UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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.
(Exact name of registrant as specified in its charter)
Florida 59-0877638
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5059 N.E. 18th Avenue, Fort Lauderdale, Florida 33334
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code, (954) 377- 1961
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 registrant
was required to file such reports), and (2) has been the subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [ ] Non-accelerated [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.) Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuers classes of
Common Stock as of the latest practicable date. On February 13, 2007, 1,889,915
shares of Common Stock, $0.10 par value, were outstanding.
-1-
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
DECEMBER 30, 2006
PART I. FINANCIAL INFORMATION
Item 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Income -- For the Thirteen Weeks ended
December 30, 2006 and December 31, 2005 (Unaudited)
Consolidated Balance Sheets -- As of December 30, 2006 (Unaudited)
and September 30, 2006
Consolidated Statements of Cash Flows- For the Thirteen Weeks ended
December 30, 2006 and December 31, 2005 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Default upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8 K
Signatures
Exhibit - 31.1
Exhibit - 31.2
Exhibit - 32.1
Exhibit - 32.2
-2-
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
Thirteen Weeks Thirteen Weeks
Ended Ended
DECEMBER 30 DECEMBER 31
2006 2005
------------ ------------
Revenues:
Restaurant food sales $ 9,030 $ 7,394
Restaurant beverage sales 2,087 1,733
Package store sales 3,482 3,753
Franchise-related revenues 300 261
Owner's fee 40 38
Other operating income 46 70
------------ ------------
14,985 13,249
------------ ------------
Costs and Expenses:
Cost of merchandise sold:
Restaurants and lounges 3,815 3,114
Package goods 2,544 2,719
Payroll and related costs 4,062 3,534
Occupancy costs 819 754
Selling, general and administrative expenses 3,033 2,466
------------ ------------
14,273 12,587
------------ ------------
Income from Operations 712 662
------------ ------------
Other Income (Expense):
Interest expense (133) (32)
Interest and other income 36 21
Insurance recovery, net of casualty loss -- 45
------------ ------------
(97) 34
------------ ------------
Income Before Provision for Income Taxes and 615 696
Minority Interests in Earnings of Consolidated
Limited Partnerships
Provision for Income Taxes 183 185
Minority Interest in Earnings of
Consolidated Limited Partnerships (108) (148)
------------ ------------
Net Income $ 324 $ 363
============ ============
-3-
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Per Share Amounts)
(Continued)
December 30, December 31,
2006 2005
Net Income Per Common Share:
Basic $ 0.17 $ 0.19
============ ============
Diluted $ 0.17 $ 0.19
============ ============
Weighted Average Shares and Equivalent
Shares Outstanding:
Basic 1,884,201 1,874,776
============ ============
Diluted 1,911,022 1,913,990
============ ============
See accompanying notes to unaudited condensed consolidated financial
statements.
-4-
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 2006 (UNAUDITED) AND SEPTEMBER 30, 2006
(In Thousands)
ASSETS
DECEMBER 30 SEPTEMBER 30
2006 2006
------------ ------------
Current Assets:
Cash and cash equivalents $ 2,483 $ 1,698
Notes and mortgages receivable,
current maturities, net 13 12
Prepaid income taxes 50 --
Due from franchisees 338 569
Other receivables 363 821
Inventories 2,643 2,215
Prepaid expenses 607 813
Deferred tax asset 187 187
------------ ------------
Total Current Assets 6,684 6,315
------------ ------------
Property and Equipment, Net 19,638 18,939
------------ ------------
Investments in Limited Partnerships 156 153
------------ ------------
Other Assets:
Liquor licenses, net 347 347
Notes and mortgages receivable, net 100 103
Deferred tax asset 397 397
Other 1,574 1,144
------------ ------------
Total Other Assets 2,418 1,991
------------ ------------
Total Assets $ 28,896 $ 27,398
============ ============
-5-
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 2006 (UNAUDITED) AND SEPTEMBER 30, 2006
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands)
DECEMBER 30 SEPTEMBER 30
2006 2006
------------ ------------
Current Liabilities:
Accounts payable and accrued expenses $ 3,943 $ 4,096
Income taxes payable -- 264
Due to franchisees 281 268
Current portion of long term debt 224 223
Deferred revenues 52 54
Deferred rent 23 14
------------ ------------
Total Current Liabilities 4,523 4,919
------------ ------------
Long Term Debt, Net of Current Maturities 4,608 4,196
------------ ------------
Line of Credit 1,962 762
------------ ------------
Deferred Rent, Net of Current Portion 226 223
------------ ------------
Minority Interest in Equity of
Consolidated Limited Partnerships 6,464 6,506
------------ ------------
Commitments, Contingencies and Subsequent
Events
Stockholders' Equity:
Common stock $.10 par value;
5,000,000 shares authorized
4,197,642 shares issued 420 420
Capital in excess of par value 6,203 6,203
Retained earnings 10,388 10,064
Treasury stock, at cost 2,313,419 shares
at December 30,2006 and 2,313,277
shares at September 30, 2006 (5,898) (5,895)
------------ ------------
Total Stockholders' Equity 11,113 10,792
------------ ------------
Total Liabilities and
Stockholders' Equity $ 28,896 $ 27,398
============ ============
See accompanying notes to unaudited condensed consolidated financial
statements.
