herein by reference).
(10)(u) Limited Partnership Agreement of CIC Investors #15 Ltd., dated March 28,
1997, between B.D. 15 Corp. as General Partner and numerous limited partners,
including Flanigan's Enterprises, Inc. as a limited partner owning twenty five
percent of the limited partnership (Item 14 (a)(10)(u) of the Form 10-KSB dated
September 27, 1997 is incorporated herein by reference).
(10)(v) Limited Partnership Agreement of CIC Investors #60 Ltd., dated July 8,
1997, between Flanigan's Enterprises, Inc., as General Partner and numerous
limited partners, including Flanigan's Enterprises, Inc. as limited partner
owning forty percent of the limited partnership (Item 14 (a)(10)(v) of Form
10-KSB dated September 27, 1997 is incorporated herein by reference).
(10)(w) Stipulated Agreed Order of Dismissal upon Mediation with former
franchisee (Item 14 (a)(10)(w) of Form 10-KSB dated September 27, 1997 is
incorporated herein by reference).
(10)(x) Limited Partnership Agreement of CIC Investors #70, Ltd. dated February
1999 between Flanigan's Enterprises, Inc. as General Partner and numerous
limited partners, including Flanigan's Enterprises, Inc. as limited partner
owning forty percent of the limited partnership. (Item 14 (a) (10) (x) of Form
10-KSB dated October 2, 1999 is incorporated herein by reference)
(10)(y) Limited Partnership Agreement of CIC Investors #80, Ltd., dated May
2001, between Flanigan's Enterprises, Inc. as General Partner and numerous
limited partners, including Flanigan's Enterprises, Inc., as limited partner
owning twenty five percent of the limited partnership. (Item 14(a) (10)(y) of
Form 1--KSB dated September 29, 2001 is incorporated herein by reference.)
(10)(z) Limited Partnership Agreement of CIC Investors #95, Ltd., dated July
2001, between Flanigan's Enterprises, Inc., as General Partner and numerous
limited partners, including Flanigan's Enterprises, Inc. as limited partner
owning twenty eight percent of the limited partnership.(Item 14 (a) (10)(z) of
Form 10-KSB dated September 29, 2001 is incorporated herein by reference.)
(10)(aa) Limited Partnership Agreement of CIC Investors #75, Ltd., dated June
17, 2003, between Flanigan's Enterprises, Inc., as General Partner, and numerous
limited partners, including Flanigan's Enterprises, Inc. as limited partner
owning twelve percent of the limited partnership. (Item 14(a)(10)(aa) of Form
10-K dated October 2, 2004 is incorporated herein by reference.)
(10)(bb) Limited Partnership Agreement of CIC Investors #65, Ltd., dated June
24, 2004, between Flanigan's Enterprises, Inc., as General Partner, and numerous
limited partners, including Flanigan's Enterprises, Inc. as limited partner
owning twenty six percent of the limited partnership. (Item 14(a)(10)(bb) of
Form 10-K dated October 1, 2005 is incorporated herein by reference.)
(10)(cc) Amended and Restated Limited Partnership Certificate and Agreement of
CIC Investors #13, Ltd., dated March 1, 2006, between Flanigan's Enterprises,
Inc., as General Partner, Flanigan's Management services, Inc. and numerous
limited partners, including Flanigan's Enterprises, Inc. as limited partner
owning thirty nine percent of the limited partnership.
48
(13) Registrant's Form 10-K constitutes the Annual Report to Shareholders for
the fiscal year ended September 30, 2006.
(22)(a) Company's subsidiaries are set forth in this Annual Report on Form 10-K.
31.1 CERTIFICATION PURSUANT TO 302 OF SARBANES-OXLEY ACT OF 2002 OF CHIEF
EXECUTIVE OFFICER
31.2 CERTIFICATION PURSUANT TO 302 OF SARBANES-OXLEY ACT OF 2002 OF CHIEF
FINANCIAL OFFICER
32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the registrant had duly caused this annual report on Form
10K to be signed on its behalf by the undersigned thereunto duly authorized.
Flanigan's Enterprises, Inc.
Registrant
By: /s/ JAMES G. FLANIGAN II
------------------------
JAMES G. FLANIGAN II
Chief Executive Officer
Date: 12/29/06
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report on Form 10K has been signed below by the following persons on
behalf of the registrant and in their capacities and on the dates indicated.
/s/ JAMES G. FLANIGAN II Chairman of the Board, Date: 12/29/06
---------------------- Chief Executor Officer,
James G. Flanigan II and Director
/s/ JEFFREY D. KASTNER Chief Financial Officer Date: 12/29/06
---------------------- Secretary and Director
Jeffrey D. Kastner
/s/ MICHAEL ROBERTS Director Date: 12/29/06
----------------------
MICHAEL ROBERTS
49
/s/ GERMAINE M. BELL Director Date: 12/29/06
----------------------
Germaine M. Bell
/s/ BARBARA J. KRONK Director Date: 12/29/06
----------------------
Barbara J. Kronk
/s/ AUGIE BUCCI Chief Operating Officer Date: 12/29/06
---------------------- and Director
Augie Bucci
/s/ MICHAEL B. FLANIGAN Director Date: 12/29/06
----------------------
Michael B. Flanigan
/s/ PATRICK J. FLANIGAN Director Date: 12/29/06
-----------------------
Patrick J. Flanigan
/s/ CHRISTOPHER O'NEIL Director Date: 12/29/06
-----------------------
Christopher O'Neil
================================================================================
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006, OCTOBER 1, 2005, AND OCTOBER 2, 2004
================================================================================
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Income F-3
Statements of Stockholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and Stockholders
Flanigan's Enterprises, Inc.
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheets of Flanigan's
Enterprises, Inc. and Subsidiaries as of September 30, 2006 and October 1, 2005
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 2006.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial position of
Flanigan's Enterprises, Inc. and Subsidiaries as of September 30, 2006 and
October 1, 2005, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended September 30, 2006 in
conformity with accounting principles generally accepted in the United States.
RACHLIN COHEN & HOLTZ LLP
Fort Lauderdale, Florida
December 21, 2006
F-1
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2006 AND OCTOBER 1, 2005
ASSETS 2006 2005
------ ---- ----
Current Assets:
Cash and cash equivalents $ 1,698,000 $ 2,674,000
Marketable securities -- 353,000
Notes and mortgages receivable, current maturities 12,000 16,000
Due from franchisees 569,000 119,000
Other receivables 821,000 189,000
Inventories 2,215,000 1,990,000
Prepaid expenses 813,000 721,000
Deferred tax assets 187,000 29,000
------------ ------------
Total current assets 6,315,000 6,091,000
------------ ------------
Property and Equipment, Net 18,939,000 13,127,000
------------ ------------
Investment in Limited Partnership 153,000 122,000
------------ ------------
Other Assets:
Liquor licenses, net 347,000 347,000
Notes and mortgages receivable 103,000 116,000
Deferred tax assets 397,000 435,000
Other 1,144,000 861,000
------------ ------------
Total other assets 1,991,000 1,759,000
------------ ------------
Total assets $ 27,398,000 $ 21,099,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued expenses $ 4,096,000 $ 2,916,000
Income taxes payable 264,000 295,000
Due to franchisees 268,000 493,000
Current portion of long-term debt 223,000 174,000
Deferred revenues 54,000 62,000
Deferred rent 14,000 14,000
------------ ------------
Total current liabilities 4,919,000 3,954,000
------------ ------------
Long-Term Debt, Net of Current Maturities 4,196,000 1,383,000
------------ ------------
Line of Credit 762,000 --
------------ ------------
Deferred Rent, Net of Current Portion 223,000 241,000
------------ ------------
Minority Interest in Equity of Consolidated Limited Partnerships 6,506,000 5,248,000
------------ ------------
Commitments, Contingencies and Subsequent Events
Stockholders' Equity:
Common stock, $.10 par value; 5,000,000 shares authorized;
4,197,642 shares issued 420,000 420,000
Capital in excess of par value 6,203,000 6,148,000
Retained earnings 10,064,000 9,472,000
Accumulated other comprehensive income -- 50,000
Treasury stock, at cost, 2,313,277 and 2,323,047 shares (5,895,000) (5,817,000)
------------ ------------
Total stockholders' equity 10,792,000 10,273,000
------------ ------------
Total liabilities and stockholders' equity $ 27,398,000 $ 21,099,000
============ ============
See notes to consolidated financial statements.
