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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 October 2, 2004
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
------------------------------- ----------------
(State of 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 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 subject to such filing
requirements for the past 90 days. Yes |X| No |_|
1
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $6,293,800 as of December 28, 2004.
There were 1,916,825 shares of the Registrant's Common Stock ($0.10) Par Value
outstanding as of October 2, 2004
2
DOCUMENTS INCORPORATED BY REFERENCE
Information contained in the Registrant's 2005 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 42
PART I
Item 1. Business
- ----------------
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
- -------
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 October 2, 2004, the Company operated 18
units, and had equity interests in seven additional units which have been
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
2004 2003 2002 NUMBER
TYPES OF UNITS
- --------------------------------------------------------------------------------
Company Owned:
- --------------
Combination package
and restaurant 4 4 4
Restaurant only 2 2 2
Package store only 5 4 4 (1)(2)(3)
Company Managed
- ---------------
Restaurants Only:
-----------------
Limited partnerships 5 4 4 (4)(5)(6)(7)(8)
Franchise 1 1 1
Company Owned Club: 1 1 1
- ------------------
- --------------------------------------------------------------------------------
TOTAL - Company
Owned/Operated Units: 18 16 16
FRANCHISED - units 7 7 7 (9)
-- --
3
Notes:
(1) During the fourth quarter of fiscal year 2000, the Company entered
into a lease for the operation of a package liquor store in Hialeah, Florida.
This package liquor store opened for business during the first quarter of fiscal
year 2002.
(2) During the fourth quarter of fiscal year 2001, the Company entered
into a ground lease for an out parcel in Hollywood, Florida. The Company has
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)
is subleased by the Company as retail space. The package store opened for
business on November 17, 2003.
(3) During the second quarter of fiscal year 2001, the Company completed
renovations to its new corporate offices and relocated to the same. The new
corporate offices consist of a two (2) story building, with space set aside on
the ground floor for a package liquor store. The Company filed the application
for its building permits during the third quarter of fiscal year 2002, but is
still involved in litigation with the adjacent shopping center over the
Company's right to non-exclusive parking in the shopping center. The
construction of the package liquor store has been postponed until the litigation
is concluded, which should occur during fiscal year 2005. The package liquor
store is not included in the table of units.
(4) During the third quarter of fiscal year 2001, the Company formed a
limited partnership which raised funds through a private offering to purchase
the assets of a restaurant in West Miami, Florida and renovate the same for
operation under the "Flanigan's Seafood Bar and Grill" servicemark. The Company
acts as general partner and has a twenty five percent ownership interest in the
partnership. The restaurant opened for business on October 11, 2001.
(5) During fiscal year 2000, the Company received official notification
from the State of Transportation, Department of Transportation, ("DOT"), that
the DOT was exercising its right of eminent domain to "take" the hotel property
upon which a restaurant, operated by the Company as general partner of a limited
partnership, was located. The restaurant was closed at the end of business on
March 30, 2002 and is not included in the table of units.
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. The Company, as
general partner of the limited partnership, is proceeding with necessary
structural repairs, while preserving its right to pursue a claim against the
landlord for its contribution to the additional structural repairs and
reimbursement of rent paid while the processing of its building plans is
delayed. The structural repairs should be completed during the second quarter of
fiscal year 2005, after which the limited partnership's building plans will be
processed by Pinecrest, Florida, building permits issued and the renovations
made to the business premises. It is anticipated
4
that the renovated restaurant will be open for business by the end of fiscal
year 2005 and is not included in the table of units.
(6) During the fourth quarter of fiscal year 2001, a limited partnership
was formed with the Company as general partner, which limited partnership
entered into a sublease agreement to own and operate an existing restaurant in
Weston, Florida. During the fourth quarter of fiscal year 2002, the sublessor
resolved the zoning and related matters and the limited partnership began
raising funds to renovate the business premises for operation as a "Flanigan's
Seafood Bar and Grill" restaurant. The Company acts as general partner and has a
twenty eight percent ownership interest in the partnership. The restaurant
opened for business on January 20, 2003.
(7) During the third quarter of fiscal year 2003, 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 a Howard
Johnson's Hotel in Stuart, Florida. During the fourth quarter of fiscal year
2003, 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 twelve percent
limited partnership interest. The restaurant opened for business on January 11,
2004.
(8) 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. Subsequent to
the end of fiscal year 2004, 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. It is
anticipated that the renovated restaurant will open for business by the start of
the third quarter of fiscal year 2005 and is not included in the table of units.
(9) Since the fourth quarter of 1999, the Company has managed the
restaurant for a franchisee. 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.
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
5
franchising its package liquor stores and lounges in the South Florida area. See
Note 9 to the consolidated financial statements and the discussion of franchised
units on page 8.
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 78% of total restaurant sales.
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 joint
ventures and wholly owned subsidiaries. The joint ventures and operating
subsidiaries are as follows:
STATE OF PERCENTAGE
ENTITY ORGANIZATION OWNED
------ ------------ -----
Flanigan's Management Services, Inc. Florida 100
Flanigan's Enterprises, Inc. of Georgia Georgia 100
Seventh Street Corp. Florida 100
Flanigan's Enterprises, Inc. of Pa. Pennsylvania 100
CIC Investors #13, Limited Partnership Florida 100
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
The income derived and expenses incurred by the Company relating to the
aforementioned joint ventures 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.
6
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.
Financial information broken into these two principal industry segments
for the three fiscal years ended October 2, 2004, September 27, 2003 and
September 28, 2002 is set forth in the consolidated financial statements which
are attached hereto, and incorporated herein by reference.
The Company's Package Liquor Stores and Restaurants
- ---------------------------------------------------
The Company's package liquor stores are operated under the "Big Daddy's
Liquors" servicemark and the Company's restaurants are operated under the
"Flanigan's Seafood Bar and Grill" 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 78% 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.
7
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 2004, 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. 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.
The units that continue to be franchised are doing well and continue to
generate income for the Company.
Investment in Joint Ventures
- ----------------------------
The Company had determined that all but one joint venture discussed below
should be consolidated by virtue of control, as evidence by general partnership
interests held by the Company. As a result, the accompanying consolidated
financial statements reflect the joint ventures in which they have a general
partnership interest on a consolidated basis. The remaining joint venture 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
8
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 October 2, 2004, only the
limited partnership which owns the restaurant in Kendall, Florida has received
an aggregate sum equal to the initial investment of all limited partners from
the net profit from the operation of the restaurant and the Company receives
one-half (1/2) of the net profit as manager of the 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.
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.
