-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LcKUANjCHH+jkafNJD14qwfCei1ee/VR8Fm7LiwmLpnLCBK5BpkfKTLBJiG7jzbq OvMzGc86bm5E4EW5tE/tzA== 0000914317-99-000003.txt : 19990108 0000914317-99-000003.hdr.sgml : 19990108 ACCESSION NUMBER: 0000914317-99-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19990107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLANIGANS ENTERPRISES INC CENTRAL INDEX KEY: 0000012040 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 590877638 STATE OF INCORPORATION: FL FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06836 FILM NUMBER: 99501889 BUSINESS ADDRESS: STREET 1: 2841 CYPRESS CREEK RD CITY: FORT LAUDERDALE STATE: FL ZIP: 33309 BUSINESS PHONE: 3059749003 MAIL ADDRESS: STREET 1: 2841 CYPRESS CREEK ROAD CITY: FORT LAUDERDALE STATE: FL ZIP: 33309 FORMER COMPANY: FORMER CONFORMED NAME: BIG DADDYS LOUNGES INC DATE OF NAME CHANGE: 19780309 FORMER COMPANY: FORMER CONFORMED NAME: CASTLEWOOD INTERNATIONAL CORP DATE OF NAME CHANGE: 19760222 FORMER COMPANY: FORMER CONFORMED NAME: MOSAM CORP DATE OF NAME CHANGE: 19690415 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 3, 1998 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 1-6836 Flanigan's Enterprises, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-0877638 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2841 Cypress Creek Road, Fort Lauderdale, Florida 33309 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code, (954) 974-9003 -------------- Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.10 Par Value American Stock Exchange ----------------------------- ----------------------- 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 [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was $4,611,537 as of December 7, 1998. There were 930,000 shares of the Registrant's Common Stock ($0.10) Par Value) outstanding as of October 3, 1998. DOCUMENTS INCORPORATED BY REFERENCE Information contained in the Registrant's 1998 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-KSB. Exhibit Index Begins on Page 32 PART I Item 1. Business. 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 3, 1998, the Company operated 13 units, and had interests in seven additional units which have been franchised by the Company. The table below sets out the changes in the type and number of units being operated. FISCAL FISCAL YEAR YEAR NOTE TYPES OF UNITS 1997 1998 NUMBER - -------------------------------------------------------------------------------- Combination package and restaurant 4 4 Restaurant only 5 5 (1)(2) Package store only 4 3 (3)(4) Clubs 1 1 - -------------------------------------------------------------------------------- TOTAL - Company operated units. 14 13 FRANCHISED - units 7 7 Notes: (1) During the first quarter of fiscal year 1996, the Company began operating a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark as general partner and fifty percent owner of a limited partnership established for such purpose. (2) During the fourth quarter of fiscal year 1997, the Company formed a limited partnership and raised funds through a private offering to purchase the assets of a restaurant in Surfside, Florida and renovate the same for operation under the "Flanigan's Seafood Bar and Grill" servicemark. The Company acts as general partner and forty percent owner of the partnership. The restaurant opened in the second quarter of fiscal year 1998. (3) During fiscal year 1995, the Company was granted possession of a store previously sold by the Company and began operating the package liquor store pursuant to Court Order. During the first quarter of fiscal year 1997 the Company acquired ownership of this store through foreclosure and continues to operate the package liquor store. (4) During fiscal year 1996, one franchisee exercised the thirty day cancellation clause under the franchise agreement and related documents and returned its franchised unit to the Company. The franchisee had operated a package liquor store and lounge under the "Big Daddy's" servicemark. The Company profitably operated the package liquor store of the franchised unit but did not reopen the lounge. The lease agreement for the business 2 premises expired on December 31, 1995 and the Company occupied the same on an oral month to month lease agreement, paying its prorata share of the real property taxes monthly and insuring the property until April 1998 when the oral month to month lease agreement was terminated and the package liquor store was closed. All of the Company's package liquor stores, restaurants and clubs are operated on leased properties. As a result of significant escalations of rent on certain of such leased properties and on leased properties that were not being operated by the Company, on November 4, 1985 the Company, not including its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. On May 5, 1987 the Company's Plan of Reorganization as amended and modified ("the Plan") was confirmed by the Bankruptcy Court. On December 28, 1987 the Company was officially discharged from bankruptcy. See Note 2 to the consolidated financial statements for a discussion of the bankruptcy proceedings to date and Item 7 for a discussion of the effect of the bankruptcy proceedings herein. The Company was incorporated in Florida in 1959 and operated in South Florida as a chain of small cocktail lounges and package liquor stores. By 1970, the Company had established a chain of "Big Daddy's" lounges and package liquor stores between Vero Beach and Homestead, Florida. From 1970 to 1979, the Company expanded its package liquor store and lounge operations throughout Florida and opened clubs in five other "Sun Belt" states. In 1975, the Company discontinued most of its package store operations in Florida except in the South Florida areas of Dade, Broward, Palm Beach and Monroe Counties. In 1982, the Company expanded its club operations into the Philadelphia, Pennsylvania area as general partner of several limited partnerships organized by the Company. In March 1985, the Company began franchising its package liquor stores and lounges in the South Florida area. See Note 11 to the consolidated financial statements and the discussion of franchised units on page 5. 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 78.6% 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 atmosphere. 3 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 wholly owned subsidiaries. The operating subsidiaries are as follows: SUBSIDIARY STATE OF INCORPORATION - ---------- ---------------------- Flanigan's Management Services, Inc. Florida Flanigan's Enterprises. Inc. of Georgia Georgia Seventh Street Corp. Florida Big Daddy's #48 Inc. Florida Flanigan's Enterprises, Inc. of Pa. Pennsylvania The income derived and expenses incurred by the Company relating to the aforementioned subsidiaries are consolidated for accounting purposes with the income and expenses of the Company in the consolidated financial statements in this Form 10-KSB. The Company's executive offices are located in a leased facility at 2841 Cypress Creek Road, Fort Lauderdale, Florida 33309 and its telephone number at such address is (954) 974-9003. Corporate Reorganization As noted in Note 2 to the consolidated financial statements, on November 4, 1985, the Company, not including any of its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The primary purposes of the petition were (1) to reject leases which were significantly above market rates and (2) to reject leases on closed units which had been repossessed by, or returned to the Company. On May 5, 1987 the Company's Plan of Reorganization as amended and modified was confirmed by the Bankruptcy Court. On December 28, 1987 the Company was officially discharged from bankruptcy. See Note 2 to the consolidated financial statements for a discussion of the bankruptcy proceedings to date and Item 7 for a discussion of the effect of the bankruptcy proceedings herein. Financial Information Concerning Industry Segments The Company's business is carried out principally in two segments: the restaurant segment, which was the restaurant and lounge segment prior to the closing of the remaining lounges during fiscal year 1996, and the package liquor store segment. Financial information broken into these two principal industry segments for the two fiscal years ended September 27, 1997 and October 3, 1998 is set forth in the consolidated financial statements which are attached hereto, and is incorporated herein by reference. 4 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. Most 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. A small number 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 78.6% of their sales being food items. These restaurants are operated under the "Flanigan's Seafood Bar and Grill" servicemark. Although these restaurants provide a neighborhood atmosphere, they have the degree of standardization prevalent in casual dining restaurant chains, including menu. The interior decor is nautical with numerous fishing and boating pictures and decorations. Drink prices may vary between locations to meet local conditions. Food prices are standardized. The restaurants' hours of operation are from 11:00 a.m. to 1:00 - 5:00 a.m. The Company continues to develop strong customer recognition of its "Flanigan's Seafood Bar and Grill" servicemark through very competitive pricing and efficient and friendly service. The Company's package liquor stores and restaurants were designed to permit minor modifications without significant capital expenditures. However, from time to time the Company is required to redesign and refurbish its units at significant cost. See Item 2, Properties and Item 7 for further discussion. Franchised Package Liquor Stores and Lounges In March of 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. Under the terms of the franchise plan, the Company sold the liquor license, furniture, fixtures and equipment of a particular unit, entered into a sublease for the business premises and a franchise agreement, whereby the franchisee licensed the right to use the Company's servicemarks "Big Daddy's Liquors" and "Big Daddy's Lounges" in the operation of its business. Investors purchasing units were required to execute ten year franchise agreements with a thirty day cancellation provision. The franchise agreement also provided for a royalty to the Company, in the amount of 1% of gross sales, plus a contribution to advertising, in an amount between 1-1/2 - 2% of gross sales. In most cases, the sublease agreement provided for rent in excess of the amount paid by the Company, in order to realize an additional return of between 2% - 3% of gross sales, depending upon a number of factors, including but not limited to the performance of the particular unit sold and its expected sales growth. As of the end of fiscal year 1986, ten units had been franchised. Four of these units were franchised to members of the family of the 5 Chairman of the Board. The Company had limited response to its franchise offering and suspended its franchise plan at the end of fiscal year 1986. During fiscal year 1988, two franchisees (one of whom is on the Company's Board of Directors) exercised the thirty day cancellation clause under the franchise agreement and related documents and returned their franchised units to the Company. No gain or loss was recognized on these returns. The Company has been profitably operating these two units. During fiscal year 1990, the