-6-
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED DECEMBER 30, 2006 AND DECEMBER 31, 2005
(In Thousands)
DECEMBER 30 DECEMBER 31
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 324 $ 363
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 514 430
Loss on abandonment of property and equipment 10
Casualty loss -- 42
Deferred rent 12 (7)
Minority interest in earnings
of consolidated limited partnerships 108 148
(Income) loss from unconsolidated limited
Partnership (3) --
Recognition of deferred revenue (2) (2)
Changes in operating assets and liabilities:
(Increase)decrease in:
Due from franchisees 231 (183)
Other receivables 138 (331)
Prepaid income taxes (50) --
Inventories (428) (211)
Prepaid expenses 206 127
Other assets (488) (214)
Increase(decrease)in:
Accounts payable and accrued expenses (154) 427
Income tax payable (264) 85
Due to franchisees 13 (68)
------------ ------------
Net cash provided by
operating activities 167 606
------------ ------------
Cash flows from Investing Activities:
Collection on notes and mortgages
receivable 2 3
Purchase of property and equipment (875) (526)
Proceeds from sale of marketable securities 381 --
Distributions from unconsolidated
Limited partnership -- 1
Proceeds from insurance settlement 112 --
------------ ------------
Net cash used in
investing activities (380) (522)
------------ ------------
-7-
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED DECEMBER 30, 2006 AND DECEMBER 31, 2005
(In Thousands)
DECEMBER 30 DECEMBER 31
2006 2005
----------- -----------
Cash flows from Financing Activities:
Payment of long term debt (49) (42)
Proceeds from line of credit 1,200 --
Purchase of treasury stock (3) (18)
Distributions to limited partnership
minority partners (150) (272)
Proceeds from exercise of stock options -- 40
----------- -----------
Net cash provided by (used in) financing
activities 998 (292)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents 785 (208)
Cash and Cash Equivalents,
Beginning of Period 1,698 2,674
----------- -----------
Cash and Cash Equivalents,
End of Period $ 2,483 $ 2,466
=========== ===========
Supplemental Disclosure for Cash Flow Information:
Cash paid during period for:
Interest $ 133 $ 32
=========== ===========
Income taxes $ 497 $ 80
=========== ===========
Supplemental Disclosure for Non-Cash Investing and
Financing Activities:
Purchase of Real Property $ 250 $ --
=========== ===========
During the first quarter of fiscal year 2007, the Company re-financed
its corporate office building with a new mortgage, in the principal
amount of $1,000,000. The existing mortgage was satisfied with a
payment of $827,000, including prepayment penalty, ($17,000), and
closing costs and as of December 30, 2006, the excess mortgage
proceeds, ($173,000), were still in the possession of the closing agent
and reflected in Other Accounts Receivable.
See accompanying notes to unaudited condensed consolidated financial
statements.
-8-
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 30, 2006
(1) BASIS OF PRESENTATION:
The accompanying financial information for the periods ended December 30,
2006 and December 31, 2005 are unaudited. Financial information as of September
30, 2006 has been derived from the audited financial statements of the Company,
but does not include all disclosures required by generally accepted accounting
principles. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
information for the periods indicated have been included. For further
information regarding the Company's accounting policies, refer to the
Consolidated Financial Statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended September 30, 2006. Operating
results for interim periods are not necessarily indicative of results to be
expected for a full year.
These financial statements include estimates relating to performance based
officers' bonuses. The estimates are reviewed periodically and the effects of
any revisions are reflected in the financial statements in the period are
determined to be necessary. Although these estimates are based on management's
knowledge of currect events and actions it may take in the future, they may
ultimately differ from actual results.
(2) EARNINGS PER SHARE:
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
share establishes standards for computing and presenting earnings per share
("EPS"). This statement requires the presentation of basic and diluted EPS. The
data on Page 4 shows the amounts used in computing earnings per share and the
effects on income and the weighted average number of shares of potential
dilutive common stock equivalents.
(3) RECLASSIFICATION:
Certain amounts in the fiscal year 2006 financial statements have been
reclassified to conform to the fiscal year 2007 presentation.
(4) RECENT 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 adoption of SAB 108 at the beginning
of fiscal year 2007 did not have a material impact on the financial condition or
results of operation of the Company.
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
-9-
Statement 157 at the beginning of fiscal year 2008 to have a material impact.
In March 2006, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 156, "Accounting for Servicing of
Financial Assets an amendment of FASB Statement 140" (Statement 156). Statement
156 amends Statement 140 with respect to separately recognized servicing assets
and liabilities. Statement 156 requires an entity to recognize a servicing asset
or liability each time it undertakes an obligation to service a financial asset
by entering into a servicing contract and requires all servicing assets and
liabilities to be initially measured at fair value, if practicable. Statement
156 also permits entities to subsequently measure servicing assets and
liabilities using an amortization method or fair value measurement method. Under
the amortization method, servicing assets and liabilities are amortized in
proportion to and over the estimated period of servicing. Under the fair value
measurement method, servicing assets are measured at fair value at each
reporting date and changes in fair value are reported in net income for the
period the change occurs. Adoption of Statement 156 is required as of the
beginning of fiscal years beginning subsequent to September 15, 2006. The
adoption of Statement 156 at the beginning of fiscal year 2007 did not have a
material impact upon the financial condition or results of operation of the
Company.