Miami, Florida
The Company operated a restaurant in Miami, Florida under the "Flanigan's
Seafood Bar and Grill" servicemark pursuant to a limited partnership agreement
through the end of the second quarter of fiscal year 2002. The Company acts as
the general partner and owned a fifty percent limited partnership interest at
that time. The State of Florida, Department of Transportation, ("DOT"),
exercised its right of eminent domain to "take" the hotel property upon which
this restaurant was located. During fiscal year 2002, the Company, as general
partner of the limited partnership, settled its apportionment claim against the
hotel owner for $700,000, which settlement resulted in a gain from disposition
of approximately $459,000 to the Company during the fiscal year ended September
28, 2002, which is included in "Other Income (Expense) on Page F-3 of this
report. During fiscal year 2003, the limited partnership settled all claims for
additional compensation from the DOT for $27,000 and during the third quarter of
fiscal year 2004 received a final payment from the DOT for $10,000 as
reimbursement of expenses during the eminent domain proceedings. The additional
compensation and reimbursement of expenses from the DOT belonged solely to the
Company. The unrelated joint venture partner received $350,000 in full
settlement of its interest and the Company controls 100% of the partnership as
of October 2, 2004.
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. The purchase
price of approximately $340,000 related to the acquisition of a below market
lease and will therefore be recognized as additional lease expense over the
remaining life of the lease once operation of the restaurant commences. As of
October 2, 2004, the $340,000 is included in the accompanying balance sheet in
other assets. The Company agreed to unconditionally guaranty the lease for the
business premises in order to procure the consent of the landlord to the
assignment of the lease. During the second quarter of fiscal year 2004 and after
removing the interior finishes in anticipation of completing its building plans
for the renovation of the building premises, the Company found numerous,
substantial structural
9
deficiencies which needed to be rectified prior to any renovations being made.
During the third quarter of fiscal year 2004, the Company, as general partner of
the limited partnership, and the landlord agreed upon the structural repairs
required, as set forth by the landlord's engineering firm, and to equally share
the cost thereof in order to minimize further delay to the renovation of the
business premises. During fourth quarter of fiscal year 2004, the structural
repairs were made by the landlord's contractor. Upon submitting its building
plans to Pinecrest, Florida for review and the issuance of building plans, the
Company was advised that there were structural problems that had not been
addressed and other structural problems that were not adequately repaired and
that its building plans would not be reviewed until the structural problems were
rectified. The Company, as general partner of the limited partnership, is
proceeding with the necessary structural repairs, while preserving its right to
pursue a claim against the landlord for its contribution to any additional
structural repairs and reimbursement of rent paid while the processing of its
building plans is delayed. The structural repairs should be completed during the
second quarter of fiscal year 2005, after which the limited partnership's
building plans will be processed by Pinecrest, Florida, building permits issued
and the renovations made to the business premises. The limited partnership still
intends to raise funds through a private offering to renovate the restaurant
once the renovation costs have been determined. As of the end of fiscal year
2004, the Company had advanced the sum of $798,862 to the limited partnership,
the use of which included, but was not limited to, funds to close on the
purchase of the existing business, architectural and engineering fees and
contribution to structural repairs made to date. The Company continues to act as
general partner and will also be the owner of up to thirty three and one-third
percent limited partnership interest. It is anticipated that the renovated
restaurant will be open for business by the end of fiscal year 2005.
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" servicemark. 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" servicemark. 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.
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" servicemark. The Company is also a forty percent owner of the
10
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.
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" servicemark. 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.
Weston, Florida
During the fourth quarter of fiscal year 2002, the Company, as general
partner of a limited partnership, began raising funds to renovate the business
premises of an existing restaurant in Weston, Florida for operation as a
"Flanigan's Seafood Bar and Grill" restaurant. 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, which had operated under its existing servicemark, was
closed on July 13, 2002 and building permits were issued to the limited
partnership at the start of fiscal year 2003. The restaurant opened for business
on January 20, 2003.
Stuart, Florida
During the third quarter of fiscal year 2003, 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 a Howard Johnson's
Hotel in Stuart, Florida. During the first quarter of fiscal year 2004, the
limited partnership completed its private offering, raising the sum of
$1,500,000 to renovate the business premises for operation as a "Flanigan's
Seafood Bar and Grill" restaurant. The Company continues to act as general
partner and 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.
Wellington, Florida
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 fourth
quarter of fiscal year 2004, the limited partnership began raising funds through
a private offering to renovate the business premises for operation as a
"Flanigan's Seafood Bar and Grill" restaurant. As of the end of fiscal year
2004, the Company had advanced the sum of $148,902 to the limited partnership,
the use of which included, but is not limited to funds due upon the execution of
the lease agreement as security deposit and prepaid rent, architect, engineering
and initial contracting fees. The advance represented eight percent of the funds
to be raised through the private offering to renovate and prepare the restaurant
to open for business,
11
including working capital. Subsequent to the end of fiscal year 2004, the
limited partnership completed its private offering, raising the sum of
$1,850,000. The Company continues to act as general partner and 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. It is anticipated that the renovated restaurant will open for
business by the start of the third quarter of fiscal year 2005.
Clubs
- -----
As of the end of fiscal year 2004, 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
- ----------------------------------------------
During fiscal year 1992, the Company entered into a Management Agreement
with Mardi Gras Management, Inc. for the operation of the Company's club in
Atlanta, Georgia through the balance of the initial term of the lease, unless
sooner terminated by Mardi Gras Management, Inc. upon thirty days prior written
notice, with or without cause. Mardi Gras Management, Inc. assumed the
management of this club effective November 1, 1991 and is currently operating
the club under an adult entertainment format. During fiscal year 1997, the
Company agreed to modify the Management Agreement to give Mardi Gras Management,
Inc. one five year renewal option to extend the term of the same, without the
right to terminate the same upon thirty days prior written notice, with or
without cause, provided the Company was satisfied with the financial condition
of Mardi Gras Management, Inc. within its sole discretion, and Mardi Gras
Management, Inc. agreed to modify the owner's fee to $150,000 per year versus
ten percent of gross sales from the club, whichever is greater. Pursuant to the
Management Agreement, as modified, the Company receives a monthly owner's fee of
$12,500, subject to adjustment each year on or about July 1, with an additional
owners fee equal to 10% of the gross sales exceeding $1,500,000 for the prior 12
month period, being due the Company. During the first quarter of fiscal year
2001, the Company accepted the exercise of the five year renewal option by Mardi
Gras Management upon its receipt of a security deposit of $200,000.
Simultaneously, with its acceptance of the exercise of the renewal option by
Mardi Gras Management, the Company exercised its five year renewal option under
the ground lease for the business premises.
During the third quarter of fiscal year 2004, Mardi Gras Management, Inc.
entered into a new lease agreement with the landlord of the Company's club in
Atlanta, Georgia. The new lease agreement is for a period of ten (10) years
commencing when the current lease expires on April 30, 2006, 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. will still
operate the club under the Management Agreement, the Company will continue to
receive an owner's fee of $150,000 per year versus ten (10%) percent of gross
sales from the club, whichever is greater, until the rental increases under the
new lease take effect. The Company
12
agreed that one-half (1/2) of the rental increases will be credited against any
owner's fee in excess of $150,000 per year for purposes of calculating the
owner's fee, 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 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. 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.