Company completed a foreclosure to take one franchise back, reducing the number of franchised units to seven. This unit was sold pursuant to a private offering to a Subchapter S corporation whose president was the Chairman and whose investors included three directors and members of the Chairman's family. This unit was managed by the Company through the end of fiscal year 1992. In the first quarter of fiscal year 1993, the Board of Directors agreed to purchase this unit from the group of investors. In purchasing this unit, the Board of Directors determined that the projected profitability would provide a fair return on investment, whereas without this purchase, the Company would only have received its 4% management fee until the Subchapter S corporation received its full investment back from this unit. During fiscal year 1991, the Company sold one unit to the unit's manager, an unaffiliated third party, who had been operating it pursuant to a management agreement since 1987. This unit consisted of a package liquor store and restaurant, which restaurant was not operating under the Company's "Flanigan's Seafood Bar and Grill" servicemark. The Company also entered into a franchise agreement with the manager, licensing the use of the "Big Daddy's Liquors" servicemark for the liquor package store in exchange for a royalty in the amount of 1% of gross sales. Although the Company counted this unit as a franchise, the Company did not consider this transaction a part of its franchise plan. During fiscal year 1995, the manager executed the Company's new franchise agreement for the operation of his restaurant under the "Flanigan's Seafood Bar and Grill" service-mark, as more fully described below. At the same time the former manager also executed a new franchise agreement for a second restaurant opened since the purchase of the unit from the Company during fiscal year 1991. During fiscal year 1992, one unaffiliated franchisee expressed an interest in selling his unit or returning it to the Company pursuant to the terms of its franchise agreement and related documents. As a result of the substantial investment necessary to upgrade and renovate this unit, an affiliated group of investors formed a Subchapter S corporation and purchased this unit from the franchisee. The shareholder interest of all officers and directors represents 42% of the total invested capital. The shareholder interest of the Chairman's family represents an additional 47.5% of the total invested capital. The Company continues to receive the same royalties, rent and mortgage payments as it had received from the unaffiliated franchisee. During fiscal year 1996, one franchisee exercised the thirty day cancellation clause under the franchise agreement and related documents and returned its franchised unit to the Company. The franchisee had operated a package liquor store and lounge under the "Big Daddy's" servicemark. The Company profitably operated the package liquor store of the franchised unit 6 but did not reopen the lounge. The lease agreement for the business premises expired on December 31, 1995 and the Company occupied the same on an oral month to month lease agreement paying its prorata share of the real property taxes monthly and insuring the property until April 1998 when the oral month to month lease agreement was terminated and the package liquor store was closed. During the third quarter of fiscal year 1996, another unaffiliated franchisee expressed its intent to terminate its new franchise agreement (package liquor store only) and to return its unit, including restaurant, to the Company. In order to induce the franchisee to continue operating its franchise through the end of fiscal year 1996, the Company agreed to reduce the weekly sublease rent and suspend all weekly payments on account of its purchase money chattel mortgage. In the interim, the Company determined that the cost necessary to convert this unit to a "Flanigan's Seafood Bar and Grill" restaurant exceeded the funds available to the Company and on September 30, 1996, during the first quarter of fiscal year 1997, the franchise was sold to a related third party, in lieu of its return to the Company. The initial shareholder interest of all officers and directors, which was comprised of the Chairman and a member of is family, represented one hundred percent of the initial invested capital. It was also agreed that the Company would manage the franchise for the related third party, pursuant to a management agreement. Subsequent to the closing of the sale of the franchise, another related franchisee, who is also a member of the Board of Directors of the Company, paid the Company the sum of $150,000 to approve his purchase of this franchise from the related third party and for the Company to relinquish its right to act as manager of the franchise. As part of this transaction, the Company agreed to continue the reduced sublease rent, the waiver of any franchise royalties and the suspension of mortgage payments through March 1997. Since April 1, 1997 the Company has received the same weekly payment as previously paid by the former franchisee during fiscal year 1996. During the third quarter of fiscal year 1997 this related party formed a limited partnership to own this franchise and through which it raised the necessary funds to renovate the restaurant. The Company is an investor in the franchise, as are other related parties, including but not limited to officers and directors of the Company and their families. The units that continue to be franchised are doing well and continue to generate income for the Company. Many of the units that were originally offered as franchises have been sold outright and are no longer being operated as Flanigan's or Big Daddy's stores. Franchised Restaurants 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" service mark pursuant to a license from the Company. The new franchise agreement was drafted jointly with existing franchisees with all modifications requested by the franchisees incorporated therein. 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 franchise 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 7 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. In most cases, the Company does not sublease the business premises to the franchisee and in those cases where it does, the Company no longer receives rent in excess of the amount paid by the Company. As of the end of fiscal year 1998, all existing franchisees who operate restaurants under the "Flanigan's Seafood Bar and Grill" or other authorized service marks have executed new franchise agreements. During fiscal year 1996, the Company's franchise agreement with a member of Mr. Flanigan's family expired and the Company declined to offer the franchisee the option of executing its new franchise agreement. During the first quarter of fiscal year 1997, the Company filed suit against the franchisee for servicemark infringement, seeking injunctive relief and monetary damages. During the first quarter of 1998 a Stipulated Agreed Order of Dismissal Upon Mediation was issued whereby the Company received $110,000 and the former franchisee agreed to cease all use of the "Flanigan's" servicemark and other trade dress features common to the Company owned and/or franchised restaurants. Investment in Joint Ventures During the first quarter of fiscal year 1996, the Company began operating a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark as general partner and fifty percent owner of a limited partnership established for such purpose. The limited partnership agreement gives the limited partnership the right to use the "Flanigan's Seafood Bar and Grill" servicemark while the Company acts as general partner only. As previously discussed, during the third quarter of fiscal year 1997, a related party formed a limited partnership to own a certain franchise in Fort Lauderdale, Florida, through which it raised the necessary funds to renovate the restaurant. 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. During the fourth quarter of fiscal year 1997, the Company formed a limited partnership and raised funds through a private offering to purchase the assets of a restaurant in Surfside, Florida and renovate the same for operation under the "Flanigan's Seafood Bar and Grill" servicemark. The Company acts as general partner of the limited partnership and is also a forty-two percent owner of the same, as are other related parties, including but not limited to officers and directors of the Company and their families. The limited partnership agreement gives the limited partnership the right to use the "Flanigan's Seafood Bar and Grill" servicemark for a fee equal to 3% of gross sales from the operation of the restaurant, while the Company acts as general partner only. This restaurant opened in the second quarter of fiscal year 1998. 8 In order to ensure that the Company had adequate cash reserves in view of its investment in the restaurant discussed above, and for other improvements, during the second quarter of fiscal year 1997, the Board of Directors authorized the Company to borrow up to $1,200,000 at an interest rate of twelve (12%) percent per annum and fully amortized over five (5) years. During the fourth quarter of fiscal year 1997, the Company borrowed $375,000 from private investors, in units of $5,000, which loan is fully secured with specific receivables owned by the Company. During the first quarter of fiscal year 1998, the Company closed on its loan from Barnett Bank in the amount of $500,000, with interest at prime rate. Equal quarterly principal payments began March, 31, 1998 and will continue quarterly for three (3) years. Interest is payable monthly on the outstanding principal balance. The loan is also fully secured with liquor licenses owned by the Company. In the third quarter of fiscal year 1998, the Company entered into a lease agreement for a restaurant in Kendall, Florida and a separate agreement for the purchase of the furniture, fixtures and equipment of the existing restaurant. The lease agreement and separate agreement are each contingent upon the Company applying for and receiving zoning variances from Miami Dade County, Florida. Subsequent to the end of the fiscal year, the Company submitted its application for zoning variances to Miami Dade County, Florida, which zoning variances were unanimously granted at a hearing on November 18, 1998. Upon the expiration of the applicable appeal period, the granting of the zoning variances will be final. At the same time, the Company raised funds through a private offering for a limited partnership to be formed, to own and renovate the restaurant for operation of the same under the "Flanigan's Seafood Bar and Grill" servicemark. The Company will act as general partner of the limited partnership and also plans to be a forty percent owner of the same, as well as other related parties, including but not limited to officers and directors of the Company and their families. The limited partnership agreement will give 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. It is anticipated that the restaurant will be renovated and open for business by June 1, 1999. Clubs As of the end of fiscal year 1998, the Company owned one club in Atlanta Georgia, which was operated by an unaffiliated third party, as discussed below. In addition, until September 20, 1996, the Company operated its remaining Pennsylvania club, (Store #850, King of Prussia, Pennsylvania), which was financed through a limited partnership in which a wholly owned subsidiary of the Company acted as general partner. The lease for this unit had only thirteen months remaining, with no more renewal options, and revenues were down as a result of competition from some expensive new clubs constructed on the waterfront. An opportunity arose to sell the lease, leasehold improvements and liquor license to Dick Clark Restaurants, Inc. With the approval of the Limited Partners, the sale of the unit was consummated on September 20, 1996 for a purchase price of $500,000. 