F-2
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2006, OCTOBER 1, 2005 AND OCTOBER 2, 2004
2006 2005 2004
---- ---- ----
Revenues:
Restaurant food sales $ 32,847,000 $ 29,219,000 $ 26,347,000
Restaurant beverage sales 7,610,000 6,610,000 7,351,000
Package store sales 13,046,000 11,810,000 10,911,000
Franchise-related revenues 1,114,000 984,000 958,000
Owner's fee 224,000 261,000 265,000
Other operating income 173,000 148,000 101,000
------------ ------------ ------------
55,014,000 49,032,000 45,933,000
------------ ------------ ------------
Costs and Expenses:
Cost of merchandise sold:
Restaurants and lounges 13,952,000 12,502,000 12,002,000
Package goods 9,312,000 8,436,000 7,870,000
Payroll and related costs 16,062,000 13,636,000 12,523,000
Occupancy costs 3,189,000 2,853,000 2,740,000
Selling, general and administrative expenses 10,800,000 9,439,000 9,525,000
------------ ------------ ------------
53,315,000 46,866,000 44,660,000
------------ ------------ ------------
Income from Operations 1,699,000 2,166,000 1,273,000
------------ ------------ ------------
Other Income (Expense):
Interest expense (206,000) (116,000) (136,000)
Interest and other income 183,000 106,000 135,000
Limited partnership income 31,000 18,000 6,000
Loss on abandonment of property and equipment (61,000) (121,000) (367,000)
Insurance recovery, net of casualty loss 666,000 -- --
------------ ------------ ------------
613,000 (113,000) (362,000)
------------ ------------ ------------
Income Before Provision for Income Taxes and
Minority Interest in Earnings of Consolidated
Limited Partnerships 2,312,000 2,053,000 911,000
------------ ------------ ------------
Provision for Income Taxes:
Current 870,000 525,000 332,000
Deferred (120,000) 18,000 (162,000)
------------ ------------ ------------
750,000 543,000 170,000
------------ ------------ ------------
Minority Interest in Earnings of Consolidated
Limited Partnerships (312,000) (403,000) (301,000)
------------ ------------ ------------
Net Income $ 1,250,000 $ 1,107,000 $ 440,000
============ ============ ============
Net Income Per Common Share:
Basic $ 0.66 $ 0.58 $ 0.23
============ ============ ============
Diluted $ 0.65 $ 0.58 $ 0.23
============ ============ ============
Weighted Average Shares and Equivalent Shares Outstanding:
Basic 1,884,000 1,895,000 1,922,000
============ ============ ============
Diluted 1,909,000 1,923,000 1,933,000
============ ============ ============
See notes to consolidated financial statements.
F-3
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2006 OCTOBER 1, 2005 AND OCTOBER 2, 2004
Common Stock Accumulated Treasury Stock
------------ Capital in Other --------------
Excess of Retained Comprehensive
Shares Amount Par Value Earnings Income Shares Amount Total
---------- ---------- ---------- ----------- --------- --------- ----------- -----------
Balance, September 27, 2003 4,197,642 $ 420,000 $6,103,000 $ 9,115,000 $ 26,000 2,271,172 $(5,313,000) $10,351,000
Year Ended October 2, 2004:
Comprehensive income:
Net income -- -- -- 440,000 -- -- -- 440,000
Net unrealized loss on
securities -- -- -- -- (1,000) -- -- (1,000)
---------- ---------- ---------- ----------- --------- --------- ----------- -----------
-- -- -- 440,000 (1,000) -- -- 439,000
Purchase of treasury stock -- -- -- -- -- 30,400 (201,000) (201,000)
Exchange of shares -
exercise of stock options -- -- 44,000 -- -- (20,755) 49,000 93,000
Dividends paid
($0.30 per share) -- -- -- (581,000) -- -- -- (581,000)
---------- ---------- ---------- ----------- --------- --------- ----------- -----------
Balance, October 2, 2004 4,197,642 420,000 6,147,000 8,974,000 25,000 2,280,817 (5,465,000) 10,101,000
Year Ended October 1, 2005:
Comprehensive income:
Net income -- -- -- 1,107,000 -- -- -- 1,107,000
Net unrealized gain on
securities -- -- -- -- 25,000 -- -- 25,000
---------- ---------- ---------- ----------- --------- --------- ----------- -----------
-- -- -- 1,107,000 25,000 -- -- 1,132,000
Purchase of treasury stock -- -- -- -- -- 42,720 (353,000) (353,000)
Exchange of shares -
exercise of stock options -- -- 1,000 -- -- (490) 1,000 2,000
Dividends paid
($0.32 per share) -- -- -- (609,000) -- -- -- (609,000)
---------- ---------- ---------- ----------- --------- --------- ----------- -----------
Balance, October 1, 2005 4,197,642 420,000 6,148,000 9,472,000 50,000 2,323,047 (5,817,000) 10,273,000
Year ended September 30, 2006
Comprehensive income:
Net income -- -- -- 1,250,000 -- -- -- 1,250,000
Net unrealized gain on
securities -- -- -- -- (50,000) -- -- (50,000)
---------- ---------- ---------- ----------- --------- --------- ----------- -----------
-- -- -- 1,250,000 (50,000) -- -- 1,200,000
Purchase of treasury stock -- -- -- -- -- 14,350 (139,000) (139,000)
Exchange of shares -
exercise of stock options -- -- 55,000 -- -- (24,120) 61,000 116,000
Dividends paid
($0.35 per share) -- -- -- (658,000) -- -- -- (658,000)
---------- ---------- ---------- ----------- --------- --------- ----------- -----------
Balance, September 30, 2006 4,197,642 $ 420,000 $6,203,000 $10,064,000 $ -- 2,313,277 $(5,895,000) $10,792,000
========== ========== ========== =========== ========= ========= =========== ===========
See notes to consolidated financial statements.
F-4
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2006, OCTOBER 1, 2005 AND OCTOBER 2, 2004
2006 2005 2004
---- ---- ----
Cash Flows from Operating Activities:
Net income $ 1,250,000 $ 1,107,000 $ 440,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,817,000 1,543,000 1,545,000
Loss on abandonment of property and equipment 61,000 121,000 367,000
Insurance recovery, net of casualty loss (666,000) -- --
Gain on sale of marketable securities (78,000) -- --
Deferred income taxes (120,000) 18,000 (162,000)
Deferred rent (18,000) -- --
Minority interests in earning of consolidated limited partnerships 312,000 403,000 301,000
Income from unconsolidated limited partnership (31,000) (18,000) (6,000)
Recognition of deferred revenues (8,000) (8,000) --
Changes in operating assets and liabilities:
(Increase) decrease in:
Due from franchisees (450,000) (119,000) --
Other receivables (221,000) 82,000 106,000
Inventories (225,000) (340,000) (288,000)
Prepaid expenses (92,000) (156,000) 316,000
Refundable deposit, major supplier -- -- 77,000
Other assets (375,000) (82,000) (359,000)
Increase (decrease) in:
Accounts payable and accrued expenses 1,180,000 83,000 198,000
Income taxes payable (31,000) 304,000 518,000
Due to franchisees (225,000) (274,000) 358,000
----------- ----------- -----------
Net cash provided by operating activities 2,080,000 2,664,000 3,411,000
----------- ----------- -----------
Cash Flows from Investing Activities:
Collections on notes and mortgages receivable 17,000 21,000 19,000
Purchase of property and equipment (3,710,000) (2,095,000) (1,532,000)
Acquisition of subsidiary (601,000) -- --
Distributions from unconsolidated limited partnership -- 20,000 14,000
Proceeds from redemption of certificate of deposit -- -- 354,000
Investment in marketable securities -- -- (144,000)
Proceeds from insurance settlement 700,000 -- --
----------- ----------- -----------
Net cash used in investing activities (3,594,000) (2,054,000) (1,289,000)
----------- ----------- -----------
Cash Flows from Financing Activities:
Payments of long-term debt (489,000) (309,000) (278,000)
Proceeds from long-term debt -- 250,000 --
Proceeds from line of credit 762,000 -- --
Dividends paid (658,000) (609,000) (581,000)
Purchase of treasury stock (139,000) (353,000) (201,000)
Distributions to limited partnerships' minority partners (1,054,000) (1,218,000) (1,131,000)
Proceeds from limited partnership interests 2,000,000* 1,365,000** 1,325,000***
Proceeds from exercise of stock options 116,000 2,000 93,000
----------- ----------- -----------
Net cash provided by (used in) financing activities 538,000 (872,000) (773,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (976,000) (262,000) 1,349,000
Cash and Cash Equivalents, Beginning 2,674,000 2,936,000 1,587,000
----------- ----------- -----------
Cash and Cash Equivalents, Ending $ 1,698,000 $ 2,674,000 $ 2,936,000
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 206,000 $ 116,000 $ 136,000
=========== =========== ===========
Income taxes $ 881,000 $ 225,000 $ 173,000
=========== =========== ===========
Non-Cash Financing and Investing Activities:
Purchase of vehicles in exchange for debt $ 70,000 $ 302,000 $ --
=========== =========== ===========
Purchase of Josar Investments, LLC in exchange for debt $ 3,280,000 $ -- $ --
=========== =========== ===========
Sale of marketable securities not settled by September 30, 2006 $ 381,000 $ -- $ --
=========== =========== ===========
* exclusive of the Company's investment in the limited partnership owning the
restaurant in Pinecrest, Florida of $1,300,000.
** exclusive of the Company's investment in the limited partnership owning the
restaurant in Wellington, Florida of $485,000.
*** exclusive of the Company's investment in the limited partnership owning the
restaurant in Stuart, Florida of $175,000.
See notes to consolidated financial statements.