In September 2002, the Company changed the accounting method for valuing
inventories from first in first out to average cost.
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.
13
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.
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 the 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 the
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 only. 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
14
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.
The Company is subject in certain states to "dram shop" or "liquor
liability" statutes, which generally provide a person injured by an intoxicated
person the right to recover damages from an establishment that wrongfully served
alcoholic beverages to such person. See Item 1, Insurance and Item 3, Legal
Proceedings for further discussion. The Company maintains a continuous program
of training and surveillance from its corporate headquarters to assure
compliance with all applicable liquor laws and regulations. During the fiscal
years ended September 28, 2002, September 27, 2003 and October 2, 2004 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 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.
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. 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 2002, fiscal year 2003, and again in fiscal year 2004 the
Company was able to purchase excess liability insurance at a reasonable premium,
whereby the Company's excess insurance carrier is responsible for $5,000,000
coverage above the Company's primary general liability insurance coverage. The
Company is self-insured against liability claims in excess of $6,000,000.
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 self-insured 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
15
Company in excess of its liability insurance coverage could have a materially
adverse effect on the Company.
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 location, type and
quality of facilities and 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 competitor's 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 October 2, 2004 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 and operated
an additional five 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 most of the franchises.
The Company's business is subject to seasonal effects, in that liquor
purchases tend to increase during the holiday seasons.
Trade Names
- -----------
The Company operates principally under three servicemarks; "Flanigan's",
"Big Daddy's", and "Flanigan's Seafood Bar and Grill". 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
16
Company has acquired a registered Federal trademark on the principal register
for its "Flanigan's" servicemark.
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 776 employees, of which 547 were
full-time and 229 were part-time. Of these, 35 were employed at the corporate
offices. Of the remaining employees, 46 were employed in package liquor stores
and 695 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
---- --------------------- --- ------------------
Joseph G. Flanigan Chairman of the Board 75 1959
of Directors, Chief
Executive Officer
James G. Flanigan President 40 2002
August Bucci Chief Operating Officer 60 2002
and Executive Vice
President
William Patton Vice President 81 1975
Community Relations
Jeffrey D. Kastner Chief Financial Officer 51 1995
General Counsel and
Secretary
Jean Picard Vice President of 66 2002
Package Store
Operations
17
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. No Company contributions were made during the fiscal year ended
October 2, 2004, but at its meeting on December 9, 2004, the Board of Directors
approved a discretionary matching contribution of $25,000 effective January 3,
2005.
Item 2. Properties
- ------------------
The Company's operations are all conducted on leased property with the
exception of the Corporate Headquarters Office Building which was purchased in
December, 1999 and has been occupied by the Company since April 2001. 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 $325,000 for its refurbishing
program for fiscal year 2005. See Item 7, "Liquidity and Capital Resources" for
discussion of the amounts spent in fiscal year 2004.
The following table summarizes the Company's properties as of October 2,
2004 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 Inc. (10) and Options to
7003 Taft Street 2/28/37
Hollywood, FL
Big Daddy's Liquors #7 1,450 N/A Company 11/1/00 to 10/31/05
Flanigan's Enterprises Inc. and Options to
1550 W. 84th Street 10/31/15
Hialeah, FL
18
Franchise/
Square License Lease
Name and Location Footage Seats Owned by Terms
- ----------------- ------- ----- -------- -----
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
Flanigan's Enterprises Inc. (1)
1550 W.84th Street
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)(12)
330 Southern Blvd
W. Palm Beach, FL
Flanigan's Legends 5,000 180 Franchise 11/15/92 to
Seafood Bar and Grill 11/15/12
#12 Galeon Tavern, Inc.(3)
2401 Tenth Ave. North
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 Joint 3/2/76 to 8/31/06
CIC Investors #15 Ltd.(3)(5) Venture Option to 8/31/11
1479 E. Commercial Blvd
Ft. Lauderdale, FL
Flanigan's Seafood 4,300 100 Franchise 2/15/72 to12/31/05
Bar and Grill #18 Options to 12/31/20
Twenty Seven Birds Option to purchase
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
19
Franchise/
Square License Lease
Name and Location Footage Seats Owned by Terms
- ----------------- ------- ----- -------- -----
Flanigan's Seafood 5,100 140 Company 7/15/68 to 12/31/05
Bar and Grill #20 Annual options
Flanigan's Enterprises Inc. (2) until the Company
13205 Biscayne Blvd. fails to exercise
North Miami, FL Additional Lease
5/1/69 to 12/31/05
Annual options
until the Company
fails to exercise
Flanigan's Seafood 4,100 200 Company 12/16/68 to
Bar and Grill #22 12/31/05
Flanigan's Enterprises Inc. (2)(4) Options to 12/31/20
2600 W. Davie Blvd. Option to purchase
Ft. Lauderdale, FL
Flanigan's Enterprises Inc. #27 (8) 3,000 90 Company 7/1/50 to 6/30/49
732-734 NE 125th St.
North Miami, FL
Flanigan's Seafood 4,600 150 Company 9/6/68 to 12/31/05
Bar and Grill #31 Options to 12/31/20
Flanigan's Enterprises Inc. (2)(13) Option to purchase
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 12/31/05
Bar and Grill #40 Options to 12/31/15
Flanigan's Enterprises Inc. (2)
5450 N. State Road 7
Ft. Lauderdale, FL
20
Franchise/c
Square License Lease
Name and Location Footage Seats Owned by Terms
- ----------------- ------- ----- -------- -----
Piranha Pat's #43 4,500 90 Franchise 12/1/72 to 11/30/07
BD 43 Corporation (2)(3)(5) Option to 11/30/12
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
Flanigan's Seafood 8,000 200 Joint 06/01/91 to 5/31/11
Bar and Grill #13, (11) Venture Options to 5/31/21
CIC Investors #13, Ltd
11415 S. Dixie Highway
Pinecrest, FL
Flanigan's Seafood 6,800 200 Joint 8/1/97 to 12/31/11
Bar and Grill #60, Venture
CIC Investors #60 Ltd.
9516 Harding Avenue
Surfside, FL
Flanigan's Seafood 6,128 200 Joint 4/01/05 to 3/31/15
Bar and Grill #65 (12) Venture Options to 3/31/25
CIC Investors #65, Ltd
2335 State Road 7,Suite 100
Wellington, FL
Flanigan's Seafood 4,850 161 Joint 4/1/98 to 3/31/08
Bar and Grill #70 Venture Options to 3/31/28
CIC Investors #70 Ltd.
12790 SW 88 St
Kendall, FL
Flanigan's Seafood 7,000 200 Joint 10/1/03 to 9/30/06
Bar and Grill #75 Venture Options to 9/30/27
CIC Investors # 75 Ltd.