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 is currently evaluating the impact that the
adoption of Interpretation No. 48 may have upon the financial condition or
results of operation of the Company.
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 adoption of this standard at
the beginning of fiscal year 2007 did not have a material impact on the
financial condition, results of operations, or liquidity of the Company.
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
-10-
of this standard at the beginning of fiscal year 2007 did not have a material
impact on the financial condition, results of operations, or liquidity of the
Company.
(5) INVESTMENT IN LIMITED PARTNERSHIPS:
Davie, Florida
During the first quarter of fiscal year 2007, a limited partnership was
formed with the Company as general partner and subsequent to the end of the
first quarter of fiscal year 2007, the limited partnership entered into a new
lease for the business premises and closed on the purchase of the existing
restaurant in Davie, Florida to renovate and operate under the "Flanigan's
Seafood Bar and Grill" servicemark. The purchase price was $650,000. The
estimate for renovations and pre-opening expenses is an additional $2,250,000,
an increase of $550,000 from initial estimates due to increases in the cost of
construction materials and labor. The funds necessary for this limited
partnership will be raised through a private offering. The Company acts as
general partner and will 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 first quarter of fiscal year 2007, 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 to renovate and operate under the
"Flanigan's Seafood Bar and Grill" servicemark. 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 estimate for renovations and pre-opening expenses is
an additional $2,045,000, an increase of $445,000 from initial estimates due to
increases in the cost of construction materials and labor. The funds necessary
for this limited partnership will be raised through a private offering, which
commenced subsequent to the end of the first quarter of fiscal year 2007. The
Company acts 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.
(6) INVESTMENT IN REAL PROPERTY:
Hallandale, Florida
During the first quarter of fiscal year 2007, 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.
-11-
North Miami, Florida
During the first quarter of fiscal year 2007, 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.
(7) LINE OF CREDIT:
During the first quarter of fiscal year 2007, 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. The Company granted its lender a
second mortgage on its corporate office as additional collateral for the
increase in the line of credit. During the first quarter of fiscal year 2007,
the Company paid monthly installments of interest only on its line of credit,
but drew an additional $1,200,000 on the same, raising the principal balance
outstanding as of December 30, 2006 to $1,962,000.
(8) 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 basis of assets and liabilities and
to tax net operating loss carryforwards and tax credits to the extent that
realization of said tax benefits is more likely than not.
(9) INTERNAL REVENUE SERVICE AUDIT OF COMPANY'S CORPORATE INCOME TAX RETURN
FOR THE FISCAL YEAR ENDING OCTOBER 1, 2005:
During the first quarter of fiscal year 2007, 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. The impact of the audit
results was fully accounted for in the fiscal year ended September 30, 2006.
(10) STOCK OPTION PLANS:
The Company has several stock option plans under which qualified stock
options may be granted to officers and other employees of the Company. The
option price for qualified stock options must be issued at 110% of the fair
market value of the Company's Common Stock on the date the options are granted.
In general, options granted under the Company's stock option plans expire after
a five (5) year period and generally vest no later than one (1) year from the
date of grant. As of December 30, 2006, there were approximately 45,000 shares
available for grant under the Company's stock option plans.
No stock options were granted during the thirteen weeks ended December 30,
2006, nor were stock options granted during the thirteen weeks ended December
31, 2005.
Stock option exercises during the thirteen weeks ended December 30, 2006
and December 31, 2005 resulted in cash inflows to the Company of $0 and $40,000,
-12-
respectively. The corresponding intrinsic value as of the exercise date of the 0
and 6,850 stock options exercised during the thirteen weeks ended December 30,
2006 and December 31, 2005 were $0 and $71,000, respectively.
Stock option activity during the thirteen weeks ended December 30, 2006
was as follows:
Weighted
Total Average
Options Exercise Price
------------ --------------
Outstanding at September 30, 2006 67,850 $ 6.27
Granted -- --
Exercised -- --
Expired 2,600 $ 6.13
------------ ------------
Outstanding at December 30, 2006 65,250 $ 6.28
============ ============
Options exercisable at December 30, 2006 65,250 $ 6.28
============ ============
The weighted-average remaining contractual terms of stock options
outstanding and stock options exercisable at December 30, 2006 was 1.97 years.
The aggregate intrinsic value of options outstanding and stock options
exercisable at December 30, 2006 was approximately $270,000.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment".
This statement is a revision of SFAS No. 123, "Accounting for Stock-Based
Compensation", supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of
Cash Flows." The statement eliminates the alternative to use the intrinsic value
method of accounting that was provided in SFAS No. 123, which generally resulted
in no compensation expense recorded in financial statements related to the
issuance of equity awards to employees. The statement also requires that the
cost resulting from all share-based payment transactions be recognized in the
financial statements. It establishes fair value as the measurement objective in
accounting for share-based payment arrangements and generally requires all
companies to apply a fair-value-based measurement method in accounting for
share-based payment transactions with employees. The Company adopted SFAS No.
123R effective January 1, 2006, using a modified version of prospective
application in accordance with the statement. 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 September 30, 2006 and granted no stock options in the thirteen
weeks ended December 30, 2006, so there is no impact of SFAS No. 123R on the
Company's condensed consolidated financial statements for the thirteen weeks
ending December 30, 2006. In accordance with the modified prospective
transaction 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.