F-5
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006, OCTOBER 1, 2005 AND OCTOBER 2, 2004
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
Incorporated in 1959, Flanigan's Enterprises, Inc. ("Flanigan's" or
the "Company") operates in South Florida as a chain of full-service
restaurants and package liquor stores. Restaurant food and beverage
sales make up the majority of total revenue. At September 30, 2006,
the Company owned and operated two full-service restaurants, five
package liquor stores and four combination full-service restaurants
and package liquor stores in South Florida. In addition, the
Company operates one full-service restaurant in South Florida
pursuant to a management agreement with an unrelated third party
and owns one club in Atlanta, Georgia, which is operated pursuant
to a management agreement with an unrelated third party. The
Company holds interests in seven limited partnerships as general
partner. The Company's restaurants are operated under the
"Flanigan's Seafood Bar and Grill" servicemark while the Company's
package stores are operated under the "Big Daddy's Liquors"
servicemark.
The Company's Articles of Incorporation, as amended, authorize the
Company to issue and have outstanding at any one time 5,000,000
shares of common stock at a par value of $.10.
The Company operates under a 52-53 week year ending the Saturday
closest to September 30. Fiscal years 2006 and 2005 are each
comprised of a 52-week period, while fiscal year 2004 is comprised
of a 53-week period.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned, and
the accounts of the seven limited partnerships in which the Company
acts as general partner and has controlling interests. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The consolidated financial statements and related disclosures are
prepared in conformity with accounting principles generally
accepted in the U.S. Management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and revenue and expenses
during the period reported. These estimates include assessing the
estimated useful lives of tangible assets. Estimates and
assumptions are reviewed periodically and the effects of revisions
are reflected in the consolidated financial statements in the
period they are determined to be necessary. Although these
estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ
from actual results.
F-6
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an
original maturity of three months or less at the date of purchase
to be cash equivalents.
Investments
In accordance with Statement of Financial Accounting Standards No.
115, "Accounting for Certain Debt and Equity Securities" (SFAS
115), securities are classified into three categories: held-to
maturity, available-for-sale, and trading.
The Company's marketable securities are classified as
available-for-sale, which means they may be sold in response to
changes in interest rates, liquidity needs, and for other purposes.
Available-for-sale securities are reported at fair value.
Unrealized holding gains and losses are excluded from earnings and
reported, net of any income tax effect, as a separate component of
stockholders' equity. Realized gains and losses are reported in
earnings based on the adjusted cost of the specific security sold.
Inventories
Inventories, which consist primarily of package liquor products,
are stated at the lower of average cost or market.
Liquor Licenses
In accordance with Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142), liquor
licenses are no longer being amortized, but are tested annually for
impairment (see Note 7).
Property and Equipment
Property and equipment are stated at cost. Expenditures for major
improvements are capitalized. Depreciation commences when the
assets are placed in service. Maintenance and repairs, which do not
improve or extend the life of the respective assets, are charged to
expense as incurred. Upon disposal of assets, the cost and related
accumulated depreciation are removed from the accounts and any gain
or loss is included in income. Depreciation is recorded on a
straight-line basis over the estimated useful lives of the
respective assets.
The estimated useful lives range from three to five years for
vehicles, and three to seven years for furniture and equipment.
Leasehold interests are amortized over the term of the lease up to
a maximum of 15 years. Leasehold improvements are currently being
amortized over the life of the lease up to a maximum of 20 years.
The building and building improvements of the corporate offices in
Fort Lauderdale, Florida and the combination restaurant and package
liquor store in Hallandale, Florida owned by the Company are being
depreciated over forty years.
F-7
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Limited Partnerships
The Company uses the consolidation method of accounting when the
Company has a controlling interest in other companies and limited
partnerships. The Company uses the equity method of accounting when
the Company has an interest between twenty to fifty percent in
other companies and limited partnerships, but does not exercise
control. Under the equity method, original investments are recorded
at cost and are adjusted for the Company's share of undistributed
earnings or losses. All significant intercompany profits are
eliminated.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk are cash and cash equivalents,
investments, other receivables and notes and mortgages receivable.
Cash and Cash Equivalents
From time to time during the year, the Company had deposits in
financial institutions in excess of the federally insured limits.
At September 30, 2006, the Company had deposits in excess of
federally insured limits of approximately $1,611,000. The Company
maintains its cash with high quality financial institutions, which
the Company believes limits these risks.
Notes and Mortgages Receivable
Notes and mortgages receivable arise primarily from the sale of
operating assets, including liquor licenses. Generally, those
assets serve as collateral for the receivable. Management believes
that the collateral, coupled with the credit standing of the
purchasers, limits these risks.
Major Supplier
Throughout fiscal years 2006, 2005 and 2004, the Company purchased
substantially all of its food products from its major supplier
pursuant to a master distribution agreement which entitled the
Company to receive certain purchase discounts, rebates and
advertising allowances. Management believes that several other
alternative vendors are available, if necessary.
Revenue Recognition
The Company records revenues from normal recurring sales upon the
sale of food and beverages and the sale of package liquor products.
Continuing royalties, which are a percentage of net sales of
franchised stores, are accrued as income when earned.
F-8
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Pre-opening Costs
Pre-opening costs are those typically associated with the opening
of a new restaurant and generally include payroll costs associated
with the "new restaurant openers" (a team of select employees who
travel to new restaurants to ensure that the Company's high
standards for quality are met), rent and promotional costs.
Pre-opening costs are expensed as incurred. Pre-opening costs
incurred for the fiscal years ended September 30, 2006, October 1,
2005 and October 2, 2004 were approximately $343,000, $416,000 and
$315,000, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs
incurred for the years ended September 30, 2006, October 1, 2005
and October 2, 2004 were approximately $464,000, $375,000 and
$319,000 respectively.
Fair Value of Financial Instruments
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair value. These instruments
include cash and cash equivalents, investments, notes and mortgages
receivable, other receivables, accounts payables and accrued
expenses. Fair values were assumed to approximate carrying values
for those financial instruments, which are short-term in nature or
are receivable or payable on demand.
The fair value of long-term debt is estimated based on current
rates offered to the Company for debt of comparable maturities and
similar collateral requirements.
Derivative Financial Instruments and Hedging Activities
The Company holds a derivative financial instrument for the purpose
of hedging the risk of certain identifiable and anticipated
transactions. In general, the type of risk hedged is that relating
to the variability of future earnings and cash flows caused by
movements in interest rates. In hedging the transaction, the
Company, in the normal course of business, holds an interest rate
swap, which hedges the fair value of variable rate debt and cash
flows of variable-rate financial assets.
Derivatives are held only for the purpose of hedging such risks,
not for speculation. Generally, the Company entered into the
hedging relationship such that changes in the fair values or cash
flows of items and transactions being hedged are expected to be
offset by corresponding changes in the value of the derivative. At
September 30, 2006, a hedging relationship existed for the mortgage
obligation described in Note 9. Subsequent to the end of fiscal
year 2006, the Company re-financed this mortgage obligation and
terminated this hedging relationship. See Note 17.
F-9
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company accounts for its income taxes using SFAS No. 109,
"Accounting for Income Taxes", which requires the recognition of
deferred tax liabilities and assets for expected future tax
consequences of events that have been included in the consolidated
financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
Comprehensive Income
The Company reports comprehensive income in accordance with the
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). This statement establishes
standards for the reporting and display of comprehensive income and
its components in a full set of general-purpose financial
statements. Comprehensive income generally represents all changes
in stockholders' equity during the year except those resulting from
investments by, or distributions to, stockholders.
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123 (revised
2004), "Share-Based Payment," (SFAS No. 123R) to account for
stock-based employee compensation. Among other items, SFAS 123R
eliminates the use of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and the
intrinsic value method of accounting and requires companies to
recognize the cost of employee services received in exchange for
stock-based awards based on the grant date fair value of those
awards in their financial statements. The Company elected to use
the modified prospective method for adoption, which requires
compensation expense to be recorded for all unvested stock options
beginning in the first quarter of adoption. For stock-based awards
granted or modified subsequent to January 1, 2006, compensation
expense, based on the fair value on the date of grant, will be
recognized in the consolidated financial statements over the
vesting period. This application requires the Company to record
compensation expense for all awards granted to employees and
directors after the adoption date and for the unvested portion of
awards that are outstanding at the date of adoption. The Company
had no unvested stock options as of January 1, 2006 and granted no
stock options in the nine months ended September 30, 2006, so there
is no impact of SFAS No. 123R on the Company's consolidated
financial statements for the year ended September 30, 2006. In
accordance with the modified prospective method, the Company's
consolidated financial statements for prior periods have not been
restated to reflect and do not include the impact of SFAS No. 123R.
Had compensation cost for the options been determined based on the
fair value at the grant date during fiscal years 2005 and 2004,
consistent with SFAS 123, the Company's net income would have been
as follows:
F-10
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation (Continued)
2005 2004
---- ----
Net income, as reported $1,107,000 $440,000
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (88,000) (25,000)
---------- --------
Pro forma net income $1,019,000 $415,000
========== ========
Earnings Per Share:
Basic:
As reported $ 0.58 $ 0.23
Pro forma $ 0.54 $ 0.22
Diluted:
As reported $ 0.58 $ 0.23
Pro forma $ 0.53 $ 0.21
The Company used the Black-Scholes option-pricing model to
determine the fair value of grants made in 2004. For purposes of
disclosure, the estimated fair value of the options were being
amortized to expense over the options vesting period of one year.