950 S. Federal Highway
Stuart, FL 34994
Flanigan's Seafood 5,000 165 Joint 4/15/01 to 12/14/19
Bar and Grill #80 Venture Options to 12/14/39
CIC Investors #80 Ltd.
8695 N.W. 12th St
Miami, FL
21
Franchise/
Square License Lease
Name and Location Footage Seats Owned by Terms
- ----------------- ------- ----- -------- -----
Flanigan's Seafood 5,700 235 Joint 7/29/01 to 7/28/17
Bar and Grill #95 Venture Options to 7/28/32
CIC Investors #95 Ltd.
2460 Weston Road
Weston, FL
Flanigan's Enterprises #600 (7) 10,000 400 Company 5/1/76 to 4/30/06
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) During fiscal year 1996, the Company purchased 37% of the underlying
leasehold from the unaffiliated third parties to whom the lease had been
assigned and subleased back. An additional 11% was purchased during fiscal
year 1997, bringing the total interest purchased to 48%.
(7) Location managed by an unaffiliated third party.
(8) Location was closed in May 1998. The Company entered into a five year
sub-lease 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) Location estimated to open for business by the end of fiscal year 2005.
(12) Location scheduled to open for business at the start of the third quarter
of fiscal year 2005.
(13) During the fourth quarter of fiscal year 2004, the Company exercised its
option purchase the real property and for an assignment of a
22
ground lease of this location pursuant to an option to purchase contained
in the Sublease Agreement.
Exercise of Option to Purchase.
- -------------------------------
During the fourth quarter of fiscal year 2004, the Company exercised the
option to purchase contained in the Sublease Agreement for the combination
restaurant and package liquor store located at 4 North Federal Highway,
Hallandale, Florida, (Store #31). The purchase includes real property and the
assignment of a ground lease for a small portion of the property. The Company
has procured financing for this purchase. The option to purchase contains a
formula whereby each party retains an appraiser to determine the "fair market
value" for the purchase of the property and if the two appraisers cannot agree
upon the same, then a third appraiser is selected, whose determination of the
"fair market price" is binding. Subsequent to the fiscal year ending October 2,
2004, it was determined that the parties would need to retain a third appraiser
to determine the purchase price. It is anticipated that the transaction will
close during the second quarter of fiscal year 2005.
Item 3. Legal Proceedings.
- --------------------------
Due to the nature of the business, the Company is sued from time to time
by patrons, usually for alleged personal injuries occurring at the Company's
business locations. The Company has 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. The Company's primary general
liability 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 the fiscal year 2002, fiscal year 2003,
and again in fiscal year 2004, the Company was able to purchase excess liability
insurance, at a reasonable premium, whereby the Company's excess insurance
carrier is responsible for $5,000,000 coverage above the Company's primary
general liability insurance coverage. 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 has in place insurance coverage to protect it from
losses, if any.
During fiscal year 2000, the Company was served with several complaints
alleging violations of the Americans with Disabilities Act, ("ADA"), at all of
its locations. The lawsuits included the restaurants owned by the limited
partnerships and franchises. The ADA has no notice provision and the first time
that the Company received notice of any ADA violations was when it was served
with a copy of the complaint. Of the law suits filed, only a few have
23
been actively pursued. The Company retained an ADA expert who has inspected
locations involved in active lawsuits, including the limited partnerships and
franchises, and provided a report setting forth ADA violations which need to be
corrected. The Company agreed to correct ADA violations noted by its ADA expert
and then vigorously defended the lawsuits arguing that the locations were in
compliance. During fiscal year 2001 and fiscal year 2002, the Company, including
three (3) of its franchises, settled all active lawsuits alleging ADA
violations.
During fiscal year 2003, the Company was served with a complaint alleging
violations of the ADA at one of its locations. The Company corrected all
violations noted in the complaint and during the fourth quarter of fiscal year
2004, settled the lawsuit.
During fiscal year 2003, the Company, as general partner of one of its
limited partnerships, and one of its franchisees, received notifications
alleging their failure to complete correcting ADA violations pursuant to their
respective settlement agreements from previous lawsuits alleging ADA violations.
The Company, as general partner of the limited partnership, and the franchisee
corrected any uncorrected ADA violations and during the fourth quarter of fiscal
year 2004, settled any claims arising out of the same.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
During the fourth quarter of fiscal year 2004 the Company did not submit
any matter to a vote of the security holders.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------------------
Fiscal 2004 Fiscal 2003 Fiscal 2002
----------- ----------- -----------
High Low High Low High Low
---- --- ---- --- ---- ---
First quarter 6.85 6.00 6.10 4.90 6.20 4.25
Second quarter 6.90 6.13 6.10 5.50 6.21 5.65
Third quarter 6.70 6.20 6.37 5.99 7.20 6.00
Fourth quarter 6.65 6.21 6.60 6.00 6.85 5.40
On December 13, 2001 the Company declared a cash dividend of 25 cents per
share payable on January 17, 2002 to shareholders of record on December 30,
2001.
24
On April 30, 2002, the Company purchased 36,000 shares of the Company's
common stock from the Company's Chief Executive Officer at $6.60 per share which
was the fair market price as of that date.
On December 19, 2002, the Company declared a cash dividend of 27 cents per
share payable on January 30, 2003 to shareholders of record on January 17, 2003.
On December 18, 2003 the Company declared a cash dividend of 30 cents per
share payable on January 15, 2004 to shareholders of record on December 30,
2003.
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.
Item 6. Selected Financial Data.
- --------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Statement of Operations Data
- ----------------------------------------------------------------------------------------------------
Revenue $45,933,000 $40,253,000 $39,124,000 $36,038,000 $32,640,000
----------- ----------- ----------- ----------- -----------
Income from
Operations $ 1,273,000 $ 2,024,000 $ 2,788,000 $ 2,583,000 $ 2,216,000
----------- ----------- ----------- ----------- -----------
Net income $ 440,000 $ 888,000 $ 1,383,000 $ 1,529,000 $ 1,364,000
=========== =========== =========== =========== ===========
Earnings
per share $ 0.23 $ 0.46 $ 0.71 $ 0.80 $ 0.73
=========== =========== =========== =========== ===========
Balance Sheet Data
- ----------------------------------------------------------------------------------------------------
Total
assets 19,774,000 $18,733,000 $17,367,000 $16,728,000 $15,477,000
=========== =========== =========== =========== ===========
Long-term
liabilities $ 1,217,000 $ 1,314,000 $ 1,593,000 $ 2,010,000 $ 1,672,000
=========== =========== =========== =========== ===========
Net working
capital $ 2,131,000 $ 2,093,000 $ 2,980,000 $ 2,436,000 $ 1,373,000
=========== =========== =========== =========== ===========
Stockholders' equity $10,101,000 $10,351,000 $ 9,957,000 $ 8,968,000 $ 7,667,000
=========== =========== =========== =========== ===========
Dividends declared $ 581,000 $ 520,000 $ 499,000 $ 231,000 $ 215,000
=========== =========== =========== =========== ===========
25
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 entertainment oriented club. As of October 2, 2004, the Company
was operating eighteen units. The Company had interests in an additional seven
units which had been franchised by the Company, which interests include the
franchised restaurant managed by the Company. Of the units operated by the
Company, four were combination package liquor store and restaurant, eight were
restaurants only and five were package liquor stores only. There was one club
operated by an unaffiliated third party under a management agreement. During
fiscal year 2001, the restaurant located in Weston, Florida, was acquired by a
limited partnership of which the Company acts as general partner. The
restaurant, which was being operated by the Company under the restaurant's
servicemark, was closed during the fourth quarter of fiscal year 2002, renovated
for operation under the "Flanigan's Seafood Bar and Grill" servicemark and
re-opened for business during the second quarter of fiscal year 2003. During
fiscal year 2001, the 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 fiscal year 2001, another
restaurant located in West Miami, Florida, owned by a limited partnership of
which the Company acts as general partner, was opened for business. During
fiscal year 2003, the Company also entered into a lease agreement and at the
start of the second quarter of fiscal year 2004, another restaurant located in
Stuart, Florida, owned by a limited partnership of which the Company acts as
general partner, was opened for business.