-13-
(11) COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS:
Guarantees
The Company guarantees various leases for franchisees, limited
partnerships and locations sold in prior years. Remaining rental commitments
required under these leases are approximately $1,460,000. In the event of a
default under any of these agreements, the Company will have the right to
repossess the premises and operate the business to recover amounts paid under
the guarantee either by liquidating assets or operating the business.
Litigation
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 the first quarter of
fiscal year 2007, the Company continued its appeal of a summary judgment in
favor of the 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.
During the first quarter of fiscal year 2007, 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 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, "General Liability Insurance" on page 14 of the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2006 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.
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. During the first quarter of fiscal year 2007, 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
-14-
deductible), from its insurance carrier and during the first quarter of fiscal
year 2007, received a final payment of $229,000.
Subsequent Events
Subsequent to the end of the first quarter of fiscal year 2007, the
Company entered into a Sale and Purchase Agreement to sell the real property
located at 732 - 734 N.E. 125th Street, North Miami, Florida (Store #27), which
real property the Company purchased during the first quarter of fiscal year
2007, to the sublessee, an unrelated third party. The purchase price for this
property is $780,000, including the interest of the Company in the liquor
license, and closing is scheduled on or before March 31, 2007.
(12) BUSINESS SEGMENTS
The Company operates principally in two segments - retail package stores
and restaurants. The operation of package stores consists of retail liquor
sales.
Information concerning the revenues and operating income for the quarters
ended December 30, 2006 and December 31, 2005, 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.
December 30, December 31,
2006 2005
---- ----
Operating Revenues:
Restaurants $ 11,117 $ 9,127
Package stores 3,482 3,753
Other revenues 386 369
------------ ------------
Total operating revenues $ 14,985 $ 13,249
============ ============
Operating Income Reconciled to Income Before
Income Taxes and Minority Interests in
Earnings of Consolidated Limited
Partnerships
Restaurants $ 914 $ 1,118
Package stores 180 333
------------ ------------
1,094 1,451
Corporate expenses, net of other
Revenues (382) (789)
------------ ------------
Operating income 712 662
Other income (expense) (97) 34
------------ ------------
Income Before Income Taxes and Minority
Interests in Earnings of Consolidated
Limited Partnerships $ 615 $ 696
============ ============
Depreciation and Amortization:
Restaurants $ 366 $ 293
Package stores 59 55
------------ ------------
425 348
Corporate 89 82
------------ ------------
Total Depreciation and Amortization $ 514 $ 430
============ ============
-15-
Capital Expenditures:
Restaurants $ 742 $ 173
Package stores 80 22
------------ ------------
822 195
Corporate 303 331
------------ ------------
Total Capital Expenditures $ 1,125 $ 526
============ ============
December 30, September 30,
Identifiable Assets: 2006 2006
---- ----
Restaurants $ 16,425 $ 15,635
Package store 4,023 3,602
------------ ------------
20,448 19,237
Corporate 8,448 8,161
------------ ------------
Consolidated Totals $ 28,896 $ 27,398
============ ============
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
Reported financial results may not be indicative of the financial results
of future periods. All non-historical information contained in the following
discussion constitutes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Words such as "anticipates, appears, expects, trends, intends, hopes,
plans, believes, seeks, estimates, may, will," and variations of these words or
similar expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and involve a number of
risks and uncertainties, including but not limited to customer demand and
competitive conditions. Factors that could cause actual results to differ
materially are included in, but not limited to, those identified in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," in the Annual Report on Form 10-K for the Company's fiscal year
ended September 30, 2006 and in this Quarterly Report on Form 10-Q. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may reflect events or circumstances after
the date of this report.
The Company owns and /or operates full service restaurants, package liquor
stores and an adult entertainment oriented club (collectively the "units"). At
December 30, 2006, the Company operated 21 units and had equity interests in
seven units which have been franchised by the Company. The table below sets out
the changes, if any, in the type and number of units being operated.
Dec. 30 Sept. 30 Dec. 31 Note
Types of Units 2006 2006 2005 Number
------------------------------------------------------------------
Company Owned:
Combination package
and restaurant 4 4 4
Restaurant only 2 2 2
Package store only 5 5 5 (1)
Company Managed
Restaurants Only:
Limited partnerships 7 7 6 (2)(3)
Franchise 1 1 1
-16-
Unrelated Third Party 1 1 -- (4)
Company Owned Club: 1 1 1
Total Company
Owned/Operated Units 21 21 19
Franchised units 7 7 7 (5)
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 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. During the
first quarter of fiscal year 2007, a limited partnership was formed, with the
Company as general partner, which limited partnership closed 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.
(3) 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. During
the first quarter of fiscal year 2007, 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.
(4) 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 whereby
the Company is entitled to one-half (1/2) of the net profit from the operation
of the same. This restaurant is included in the table of units.
(5) 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.