The following assumptions were applied in determining the pro forma
compensation cost:
2004
----
Risk Free Interest Rate 3.1%
Expected Dividend Yield 5.0%
Expected Option Life 5 years
Expected Stock Price Volatility 24%
Long-Lived Assets
The Company continually evaluates whether events and circumstances
have occurred that may warrant revision of the estimated life of
its intangible and other long-lived assets or whether the remaining
balance of its intangible and other long-lived assets should be
evaluated for possible impairment. If and when such factors, events
or circumstances indicate that intangible or other long-lived
assets should be evaluated for possible impairment, the Company
will determine the fair value of the asset by making an estimate of
expected future cash flows over the remaining lives of the
respective assets and compare that fair value with the carrying
value of the assets in measuring their recoverability. In
determining the expected future cash flows, the assets will be
grouped at the lowest level for which there are cash flows, at the
individual store level.
Reclassifications
Certain amounts in the prior year consolidated financial statements
have been reclassified to conform to the presentation of the 2006
consolidated financial statements.
F-11
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements
In September 2006, the SEC issued Staff Accounting Bulletin No.
108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements"
(SAB 108). SAB 108 requires companies to evaluate the materiality
of identified unadjusted errors on each financial statement and
related disclosures using both the rollover and the iron curtain
approach. SAB 108 applies to annual financial statements for fiscal
years ending after November 15, 2006. The Company does not expect
the adoption of SAB 108 to have a material impact on its financial
condition or results of operation.
In September 2006, the FASB issued SFAS 157, "Fair Value
Measurements" which provides guidance for using fair value to
measure assets and liabilities. The standard applies whenever other
standards require (or permit) assets or liabilities to be measured
at fair value but does not expand the use of fair value in any new
circumstances. The standard clarifies that for items that are not
actively traded, such as certain kinds of derivatives, fair value
should reflect the price in a transaction with a market
participant, including an adjustment for risk, not just the
company's mark-to-model value. SFAS 157 also requires expanded
disclosure of the effect on earnings for items measured using
unobservable data. The provisions of SFAS 157 are effective for
financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years.
The Company does not expect the adoption of SFAS 157 at the
beginning of 2008 to have a material impact
In July 2006, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS Statement No. 109. This
Interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprise's financial statements in
accordance with SFAS Statement No. 109, Accounting for Income
Taxes. This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure, and transition. This Interpretation
is effective for fiscal years beginning after December 15, 2006.
The Company does not expect the adoption of Interpretation No. 48
to have a material impact.
On April 13, 2006, the FASB issued FSP No. FIN 46(R)-6,
"Determining the Variability to Be Considered in Applying FASB
Interpretation No. 46(R)," which requires the use of a "by design"
approach for determining whether an interest is variable when
applying FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities." This approach includes evaluating whether an
interest is variable based on a thorough understanding of the
design of the potential variable interest entity ("VIE"), including
the nature of the risks that the potential VIE was designed to
create and pass along to interest holders in the entity. The
guidance in this FSP is effective for reporting periods beginning
after June 15, 2006. The Company adopted the guidance presented in
this FSP in the fourth quarter of 2006 on a prospective basis. The
implementation did not have an effect on the results of operations
or financial position.
F-12
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
On February 3, 2006, the FASB issued FSP No. FAS 123(R)-4
"Classification of Options and Similar Instruments Issued as
Employee Compensation That Allow for Cash Settlement upon the
Occurrence of a Contingent Event." This FSP amends SFAS No. 123(R),
addressing cash settlement features that can be exercised only upon
the occurrence of a contingent event that is outside the employee's
control. These instruments are not required to be classified as a
liability until it becomes probable that the event will occur. The
Company adopted this FSP in the second quarter of 2006. The
implementation did not have an effect on the results of operations
or financial position.
In November 2005, the FASB issued final FASB Staff Position ("FSP")
FAS No. 123R-3, "Transition Election Related to Accounting for the
Tax Effects of Share-Based Payment Awards." The FSP provides an
alternative method of calculating excess tax benefits from the
method defined in SFAS No. 123R for share-based payments. A
one-time election to adopt the transition method in this FSP is
available to those entities adopting SFAS No. 123R using either the
modified retrospective or modified prospective method. Up to one
year from the initial adoption of SFAS No. 123R or effective date
of the FSP is provided to make this one-time election. However,
until an entity makes its election, it must follow the guidance in
SFAS No. 123R. The FSP is effective upon initial adoption of SFAS
No. 123R and became effective for the Company in the second quarter
of 2006. The Company is currently evaluating the allowable methods
for calculating excess tax benefits and have not yet determined
whether it will make a one-time election to adopt the transition
method described in this FSP, nor the expected impact on its
position or results of operation.
In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes
and Error Corrections, a Replacement of APB Opinion No. 20 and FASB
Statement No. 3". SFAS 154 applies to all voluntary changes in
accounting principle and requires retrospective application to
prior periods' financial statements of changes in accounting
principle. This statement also requires that a change in
depreciation, amortization, or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154
carries forward without change the guidance contained in Opinion
No. 20 for reporting the correction of an error in previously
issued financial statements and a change in accounting estimate.
This statement is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005.
The Company does not expect the adoption of this standard to have a
material impact on its financial condition, results of operations,
or liquidity.
F-13
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
In March 2005, the Financial Accounting Standards Board issued FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement No. 143." This
Interpretation clarifies that the term conditional asset retirement
obligation refers to a legal obligation to perform an asset
retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be
within the control of the entity. Accordingly, an entity is
required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value can be
reasonably estimated. This Interpretation is effective no later
than the end of fiscal years ending after December 15, 2005. The
adoption of this standard did not have a material impact on the
financial condition, results of operations, or liquidity of the
Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment." SFAS No. 123(R) is a revision of SFAS No.
123, "Accounting for Stock-Based Compensation," and supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
Statement No. 123(R) will require the fair value of all stock based
awards issued to employees to be recorded as an expense over the
related vesting period. The statement also requires the recognition
of compensation expense for the fair value of any unvested stock
based awards outstanding at the date of adoption. This statement
became effective January 1, 2006. The adoption of this standard did
not have a material impact on the financial condition or results of
operations of the Company.
NOTE 2. ACQUISITION
On July 26, 2006, the Company acquired Josar Investments, LLC (Josar)
for $3,876,000 of total consideration. The assets acquired, liabilities
assumed and the results of operations have been included in the
Company's consolidated financial statements as of that date. The
acquisition of Josar included the purchase by the Company of 100% of
the membership interests of Josar, which became a wholly owned
subsidiary of the Company. The Company purchased Josar for the purpose
of acquiring the land and building owned by Josar and leased by the
Company for a combination restaurant and package liquor store
operation. The purchase price was fully attributed to the fair value of
the land and building.
Contemporaneous to closing on the purchase of Josar, the Company
entered into a mortgage loan on the property acquired together with
property owned by the Company adjacent thereto for $3,280,000. Proceeds
from the mortgage loan were used to satisfy a portion of the purchase
price, to retire the previous mortgage loan on the Company's adjacent
property for $266,000 and to pay certain fees associated with the
transaction.
F-14
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. INVESTMENTS
Cost and fair value of investments available for sale are as follows:
2005
----
Cost - equity instruments $303,000
Gross unrealized gains 50,000
--------
Total $353,000
========
All funds held at October 1, 2005 were invested in marketable
securities of one entity. This investment was sold during the fiscal
year ended September 30, 2006, resulting in a gain on sale of
approximately $78,000.
NOTE 4. NOTES AND MORTGAGES RECEIVABLE
Receivables consist of the following at September 30, 2006 and October
1, 2005:
2006 2005
---- ----
Notes and mortgages receivable from unrelated parties, bearing interest
at rates ranging from 10.5% to 15% and due in varying
installments through 2013 $ 45,000 $ 51,000
Mortgage receivable from related party, bearing interest at 14%
and due in installments through 2011 70,000 81,000
-------- --------
115,000 132,000
Current portion 12,000 16,000
-------- --------
$103,000 $116,000
======== ========
The majority of the notes and mortgages receivable represent amounts
owed to the Company for store operations which were sold. Unless a
significant amount of cash is received on the sale, a pro rata portion
of the gain is deferred and recognized only as payments on the notes
and mortgages are received by the Company. Any losses on sales of
stores are recognized currently. Approximately $8,000 of deferred gain
was recognized on collections of such notes receivable during each of
the fiscal years ended September 30, 2006 and October 1, 2005 and
$6,000 was recognized during the fiscal year ended October 2, 2004.
Future scheduled payments on the receivables at September 30, 2006
consist of the following:
2007 $12,000
2008 14,000
2009 16,000
2010 19,000
2011 9,000
Thereafter 45,000
--------
$115,000
========
F-15
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. PROPERTY AND EQUIPMENT
2006 2005
---- ----
Furniture and equipment $ 8,057,000 $ 7,367,000
Leasehold interests and improvements 15,716,000 13,309,000
Land and land improvements 4,203,000 1,024,000
Building and improvements 2,121,000 1,168,000
Vehicles 665,000 585,000
Construction in progress -- 260,000
----------- -----------
30,762,000 23,713,000
Less accumulated depreciation and amortization 11,823,000 10,586,000
----------- -----------
$18,939,000 $13,127,000
=========== ===========
NOTE 6. INVESTMENTS IN LIMITED PARTNERSHIPS
The Company has determined that all but one limited partnership
discussed below should be consolidated by virtue of control as
evidenced by general partnership interests held by the Company. As a
result, the accompanying consolidated financial statements reflect the
limited partnerships in which the Company has a general partnership
interest on a consolidated basis. The remaining limited partnership in
which the Company does not have control has been accounted for
utilizing the equity method.