Results of Operations
- ---------------------
THE FISCAL YEAR ENDING OCTOBER 2, 2004, ("FISCAL 2004"), WAS A FIFTY THREE WEEK
FISCAL YEAR WHILE THE FISCAL YEARS ENDING SEPTEMBER 27, 2003, ("FISCAL 2003"),
AND SEPTEMBER 28, 2002, ("FISCAL 2002"), WERE FIFTY TWO WEEK FISCAL YEARS. THE
EXTRA WEEK IN THE 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 2003 and 2002, WITH THE EXCEPTION OF THE WEEKLY AVERAGE OF SAME
STORE SALES.
26
REVENUES (in thousands):
- ------------------------------------------------------------------------------------------------
Fifty Three Fifty Two Fifty Two
Weeks Ended Weeks Ended Weeks Ended
Oct. 2, 2004 Sept. 27, 2003 Sept. 28, 2002
Sales
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Restaurant, food $26,347 59.1% $22,489 57.7% $22,086 58.4%
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Restaurant, bar 7,351 16.5% 6,705 17.2% 6,533 17.3%
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Package goods 10,911 24.4% 9,777 25.1% 9,174 24.3%
- ------------------------------------------------------------------------------------------------
Total 44,609 100.0% 38,971 100.0% 37,793 100.0%
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Franchise revenues 958 904 985
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Owners fee 265 260 251
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Other operating
income 101 118 95
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total Revenues $45,933 $40,253 $39,124
- ------------------------------------------------------------------------------------------------
As the table above illustrates, total revenues have increased when
compared to fiscal 2004, 2003 and 2002. During fiscal year 2005, total revenues
are expected to continue increasing primarily due to the restaurant in Stuart,
Florida being open for the entire year, the anticipated opening of the new
restaurant in Wellington, Florida at the start of the third quarter of fiscal
year 2005 and the new package liquor store in Hollywood, Florida being open for
the entire year. If the new restaurant in Pinecrest, Florida is open for
business prior to the end of fiscal year 2005, revenues will increase even
further during the fiscal year.
Restaurant food sales represented 59.1% of total sales for the fiscal 2004
as compared to 57.7% and 58.4% of total sales in fiscal 2003 and 2002,
respectively. The weekly average of same store restaurant food sales, which now
includes three joint venture restaurants instead of one, was $404,000 for fiscal
2004 as compared to $388,000 and $385,000 for fiscal 2003
27
and 2002, respectively, an increase of 4.1% and 4.9% from fiscal 2003 and 2002,
respectively. The weekly average of restaurant food sales increased for fiscal
2004 as compared to fiscal 2003 and 2002 due to menu price increases and
increased volume. The percentage of restaurant food sales to total sales
decreased due to increased package store sales.
Restaurant bar sales represented 16.5% of total sales for fiscal 2004 as
compared to 17.2% and 17.3% of total sales in fiscal 2003 and 2002,
respectively. The weekly average of same store restaurant bar sales was $101,000
for fiscal 2004 as compared to $104,000 and $106,000 for fiscal 2003 and 2002
respectively, a decrease of 2.9% from fiscal 2003 and 4.7% from fiscal 2002. The
decrease in the weekly average of same store restaurant bar sales is expected to
continue as the Company's perception as a family restaurant continues to grow.
Package store sales represented 24.4% of total sales for fiscal 2004 as
compared to 25.1% and 24.3% of total sales in fiscal 2003 and 2002,
respectively. The weekly average of same store package sales was $180,000 for
fiscal 2004 as compared to $177,000 and $170,000 for fiscal 2003 and 2002
respectively, an increase of 1.7% and 5.9% from fiscal 2003 and 2002,
respectively. The increase was primarily due to increased volume. During fiscal
year 2005, package store sales are expected to increase due to the new package
liquor store in Hollywood, Florida being open for the entire year and the
continued increase in the weekly average of same store package stores.
The gross profit margin for restaurant sales was 64.4% for fiscal 2004 as
compared to 65.8% and 66.6% for fiscal 2003 and 2002, respectively. The gross
profit margin for restaurant sales for fiscal 2004 was adversely affected by
increasing costs. The Company has offset increased costs by price increases and
expects to reverse this trend during fiscal year 2005. The Company will continue
to offset increased costs by price increases, where competitively possible,
during fiscal year 2005.
The gross profit margin for package goods sales was 27.9% for fiscal 2004
as compared to 27.0% and 25.9% for the fiscal 2003 and 2002, respectively. For
the fiscal 2004, the increase in gross profit is attributed to the purchase of
"close out" and inventory reduction merchandise from wholesalers and the
implementation of a new training program for package store employees. For fiscal
2002, the gross profit margin for package good sales was adversely affected by a
charge due to a change in accounting method. The gross profit margin for package
good sales is expected to remain constant during fiscal year 2005.
Overall gross profits were 55.5% for fiscal 2004, as compared to 56.1% and
57.1% for the fiscal 2003 and 2002, respectively. The decline in overall gross
profits is primarily attributed to increasing costs and a higher percentage of
restaurant food and package sales versus a decline in restaurant beverage sales.
During fiscal 2004, the Company began offsetting the decline in overall gross
profits by price increases and expects to reverse this trend during fiscal year
2005.
Franchise revenue, which includes but is not limited to rental income and
franchise-related income such as franchise royalties, bookkeeping and accounting
fees and reimbursement of attorney's fees, increased to $958,000 for fiscal 2004
as compared to $904,000 and $985,000 for fiscal 2003 and
28
2002, respectively, an increase of 6.0% from fiscal 2003 and a decrease of 3.8%
from fiscal 2002.