-17-
Results of Operations
Thirteen Weeks Ended
Dec. 30, Dec. 31,
2006 2005
Amount Percent Amount Percent
------ ------- ------ -------
(In Thousands) (In Thousands)
Restaurant food sales $ 9,030 61.85 $ 7,394 57.41
Restaurant bar sales 2,087 14.30 1,733 13.45
Package store sales 3,482 23.85 3,753 29.14
--------- --------- --------- ---------
Total sales $ 14,599 100.00 $ 12,880 100.00
Franchise related revenues 300 261
Owners fee 40 38
Other operating income 46 70
--------- ---------
Total Revenue $ 14,985 $ 13,249
========= =========
Comparison of Thirteen Weeks Ended December 30, 2006 and December 31, 2005
--------------------------------------------------------------------------
Notwithstanding an increase in total revenue of $1,736,000 in the first
quarter of fiscal year 2007 when compared to the first quarter of fiscal year
2006, net income decreased to $324,000 from $363,000 in the first quarter of
fiscal year 2006. The decrease in net income is due primarily to higher food
costs, overall expenses including interest expense and a higher effective tax
rate. In response to a decrease in food gross profit during the fourth quarter
of fiscal year 2006, menu price increases of approximately 4.5% were instituted,
most of which were only effective towards the end of the first quarter of fiscal
year 2007. When comparing expenses from the first quarter of fiscal year 2007 to
expenses of the first quarter of fiscal year 2006, there are significant
increases in expenses such as electric, gas and real property taxes. In
addition, interest expense increased during the first quarter of fiscal year
2007 due to the mortgage on the Company's Hallandale property and its line of
credit. Higher food costs, with the exception of the Company's price for ribs
for calendar year 2007, and overall expenses are expected to continue
increasing, including property and windstorm insurance coverage, but management
believes that the menu price increases put into effect during the first quarter
of fiscal year 2007 have adequately projected increases in food costs and
overall expenses throughout the balance of fiscal year 2007.
As the table above illustrates, total revenues in the thirteen weeks ended
December 30, 2006 increased by 13.10% as compared to the total revenues for the
thirteen weeks ended December 31, 2005 primarily due to the restaurant in
Pinecrest, Florida, ($1,285,000), being open for the fiscal quarter. Total
revenues were adversely affected during the first quarter of fiscal year 2006 by
an estimated loss of $550,000 in restaurant food and beverage revenue as a
result of Hurricane Wilma which impacted South Florida on October 24, 2005.
Total revenues should continue to increase due to the restaurant in Pinecrest,
Florida being open for the entire fiscal year and the anticipated opening of the
restaurants in Pembroke Pines, Florida and Davie, Florida during the third and
fourth quarters of fiscal year 2007, respectively.
-18-
Restaurant food sales represented 61.85% of total sales in the thirteen
weeks of fiscal year 2007 as compared to 57.41% of total sales in the thirteen
weeks of fiscal year 2006. The increase in restaurant food sales is due to the
restaurant in Pinecrest, Florida being open for the fiscal quarter, menu price
increases and the continued increase in the weekly average of same store
restaurant food sales. Restaurant food sales during the first quarter of fiscal
year 2006 were adversely affected by an estimated loss of $450,000 as a result
of Hurricane Wilma. The weekly average of same store restaurant food sales,
which includes six (6) limited partnership restaurants, were $612,000 and
$569,000 for the thirteen weeks ended December 30, 2006 and December 31, 2005,
respectively, an increase of 7.56%. Restaurant food sales should continue to
increase 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 year
2007, respectively; and the expected continued increase in the weekly average of
same store restaurant food sales.
Restaurant bar sales represented 14.30% of total sales in the thirteen
weeks of fiscal year 2007 as compared to 13.45% of total sales in the thirteen
weeks of fiscal year 2006. The increase in restaurant bar sales is due to the
restaurant in Pinecrest, Florida being open for the fiscal quarter and the use
of promotions to increase restaurant bar sales, without jeopardizing the
Company's perception as a family restaurant. Restaurant bar sales during the
first quarter of fiscal year 2006 were adversely affected by an estimated loss
of $100,000 as a result of Hurricane Wilma. The weekly average of same store
restaurant bar sales, which includes six (6) limited partnership restaurants,
were $144,000 and $133,000 for the thirteen weeks ended December 30, 2006 and
December 31, 2005, respectively, an increase of 8.27%. Restaurant bar sales
should continue to increase 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 year 2007, respectively; and the expected continued increase in the
weekly average of same store restaurant bar sales.
Package store sales represented 23.85% of total sales in the thirteen
weeks of fiscal year 2007, as compared to 29.14% of total sales in the thirteen
weeks of fiscal year 2006. The weekly average of same store package sales were
$268,000 and $289,000 for the thirteen weeks ended December 30, 2006 and
December 31, 2005, respectively, a decrease of 7.27%. The decrease was primarily
due to the fact that New Year's Eve falls in the second quarter of fiscal year
2007, as compared to the first quarter of fiscal year 2006 and increased
competition. Package store sales are expected to decrease throughout the balance
of fiscal year 2007 due to increased competition.
The gross profit margin for restaurant food and bar sales was 65.68% and
65.88% for the thirteen weeks ended December 30, 2006 and December 31, 2005,
respectively. During the first quarter of fiscal year 2007, the Company
instituted menu price increases to restore and maintain its gross profit margin
for restaurant sales, which dropped to 64.10% during the fourth quarter of
fiscal year 2006. The gross profit margin for restaurant food and bar sales is
expected to increase throughout the balance of fiscal year 2007 because the
majority of the menu price increases were only instituted during the latter part
of the first quarter of fiscal year 2007.