9 Operation of Units by Unaffiliated Third Parties 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 provided the Company is 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, for any additional rent due as a result of 10% of the gross sales exceeding $150,000 for the prior 12 month period. 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 plan 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 three 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 "spotters", 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 to two days of the placing of an order. Frequently, there is only one wholesaler in the immediate marketing area with an exclusive 10 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 holiday periods. Pursuant to Florida law, the Company pays for its liquor purchases within ten days of delivery. All negotiations with food suppliers are handled by the Company's purchasing department at the Company's corporate headquarters. This ensures that the best quality and prices will be available to each unit. Orders for food products are prepared by each unit's kitchen manager and reviewed by the unit's general manager before being placed with the approved vendor. Merchandise is delivered by the supplier directly to each unit. Orders are placed several times a week to ensure product freshness. Food inventory is primarily paid for monthly. 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, 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, the licenses have purchase and resale value based upon supply and demand in the particular areas in which they are issued. The Florida quota licenses held by the Company allow the sale of liquor for on-premises and/or off-premises consumption. In the State of Georgia, the other state in which the Company operates, licensed establishments 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 or 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 operation, advertising, wholesale purchasing, inventory control, handling, storage and dispensing of alcoholic beverages, internal 11 control and accounting and collection of state alcoholic beverage taxes. As the sale of alcoholic beverages constitutes a large share of the Company's revenue, the failure to receive or retain, or a delay in obtaining a liquor license in a particular location could adversely affect the Company's operations in that location and could impair the Company's ability to obtain licenses elsewhere. 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 fourth quarter of fiscal year 1997, the Division of Alcoholic Beverages and Tobacco (DABT), subpoenaed several employees of the Company to inquire about three cash purchases of inventory made by the Company in calendar years 1995 and 1996 from a distributor, without invoices. The total purchase price for the inventory was $5,100. The Company was charged administratively by the DABT for failing to have invoices from these cash purchases, but subsequent to the end of fiscal year 1998 the Company entered in a settlement agreement with the DABT and paid a fine of $4,000. At its meeting on September 4, 1997, the Board of Directors was advised of the investigation by the DABT and unanimously passed a resolution prohibiting management from purchasing inventory without an invoice and in cash. Otherwise, during the fiscal year ended October 3, 1998, through the present time, the Company has had no significant pending matters initiated by the DABT 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. The Company is self-insured against liability claims in excess of $1,000,000. 12 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 expenses 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 on liability claims is included in the consolidated balance sheets in the caption "Accrued and Other Current Liabilities". A significant unfavorable judgment or settlement against the Company in excess of its liability insurance coverage could have a materially adverse effect on the Company. Through the end of the 1990 fiscal year, the Company was uninsured for dram shop liability. Pennsylvania still has an unrestricted dram shop law, which allows persons injured by an "obviously intoxicated person" to bring a civil action against the business which served alcoholic beverages to an "obviously intoxicated person". Florida has restricted its dram shop law by statute, permitting persons injured by an "obviously intoxicated person" to bring a civil action against the business which served alcoholic beverages to a minor or an individual known to be habitually addicted to alcohol. 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 the Company then vigorously defends these claims on the grounds that its employees did not serve an "obviously intoxicated person". Damages in most dram shop claims are substantial. During fiscal year 1997, the Company favorably settled its remaining uninsured dram shop claim asserted against one of the limited partnerships in Pennsylvania and the Company, as general partner. At the present time, there are no dram shop claims pending against the Company. Competition and the Company's Market The liquor and the 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 3, 1998 the Company owned and operated nine restaurants, seven of which had formerly been lounges and were 13 renovated to provide for full food service. 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 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. The liquor industry and the Company's liquor business have also been adversely affected by the physical fitness awareness. Trade Names The Company operates principally under three trade names: "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 complete restriction upon all future sales of distilled spirits in Florida under the "Big Daddy's" name by the other party who has a federally registered servicemark for "Big Daddy's" use in the restaurant business. The Federal Court retained jurisdiction to enforce the consent decree. The Company has acquired a registered federal trademark on the principal register for its "Flanigan's" service mark. During fiscal year 1996, the Company's franchise agreement with a member of Mr. Flanigan's family expired and the Company declined to offer the franchisee the option of executing its new franchise agreement. During the first quarter of fiscal year 1997, the Company filed suit against the franchisee for servicemark infringement, seeking injunctive relief and monetary damages. During the first quarter of fiscal year 1998, a Stipulated Agreed Order of Dismissal Upon Mediation was issued whereby the Company received $110,000 and the former franchisee agreed to cease all use of the "Flanigan's" servicemark and other dress features common to the Company owned and/or franchised restaurants. 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 it is a federally registered trademark owned by the Company. Employees As of year end, the Company employed 389 persons, of which 316 were full-time and 73 were part-time. Of these employees, 25 were employed at the Company's corporate offices. Of the remaining employees, 35 were employed in package liquor stores, and 329 in restaurants. 14 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 of Directors, Chief Executive Officer, and President 69 1959 William Patton Vice President Community Relations 75 1975 Edward A. Doxey Chief Financial Officer 57 1992 and Secretary Jeffrey D. Kastner Assistant Secretary 45 1995 Item 2. Properties The Company's operations are all conducted on leased property. 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 the 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. The majority of the Company's leases contained rent escalation clauses based upon the consumer price index which made the continued profitable operation of many of these locations impossible and jeopardized the financial position of the Company. As a result of the Company's inability to renegotiate these leases, on November 4, 1985 the Company, not including its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The primary purpose of the reorganization was to reject and/or renegotiate the leases on such properties. 15 On January 11, 1986, the Bankruptcy Court entered its Order granting the Company's motions to reject thirteen leases and the Company was successful in negotiating a termination of three other leases. On April 7, 1986, the Bankruptcy Court granted the Company's motions to reject two additional leases and two more leases were rejected by the Company's failure to assume the same by May 22, 1986. In addition, during the pendency of the bankruptcy proceedings, the Company was successful in renegotiating a substantial number of the Company's remaining leases, generally amending the terms to five years with three five year renewal options and deleting cost of living rental adjustments in exchange for rents based upon the "fair market rental" for each particular location. The Company believes that the units retained, especially with the aforementioned lease modifications, are adequate to support its operations, including any damages as a result of its bankruptcy proceedings. All of the Company's units require periodic refurbishing in order to remain competitive. The Company has budgeted $255,000 for its refurbishing program for fiscal year 1999. See Item 7, "Liquidity and Capital Resources", for discussion of the amounts spent in fiscal year 1998. The following table summarizes the Company's properties as of October 3, 1998 including franchise locations, a club and Company managed locations.
Square License Name and Location Footage Seats Owned by Lease Terms - ----------------- ------- ----- -------- ----------- Big Daddy's Liquors #9 (2) Flanigan's Enterprises, Inc. 1550 W. 84th Street 8/1/71 to 12/31/99 Hialeah, Florida 4,300 130 Company options to 12/31/2009 Big Daddy's Liquors #11 #11 Corporation 330 Southern Blvd. W. Palm Beach, FL 33405 5,000 150 Franchisee 5/15/97 to 5/14/2000 Big Daddy's Liquors #12 Galeon Tavern, Inc 2401 10th Avenue North 11/15/92 to 11/15/2002 Lake Worth, FL 33461 5,000 180 Franchisee option to 11/15/2012 Flanigan's Seafood Bar & Grill #13 CIC Investors #13, Inc. 1549 N.W. Le June Rd. Miami, FL 33126 5,000 200 Joint Venture N/A Big Daddy's Liquors #14 (2)(3) Big Daddy's #14, Inc. 2041 N.E. Second Street 6/1/79 to 6/1/99 Deerfield Beach, Florida 3,320 90 Franchisee options to 2009
16