Operating Costs and Expenses
- ----------------------------
Operating costs and expenses for fiscal 2004 were $44,660,000 as compared
to $38,229,000 and $36,336,000 for the fiscal 2003 and 2002, respectively.
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 2004 increased by 16.8% and 22.9% as
compared to operating costs and expenses for fiscal 2003 and 2002, primarily due
to the opening of the new restaurant in Stuart, Florida on January 11, 2004, the
opening of the new package store in Hollywood, Florida on November 17, 2003 and
the restaurant in Weston, Florida being open for the entire fiscal 2004, as well
as a general increase in overall operating costs and expenses. During fiscal
year 2005, operating costs and expenses are expected to continue increasing
primarily due to the restaurant in Stuart, Florida being open for the entire
year, the opening of the new restaurant in Wellington, Florida at the start of
the third quarter of fiscal year 2005 and the new package liquor store in
Hollywood, Florida being open for the entire fiscal year. The opening of the new
restaurant in Pinecrest, Florida, or even the preparation for opening of the
same for business by the end of fiscal year 2005, will increase operating costs
and expenses for the fiscal year. Overall, operating costs and expenses for
existing stores are also expected to continue increasing slightly.
Payroll and related costs were $12,523,000 for fiscal 2004, as compared to
$11,423,000 and $11,377,000 for fiscal 2003 and 2002, respectively. Payroll and
related costs for the fiscal 2004 increased as compared to payroll and related
costs for fiscal 2003 and 2002, primarily due to the opening of the new
restaurant in Stuart, Florida on January 11, 2004, the opening of the new
package store in Hollywood, Florida on November 17, 2003 and the restaurant in
Weston, Florida being open for the entire fiscal 2004.
Occupancy costs, which include rent, common area maintenance, repairs and
taxes were $2,740,000 for the fiscal 2004 as compared to $2,158,000 and
$1,756,000 for fiscal 2003 and 2002, respectively. The increase in occupancy
costs during the fiscal 2004 was due primarily to the payment of rent for the
restaurant in Weston, Florida for the entire fiscal year, the payment of rent
for the new restaurant in Stuart, Florida and the payment of rent for a new
restaurant location in Pinecrest, Florida commencing at the start of the second
quarter of fiscal 2004.
Selling, general and administrative expenses were $9,525,000 for fiscal
2004 as compared to $7,534,000 and $6,785,000 for fiscal 2003 and 2002,
respectively. The increase in selling, general and administrative expenses
during fiscal 2004 was primarily due to the restaurant in Weston, Florida being
open for the entire fiscal year, the opening of the new restaurant in Stuart,
Florida on January 11, 2004 and the opening of the new package store in
Hollywood, Florida on November 11, 2003.
29
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:
a. 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
========
New Joint Venture Restaurants
- -----------------------------
As the Company opens new joint venture restaurants on a more regular
basis, the Company's income from operations will be adversely effected by the
higher costs associated with the opening of the same. 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 the new
joint venture restaurant in Stuart, Florida, lodging had to be provided for the
"new restaurant openers", which increased the opening cost significantly over
the opening cost of local restaurants. In addition, 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 joint venture investors and the
Company employees. By way of illustration, the opening of the last two joint
venture restaurants in Stuart, Florida and Weston, Florida incurred the
following pre-opening and opening expenses:
30
#75 - Stuart, Fl. #95 - Weston, Fl.
----------------- -----------------
Pre-Opening Rent: $17,000 $ 72,000
Pre-Opening Payroll: $22,000* $ 36,000
Post-Opening Increased $42,000* $ 18,000
Payroll Costs (90 days):
Promotional Costs: $ 7,000 $ 9,000
------- --------
Total: $88,000 $135,000
* excludes lodging and per diem allowances, ($74,000), for new
restaurant openers incurred due to the proximity of this location.
The pre-opening rent 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 begins. In the case of the joint venture restaurant
in Stuart, Florida, the sublease agreement included a ninety (90) day period for
renovations, although the restaurant did not open for six and one half (6 1/2)
months from the execution of the sublease agreement. The sublease agreement for
the location in Weston, Florida provided for five (5) months for renovations
before rent began, although the commencement date of the sublease agreement was
delayed while licensing matters had to be resolved. Since the opening of the
joint venture restaurant in Surfside, Florida, the pre-opening rent expense for
joint venture restaurants has ranged from $17,000 - $137,000. The pre-opening
rent expense for the new joint venture restaurant in Pinecrest, Florida has
already proven to be an exception to the customary pre-opening rent expense due
to structural repairs which must be made to the business premises prior to
renovations beginning. As of October 2, 2004, pre-opening rent was $153,000 and
continuing at $17,000 per month. The Company has preserved its right to argue
with the landlord that some of the pre-opening rent is not due while structural
repairs have delayed its renovations.
During fiscal 2004, the joint venture in Stuart, Florida reported a loss
of $276,000 and the joint venture restaurant in Pinecrest, Florida, which is
still undergoing structural repairs at this time, has already reported a loss of
$239,000 thus contributing to the reduction in operating income for fiscal 2004
when compared to fiscal 2003. During fiscal year 2005, operating income will be
adversely affected by the opening costs to be incurred for the new joint venture
restaurant in Wellington, Florida, and continuing opening costs of the new joint
venture restaurant in Pinecrest, Florida.
Other Income and Expenses
- -------------------------
Other income and expenses, which include minority interest in consolidated
limited partnerships, were an expense of ($663,000) for fiscal 2004 as compared
to ($594,000) and ($717,000) for fiscal 2003 and 2002,
31
respectively. During the fourth quarter of fiscal 2004, management inspected
fixed assets stored in the Company's warehouses and restaurants and determined
that most of the fixed assets stored there were obsolete or unusable. As a
result, other income and expense of fiscal 2004 includes the expense of $367,000
relating to the abandonment of fixed assets. Other income and expenses for
fiscal 2002 includes the gain of $459,000 on disposition relating to the eminent
domain proceedings.
Trends
- ------
During the next twelve months management expects continued increases in
restaurant sales, due primarily to the restaurant in Stuart, Florida being open
for the entire fiscal year, the opening of the new restaurant in Wellington,
Florida, and continued increases in same store sales. The opening of the new
restaurant in Pinecrest, Florida for business prior to the end of fiscal year
2005 will further increase restaurant sales. Package goods sales are also
expected to increase due primarily to the new package store in Hollywood,
Florida being open for the entire fiscal year and continued increases in same
store sales. Franchise royalties are expected to increase due to restaurant in
Stuart, Florida being open for the entire fiscal year, the opening of the new
restaurant in Wellington, Florida and continued increases in same store sales
for the limited partnerships and franchises. The opening of the new restaurant
in Pinecrest, Florida prior to the end of fiscal year 2005 will further increase
franchise royalties. At the same time, management also expects higher food costs
and overall expenses to increase generally, although the Company has already
raised some of its menu prices to offset the higher food costs and will continue
to do so 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 does not plan to construct any more buildings for the
operation of a package store and is not actively searching for locations, but if
an appropriate location for a package store becomes available, the Company will
consider the same.