The gross profit margin for package store sales was 26.94% and 27.55% for
the thirteen weeks ended December 30, 2006 and December 31, 2005. The decline in
gross profit margin for package store sales is due to increased competition and
the Company's policy of meeting the published sales prices of its competitors.
The gross profit margin for package store sales is expected to remain constant
through the balance of fiscal year 2007.
-19-
Operating Costs and Expenses
Operating costs and expenses were $14,273,000 and $12,587,000 for the
thirteen weeks ended December 30, 2006 and December 31, 2005, respectively, an
increase of 13.39%. The increase is due to the operation of the restaurant in
Pinecrest, Florida for the fiscal quarter, as well as a general increase in
overall operating costs and expenses. Operating costs and expenses are expected
to continue increasing through the balance of fiscal year 2007 with the
restaurant in Pinecrest, Florida being open for the entire fiscal year;
anticipated opening of the restaurants in Pembroke Pines, Florida and Davie,
Florida during the third and fourth quarters of fiscal year 2007, respectively;
and a general increase in overall operating costs and expenses.
Payroll and related costs were $4,062,000 and $3,534,000 for the thirteen
weeks ended December 30, 2006 and December 31, 2005, respectively, an increase
of 14.94%. The increase is attributed to the operation of the restaurant in
Pinecrest, Florida for the fiscal quarter and the annual increase in the Florida
minimum wage which was effective January 1, 2006. Throughout the balance of
fiscal year 2007, payroll and related costs are expected to increase due to the
anticipated opening of the restaurants in Pembroke Pines, Florida and Davie,
Florida during the third and fourth quarters of fiscal year 2007, respectively,
and the 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 $819,000 and $754,000 for the thirteen weeks ended December 30, 2006
and December 31, 2005, respectively, an increase of 8.62%. The increase is
accounted for primarily by the increases in real property taxes and common area
maintenance, which generally includes property insurance for units located
within shopping centers. Occupancy costs will increase during the balance of
fiscal year 2007 due primarily to the commencement of rental payments during the
second quarter of fiscal year 2007 for the restaurants in Pembroke Pines,
Florida and Davie, Florida.
Selling, general and administrative expenses, which includes loss on
abandonment of property and equipment, were $3,033,000 and $2,466,000 for the
thirteen weeks ended December 30, 2006 and December 31, 2005, respectively, an
increase of 22.99%. The increase in selling, general and administrative expense
is accounted for by the operation of the restaurant in Pinecrest, Florida for
the fiscal quarter and an overall increase in expenses.
Other Income and Expense
Other income and expenses were an expense of $97,000 for the thirteen
weeks of fiscal year 2007 as compared to income of $34,000 for the thirteen
weeks of fiscal year 2006. Other income and expense for the thirteen weeks of
fiscal year 2007 includes interest expense of $133,000, as compared to an
expense of $32,000 for the thirteen weeks of fiscal year 2006. The increase in
interest expense is due to the interest paid on the Company's line of credit and
mortgage used for the purchase of the membership interest of the limited
liability company which owns the property in Hallandale, Florida during the
thirteen weeks of fiscal year 2007, which did not exist during the thirteen
weeks of fiscal year 2006. Other income and expenses for the thirteen weeks of
fiscal year 2006 includes insurance recovery, net of casualty loss, of
approximately $45,000.
New Limited Partnership Restaurants
As the Company opens new limited partnership restaurants on a more regular
basis the Company's income from operations will be adversely affected by the
higher costs associated with the opening of the same. The higher costs include,
but are not limited to pre-opening rent. Although no pre-opening rent was paid
-20-
during the first quarter of fiscal year 2007, the Company recognized $18,000 in
rent expense for the new limited partnership restaurant in Pembroke Pines,
Florida, while during the first quarter of fiscal year 2006, pre-opening rent
was paid and expensed for the new limited partnership restaurant in Pinecrest,
Florida, in the amount of approximately $51,000, which was the full rent
provided in the lease.
During the balance of fiscal year 2007, income from operations will be
adversely affected by the pre-opening costs to be incurred for the new limited
partnership restaurants in Pembroke Pines, Florida and Davie, Florida, including
but not limited to the payment and expensing of pre-opening rent. The lease for
the limited partnership restaurant in Pembroke Pines, Florida provides for one
hundred five (105) days prior to the commencement of rent, after which the full
rent provided in the lease is due. The Company is recognizing rent expense on a
straight line basis over the term of the lease. The lease for the limited
partnership restaurant in Davie, Florida provides for the immediate payment of
the full rent provided in the lease.
Trends
During the next twelve months management expects continued increases in
restaurant sales, due primarily 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; and continued increases in same
store restaurant sales. Package store sales are expected to decrease due
primarily to increased competition. At the same time, management expects higher
food costs and overall expenses to increase. The Company has already raised its
menu prices to offset higher food costs and overall expenses and will continue
to do so wherever competitively possible.
Liquidity and Capital Resources
Cash Flows
The following table is a summary of the Company's cash flows for the first
thirteen weeks of fiscal years 2007 and 2006.