Beginning with the limited partnership which owns the restaurant in
Surfside, Florida and for all limited partnerships formed subsequent
thereto for the purpose of owning and operating a restaurant under the
"Flanigan's Seafood Bar and Grill" servicemark, a standard financial
arrangement has been used in each limited partnership agreement. Under
this financial arrangement, until the limited partnership has received
an aggregate sum equal to the initial investment of all limited
partners from the net profit from the operation of the restaurant, the
limited partnership receives an aggregate sum equal to 25% of the
initial investment of all limited partners first each year, with any
additional net profit divided equally between the Company, as manager
of the restaurant, and the limited partnership. Once the limited
partnership has received an aggregate sum equal to the initial
investment of all limited partners from the net profit from the
operation of the restaurant, the net profit is divided equally between
the Company, as manager of the restaurant, and the limited partnership.
As of September 30, 2006, the limited partnerships which own the
restaurants in Kendall, Florida, West Miami, Florida and Surfside,
Florida have each received an aggregate sum equal to the initial
investment of their respective limited partners from the net profit
from the operation of their respective restaurants and the Company
receives one-half (1/2) of the net profit as manager of each
restaurant. The Company plans to continue forming limited partnerships
to raise funds to own and operate restaurants under the "Flanigan's
Seafood Bar and Grill" servicemark using the same financial
arrangement.
F-16
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. INVESTMENTS IN LIMITED PARTNERSHIPS (Continued)
Each limited partnership agreement, excluding only the limited
partnership agreement for the franchised restaurant in Fort
Lauderdale, Florida which is governed by a franchise agreement,
gives the limited partnership the right to use the "Flanigan's
Seafood Bar and Grill" servicemark for a fee equal to 3% of the
gross sales from the operation of the restaurant, while the Company
acts as general partner only. This 3% fee is "earned" when sales
are made by the limited partnerships and is paid weekly, in
arrears. The Company manages the books and records of all limited
partnerships, including collecting funds generated by the same. As
a result, the 3% fee is paid to the Company by book entry on a
weekly basis and is never delinquent.
Pinecrest, Florida
During the fourth quarter of fiscal year 2006, the limited
partnership completed the structural repairs and its interior
build-out of the business premises in Pinecrest, Florida for the
operation of a restaurant under the "Flanigan's Seafood Bar and
Grill" servicemark. During the third quarter of fiscal year 2006,
the limited partnership completed its private offering, raising the
sum of $3,300,000 to reimburse the Company for advances of
$1,506,000 made to the limited partnership in excess of its
investment in the same, to complete the renovations to the business
premises and to provide working capital. The Company continues to
act as general partner and is also the owner of a thirty nine
percent limited partnership interest, as are other related parties,
including, but not limited to officers and directors of the Company
and their families. This restaurant opened for business on August
14, 2006. This entity is consolidated in the accompanying financial
statements.
Surfside, Florida
The Company has an investment in a limited partnership, which
purchased the assets of a restaurant in Surfside, Florida and
renovated it for operation under the "Flanigan's Seafood Bar and
Grill" servicemark. The Company acts as general partner of the
limited partnership and is also a forty-two percent limited
partner. Other related parties, including, but not limited to,
officers and directors of the Company and their families are also
investors. As of the second quarter of fiscal year 2006, the
limited partners had received distributions from the limited
partnership equal to their original investment and pursuant to the
limited partnership agreement, the Company thereafter receives
fifty percent of the net profit from the operation of the
restaurant as a management fee. This entity is consolidated in the
accompanying financial statements.
Kendall, Florida
The Company owns an investment in a limited partnership, which
constructed and now operates a restaurant under the "Flanigan's
Seafood Bar and Grill" servicemark in Kendall, Florida. The Company
is the general partner and has a forty percent limited partnership
interest. As of April 1, 2003, the limited partners had received
distributions from the limited partnership equal to their original
investment and pursuant to the limited partnership agreement, the
Company thereafter receives fifty percent of the net profit from
the operation of the restaurant as a management fee. This entity is
consolidated in the accompanying financial statements.
F-17
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. INVESTMENTS IN LIMITED PARTNERSHIPS (Continued)
West Miami, Florida
The Company owns an investment in a limited partnership, which
purchased, renovated and now operates a restaurant under the
"Flanigan's Seafood Bar and Grill" servicemark in West Miami,
Florida. The Company is the general partner and has a twenty-five
percent limited partnership interest. Other related parties,
including, but not limited to, officers and directors of the
Company and their families are also investors. As of December 31,
2005, the limited partners had received distributions from the
limited partnership equal to their original investment and pursuant
to the limited partnership agreement, the Company thereafter
receives fifty percent of the net profit from the operation of the
restaurant as a management fee. This entity is consolidated in the
accompanying financial statements.
Weston, Florida
The Company owns an investment in a limited partnership, which
acquired, renovated and now operates a restaurant under the
"Flanigan's Seafood Bar and Grill" servicemark in Weston, Florida.
The Company is the general partner and has a twenty-eight percent
limited partnership interest. Other related parties, including, but
not limited to, officers and directors of the Company and their
families are also investors. This entity is consolidated in the
accompanying financial statements.
Stuart, Florida
The Company owns an investment in a limited partnership, which
acquired, renovated and now operates a restaurant under the
"Flanigan's Seafood Bar and Grill" servicemark in Stuart, Florida.
The Company is the general partner and has a twelve percent limited
partnership interest. Other related parties, including, but not
limited to, officers and directors of the Company and their
families are also investors. This entity is consolidated in the
accompanying financial statements.
Wellington, Florida
The Company owns an investment in a limited partnership, which
acquired, renovated and now operates a restaurant under the
"Flanigan's Seafood Bar and Grill" servicemark in Wellington,
Florida. The Company is the general partner and has a twenty six
percent limited partnership interest. Other related parties,
including, but not limited to, officers and directors of the
Company and their families are also investors. This restaurant
opened for business on May 27, 2005. This entity is consolidated in
the accompanying financial statements.
F-18
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. INVESTMENTS IN LIMITED PARTNERSHIPS (Continued)
Davie, Florida
During the first quarter of fiscal year 2006, the Company, as agent
for a Florida limited partnership to be formed, entered into a
contract to purchase an existing restaurant in Davie, Florida for a
purchase price of $650,000 to renovate and operate a restaurant
under the "Flanigan's Seafood Bar and Grill" servicemark.
Subsequent to the end of fiscal year 2006, a limited partnership
was formed with the Company as general partner, which limited
partnership expects to enter into a new lease for the business
premises and close on the purchase at the start of the second
quarter of fiscal year 2007. The initial estimate for renovations
and pre-opening expenses is $1,700,000. The funds necessary will be
raised through a private offering by the limited partnership. The
Company will act as general partner and own up to thirty percent of
the limited partnership. The restaurant is expected to open for
business during the fourth quarter of fiscal year 2007.
Pembroke Pines, Florida
During the third quarter of fiscal year 2006, the Company, as agent
for a Florida limited partnership to be formed, entered into a
contract to purchase an existing restaurant in Pembroke Pines,
Florida for a purchase price of $500,000 to renovate and operate a
restaurant under the "Flanigan's Seafood Bar and Grill"
servicemark. Subsequent to the end of fiscal year 2006, a limited
partnership was formed with the Company as general partner, which
limited partnership entered into a new lease for the business
premises and closed on the purchase. The purchase price was reduced
to approximately $305,000 due to the fact that site plan
restrictions in the plat where the business premises is located
would not permit outdoor seating and the liquor license owned by
the seller was a restaurant liquor license, with no market value,
rather than a quota liquor license, with a market value of
$145,000, as contracted. The initial estimate for renovations and
pre-opening expenses is $1,600,000. The funds necessary will be
raised through a private offering by the limited partnership. The
Company will act as general partner and will own up to thirty
percent of the limited partnership. The restaurant is expected to
open for business during the third quarter of fiscal year 2007.
Fort Lauderdale, Florida
The Company has a franchise agreement with a limited partnership
which owns a restaurant in Fort Lauderdale. The Company is a
twenty-five percent limited partner in the franchise. Other related
parties, including, but not limited to, officers and directors of
the Company and their families are also investors. This entity is
reported using the equity method in the accompanying consolidated
financial statements.
F-19
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. INVESTMENTS IN LIMITED PARTNERSHIPS (Continued)
The following is a summary of condensed unaudited financial
information pertaining to the Company's limited partnership
investment in Fort Lauderdale, Florida:
2006 2005 2004
---- ---- ----
Financial Position:
Current assets $ 68,000 $ 47,000 $ 109,000
Non-current assets 588,000 544,000 483,000
Current liabilities 88,000 134,000 118,000
Non-current liabilities 71,000 81,000 91,000
Operating Results:
Revenues 2,171,000 2,111,000 2,244,000
Gross profit 1,426,000 1,378,000 1,438,000
Net income 122,000 72,000 25,000
NOTE 7. LIQUOR LICENSES
The Company stopped amortizing liquor licenses September 29, 2002.