Square License Name and Location Footage Seats Owned by Lease Terms - ----------------- ------- ----- -------- ----------- Big Daddy's Liquors #15 (3)(5) CIC Investors #15 Ltd. 1479 E. Commercial Boulevard 3/12/76 to 8/31/01 Fort Lauderdale, Florida 4,000 90 Franchisee options to 8/31/2011 Big Daddy's Liquors #18 (2)(3)(5) Twenty-Seven Birds, Corp. 2721 Bird Avenue 2/15/72 to 12/31/2000 Miami, Florida 4,300 100 Franchisee options to 12/31/2010 Big Daddy's Liquors #19 (2)(4) Flanigan's Enterprises, Inc. 2505 N. University drive 3/1/72 to 12/31/2000 Hollywood, Florida 4,500 160 Company option to 12/31/2005 Big Daddy's Liquors #20 (2) 7/15/68 to 12/31/99 Flanigan's Enterprises, Inc. options to 12/31/2006 13205 Biscayne Boulevard Additional Lease North Miami, Florida 5,100 140 Company 5/1/69 to 12/31/99 options to 12/31/2006 Big Daddy's Liquors #22 (2)(4) Flanigan's Enterprises, Inc. 2600 W. Davie Boulevard 12/16/68 to 12/31/2000 Fort Lauderdale, Florida 4,100 200 Company options to 12/31/2010 Flanigan's Cafe #27 (9) Flanigan's Enterprises, Inc. 732-734 N.E. 125th Street North Miami, Florida 3,000 90 Company 7/1/50 to 6/30/2049 Big Daddy's Liquors #31 (2) Flanigan's Enterprises, Inc. 4 North Federal Highway 9/6/68 to 12/31/2000 Hallandale, Florida 4,600 150 Company options to 12/31/2010 Big Daddy's Liquors #33 (2)(3)(5) Guppies, Inc. 11/1/68 to 10/31/2003 45 South Federal Highway New lease Boca Raton, Florida 4,620 130 Franchisee 11/1/2003 to 12/31/2009 Big Daddy's Liquors #34 (1) Flanigan's Enterprises, Inc. 9494 Harding Avenue Surfside, Florida 3,000 N/A Company 5/29/97 to 5/28/2002
17
Square License Name and Location Footage Seats Owned by Lease Terms - ----------------- ------- ----- -------- ----------- Big Daddy's Liquors #36 (2) 3/10/87 to 12/31/2000 Flanigan's Enterprises, Inc. Additional lease 102 North Dixie Highway 4/29/87 to 12/31/2000 Lake Worth, Florida 4,600 N/A Company option to 12/31/2005 Big Daddy's Liquors #37 (4) Flanigan's Enterprises, Inc. 1720 North Andrews Avenue 6/1/69 to 5/31/99 Fort Lauderdale, Florida 4,100 80 Company options to 5/31/2019 Big Daddy's Liquors #40 (2) Flanigan's Enterprises, Inc. 5450 North State Road #7 4/1/71 to 12/31/2000 Fort Lauderdale, Florida 4,600 140 Company option to 12/31/2005 Big Daddy's Liquors #43 (2)(3)(5) BD 43 Corporation 2500 E. Atlantic Avenue 12/1/72 to 11/30/2002 Pompano Beach, Florida 4,500 90 Franchisee options to 2012 Big Daddy's Liquors #47 (6)(8) Flanigan's Enterprises, Inc. 8600 Biscayne Boulevard 12/21/68-1/1/2010 Miami, Florida 6,000 N/A Company options to 1/1/2060 Flanigan's Lounge #600 (7) Powers Ferry Landing 5/1/76 to 4/30/2001 Atlanta, Georgia 10,000 400 Company option to 4/30/2006 Flanigan's Seafood Bar & Grill #60 CIC Investors #60, Ltd. 9516 Harding Ave. Surfside, FL 93154 6800 200 Joint Venture 8/1/97 - 12/31/2011 Flanigan's Seafood Bar & Grill #70 CIC Investors #70, Ltd. 12790 S.W 88 Street 4/1/98 - 3/31/2008 Kendall, Miami, FL 33186 4850 161 Joint Venture Options to 3/31/2028
18 (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 the Company. (5) Lease assigned to franchisee. (6) Lease originally assigned to unaffiliated third parties. During fiscal year 1996, the Company purchased 37% of the leasehold interest from the unaffiliated third parties. 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) Business formerly operated by the Company pursuant to Court Order, until December 31, 1996, when the Company reacquired ownership of the business through foreclosure. (9) Store was closed May 1998. The Company entered into a five year sub-lease agreement, with two five year options, with an unaffiliated third party who will operate a restaurant at this location commencing December 24, 1998. 19 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 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. 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". The Company's insurance coverage relating to this type of incident is limited. Through the end of the 1990 fiscal year, the Company was uninsured for dram shop liability. Pennsylvania still has an unrestricted dram shop law, which allows persons injured by an "obviously intoxicated person" to bring a civil action against the business which served alcoholic beverages to an "obviously intoxicated person". Florida has restricted its dram shop law by statute, permitting persons injured by an "obviously intoxicated person" to bring a civil action against the business which had served alcoholic beverages to a minor or an individual known to be habitually addicted to alcohol. 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 the Company then vigorously defends these claims on the grounds that its employee did not serve an "obviously intoxicated person". Damages in most dram shop claims are substantial. During fiscal year 1997, the Company favorably settled its remaining uninsured dram shop claim asserted against one of the limited partnerships in Pennsylvania and the Company, as general partner. At the present time, there are no dram shop claims pending against the Company. On November 4, 1985 the Company, not including its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The Petition, identified as case no. 85-02594-BKC-AJC, was filed in Fort Lauderdale, Florida. By Order of the Court dated November 4, 1985, the Company was appointed "debtor in possession". The Company's action was a result of significant escalations of rent on certain of the Company's leases which made continued profitable operations at those locations impossible and jeopardized the Company's financial position. The major purpose of the reorganization was to reject such leases. On January 11, 1986, the Bankruptcy Court granted the Company's motions to reject thirteen leases and the Company was successful in negotiating the termination of three additional leases. On April 7, 1986, the Bankruptcy Court granted the Company's motion to reject two additional leases and two more leases were automatically rejected due to the Company's failure to assume the same prior to May 22, 1986. During the fiscal year ended October 3, 1987, the Company negotiated a formula with the Official Committee of Unsecured Creditors, ("Committee"), which formula was used to calculate lease rejection damages under the Company's Amended Plan of Reorganization. Stipulations were filed by the Company with all but three of these unsecured creditors, which stipulations received Bankruptcy Court 20 approval prior to the hearing on confirmation. In addition to the rejection of leases, the Company also sought its release from lease agreements for businesses sold, which sales included the assignment of the leases for the business premises. While several landlords whose leases had been assigned did file claims against the Company, the majority did not, which resulted in the Company being released from its guarantees under those leases. The Company was also successful in negotiating the limitation or release of the lease guarantees of those landlords who filed claims, which settlements received Bankruptcy Court approval prior to the hearing on confirmation. On February 5, 1987, the Company filed its Amended Plan of Reorganization and Amended Disclosure Statement, which documents were approved by the Committee. On February 25, 1987, the Company further modified its Amended Plan of Reorganization to secure the claims of Class 6 Creditors (Lease Rejection) and Class 8 Creditors (Lease Guarantee Rejections). The Bankruptcy Court approved the Amended Disclosure Statement by Order dated March 7, 1987 and scheduled the hearing to consider confirmation of the Amended Plan of Reorganization on April 13, 1987. On April 10, 1987, in order to insure receipt of the necessary votes to approve its Amended Plan of Reorganization, the Company agreed to a further modification of its Amended Plan, whereby creditors of Classes 6 and 8 will receive $813,000 prorata as additional damages under the terms of the Amended Plan. On April 13, 1987, the Company's Amended Plan of Reorganization was confirmed and the Bankruptcy Court entered its Order of Confirmation on May 5, 1987. Pursuant to the terms of the Amended Plan of Reorganization, the Effective Date of the same was June 30, 1987. As of that date, confirmation payments totaling $1,171,925 were made by the Company's Disbursing Agent with $647,226 being retained in escrow for disputed claims ($1,819,151 total). The Bankruptcy Court ratified the disbursements made by the Disbursing Agent by its Order dated December 21, 1987. On December 28, 1987, the Bankruptcy Court entered its Notice of Discharge of the Company. During fiscal 1991 and again during fiscal 1992, the Company and Class 6 and Class 8 Creditors under the Company's Amended Plan of Reorganization modified the schedule for the payment of bankruptcy damages, reducing the amount of the quarterly payments by extending the term of the same, but without reducing the total amount of bankruptcy damages. The modification to the payment schedule provided the Company with needed capital. Item 4. Submission of Matters to a Vote of Security Holders. During the fourth quarter of fiscal year 1998 the Company did not submit any matter to a vote of security holders. 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. RANGE OF PER SHARE MARKET PRICES FISCAL 1997 FISCAL 1998 ------------------- ------------------- High Low High Low ---- --- ---- --- First quarter 5-7/8 4-3/4 12-3/4 7-3/8 Second quarter 4-3/4 4 13-1/2 7-1/8 Third quarter 4-7/8 3-5/8 13-1/4 10-3/4 Fourth quarter 10-3/16 7-1/4 11-3/8 8-1/4 The Company's shares are traded on the American Stock Exchange, under the symbol BDL. No dividends were paid to shareholders from the date of the initial public offering in August 1969, through the fiscal year ended September 27, 1975. Cash dividends of 20 cents and 10 cents per share were paid on January 12, 1976 and July 5, 1976, respectively. No dividends were paid during the period July 5, 1976 to March 15, 1988. During fiscal year 1988, a cash dividend of 10 cents per share was paid on March 15, 1988. No dividends were paid from March 16, 1988 through the fiscal year ended October 3, 1998. Subsequent to the end of the fiscal year 1998, the Board of directors declared a cash dividend of 20 cents per share to shareholders of record on January 4, 1999, payable on February 1, 1999. Item 6. Selected Financial Data. Not required. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. At September 27, 1997, the Company was operating 14 units. The Company acquired ownership of the assets of a unit formerly operated under Court Order which unit is included in the total of stores being operated, and had interests in an additional seven units which had been franchised by the Company. Of the units operated by the Company, four were combination package liquor stores and restaurants, five were restaurants only, and four were package liquor stores only. The unit formerly operated by the Company pursuant to Court Order was a package liquor store only. There was one club operated by an unaffiliated third party under a management agreement. In comparison to fiscal year 1997, at October 3, 1998, the Company was operating 13 units. The Company acquired ownership of the assets of the unit formerly operated under Court Order which unit is included in the total of stores being operated, and had interests in an additional seven units which had been franchised by the Company. Of the units operated by the Company, four were combination package liquor stores and restaurants, five were restaurants only, and three were package liquor stores only. The unit formerly operated by the Company pursuant to Court Order was a package liquor store only. There was one club operated by an unaffiliated third 22 party under a management agreement. Liquidity and Capital Resources Cash Flows The following table is a summary of the Company's cash flows for the years ended September 27, 1997 and October 3, 1998.