32
Liquidity and Capital Resources
- -------------------------------
Cash Flows
- ----------
The following table is a summary of the Company's cash flows for fiscal
2004, 2003 and 2002:
- --------------------------------------------------------------------------------
Fiscal Years
- --------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
(in thousands)
- --------------------------------------------------------------------------------
Net cash provided by
operating activities $ 3,752 $ 4,418 $ 2,495
- --------------------------------------------------------------------------------
Net cash used in
investing activities (1,630) (3,269) (881)
- --------------------------------------------------------------------------------
Net cash used in
financing activities (773) (705) (2,020)
- --------------------------------------------------------------------------------
Net increase (decrease)
in cash and equivalents 1,349 444 (406)
- --------------------------------------------------------------------------------
Cash and equivalents
beginning of year 1,587 1,143 1,549
- --------------------------------------------------------------------------------
Cash and equivalents
end of year $ 2,936 $ 1,587 $ 1,143
- --------------------------------------------------------------------------------
Capital Expenditures
- --------------------
Capital expenditures were $1,873,000, $3,028,000 and $1,216,000 during
fiscal 2004, 2003 and 2002, respectively. The capital expenditures for each
fiscal year included upgrading existing units serving food and improvements to
package liquor stores. The capital expenditures for fiscal 2004 included
renovations to the business premises by the joint venture in Stuart, Florida,
($432,000), and the completion of the construction of the building in Hollywood,
Florida for the operation of a package liquor store, ($84,000).
33
Contractual Cash Obligations
- ----------------------------
Less Than 1-5 After
Total 1 Year Years 5 Years
----- ------ ----- -------
Employment contract $ 150,000 $ 150,000 $ -- $ --
Long-term debt 1,314,000 97,000 1,217,000 --
Operating leases 18,134,000 2,264,000 7,379,000 8,491,000
Rib Contract 3,600,000 3,600,000 -- --
----------- ---------- ---------- ----------
Total $23,198,000 $6,111,000 $8,596,000 $8,491,000
=========== ========== ========== ==========
All of the Company's units require periodic refurbishing in order to
remain competitive. During fiscal 1992, as cash flow improved, the Company
embarked on a refurbishing program which continues. The budget for fiscal year
2005 includes approximately $325,000 for this purpose, which is not included in
the above table. The Company expects the funds for these improvements to be
provided from operations. In addition it is anticipated that two new joint
ventures, (Wellington, Florida and Pinecrest, Florida), will require
approximately $4,000,000 in capital expenditures during fiscal year 2005, the
majority of which will be raised through private offerings. Subsequent to the
end of fiscal 2004, the limited partnership which owns the new restaurant in
Wellington, Florida, completed its private offering, raising the sum of
$1,850,000. The table also does not include any lease guarantees for
franchisees, which approximate $2,600,000.
Purchase Commitments
- --------------------
Effective November 1, 2004, the company entered into a purchase agreement
with its rib supplier. The terms of the agreement stipulate that the Company
will purchase approximately 1 million pounds of baby back ribs during calendar
year 2005 at a fixed cost of $3.60 per pound. The Company purchases all of its
rib supply from this vendor, but management believes that several other
alternative vendors are available, if needed.
Long Term Debt
- --------------
During the fourth quarter of fiscal 2002, the Company closed on an
unsecured $456,000 loan from BankAtlantic, which loan was used to prepay the
principal balance due on a $1,000,000 loan from Bank of America, (formerly
NationsBank), which loan originated during the second quarter of fiscal 2000.
The loan was paid in full during the fourth quarter of fiscal 2004.
During the fourth quarter of fiscal 2001, the Company borrowed the sum of
$895,000 from Bank of America (formerly Nations Bank). The promissory note earns
interest at the rate of 8.62% per annum, amortized over 20 years with principal
and interest payable monthly, with the entire unpaid principal balance and all
accrued interest due on August 1, 2008. The promissory note is secured by a
mortgage on the office building purchased by the Company for its corporate
offices, which office building was released from the lien
34
granted by the Company to Bank of America (formerly Nations Bank), as collateral
for the $1,000,000 loan in the second quarter of fiscal 2000. In order to
achieve the fixed interest rate, the Company entered into an ISDA Master
Agreement with Bank of America, ("SWAP Agreement"), and in the event the Company
elects to prepay the promissory note, there may be a prepayment penalty
associated therewith. The outstanding balance as of the end of fiscal 2004 was
$836,000.
During the fourth quarter of fiscal year 1997, the Company, as general
partner of a limited partnership, purchased the assets of an existing restaurant
in Surfside, Florida for renovation and operation as a "Flanigan's Seafood Bar
and Grill" restaurant. The purchase price was seller financed, secured by a
chattel mortgage upon the assets of the limited partnership, bearing interest at
the rate of 8% per annum and being fully amortized over 10 years with equal
monthly installments of principal and interest, each in the amount of $6,066.40.
The principal balance due as of October 2, 2004 was $189,000.
During the third quarter of fiscal year 1997, the Company purchased
unimproved real property adjacent to one of its units to ensure adequate parking
for the restaurant. The purchase price was seller financed, secured by a
mortgage upon the real property purchased, bearing interest at the rate of 8%
per annum and being payable in equal monthly installments of principal and
interest, each in the amount of $3,042.55, until April 24, 2007, when the entire
principal balance and all accrued interest is due in full. The principal balance
due as of October 2, 2004 was $289,000.
The Company repaid long term debt, including the Bank of America note
payable, the Bank Atlantic note payable, mortgages, capital lease obligations
and Chapter 11 bankruptcy damages in the amount of $278,000, $346,000, and
$498,000 in fiscal 2004, 2003 and 2002 respectively.
Subsequent to the end of fiscal 2004, the Company closed on an unsecured
$100,000 loan from BankAtlantic, which funds will be used as a part of the
purchase price of the real property and for an assignment and assumption of a
ground lease at one location owned by the Company pursuant to the exercise of an
option to purchase. The promissory note earns interest at prime rate and is
fully amortized over 36 months, with equal monthly payments of principal and
interest.
Working capital
- ---------------
The table below summarizes the current assets, current liabilities and
working capital for fiscal 2004, 2003 and 2002:
Oct. 2 Sept. 27 Sept. 28
2004 2003 2002
---- ---- ----
Current assets $5,889,000 $4,958,000 $5,354,000
Current liabilities 3,758,000 2,865,000 2,374,000
Working capital 2,131,000 2,093,000 2,980,000
35
Working capital for fiscal 2004 increased by 2% from the working capital
for fiscal 2003 and decreased by 28% from the working capital for fiscal 2002.