Liquor licenses are tested for impairment in September of each fiscal
year. The fair value of liquor licenses at September 30, 2006, exceeded
the carrying amount; therefore, no impairment loss was recognized. The
fair value of the liquor licenses was evaluated by comparing the
carrying value to recent sales for similar liquor licenses in the
County issued. At September 30, 2006 and October 1, 2005, the total
carrying amount of liquor licenses was approximately $347,000. There
were no liquor licenses acquired in fiscal year 2006 which require
capitalization.
NOTE 8. INCOME TAXES
The components of the Company's provision for income taxes for fiscal
years 2006, 2005 and 2004 are as follows:
2006 2005 2004
---- ---- ----
Current:
Federal $ 703,000 $ 407,000 $ 252,000
State 167,000 118,000 80,000
--------- --------- ---------
870,000 525,000 332,000
--------- --------- ---------
Deferred:
Federal (94,000) 21,000 (146,000)
State (26,000) (3,000) (16,000)
--------- --------- ---------
(120,000) 18,000 (162,000)
--------- --------- ---------
$ 750,000 $ 543,000 $ 170,000
========= ========= =========
F-20
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. INCOME TAXES (Continued)
A reconciliation of income tax computed at the statutory federal rate
to income tax expense is as follows:
2006 2005 2004
---- ---- ----
Tax provision at the statutory rate of 34% $ 795,000 $ 561,000 $ 207,000
State income taxes, net of federal income tax 93,000 76,000 40,000
Tax benefit of tip credit generated (127,000) (118,000) (125,000)
Tax benefit of employee retention credit (14,000) -- --
Other 3,000 24,000 48,000
--------- --------- ---------
$ 750,000 $ 543,000 $ 170,000
========= ========= =========
At October 1, 2005, the Company had alternative minimum tax credit
carryforwards available of approximately $61,000, which were utilized
in the fiscal year ending September 30, 2006.
The Company has deferred tax assets which arise primarily due to
depreciation recorded at different rates for tax and book purposes
offset by cost basis differences in depreciable assets due to the
deferral of the recognition of insurance recoveries on casualty losses
for tax purposes, investments in limited partnerships, accruals for
potential uninsured claims and bonuses accrued for book purposes but
not paid within two and a half months for tax purposes, and the
capitalization of certain inventory costs for tax purposes not
recognized for financial reporting purposes.
The components of the deferred tax assets were as follows at September
30, 2006 and October 1, 2005:
2006 2005
---- ----
Current:
Reversal of aged payables $ 27,000 $ --
Capitalized inventory costs 22,000 --
Accrued bonuses 132,000 --
Accruals for potential uninsured claims 6,000 29,000
-------- --------
$187,000 $ 29,000
======== ========
Long-Term:
Book/tax differences in property and equipment $233,000 $351,000
Alternative minimum tax credit -- 61,000
Limited partnership investments 164,000 23,000
-------- --------
$397,000 $435,000
======== ========
F-21
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. DEBT
Long-Term Debt
2006 2005
---- ----
Mortgage payable to bank; secured by first mortgage on a building;
payable $2,248 per month, plus interest through maturity in August,
2008, at which time the unpaid principal of approximately $736,000
plus unpaid interest becomes due. The Company has entered into an
interest rate swap agreement for a notional amount of approximately
$895,000. The interest rate swap agreement hedges the variable
interest rate of the mortgage payable to a fixed rate of 8.62%. $788,000 $813,000
Note payable to bank by limited partnership, unsecured, bearing
interest at 6.5%, payable in monthly installments of principal and
interest of approximately $4,600, maturing in March 2008. 79,000 127,000
Mortgage payable, secured by land, bearing interest at 8%; payable
in monthly installments of principal and interest of approximately
$3,000, which mortgage was paid off during the fourth quarter of
fiscal 2006. - 275,000
Mortgage payable, secured by land and building, bearing interest at
7.5%; payable in monthly installments of principal and interest of
$26,645, maturing in August 2013. 3,274,000 -
Notes payable to bank, secured by vehicles, bearing interest at
0.9% payable in monthly installments of principal and interest of
approximately $1,800 per month, maturing in October 2007. 24,000 46,000
Note payable to finance company, secured by vehicle, bearing
interest at 9.25%, payable in monthly installments of principal and
interest of approximately $4,500 through maturity in July 2010, at
which time the unpaid principal of $45,000 becomes due. 196,000 227,000
Note payable to finance company, secured by vehicle, bearing
interest at 9.04%, payable in monthly installments of principal and
interest of approximately $1,300 through maturity in February 2011. 58,000 ---
F-22
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. DEBT (Continued)
Long-Term Debt (Continued)
2006 2005
---- ----
Note payable to bank, unsecured, bearing interest at prime payable
in monthly installments of principal and interest of approximately
$3,100, which was paid off during the second quarter of fiscal year
2006 with funds drawn on the Company's line of credit.
-- 69,000
---------- ----------
4,419,000 1,557,000
Less current portion 223,000 174,000
---------- ----------
$4,196,000 $1,383,000
========== ==========
Long-term debt at September 30, 2006 matures as follows:
2007 $223,000
2008 925,000
2009 145,000
2010 190,000
2011 110,000
Thereafter 2,826,000
----------
$4,419,000
==========
Line of Credit
As of the end of fiscal 2006, the Company has a $2,000,000 line of
credit, which has a variable interest rate at prime and is payable
in monthly installments of interest only on the outstanding
principal balance, with a two (2) year maturity in the second
quarter of fiscal year 2008. Subsequent to the end of fiscal 2006,
the Company increased its line of credit to $2,650,000, under the
same terms and conditions. However, the Company granted its lender
a second mortgage on its corporate offices as additional collateral
for the increase in the line of credit in addition to a security
interest in substantially all of the assets of the Company. As of
September 30, 2006, the line of credit had a principal balance of
$762,000. Subsequent to the end of fiscal year 2006, the Company
drew additional funds on its line of credit, in the aggregate
amount of $1,200,000, raising the total outstanding balance to
$1,962,000.
NOTE 10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
Legal Matters
The Company is a party to various claims, legal actions and
complaints arising in the ordinary course of its business. In the
opinion of management, all such matters are without merit or
involve such amounts that an unfavorable disposition would not have
a material adverse effect on the financial position or results of
operations of the Company.
F-23
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Leases
The Company leases a substantial portion of the land and buildings
used in its operations under leases with initial terms expiring
between 2007 and 2049. Renewal options are available on many of the
leases. Most of the leases are fixed rent agreements. In two
instances, lease rentals are subject to sales overrides ranging
from 1.75% to 4% of annual sales in excess of between $1,162,000
and $1,200,000. Rent expense is recognized on a straight line basis
over the term of the lease. Certain of the leases are subject to
fair market rental appraisals at the time of renewal. Certain
properties are subleased through various expiration dates.
During the fourth quarter of fiscal year 2001, the Company entered
into a ground lease for an out parcel in Hollywood, Florida. The
Company constructed a building on the out parcel, one-half (1/2) of
which is used by the Company for the operation of a package liquor
store and the other one-half (1/2) was subleased by the Company as
retail space during the second quarter of fiscal 2004. Rent for the
retail space commenced January 1, 2005, and income of $45,000 and
$31,400 was derived from this source during fiscal years ending
September 30, 2006 and October 1, 2005, respectively.
Future minimum lease payments under non-cancelable operating leases
are as follows:
2007 $ 2,156,000
2008 2,026,000
2009 1,842,000
2010 1,682,000
2011 1,300,000
Thereafter 6,604,000
-----------
Total $15,610,000
===========
Total rent expense for all operating leases was approximately
$2,355,000, $2,158,000 and $1,957,000 in fiscal years 2006, 2005
and 2004, respectively, and is included in "Occupancy costs" in the
accompanying consolidated statements of income. This total rent
expense is comprised of the following:
2006 2005 2004
---- ---- ----
Minimum $2,172,000 $2,158,000 $1,957,000
Contingent 183,000 175,000 159,000
---------- ---------- ----------
Total $2,355,000 $2,333,000 $2,116,000
========== ========== ==========
The Company guarantees various leases for franchisees. Remaining
rental payments required under these leases total approximately
$1,570,000.
F-24
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Purchase Commitments
Effective December 1, 2006, the Company entered into a purchase
agreement with its rib supplier. The terms of the agreement
stipulate that the Company will purchase approximately $2,800,000
of baby back ribs during the 2007 calendar year at a fixed cost.
The Company contracts for the purchase of baby back ribs on an
annual basis to fix the cost and ensure adequate supply for the
calendar year. The Company purchases all of its rib supply from
this vendor, but management believes that several other alternative
vendors are available, if necessary.
Franchise Program
At September 30, 2006, the Company was the franchisor of seven
units under franchise agreements. Of the seven franchised stores,
four are owned and operated by related parties. Under the franchise
agreements, the Company agrees to provide guidance, advice and
management assistance to the franchisees. In addition, the Company
acts as fiscal agent for the franchisees whereby the Company
collects all revenues and pays all expenses and distributions. The
Company also, from time to time, advances funds on behalf of the
franchisees for the cost of renovations. The resulting amounts
receivable from and payable to these franchisees are reflected in
the accompanying consolidated balance sheet as either an asset or a
liability. The Company also agrees to sponsor and manage
cooperative buying groups on behalf of the franchisees for the
purchase of inventory. The franchise agreements provide for
royalties to the Company of approximately 3% of gross sales. The
Company is not currently offering or accepting new franchises.