Fiscal Years Ended --------------------------- 1997 1998 ------- --------- (in thousands) Net cash provided by operating activities $ 2,094 $ 1,060 Net cash used in investing activities (1,291) (760) Net cash used in financing activities (266) (166) ------- ------- Net increase in cash and cash equivalents 537 134 Cash and cash equivalents: Beginning of year 797 1,334 ------- ------- End of year $ 1,334 $ 1,468 ======= =======
Adjustments to net income to reconcile to cash flows from operating activities in fiscal year 1997 include a provision for uncollectible notes and mortgages receivable of $21,000. Also included is a $19,000 loss on the retirement of fixed assets, a reduction of $58,000 in the accrual for potential liability claims and $150,000 received from the sale of the rights to manage a franchise. Adjustments to net income to reconcile to cash flows from operating activities in fiscal year 1998 include a loss of $37,000 from the retirement of the Company's general ledger system. Also included is a $124,000 reduction of allowance for bad debts. During the first quarter of fiscal year 1998, the Company closed on its loan from Barnett Bank in the principal amount of $500,000, being fully amortized over three years with interest accruing at the prime rate charged by Barnett Bank to its commercial customers. The loan is payable in twelve equal quarterly installments of principal, each in the amount of $41,667, which commenced March 31, 1998, with interest payable monthly. The Company pledged twelve liquor licenses as collateral, which liquor licenses have an estimated fair market value of approximately $550,000. The Company used the proceeds from the loan to help fund a portion of the investment in a joint venture in fiscal year 1998. 23 The Year 2000 Issue The Company has assessed and continues to assess the impact of the Year 2000 Issue on its reporting systems and operations. The Year 2000 Issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date occurs, date sensitive systems may recognize the year 2000 as 1900 or not at all. This inability to recognize or properly treat the year 2000 may cause the Company's systems to process critical financial and operational information incorrectly. During the third quarter of fiscal year 1998, in order to resolve the Year 2000 issue, the Company contracted to install a Great Plains accounting package to replace the accounting software presently in use. As of the end of the fiscal year 1998 the Company has expended approximately $100,000 on the installation of the program and estimates the total cost to approximate $125,000. The Company expects to have the new accounting package to be fully functional in January 1999. The Company utilizes POSitouch cash registers in its restaurant operations and Omron cash registers in its package stores. The registers record revenues, calculate inventory values and track inventories. Both systems are year 2000 compliant. The Company has confirmed with each of its major suppliers that they will be 2000 compliant by the end of 1999. The Company does not rely solely on computer systems to transact business with its suppliers and does not use any computer operated production lines. Improvements Capital expenditures were $1,468,000 and $808,000 during fiscal years 1997 and 1998, respectively. The capital expenditures were for upgrading existing units serving food, improvements to package liquor stores and upgrading the corporate computer system. During the third quarter of fiscal year 1997, the Company closed on its purchase of the real property adjacent to its restaurant located at 4 N. Federal Highway, Hallandale. The Company improved this real property in fiscal 1998 as additional parking for customers of its restaurant. The purchase price was $620,000, with the seller holding a purchase money mortgage in the amount of $485,000. The purchase of and improvements to this property are included in the capital expenditures of $1,468,000 in 1997 and improvements to this property are included in the capital expenditures of $808,000 in 1998. Except as otherwise noted all of the money for additions came from operations. 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 continued through fiscal year 1998. The budget for fiscal year 1999 includes approximately $255,000 for this program. The Company believes that improved operations will provide the cash to continue the refurbishing program. 24 Property and Equipment The Company's property and equipment, at cost less accumulated depreciation and amortization, was $3,544,000 at September 27, 1997 compared to $3,717,000 at October 3, 1998. The Company's liquor licenses less accumulated amortization were $358,000 at September 27, 1997 compared to $384,000 at October 3, 1998. The Company's leased property under capital leases, less accumulated amortization, was $162,000 at September 27, 1997 compared to $129,000 at October 3, 1998. The Company's leased property under capital leases has continued to decline because any new leases the Company enters into are operating leases, and thus there are no additions to capital leases. Long term debt The Company closed on its $500,000 loan with Barnett Bank during the first quarter of fiscal year 1998 and repaid principal of $125,000 during the fiscal year. The Company repaid long term debt, including the Barnett Bank note payable, capital lease obligations and Chapter 11 damages in the amount of $340,000 and $692,000 in fiscal years 1997 and 1998, respectively. Working capital The table below summarizes the current assets, current liabilities and working capital for fiscal years 1997 and 1998:
Sept. 27, Oct. 3, Item 1997 1998 ---- ---------- ---------- Current assets $3,000,000 $3,456,000 Current liabilities 2,658,000 2,242,000 Working capital 342,000 1,214,000
During fiscal year 1991 and again in fiscal year 1992, the Company refinanced existing debt due Class 6 and Class 8 Creditors under the Company's Amended Plan by extending the payment schedule to the year 2002, thereby reducing the payments from $500,000 per year to $200,000 per year for two years and thereafter to $300,000 per year until paid, but without reducing the total amount of bankruptcy damages. Management believes that positive cash flow from operations will adequately fund operations, debt reductions and planned capital expenditures in fiscal year 1999. The Company's Amended Plan of Reorganization was prepared to allow the Company to meet its obligations from cash generated from operations. The Amended Plan was approved by a majority of the creditors and confirmed by the Bankruptcy Court on May 5, 1987 and the Company was officially discharged from bankruptcy on December 28, 1987. As noted above, during fiscal year 1991 and again in fiscal year 1992, the Class 6 and Class 8 Creditors agreed to refinance existing debt by extending their payment schedule. See Bankruptcy Proceedings below and Note 2 to the consolidated financial statements. 25 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 carryforwards to the extent that realization of said benefits is more likely than not. For discussion regarding the Company's net operating loss carryforwards refer to Note 4 to the consolidated financial statements for fiscal year ended October 3, 1998. Bankruptcy Proceedings As noted above and in Note 2 to the consolidated financial statements, on November 4, 1985, Flanigan's Enterprises, Inc., not including any of its subsidiaries, filed a Voluntary Petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. The primary purposes of the Petition were (1) to reject leases which were significantly above market rates and (2) to reject leases on closed units which had been repossessed by or returned to the Company. During fiscal year 1986 the Company terminated or rejected 34 leases. Many of the leases remaining were renegotiated to five year terms, with three five year renewal options at fair market rental. As was their right under the Bankruptcy Code, the landlords of properties rejected by the Company filed claims for losses or damages sustained as a result of the Company's rejection of such leases. The amount of such damages is limited by federal law. The Company outlined a schedule for payment of these damages in the Amended Plan. As noted above, the Amended Plan was approved by the Bankruptcy Court on May 5, 1987. The gross amount of damages payable to creditors for rejected leases was $4,278,000. Since the damage payments were to be made over nine years, the total amount due was discounted at a rate of 9.25%. See Note 2 to the consolidated financial statements for the current payment schedule of these damages. Other Legal Matters Through the end of fiscal year 1990, the Company was uninsured for dram shop liability. In fiscal year 1997, the Company favorably settled its remaining uninsured dram shop claim against a limited partnership in Pennsylvania and the Company, as general partner. See page 12 and 13 for further discussion regarding dram shop suits. During fiscal year 1996, the Company was forced to continue its lawsuit against the assignee of a sold store in 1990 when the assignee failed to amicably return the package liquor store in order to regain possession of the business premises, including furniture, fixtures, equipment and liquor license, and for damages for unpaid real property taxes, rent and damages to the business premises. During the first quarter of fiscal year 1997, the parties entered into a Stipulation, whereby the Court entered an Agreed Summary Final Judgment for Eviction, Damages and Foreclosure of Security Agreement, ("Summary Final Judgment"), through which the furniture, fixtures, equipment and liquor license at this 26 location were sold at foreclosure sale and through which the Company received an award of damages against the assignee, the principal of the assignee who personally guaranteed its obligations, and the affiliated entity of the assignee, which also guaranteed its obligations to the Company. During the first quarter of fiscal year 1997, the Company reacquired ownership of the furniture, fixtures, equipment and liquor license,at this location, as well as possession of the business premises through the foreclosure sale. The Company operated the package liquor store throughout the litigation and continues doing so after acquiring ownership of the same. During fiscal year 1996, two claims were filed against the Company with the Equal Employment Opportunity Commission ("EEOC") alleging sexual harassment and/or discrimination. In the first claim, a former employee initially alleged that the Company permitted sexual harassment to continue at one of its restaurants. After the former employee was transferred to another restaurant, she resigned, and thereafter amended her complaint to allege that she was forced to resign due to retaliatory conduct on the part of the Company. During the first quarter of fiscal year 1997, the EEOC closed its files on these claims taking no action. From the date the EEOC closed its file, the former employee had ninety days to file suit in Federal Court, which she failed to do. Similarly, an action under Florida law is barred by a one year statute of limitations. In the second claim, a former employee alleged that her position with the Company was changed due to her pregnancy. The Equal Employment Opportunity Commission failed to make a determination on this claim within one hundred eighty (180) days of its filing and subsequent to the end of the fiscal year 1996, this claimant filed suit against the Company. The Company disputed this claim and vigorously defended the same. During the fourth quarter of fiscal year 1997, the former employee's attorney withdrew and during the first quarter of fiscal year 1998 the lawsuit was dismissed due to the failure of the former employee to retain substitute counsel. Results of Operations