The increase in working capital from the working capital for fiscal 2003 is due
to the fact that the construction of the building in Hollywood, Florida from
which the Company operates a package liquor store was substantially completed by
the end of fiscal 2003. The Company currently has no plans to construct another
building for the purpose of operating a package liquor store. The increase in
working capital would have been greater had the Company not advanced funds for
capital improvements and on-going expenses for the restaurant in Pinecrest,
Florida, ($799,000). During fiscal year 2005 and the completion of the private
offering by the limited partnership owning the restaurant in Pinecrest, Florida,
the Company will be reimbursed for advances made in excess of its investment
($700,000 investment at a minimum), thereby improving working capital.
Management believes that positive cash flow from operations will
adequately fund operations, debt reductions and planned capital expenditures in
fiscal year 2005. However, it is also anticipated that during fiscal year 2005,
working capital will be adversely affected by the annual dividend, investments
and/or advances made by the Company to limited partnership in Pinecrest, Florida
pending reimbursement of advances made by the Company in excess of its
investment once the private offering by the limited partnership is completed and
the exercise by the Company of its option to purchase the real property and
ground lease of one location currently leased by the Company.
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
36
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.
In fiscal 2004, management reviewed the estimated useful lives for
leasehold improvements and recorded an adjustment which was not significant.
Consolidation of Limited Partnerships
- -------------------------------------
The Company operates 5 restaurants as general partner for the limited
partnership that owns the operations of these restaurants. The Company refers to
these entities as joint ventures or limited partnerships. Additionally, the
Company expects that any expansion which takes place in opening new restaurants
will also result in the Company operating the 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 joint ventures 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 7 to the consolidated financial
statements for fiscal 2004.
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.
37
Item 7A. Quantative and Qualitative Disclosures About Market Risk
- -----------------------------------------------------------------
The Company does not ordinarily hold market risk sensitive instruments for
trading purposes, but as of October 2, 2004 holds one equity security, at a cost
of $303,000, for dividend payments. Even if the price of the equity securities
decreased by 10% below its cost, results of operations would be reduced by
$30,000, an amount management considers immaterial.
Interest Rate Risk
- ------------------
At October 2, 2004, the Company has no risk from interest rate exposure.
The Company has only one debt arrangement which has a variable interest rate.
For this instrument, 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 October 2, 2004 of $836,000. The other debt
instrument which had a variable interest rate was satisfied in full during the
fourth quarter of fiscal year 2004.
Subsequent to the end of fiscal year 2004, the Company closed on a new
unsecured loan from BankAtlantic, in the principal amount of $100,000, which
funds are to be used in connection with the Company's exercise of an option to
purchase the real property and take an assignment of a ground lease at one of
its locations. The promissory note has a variable interest, at prime. but even
if interest rates increased by 10%, results of operations would be reduced by
less than $10,000, an amount management considers immaterial.
At October 2, 2004, 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. In addition, the Company incurs
interest charges on debt at variable rates, which to the extent that the Company
has not entered into interest rate swap agreements to hedge this risk, could
negatively impact 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 October 2, 2004, September 27, 2003
and September 28, 2002, which include each of the three years in the period
ended October 2, 2004 and the independent certified public accountants' report
thereon, are included herein.
Item 9A. Controls and Procedures.
- -------------------------------
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934
38
(Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period
covered by this annual report, have concluded that our disclosure controls
and procedures are effective based on their evaluation of these controls
and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or
15d-15.
(b) Changes in Internal Control over Financial Reporting.
During the fourth quarter of fiscal year 2004, as well as the entire
fiscal year 2004, 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 assessments were made by management, under the supervision of
our Chief Financial Officer. During the course of assessing the
effectiveness of our internal controls over financial reporting, we
identified a number of items for review and began an extensive effort to
analyze our financial information and related accounting records for
fiscal year 2004. As a result, we made a number of significant changes in
our internal control over financial reporting during the fourth quarter of
fiscal year 2004, as well as the entire fiscal year 2004, as summarized
below. Other than as described below, we made no other changes in our
internal control over financial reporting during the fiscal year ending
October 2, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial
reporting.
As a result of our efforts, we have concluded that the following internal
control issues over our financial reporting constituted weaknesses and/or
deficiencies during the fiscal year ending October 2, 2004. At the same
time, we also identified opportunities to correct these weaknesses and/or
deficiencies, all of which have been or are in the process of being
implemented.
a. Deficiencies related to design of policies and execution of
processes related to accounting for transactions involving
insurance premiums, real property taxes and supplies inventory
as they pertain to Company, joint venture and franchisees. We
identified deficiencies in accounting for certain aspects of
our operations relating to account reviews and verification;
and accounting for property and equipment.
b. Deficiencies related to the internal control environment. As a
result of the deficiencies described above, we concluded that
there were deficiencies in our control environment relating to
accounting, financial reporting and internal controls during
the fiscal year ended October 2, 2004, which constituted at
times, material weaknesses and at other times, deficiencies as
described below. We continue to emphasize the importance of
establishing the appropriate environment in relation to
accounting, financial reporting and internal control over
financial reporting and continue to identify areas of
improvement and to create and implement new policies and
procedures where material weaknesses or deficiencies exist.
During fiscal year 2004, we have taken a number of steps that we believe
will impact the effectiveness of our internal control over our financial
reporting including the following:
39
a. We appointed a new Chief Financial Officer.
b. We added a financial expert to our Board of Directors and the
Audit Committee.
c. We have implemented a new computerized system for store
supplies stored in the corporate offices to insure proper
inventory count, security and charging the appropriate entity
when supplies are transferred to joint ventures and
franchises.
d. Throughout the fiscal year, we instituted policies to review
accounts for accuracy and if possible to simplify the same.
This is being accomplished through a system of checks on
accounting entries by more than one employee.
e. In July, 2004, we began a review of property and equipment in
Company warehouses and at restaurant locations and determined
that a significant amount of property and equipment located in
Company warehouses was obsolete and unusable. We are
implementing a system of inventory control, whereby all
property and equipment moved in or out of Company warehouses
will be documented both upon its arrival at and then its
transfer from the warehouse, as well as at its arrival at and
its removal from a corporate, joint venture or franchise
location. Regular inspections of fixed assets in Company
warehouses and locations are also being implemented.
f. In October, 2004, we hired a new corporate comptroller.
g. In December, 2004, we retained an independent third party to
assist in the preparation of the Company's compliance with
Rule 404 of the Sarbanes-Oxley Act of 2002.
We believe that the steps taken to date have addressed the weaknesses
and/or deficiencies that affected our internal controls over financial
reporting in fiscal year 2004. We will continue with our on-going
evaluation and will improve our internal controls over financial reporting
as necessary to assure their effectiveness. Notwithstanding, the
effectiveness of