Employment Agreement/Bonuses
On December 31, 2004, the Company renewed the employment agreement
with its former Chief Executive Officer, Joseph G. Flanigan, for
calendar year 2005. The agreement provided, among other things, for
a base annual salary not to exceed $150,000 and a performance bonus
equal to 20% of pre-tax net income before depreciation and
amortization in excess of $650,000, 10% of which is to be allocated
to other members of management. The employment agreement terminated
upon the death of Joseph G. Flanigan on January 28, 2005.
Bonuses for fiscal year 2004 under the employment agreement
amounted to approximately $224,000 (none in 2006 or 2005).
As of September 30, 2006, the Company had no employment agreements.
During the second quarter of fiscal year 2005, the Board of
Directors approved an annual performance bonus, with 14% of the
pre-tax net income before depreciation and amortization in excess
of $650,000 paid to the Chief Executive Officer and 6% paid to
other members of management. Bonuses for fiscal year 2006 and 2005
amounted to approximately $523,000 and $448,000, respectively.
F-25
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued)
Employment Agreement/Bonuses (Continued)
During the second quarter of fiscal year 2005, the Board of
Directors also approved an annual performance bonus, with 5% of the
pre-tax net income before depreciation and amortization from the
Company's restaurants and the Company's share of the pre-tax net
income before depreciation and amortization from the restaurants
owned by the limited partnerships paid to the Chief Operating
Officer and 5% paid to the Chief Financial Officer. Bonuses for
fiscal year 2006 and 2005 amounted to $298,000 and $216,000,
respectively.
During the second quarter of fiscal year 2005, the Board of
Directors approved an annual performance bonus, with 3% of the
pre-tax net income before depreciation and amortization from the
package liquor stores paid to the Vice President of Package
Operations and 2% paid to the package store supervisor. Bonuses for
fiscal year 2006 and 2005 amounted to $52,000 and $48,000,
respectively.
Management Agreements
Atlanta, Georgia
During fiscal years 2006, 2005 and 2004, the Company received an
owner's fee pursuant to a management agreement with a
non-related company that operates a club in Atlanta, Georgia,
which club is owned by the Company. The non-related company
entered into a new lease agreement for the business premises,
which new lease commenced May 1, 2006 for a period of ten (10)
years, with one (1) ten (10) year renewal option. The Company
has no liability on the new lease, but since the non-related
company still operates under the management agreement, the
Company continues to receive an owner's fee of $150,000 per
year, paid monthly, versus ten (10%) percent of gross sales from
the club, whichever is greater, subject to adjustment annually
as rental increases under the new lease take effect. One-half
(1/2) of the rental increases will be credited against the
owner's fee, each year, provided the owner's fee is never less
than $150,000 per year. The management agreement provided for a
security deposit of $200,000, but during fiscal year 2005 and
2006, $130,000 and $70,000, respectively of the security deposit
was applied towards outstanding additional owner's fee due the
Company. As of September 30, 2006, no balance remains of the
security deposit. In fiscal years 2006, 2005 and 2004, the
owner's fee earned was $224,000, $261,000 and $265,000,
respectively.
Deerfield Beach, Florida
During the first quarter of fiscal year 2006, the Company
entered into a management agreement to operate an existing
restaurant in Deerfield Beach, Florida under its current format,
"The Whale's Rib", and to be entitled to one-half (1/2) of the
net profit from the operation of the same. The term of the
management agreement is for ten (10) years, with four (4) five
(5) year renewal options. The Company paid $500,000 for the
management rights to the restaurant. The Company assumed the
management of this restaurant on January 9, 2006. For the nine
(9) months of fiscal year 2006, the Company recognized income
under the management agreement of $108,000.
F-26
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMON STOCK
Treasury Stock
Purchase of Common Shares
During fiscal years 2006, 2005 and 2004, the Company purchased a
total of 14,350, 42,720 and 30,400 shares of Company common
stock, respectively, at a total cost of approximately $139,000,
$353,000 and $201,000, respectively, under a repurchase program
authorized by the Board of Directors. Of the shares of the
Company's common stock purchased during fiscal year 2006, 7,500
shares were purchased from the Chief Operating Officer/Director
of the Company, at a total cost of approximately $77,000. No
shares of the Company's common stock purchased during fiscal
years 2005 and 2004 were purchased from officers or directors of
the Company.
Sale of Common Shares
During fiscal years 2006, 2005 and 2004, the Company sold an
aggregate of 24,120, 490 and 20,755 shares of its common stock,
respectively, pursuant to the exercise of options, to certain
employee and officers for a total of approximately $116,000,
$2,000 and $93,000, respectively.
Stock Options
There were no options granted during fiscal years 2006 and 2005.
In May 2004, the Company granted options to purchase 50,000 shares
of Company common stock to certain employees. The options vested
one year from the grant date, have a five-year life, and an
exercise price of $6.35 per share, the then market price of the
common stock. At September 30, 2006, options to purchase 45,000
shares remain outstanding and exercisable.
In October 2003, the Company granted options to purchase 16,550
shares of Company common stock to certain employees. The options
vested one year from the grant date, have a five-year life, and an
exercise price of $6.14 per share, the then market price of the
common stock. At September 30, 2006, options to purchase 12,900
shares remain outstanding and exercisable.
Effective January 1, 2006, the Company adopted SFAS No. 123
(revised 2004), "Share-Based Payment," (SFAS No. 123R) to account
for stock-based employee compensation. The Company elected to use
the modified prospective method for adoption, which requires
compensation expense to be recorded for all unvested stock options
beginning in the first quarter of adoption. The Company had no
unvested stock options as of January 1, 2006 and granted no stock
options in the nine months ended September 30, 2006, so no
compensation cost has been recognized on the Company's consolidated
financial statements for the year ended September 30, 2006.
F-27
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMON STOCK (Continued)
Stock Options (Continued)
Changes in outstanding incentive stock options for common stock are
as follows:
2006 2005 2004
---- ---- ----
Outstanding at beginning of year 100,810 101,900 122,660
Options granted -- -- 66,550
Options exercised (24,120) (490) (20,755)
Options expired (8,840) (600) (66,555)
-------- -------- --------
Outstanding at end of year 67,850 100,810 101,900
-------- -------- --------
Exercisable at end of year 67,850 100,810 51,900
======== ======== ========
The weighted-average grant-date fair value of the 66,550 options
granted during the year ended October 2, 2004 was $419,000 (none in
2005 or 2006).
The intrinsic value as of the exercise date of the 24,120, 490 and
20,755 stock options exercised during the years ended September 30,
2006, October 1, 2005 and October 2, 2004 were $124,000, $2,000 and
$42,000 , respectively.
Weighted average option exercise price information for fiscal years
2006, 2005 and 2004 is as follows:
2006 2005 2004
---- ---- ----
Outstanding at beginning of year $ 5.75 $ 5.77 $ 4.61
======= ======= =======
Granted during the year $ -- $ -- $ 6.30
======= ======= =======
Exercised during the year $ 4.83 $ 4.56 $ 4.50
======= ======= =======
Outstanding at end of year $ 6.27 $ 5.75 $ 5.77
======= ======= =======
Exercisable at end of year $ 6.27 $ 5.75 $ 5.20
======= ======= =======
Significant option groups outstanding at September 30, 2006 and
related weighted average price and life information are as follows:
Grant Options Options Exercise Remaining
Date Outstanding Exercisable Price Life (Years)
---- ----------- ----------- ----- ------------
4-2-02 9,950 9,950 $6.10 0.5
10-1-03 12,900 12,900 $6.14 2.0
5-20-04 45,000 45,000 $6.35 2.5
The weighted-average remaining contractual terms of stock options
outstanding and stock options exercisable at September 30, 2006 was
2.2 years. The aggregate intrinsic value of options outstanding and
stock options exercisable at September 30, 2006 was approximately
$186,000.
F-28
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. NET INCOME PER COMMON SHARE
The Company follows SFAS No. 128, "Earnings per Share." SFAS 128
provides for the calculation of basic and diluted earnings per share.
Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted
earnings per share assume the exercise of options granted. Earnings per
share are computed by dividing income available to common stockholders
by the basic and diluted weighted average number of common shares.
2006 2005 2004
---- ---- ----
Basic weighted average shares 1,884,000 1,895,000 1,922,000
Incremental shares relating to outstanding
options 25,000 28,000 11,000
--------- --------- ---------
Diluted weighted average shares 1,909,000 1,923,000 1,933,000
========= ========= =========
NOTE 13. RELATED PARTY TRANSACTIONS
The Company's Chief Executive Officer manages one of the Company's
franchised stores.
During fiscal year 2004, the Company incurred legal fees in the form of
salary of approximately $55,000 for services provided by a member of
the Board of Directors. These legal fees ceased during fiscal year 2004
when this Board member became a full-time employee and the associated
salary was included in officers' payroll.