REVENUES (in thousands): Fifty-Two Fifty-Three Weeks Ended Weeks Ended Sales Sept. 27, 1997 Oct. 3, 1998 - ----- --------------------- -------------------- Restaurant, food $ 9,648 50.2% $10,628 52.0% Restaurant, bar 2,888 15.0% 2,891 14.0% Package goods 6,681 34.8% 6,901 33.8% ------- ----- ------- ----- Total 19,217 100.0% 20,420 100.0% Franchise revenues 591 761 Owner's fee 150 173 Joint venture income 168 207 Other operating income 194 206 ------- ------- Total revenues $20,320 $21,767
27 As the table above illustrates, total revenues have increased for the fiscal year ended October 3, 1998 when compared to fiscal year ended September 27, 1997. During the third quarter of fiscal year 1998 the Company closed its restaurant in North Miami which operated under the "Flanigan's Cafe" servicemark. Subsequent to the end of fiscal year 1998, the Company entered into a sublease for the property with an unaffiliated third party. Restaurant food sales represented 50.2% of total sales in the fifty-two weeks ended September 27, 1997 as compared to 52.1% in the fifty-three week period of fiscal year 1998. The weekly average of same store restaurant food sales was $182,174 and $197,132 for the fifty-two week period of fiscal year 1997 and the fifty-three weeks of fiscal year 1998, an increase of 8.2%. The same store weekly average for restaurant bar sales was $50,909 for the fifty-two weeks ended September 27, 1997 compared to $51,151 for the fifty-three weeks ended October 3, 1998, an increase of less than 1%. The Company's emphasis during the past few years has been towards increasing its restaurant food sales, which caters to a family oriented business. This has accounted for minimal change in the weekly average of same store restaurant bar sales. Package goods sales have reversed the decline of prior years with sales increasing at a weekly average of same store sales of $111,708 for the fifty-two weeks of fiscal year 1997 compared to $121,645 for the fifty-three weeks of fiscal year 1998, an increase of 8.9%. Franchise revenue increased from $591,000 for the fifty-two weeks ended September 27, 1997 to $761,000 for the fifty-three week period ended October 3, 1998. The increase in franchise revenue resulted from the opening of a joint venture restaurant in the second quarter of fiscal year 1998 and the resumption of the sublease rent and royalties at the start of the third quarter of fiscal year 1997 on a franchised unit that was sold to a related party in fiscal year 1997. Owner's fee represents fees received pursuant to a Management Agreement from the operation of a club owned by the Company in Atlanta, Georgia. The Management Agreement was amended effective July 1, 1996, whereby the Company also receives ten percent of annual sales exceeding $1,500,000 per annum as additional owner's fees. During the first quarter of fiscal year 1996, the Company began operating a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark as general partner and fifty percent owner of a limited partnership established for such purpose. During fiscal year 1997 the Company received $168,000 as its share of income, compared to $242,000. During the third quarter of 1997, the Company began operating a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark as the franchisor and twenty-five percent owner of a limited partnership established for such purpose. During fiscal year 1997, the Company did not recognize any income from the partnership as compared to receiving $31,000 as its share of the income for fiscal 1998. 28 During the second quarter of fiscal year 1998, the Company began operating a restaurant under the "Flanigan's Seafood Bar and Grill" servicemark as general partner and forty-two percent of a limited partnership established for such purpose. The Company reports its income and investment under the equity method of accounting and recorded a loss of $66,000 for fiscal year 1998. The loss is attributable to pre-opening costs and expenditure of certain intangible costs as required by SOP 98-5, "reporting on the costs of start-up activities". The gross profit margin for restaurant sales was 63.3% and 62.3% for the fiscal years 1997 and 1998, respectively. The gross profit margin for package goods sales during the fifty-two weeks ended September 27, 1997 and the fifty-three weeks ended October 3, 1998 was 26.9% and 26.0%, respectively. Overall gross profits were 50.6% for the fiscal year ended September 27, 1997 compared to 50.0% for the fiscal year ended October 3, 1998. Operating Costs and Expenses Operating costs and expenses for the fifty-two weeks ended September 27, 1997 were $19,268,000 compared to $20,383,000 for the fifty-three week period in fiscal year 1998. Operating expenses are comprised of the cost of merchandise sold, payroll and related costs, occupancy costs and selling, general and administrative expenses. Payroll and related costs, which include workers compensation insurance premiums, were $5,580,000 and $5,964,000 for fiscal years 1997 and 1998, respectively. The 6.9% increase was attributable to increases in salaries paid to the restaurant and package division employees. Occupancy costs, which include rent, common area maintenance, repairs and taxes were $927,000 and $1,047,000 for fiscal years 1997 and 1998, respectively. The 12.9% increase was attributable to an increase in real property taxes as well as rental increases related with the Company's operating leases. Selling, general and administrative expenses were $3,270,000 for the fifty-two weeks ended September 27, 1997 and $3,163,000 for the fifty-three weeks ended October 3, 1998. The net decrease of 3.3% in selling, general and administrative expenses was achieved through management's careful monitoring of the same and decreased insurance costs in fiscal year 1998. Other Income and Expense Other income and expense totaled $54,000 and $37,000 in fiscal years 1997 and 1998 respectively. The increase of $66,000 in interest expense on long-term debt and damages payable, which was $91,000 and $157,000 for the fifty-two weeks of fiscal year 1997 and fifty-three weeks of fiscal year 1998, is attributed to the increase in long-term debt. The decline of $8,000 in interest 29 expense on obligations under capital leases, which was $54,000 and $46,000 for the fiscal years 1997 and 1998, respectively, is the result of declining principal balances of capital leases in general. The Company realized $110,000 of income in the first quarter of fiscal year 1998 from the settlement of litigation. The category "Other, net" was $-0- for the fifty-two weeks of fiscal year 1997 and $162,000 for the fifty-three weeks of fiscal year 1998. Other, net in the consolidated statements of income consists of the following for the years ended September 27, 1997 and October 3, 1998:
Fiscal Years Ended --------------------------- 1997 1998 --------- --------- Non-franchise related rental income $ 32,000 $ 45,000 Loss on retirement of fixed assets (19,000) (37,000) Settlement of litigation -- 110,000 Adjustment on sale of Pennsylvania limited partnership (31,000) -- Insurance recovery 13,000 -- Miscellaneous 5,000 44,000 --------- --------- $ -- $ 162,000 ========= =========
Trends During the next twelve months management expects a continued increase in income from investments in joint ventures and anticipates that expenses will remain constant, thereby increasing overall profits. The Company intends to add more restaurants as cash becomes available. Other Matters Impact of Inflation The Company does not believe that inflation has had any material effect during the past two years. To the extent allowed by competition, the Company recovers increased costs by increasing prices. Post Retirement Benefits Other Than Pensions The Company currently provides no post retirement benefits to any of its employees, therefore Financial Accounting Standards Board Statement No. 106 has no effect on the Company's financial statements. Item 8. Financial Statements and Supplementary Data. Financial statements of the Company at September 27, 1997 and October 3, 1998, which include each of the two years in the period ended October 3, 1998 and the independent certified public accountants' report thereon are incorporated by reference from the 1998 Annual Report to Shareholders, included herein. 30 Item 9. Disagreements on Accounting and Financial Disclosure. (Not Applicable.) PART III Item 10. Directors and Executive Officers of the Registrant. The information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement for its 1999 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission pursuant to regulation 14A under the Securities and Exchange Act of 1934, as amended (the 1999 Proxy Statement), is incorporated herein by reference. See also "Executive Officers of the Registrant" included in Part I hereof. Item 11. Executive Compensation. The information set forth in the 1999 Proxy Statement under the caption "Executive Compensation" is incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 1999 Proxy Statement is incorporated by reference. Item 13. Certain Relationships and Related Transactions The information set forth under the caption "Election of Directors Certain Relationships and Related Transactions" in the 1999 Proxy Statement is incorporated by reference. PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) 1. Financial Statements All the financial statements, financial statement schedule and supplementary data listed in the accompanying Index to Financial Statements and Schedule are filed as part of this Annual Report. 2. Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual Report. (b) Reports on Form 8-K No reports on form 8-K were filed during the fourth quarter of fiscal 1998 or subsequent to yearend. 