Thirteen Weeks Ended
Dec. 30, Dec. 31,
2006 2005
---------- ----------
(In Thousands)
Net cash provided by (used in)
operating activities $ 167 $ 606
Net cash provided by (used in)
investing activities (380) (522)
Net cash provided by (used in)
financing activities 998 (292)
---------- ----------
Net Increase (Decrease) in Cash and
Cash Equivalents 785 (208)
Cash and Cash Equivalents, Beginning 1,698 2,674
---------- ----------
Cash and Cash Equivalents, Ending $ 2,483 $ 2,466
========== ==========
-21-
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. Since the dividend was only declared subsequent to the end of the first
quarter of fiscal 2006, the amount is not reflected above.
Capital Expenditures
The Company had additions to property and equipment of $1,125,000 (of
which $250,000 was financed), during the thirteen weeks ended December 30, 2006,
including $802,500 for the purchase of real property and $204,000 for
renovations to two (2) existing Company restaurants, as compared to $526,000
during the thirteen weeks ended December 31, 2005, which included $101,000 as a
direct result of Hurricane Wilma.
All of the Company's units require periodic refurbishing in order to
remain competitive. The budget for fiscal 2007 is $800,000. The Company expects
the funds for these improvements to be provided from operations. In addition, it
is anticipated that the limited partnership owning the restaurant in Pembroke
Pines, Florida will require approximately $2,000,000 in additional funds for
capital expenditures to complete its renovations and prepare for opening as a
"Flanigan's Seafood Bar and Grill" restaurant, which funds will be raised
through private offerings. It is also anticipated that the limited partnership
purchasing the restaurant in Davie, Florida will require approximately
$2,800,000 in additional funds to close on the purchase of the existing
restaurant and for capital expenditures to complete its renovations and prepare
for opening as a "Flanigan's Seafood Bar and Grill" restaurant, which funds will
also be raised through private offerings. The funds raised through the private
offerings will also reimburse the Company for advances made in excess of its
planned investment in each of these limited partnerships.
Long Term Debt
As of December 30, 2006, the Company had long term debt of $6,794,000, as
compared to $1,515,000 as of December 31, 2005, and $5,181,000 as of September
30, 2006.
During the first quarter of fiscal 2007, 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
liquor store located at 4 N. Federal Highway, Hallandale, Florida (Store #31).
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 $28,600, with the
entire principal balance and all accrued interest still due on its original
maturity date in seven (7) years.
During the first quarter of fiscal 2007, the Company re-financed the
mortgage note encumbering the Company's corporate offices. The new mortgage, in
the 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
old mortgage note, which otherwise matured in August, 2008, incurred a
prepayment penalty of $17,000.
During the first quarter of fiscal 2007, 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. 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 December 30, 2006.
-22-
As of December 30, 2006, the Company is in compliance with the affirmative
covenants contained in its loan documents.
Purchase of Company Common Stock
Pursuant to a discretionary plan approved by the Board of Directors,
during the thirteen weeks ended December 30, 2006, the Company purchased 332
shares of its common stock for an aggregate purchase price of $3,000.
Working Capital
The table below summarizes the current assets, current liabilities, and
working capital for the fiscal quarters ended December 30, 2006, December 31,
2005, and the fiscal year ended September 30, 2006.
Dec. 30, Dec. 31, Sept. 30,
Item 2006 2005 2006
------- ------- -------
(In Thousands)
Current Assets $6,684 $6,464 $6,315
Current Liabilities 4,523 4,399 4,919
Working Capital 2,161 2,065 1,396
Working capital for the fiscal quarter ending December 30, 2006 increased
by 4.65% from the working capital for the fiscal quarter ending December 31,
2005 and by 54.80% from the working capital for the fiscal year ending September
30, 2006. Working capital for the fiscal quarter ending December 30, 2006
increased primarily due to the draw on the Company's line of credit during the
fiscal quarter, ($1,200,000), which draw included funds to advance to the
limited partnership to close on the purchase of the existing restaurant in
Davie, Florida ($625,000), which closing took place subsequent to the end of the
first quarter of fiscal 2007. Working capital for the fiscal quarter ended
December 30, 2006 was adversely affected by the payment of the balance of the
cost of improvements to two (2) existing Company restaurants ($204,000) and the
cash to close on the purchase of the real property subject to ground leases of
two locations currently leased by the Company, ($560,000). Working capital for
the fiscal quarter ended December 31, 2005 was adversely affected by the loss of
restaurant food and beverage revenue as a result of Hurricane Wilma and the cost
of repairs to damages caused by the same, while the Company waited for
reimbursement of all or a part of such losses from its insurance carrier.
Subsequent to the end of the first quarter of fiscal 2007, management
projects that working capital will be adversely affected by investments and/or
further advances to be made by the Company to the limited partnership which owns
the restaurant in Pembroke Pines, Florida and to the limited partnership which
is expected to own the restaurant in Davie, Florida. In order to insure the
Company's ability to meet its cash flow needs, during the first quarter of
fiscal 2007, the Company increased its line of credit from $2,000,000 to
$2,650,000. Management believes that over the balance of fiscal year 2007,
working capital will increase because the Company does not anticipate the same
demand upon its cash flow as it experienced during fiscal year 2006 and during
the first quarter of fiscal year 2007, as well as reimbursement of funds
advanced by the Company for the closing and/or renovation of the restaurants in
Pembroke Pines, Florida and Davie, Florida in excess of its investment once the
limited partnerships complete their respective private offerings. As of December
30, 2006, the Company has advanced $392,000 to the limited partnership which
owns the restaurant in Pembroke Pines, Florida and will invest no less than
$235,000 in the limited partnership, with any excess advances returned to the
Company.