The Company paid approximately $109,000 in lease rentals to an entity
owned and controlled by a former member of its Board of Directors
during fiscal year 2004. During fiscal year 2004, the related party
sold all related property.
Also see Notes 4, 6, 10, and 11 for additional related party
transactions.
NOTE 14. BUSINESS SEGMENTS
The Company operates principally in two segments -package stores and
restaurants. The operation of package stores consists of retail liquor
sales.
Information concerning the revenues and operating income for the fiscal
years ended 2006, 2005 and 2004, and identifiable assets for the two
segments in which the Company operates, are shown in the following
table. Operating income is total revenue less cost of merchandise sold
and operating expenses relative to each segment. In computing operating
income, none of the following items have been included: interest
expense, other non-operating income and expense and income taxes.
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets are principally
cash, notes and mortgages receivable, real property, improvements,
furniture, equipment and vehicles. The Company does not have any
operations outside of the United States and intersegment transactions
are not material.
F-29
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. BUSINESS SEGMENTS (Continued)
2006 2005 2004
---- ---- ----
Operating Revenues:
Restaurants $ 40,457,000 $ 35,829,000 $ 33,698,000
Package stores 13,046,000 11,810,000 10,911,000
Other revenues 1,511,000 1,393,000 1,324,000
------------ ------------ ------------
Total operating revenues $ 55,014,000 $ 49,032,000 $ 45,933,000
============ ============ ============
Operating Income Reconciled to Income
before Income Taxes: and Minority Interest in
Earnings of Consolidated Limited Partnerships
Restaurants $ 3,311,000 $ 3,457,000 $ 3,023,000
Package stores 817,000 744,000 348,000
------------ ------------ ------------
4,128,000 4,201,000 3,371,000
Corporate expenses, net of other revenues (2,429,000) (2,035,000) (2,098,000)
------------ ------------ ------------
Operating income 1,699,000 2,166,000 1,273,000
Equity in net income of limited partnership 31,000 18,000 6,000
Minority interest in earnings of consolidated
limited partnerships (312,000) (403,000) (301,000)
Interest expense, net of interest income (164,000) (68,000) (80,000)
Other 807,000 58,000 79,000
Loss on abandonment of property and
equipment (61,000) (121,000) (367,000)
------------ ------------ ------------
Income Before Income Taxes $ 2,000,000 $ 1,650,000 $ 610,000
============ ============ ============
Identifiable Assets:
Restaurants $ 15,635,000 $ 10,277,000 $ 10,033,000
Package store 3,602,000 3,527,000 2,505,000
------------ ------------ ------------
19,237,000 13,804,000 12,538,000
Corporate 8,161,000 7,295,000 7,236,000
------------ ------------ ------------
Consolidated Totals $ 27,398,000 $ 21,099,000 $ 19,774,000
============ ============ ============
Capital Expenditures:
Restaurants $ 2,891,000 $ 1,848,000 $ 987,000
Package stores 148,000 251,000 211,000
------------ ------------ ------------
3,039,000 2,099,000 1,198,000
Corporate 741,000 298,000 334,000
------------ ------------ ------------
Total Capital Expenditures $ 3,780,000 $ 2,397,000 $ 1,532,000
============ ============ ============
Depreciation and Amortization:
Restaurants $ 1,255,000 $ 1,166,000 $ 1,208,000
Package stores 229,000 163,000 133,000
------------ ------------ ------------
1,484,000 1,329,000 1,341,000
Corporate 333,000 214,000 204,000
------------ ------------ ------------
Total Depreciation and Amortization $ 1,817,000 $ 1,543,000 $ 1,545,000
============ ============ ============
F-30
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 15. QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of the Company's unaudited quarterly results
of operations for the quarters in fiscal years 2006 and 2005.
Quarter Ended
----------------------------------------------------------
December 31, April 1, July 1, September 30,
2005 2006 2006 2006
---- ---- ---- ----
Revenues $ 13,249,000 $ 14,477,000 $13,851,000 $13,437,000
Income (loss) from operations 662,000 518,000 654,000 (135,000)
Net income (loss) 363,000 582,000 203,000 102,000
Net income (loss) per share -
basic .19 .31 .11 .05
Net income (loss) per share -
diluted .19 .30 .11 .05
Weighted average common
stock outstanding - basic 1,874,776 1,879,809 1,893,486 1,887,167
Weighted average common
stock outstanding - diluted 1,913,990 1,908,919 1,920,472 1,912,147
The following is a summary of the significant fourth quarter
adjustments for fiscal year 2006:
Additional accrual for officers' bonuses $ 116,000
=========
Quarter Ended
----------------------------------------------------------
January 1, April 2, July 2, October 1,
2005 2005 2005 2005
---- ---- ---- ----
Revenues $11,825,000 $12,449,000 $12,342,000 $12,416,000
Income from operations 339,000 598,000 716,000 513,000
Net income (loss) 240,000 327,000 499,000 41,000
Net income (loss) per share -
basic 0.13 0.17 0.26 0.02
Net income (loss) per share -
diluted 0.12 0.17 0.26 0.02
Weighted average common
stock outstanding - basic 1,915,000 1,905,000 1,885,000 1,874,000
Weighted average common
stock outstanding - diluted 1,929,000 1,933,000 1,912,000 1,914,000
The following is a summary of the significant fourth quarter
adjustments for fiscal year 2005:
Additional accrual for officers' bonuses $ 250,000
Adjusting estimated income taxes to actual 100,000
Abandonment of property and equipment 121,000
----------
$ 471,000
==========
F-31
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 15. QUARTERLY INFORMATION (UNAUDITED) (Continued)
Quarterly operating results are not necessarily representative of
operations for a full year for various reasons including the seasonal
nature of both the restaurant and package store segments.
NOTE 16. 401(k) PLAN
Effective July 2004, the Company began sponsoring a 401(k) retirement
plan covering substantially all employees who met certain eligibility
requirements. Employees may contribute elective deferrals to the plan
up to amounts allowed under the Internal Revenue Code. The Company is
not required to contribute to the plan but may make discretionary
profit sharing and matching contributions. During fiscal year 2006 and
2005, the Company made discretionary contributions of $12,000 and
$37,500, respectively (none in 2004).
NOTE 17. SUBSEQUENT EVENTS
Hurricane Wilma
During fiscal year 2006, the Company submitted insurance claims
totaling $1,092,300 for damages and losses for business
interruption caused when Hurricane Wilma impacted South Florida on
October 24, 2005. Other income and expense for fiscal 2006 includes
insurance recovery, net of casualty loss, of $666,000 which
includes the deletion of the net book value of property and
equipment as a result of Hurricane Wilma ($64,000), repair of
damage ($138,000) and food waste ($61,000). Subsequent to the end
of fiscal year 2006, the Company settled its claims against its
insurance carrier for $929,000, ($979,000 less the $50,000
deductible). During fiscal year 2006, the Company received advances
in the aggregate amount of $700,000, ($750,000 less the $50,000
deductible), from its insurance carrier and subsequent to the end
of fiscal year 2006 received a final payment of $229,000.
Contracts to Purchase Real Property
Purchase of Real Property Subject to Ground Lease (Hallandale,FL.)
Subsequent to the end of fiscal year 2006, the Company
simultaneously entered into a contract and closed on the
purchase of the real property which is subject to a ground lease
owned by the Company at its combination restaurant and package
liquor store located in Hallandale, Florida, (Store #31). The
purchase price for this property was $552,500, which was
partially financed with an advance of $250,000 on a mortgage
(see Note 2).
F-32
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 17. SUBSEQUENT EVENTS (Continued)
Contracts to Purchase Real Property (Continued)
Purchase of Real Property Subject to Ground Lease (N. Miami, FL.)
Subsequent to the end of fiscal year 2006, the Company entered
into a contract and closed on the purchase of the real property
which is subject to a ground lease owned by the Company and
subleased to an unrelated third party located in North Miami,
Florida (Store #27). The purchase price for this property was
$250,000, which was paid in cash by the Company at closing.
Internal Revenue Service Audit of Company's Corporate Income Tax Return
for the Fiscal Year Ending October 1, 2005
Subsequent to the end of fiscal year 2006, the Company received
notification from the Internal Revenue Service that its corporate
income tax return for the fiscal year ending October 1, 2005 was
being audited. The audit was completed prior to the end of the
first quarter of fiscal year 2007, with the Company agreeing that
the sum of $107,000 was due as additional corporate income tax for
the fiscal year ending October 1, 2005.
Re-Financing
Corporate Offices
Subsequent to the end of fiscal 2006, the Company re-financed
the mortgage note encumbering the Company's corporate offices.
The new mortgage, in the original principal amount of
$1,000,000, bears interest at the rate of 7.25% per annum, is
amortized over twenty (20) years with equal monthly payments of
principal and interest, each in the amount of $8,000, with the
entire principal balance and all accrued interest due in seven
(7) years. The pre-payment of the mortgage note, which otherwise
matured in August, 2008, incurred a prepayment penalty of
$17,000.
Schedule II - Valuation and Qualifying Accounts
The Company maintains no accounts that qualify for this schedule
for each of the three years ended September 30, 2006, October 1,
2005 or October 2, 2004.
--------------------------------------------------------------------------------
F-33