31 Index to Exhibits Item 14 (a) (2) Description (2) Plan of Reorganization, Amended Disclosure Statement, Amended Plan of Reorganization, Modification of Amended Plan of Reorganization, Second Modification of Amended Plan of Reorganization, Order Confirming Plan of Reorganization, (Item 7 (c) of Quarterly Report on Form 8-K filed May 5, 1987 is incorporated herein by reference). (3) Restated Articles of Incorporation (Part IV, Item 14 (a)(2) of Annual Report on Form 10-K filed on December 29, 1982 is incorporated herein by reference). (3) By-laws (Part IV, Item 14 (a)(2) of Annual Report on Form 10-K filed on December 29, 1982 is incorporated herein by reference). (10)(a)(1) Employment Agreement with Joseph G. Flanigan (Exhibit A of the Proxy Statement dated January 27, 1988 is incorporated herein by reference). (10)(a)(2) Form of Employment Agreement between Joseph G. Flanigan and the Company (as ratified and amended by the stockholders at the 1988 annual meeting is incorporated herein by reference). (10)(c) Consent Agreement regarding the Company's Trademark Litigation (Part 7(c)(19) of the Form 8-K dated April 10, 1985 is incorporated herein by reference). (10)(d) King of Prussia (#850) Partnership Agreement (Part 7 (c)(19) of the Form 8-K dated April 10, 1985 is incorporated herein by reference). (10)(o) Management Agreement for Atlanta, Georgia (#600) (Item 14 (a)(10)(o) of the Form 10-K dated October 3, 1992 is incorporated herein by reference). (10)(p) Settlement Agreement with Former Vice Chairman of the Board of Directors (re #5) (Item 14 (a)(10)(p) of the Form 10-K dated October 3, 1992 is incorporated herein by reference). (10)(q) Hardware Purchase Agreement and Software License Agreement for restaurant point of sale system. (Item 14(a)(10)(g) of the Form 10-KSB dated October 2, 1993 is incorporated herein by reference). (10)(a)(3) Key Employee Incentive Stock Option Plan (Exhibit A of the Proxy Statement dated January 26, 1994 is incorporated herein by reference). 32 (10)(r) Limited Partnership Agreement of CIC Investors #13, Ltd., between Flanigan's Enterprises, Inc., as General Partner and fifty percent owner of the limited partnership, and Hotel Properties, LTD. (Item 14 (a)(10)(r) of the Form 10-KSB dated September 30, 1995 is incorporated herein by reference.) (10)(s) Form of Franchise Agreement between Flanigan's Enterprises, Inc., and Franchisees. (Item 14 (a)(10)(s) of the Form 10-KSB dated September 30, 1995 is incorporated herein by reference.) (10)(t) Licensing Agreement between Flanigan's Enterprises, Inc. and James B. Flanigan, dated November 4, 1996, for non-exclusive use of the servicemark "Flanigan's" in the Commonwealth of Pennsylvania. (Item 14 (a)(10)(t) of the Form 10-KSB dated September 28, 1996 is incorporated herein by reference.) (10)(u) Limited Partnership Agreement of CIC Investors #15 Ltd., dated March 28, 1997, between B.D. 15 Corp. as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as a limited partner owning twenty-five percent of the limited partnership (Item 14 (a)(10)(u) of the Form 10-KSB dated September 27, 1997 is incorporated herein by reference.) (10)(v) Limited Partnership Agreement of CIC Investors #60, Ltd., dated July 8, 1997, between Flanigan's Enterprises, Inc., as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as a limited partner owning forty percent of the limited partnership (Item 14 (a)(10)(v) of the Form 10-KSB dated September 27, 1997 is incorporated herein by reference.) (10)(w) Stipulated Agreed Order of Dismissal upon Mediation with former franchisee (Item 14 (a)(10)(w) of the Form 10-KSB dated September 27, 1997 is incorporated herein by reference.) (11) Statement regarding computation of per share earnings is set forth in this Annual Report on Form 10-KSB. (13) Registrant's Form 10-KSB constitutes the Annual Report to Shareholders for fiscal year ended October 3, 1998. (22)(a) Company's subsidiaries are set forth in this Annual Report on Form 10-KSB. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Flanigan's Enterprises, Inc. Registrant Date 1/7/1999 By: /s/JOSEPH G. FLANIGAN --------------------- Joseph G. Flanigan Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/JOSEPH G. FLANIGAN Chairman of the Board, Date 1/7/1999 - --------------------- Chief Executive Officer Joseph G. Flanigan and President /s/EDWARD A. DOXEY Chief Financial Officer Date 1/7/1999 - ------------------ and Secretary Edward A. Doxey /s/CHARLES KUHN Director Date 1/7/1999 - --------------- Charles Kuhn /s/GERMAINE M. BELL Director Date 1/7/1999 - ------------------- Germaine M. Bell /s/CHARLES E. MCMANUS Director Date 1/7/1999 - --------------------- Charles E. McManus /s/JEFFREY D. KASTNER Assistant Secretary Date 1/7/1999 - --------------------- and Director Jeffrey D. Kastner /s/WILLIAM PATTON Vice President, Public Date 1/7/1999 - ----------------- Relations and Director William Patton /s/JAMES G. FLANIGAN Director Date 1/7/1999 - -------------------- James G. Flanigan /s/PATRICK J. FLANIGAN Director Date 1/7/1999 - ---------------------- Patrick J. Flanigan 34 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULE FINANCIAL STATEMENTS: Report of Independent Certified Public Accountants Consolidated Balance Sheets -- September 27, 1997 and October 3, 1998 Consolidated Statements of Income for the Years Ended September 27, 1997 and October 3, 1998 Consolidated Statements of Stockholders' Investment for the Years Ended September 27, 1997 and October 3, 1998 Consolidated Statements of Cash Flows for the Years Ended September 27, 1997 and October 3, 1998 Notes to Consolidated Financial Statements SCHEDULE: II Valuation and Qualifying Accounts for the Years Ended September 27, 1997 and October 3, 1998 Schedules, other than the schedule listed above, are not submitted because they are not applicable, not required, or because the required information is included in the consolidated financial statements or notes thereto. Individual financial statements of the registrant have been omitted because the registrant is primarily an operating company and the subsidiaries included in the consolidated financial statements are wholly owned. 35 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Flanigan's Enterprises, Inc.: We have audited the accompanying consolidated balance sheets of Flanigan's Enterprises, Inc. (a Florida corporation) and subsidiaries as of September 27, 1997 and October 3, 1998, and the related consolidated statements of income, stockholders' investment and cash flows for the years then ended. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Flanigan's Enterprises, Inc. and subsidiaries as of September 27, 1997 and October 3, 1998, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statements is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ARTHUR ANDERSEN LLP - ---------------------- ARTHUR ANDERSEN LLP Fort Lauderdale, Florida, December 10, 1998. 36
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 ASSETS 1997 1998 ---------- ----------- CURRENT ASSETS: Cash and cash equivalents $1,334,000 $1,468,000 Receivables, less allowance for uncollectible amounts and deferred gains, including related party receivables of $24,000 and $25,000 (before allowances and deferred gains) in 1997 and 1998, respectively 80,000 320,000 Inventories 1,253,000 1,237,000 Prepaid expenses 333,000 431,000 ---------- ---------- Total current assets 3,000,000 3,456,000 ---------- ---------- PROPERTY AND EQUIPMENT, net 3,544,000 3,717,000 ---------- ---------- LEASED PROPERTY UNDER CAPITAL LEASES, less accumulated amortization of $711,000 and $744,000 in 1997 and 1998, respectively 162,000 129,000 ---------- ---------- OTHER ASSETS: Liquor licenses, less accumulated amortization of $90,000 and $98,000 in 1997 and 1998, respectively 358,000 384,000 Notes and mortgages receivable, less allowance for uncollectible amounts and deferred gains, including related party receivables of $197,000 and $173,000 (before allowances and deferred gains) in 1997 and 1998, respectively 168,000 161,000 Investment in joint ventures 987,000 937,000 Other 163,000 259,000 ---------- ---------- Total other assets 1,676,000 1,741,000 ---------- ---------- TOTAL ASSETS $8,382,000 $9,043,000 ========== ==========
(continued) 37
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 LIABILITIES AND STOCKHOLDERS' INVESTMENT (continued) 1997 1998 ----------- ----------- CURRENT LIABILITIES: Accounts payable $ 859,000 $ 850,000 Accrued and other current liabilities 1,304,000 752,000 Current portion of long-term debt 84,000 241,000 Current obligations under capital leases 70,000 101,000 Current portion of damages payable on terminated or rejected leases 259,000 268,000 Due to Pennsylvania limited partnership 82,000 30,000 ----------- ----------- Total current liabilities 2,658,000 2,242,000 ----------- ----------- LONG-TERM DEBT, net of current portion 812,000 793,000 ----------- ----------- OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 319,000 218,000 ----------- ----------- DAMAGES PAYABLE ON TERMINATED OR REJECTED LEASES, net of current portion 954,000 685,000 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 5 and 10) STOCKHOLDERS' INVESTMENT: Common stock, par value $.10, authorized 5,000,000 shares, issued and outstanding 2,099,000 shares in 1997 and 1998 210,000 210,000 Capital in excess of par value 6,395,000 6,395,000 Retained earnings 1,846,000 3,234,000 Less - Treasury stock, at cost, 1,192,000 shares in 1997 and 1,170,000 shares in 1998 (4,812,000) (4,734,000) ----------- ----------- Total stockholders' investment 3,639,000 5,105,000 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 8,382,000 $ 9,043,000 =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. 38
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 1997 1998 ------------ ------------ REVENUES: Restaurant food sales $ 9,648,000 $ 10,628,000 Restaurant bar sales 2,888,000 2,891,000 Package goods sales 6,681,000 6,901,000 Franchise-related revenues 591,000 761,000 Owner's fee 150,000 173,000 Joint venture income 168,000 207,000 Other operating income 194,000 206,000 ------------ ------------ 20,320,000 21,767,000 ------------ ------------ COSTS AND EXPENSES: Cost of merchandise sold - restaurants and lounges 4,604,000 5,102,000 package goods 4,887,000 5,107,000 Payroll and related costs 5,580,000 5,964,000 Occupancy costs 927,000 1,047,000 Selling, general and administrative expenses 3,270,000 3,163,000 ------------ ------------ 19,268,000 20,383,000 ------------ ------------ Income from operations 1,052,000 1,384,000 ------------ ------------ OTHER INCOME (EXPENSE): Interest expense on obligations under capital leases (54,000) (46,000) Interest expense on long-term debt and damages payable (91,000) (157,000) Interest income 43,000 72,000 Sale of management rights 150,000 -- Recognition of deferred gains 6,000 6,000 Other, net -- 162,000 ------------ ------------ 54,000 37,000 ------------ ------------ Income before provision for income taxes 1,106,000 1,421,000
(continued) 39
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 (continued) 1997 1998 ---------- ---------- PROVISION FOR INCOME TAXES 13,000 33,000 ---------- ---------- Net income $1,093,000 $1,388,000 ========== ========== NET INCOME PER COMMON SHARE: Basic $ 1.21 $ 1.51 ========== ========== Diluted $ 1.18 $ 1.37 ========== ========== WEIGHTED AVERAGE SHARES AND EQUIVALENT SHARES OUTSTANDING: Basic 907,000 915,000 ========== ========== Diluted 927,000 1,010,000 ========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements. 40