-23-
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company does not ordinarily hold market risk sensitive instruments for
trading purposes and as of December 30, 2006 held no equity securities.
Interest Rate Risk
At December 30, 2006, the Company has one debt arrangement, its line of
credit, which has a variable interest rate, which is at prime. 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.
At December 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 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, with the
participation of management, evaluated the effectiveness of the Company's
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934, as amended, ("Exchange Act") Rule 13a-15(e) or 15d-15(e)) as of
December 30, 2006. Based upon that evaluation, we concluded that as of December
30, 2006, our disclosure controls and procedures were ineffective to ensure that
information required to be disclosed in reports that we file or submit under the
Exchange Act were recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission or that such information is accumulated and communicated to our
management including our Chief Executive Officer and Chief Financial Officer, to
allow for timely decisions regarding required disclosure. The basis for this
determination was that we identified a material weakness in our internal control
over financial reporting with regard to the accounting for officers' bonuses,
which we view as an integral part of our disclosure controls and procedures.
Subsequent to the end of the period covered by this Form 10Q and the
remediation discussed below, we carried out another evaluation under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures, including but
not limited to the accounting for officers' bonuses. It is the opinion 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 the first quarter of fiscal year 2007, the Company continued to
assess the effectiveness of our "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 results of management's assessment and review were
reported to the Audit Committee of the Board of Directors.
Based upon management's assessment and review, management believes that we
did not maintain effective internal control over financial reporting as of
December 30, 2006, as a result of one material weakness, namely the accounting
for officers' bonuses.
In the course of management's investigation, management noted one matter
involving internal control and its operation that management considered a
material weakness under standards established by the Public Company Accounting
Oversight Board. A control deficiency exists when the design or operation of a
control does not allow management or employees, in the normal course of
performing their assigned functions, to prevent or detect misstatements on a
timely basis. A significant deficiency is a control deficiency, or combination
of control deficiencies, that adversely affects the company's ability to
initiate, authorize, record, process or report external financial data reliably
in accordance with generally accepted accounting principles such that there is
more than a remote likelihood that a misstatement of the company's annual or
interim financial statements that is more than inconsequential will not be
prevented or detected. A material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that material misstatement of the annual or interim financial
statements will not be prevented or detected.
Management's consideration of internal control would not necessarily
disclose all matters in internal control that might be significant deficiencies
and, accordingly, would not necessarily disclose all significant deficiencies
that are also considered to be material weaknesses as defined above. However,
management did identify weaknesses in internal controls involving the accounting
of officers' bonuses, specifically with respect to the posting of interim
payments against officers' bonuses which directly relate to accruals of same.
Management believes this constitutes a material weakness in our internal control
over the financial reporting process.
Since December 30, 2006, management has significantly expanded procedures
to remediate the material weakness in internal control over financial reporting
and ensure the integrity of our financial reporting processes, which expanded
procedures include the following:
o posting of interim payments of officers' bonuses against accruals of
officers' bonuses directly from payroll;
o establish a separate accrued officers' bonus liability account in lieu of
the general accrued payroll account;
o payment of officers' bonuses by written memorandum, thereby creating a
paper trail for reconciliation purposes; and
o additional post-closing procedure for the reporting period, including a
reconciliation of the accrued officers' bonus liability account, officers'
bonus payroll expense account and interim or final payments of officers'
bonuses.
In an effort to improve internal control over financial reporting,
management continues to emphasize the importance of establishing the appropriate
environment in relation to accounting, financial reporting and internal control
over financial reporting and the importance of identifying areas of improvement
and the creation and implementation of new policies and procedures where
material weaknesses exist.
With the exception of the changes to the accounting of officers' bonuses
discussed above, we made no changes in our internal control over financial
reporting during the fiscal quarter ending December 30, 2006 or subsequent
thereto, 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.
-24-
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings: See "Litigation" on page 14 of this report and Item
1 and Item 3 to Part 1 of the Annual Report on Form 10-K for the fiscal year
ended September 30, 2006 for a discussion of other legal proceedings resolved in
prior years.
Item 2- Unregistered Sales of Equity Securities and Use of Proceeds: None
Item 3- Defaults Upon Senior Securities: None
Item 4- Submission of Matters to a Vote of Security Holders: None
Item 5- Other Information: None
Item 6- Exhibits and Reports on Form 8-K:
(a) Exhibits: Exhibits 31.1, 31.2, 32.1 and 32.2 (Certifications)
(b) Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized. The information furnished reflects all
adjustments to the statement of the results for the interim period.
FLANIGAN'S ENTERPRISES, INC.
/s/ James G. Flanigan
----------------------------------
JAMES G. FLANIGAN,
Chief Executive Officer and
President
Date: February 13, 2007
-----------------
/s/ Jeffrey D. Kastner
---------------------------
JEFFREY D. KASTNER
Chief Financial Officer and Secretary
Date: February 13, 2007
-----------------
-25-