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 COMMON STOCK TREASURY STOCK ----------------------------------------- --------------------------------------------- (Accumulated Capital in Deficit) Number of Excess of Retained Number of Shares Amount Par Value Earnings Shares Amount BALANCE, September 28, 1996 2,099,000 $ 210,000 $ 6,395,000 $ 753,000 1,192,000 $ 4,811,000 Net income -- -- -- 1,093,000 -- -- Purchase of 160 shares of treasury stock -- -- -- -- -- 1,000 ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, September 27, 1997 2,099,000 210,000 6,395,000 1,846,000 1,192,000 4,812,000 Net income -- -- -- 1,388,000 -- -- Exercised stock options -- -- -- -- (22,000) (78,000) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, October 3, 1998 2,099,000 $ 210,000 $ 6,395,000 $ 3,234,000 1,170,000 $ 4,734,000 =========== =========== =========== =========== =========== ===========
The accompanying notes to consolidated financial statements are an integral part of these statements. 41
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 1997 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,093,000 $ 1,388,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 619,000 655,000 Provision for (reduction of) uncollectible notes and mortgages receivable 21,000 (124,000) Change in provision for potential uninsured claims (58,000) -- Recognition of deferred gains and other deferred income (6,000) (6,000) Loss on property, equipment and liquor licenses 19,000 37,000 Sale of management rights (150,000) -- Changes in assets and liabilities: Decrease (increase) in receivables 328,000 (151,000) (Increase) decrease in inventories (175,000) 16,000 (Increase) in prepaid expenses (5,000) (98,000) Decrease (increase) in other assets 38,000 (96,000) Increase (decrease) in accounts payable 277,000 (9,000) Increase (decrease) in accrued and other current liabilities 93,000 (552,000) ----------- ----------- Net cash provided by operating activities 2,094,000 1,060,000 ----------- -----------
(continued) 42
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 (continued) 1997 1998 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of property, equipment, liquor licenses and management rights 95,000 -- Collections on notes and mortgages receivable 56,000 48,000 Purchase of property and equipment (983,000) (808,000) Investment in joint ventures (428,000) -- Proceeds (adjustment) from sale of Pennsylvania limited partnership (31,000) -- ---------- ---------- Net cash used in investing activities (1,291,000) (760,000) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt 423,000 500,000 Payments of long-term debt (33,000) (362,000) Payments of obligations under capital leases (59,000) (70,000) Payments of damages payable on terminated or rejected leases (248,000) (260,000) Change in amount due to Pennsylvania limited partnership (348,000) (52,000) Purchase of treasury stock (1,000) -- Proceeds from exercise of options -- 78,000 ---------- ---------- Net cash used in financing activities (266,000) (166,000) ---------- ----------
(continued) 43
FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 (continued) 1997 1998 ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 537,000 134,000 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 797,000 1,334,000 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $1,334,000 $1,468,000 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 142,000 $ 199,000 Income taxes 18,000 33,000 Noncash Activities: Retirement of unrealizable general ledger system, at net book value -- $ 37,000 Exchange of note receivable for sale of management rights $ 100,000 $ -- Investment in joint ventures $ 439,000 $ (50,000) Write-off of fully reserved mortgage receivable $ 60,000 $ -- Exchange of note payable for purchase of land $ 485,000 $ -- Receipt of liquor license in connection with litigation settlement -- $ 35,000
The accompanying notes to consolidated financial statements are an integral part of these statements. 44 FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 (1) NATURE OF OPERATIONS: Incorporated in 1959, Flanigan's Enterprises, Inc. ("Flanigan's" or the "Company") began operations in South Florida as a chain of small cocktail lounges and package liquor stores. At October 3, 1998, the Company owns and/or operates five full-service restaurants, three package liquor stores, four combination full-service restaurants and package liquor stores in Florida, and one club in Georgia, for which Flanigan's receives an owner's fee pursuant to a management agreement. The Company's restaurants are operated under the "Flanigan's Seafood Bar and Grill" servicemark while the Company's package stores are operated under the "Big Daddy's Liquors" servicemark. Additionally, the Company holds interests in seven franchised units. (2) PETITION IN BANKRUPTCY: On November 4, 1985, Flanigan's Enterprises, Inc., not including any of its subsidiaries, filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Florida seeking to reorganize under Chapter 11 of the Federal Bankruptcy Code. Flanigan's was authorized to continue in the management and control of its business and property as debtor-in-possession under the Bankruptcy Code. On May 5, 1987, Flanigan's Plan of Reorganization, as amended and modified (the "Plan"), was confirmed by the Bankruptcy Court. On December 28, 1987, Flanigan's was officially discharged from bankruptcy. The Bankruptcy Code allows the debtor-in-possession to either assume or reject certain liabilities, leases, or other executory contracts subject to court approval. Lessors or other parties to contracts, which are rejected are entitled to file claims for losses or damages sustained as a result of the rejection. In fiscal 1986, Flanigan's recorded estimated damages of $4,278,000 for claims for losses as a result of rejected leases. Because the damage payments were to be made over nine years, the total amount due was discounted at a rate of 9.25%, Flanigan's then effective borrowing rate. During fiscal 1991 and 1992, Flanigan's renegotiated the payment of this obligation to extend through fiscal 2002, which effectively reduced the discount rate to 3.71%. Remaining liabilities for damage payments are included as "Damages Payable on Terminated or Rejected Leases" in the accompanying consolidated balance sheets. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of damages payable on terminated or rejected leases is approximately $953,000. The fair value of all other financial instruments approximates the carrying value on the balance sheets, due to their short-term nature or market rates of interest. 45 As of October 3, 1998, damages payable on terminated or rejected leases, including imputed interest, mature as follows: Fiscal Amount ------ ------ 1999 300,000 2000 300,000 2001 300,000 2002 119,000 --------- 1,019,000 Less - Amount representing interest (66,000) --------- $ 953,000 ========= (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (a) Basis of Consolidation - The consolidated financial statements include the accounts of Flanigan's Enterprises, Inc. and its subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation. The Company's fiscal year ends on the Saturday nearest September 30. (b) Cash and Cash Equivalents - The Company considers all highly liquid debt instruments with a maturity of three months or less at the date of purchase to be cash equivalents. (c) Inventories - Inventories are stated at lower of cost (first in, first out) or market. (d) Liquor Licenses - Liquor licenses purchased prior to October 31, 1970 (the date Accounting Principles Board ("APB") Opinion No. 17 became effective), amounted to $145,000 at September 27, 1997 and October 3, 1998, and are not amortized unless an impairment in value is indicated. The cost of liquor licenses acquired subsequent to October 31, 1970, is amortized over a period of 40 years. 46 (e) Property and Equipment - For financial reporting, the Company uses the straight-line method for providing depreciation and amortization on property and equipment. Property and equipment at September 27, 1997 and October 3, 1998, consisted of the following:
Useful Lives 1997 1998 ---------- ----------- ----------- Land and land improvements N/A $ 630,000 $ 816,000 Furniture and equipment 3 -7 years 4,839,000 4,951,000 Leasehold interests and improvements See below 4,929,000 5,309,000 ----------- ----------- 10,398,000 11,076,000 Less - accumulated depreciation and amortization (6,854,000) (7,359,000) ----------- ==--------- $ 3,544,000 $ 3,717,000 =========== ===========
Leasehold interests are amortized over the minimum term of the lease. Leasehold improvements are amortized over the life of the lease up to a maximum of 10 years. If the locations are sold or abandoned before the end of the amortization period, the unamortized cost is expensed. (f) Investment in Joint Ventures- The equity method of accounting is used when the Company has a twenty percent to fifty percent interest in other companies, joint ventures, and partnerships, and can exercise significant influence. Under the equity method, original investments are recorded at cost and are adjusted by dividends and the Company's share of undistributed earnings or losses. (g) Newly Issued Accounting Pronouncement- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128 supersedes the previous standard (Accounting Principles Board Opinion No. 15), modifies the methodology for calculating earnings per share, and is effective for annual and interim periods ending after December 15, 1997; early adoption is not permitted. Earnings Per Share for fiscal year 1998 have been calculated under SFAS No. 128 and have been restated under SFAS No. 128 for fiscal year 1997. Statement of Financial Accounting Standards No. 131 ("SFAS") No. 131, "Disclosure about Segments of an Enterprise and Related Information", was issued by the Financial Accounting Standards Board in June 1997. This statement establishes standards for reporting of selected information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for fiscal years beginning 47 after December 15, 1997. The Company will adopt SFAS 131 beginning October 4, 1998. Adoption of this standard will not have a material effect on the Company's existing segment reporting disclosures. (h) Use of Estimates in the Preparation of Financial Statements- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (i) Stock-based Compensation- Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require companies to record compensation plans using a fair value based method. The Company has chosen to continue to account for stock-based compensation using the intrinsic value based method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees". Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the corporation's stock at the date of the grant over the amount an employee must pay to acquire the stock. (j) Long-Lived Assets- The Company continually evaluates whether events and circumstances have occurred that may warrant revision of the estimated life of its intangible assets and other long-lived assets or whether the remaining balance of its intangible assets and other long-lived assets should be evaluated for possible impairment. When such factors, events or circumstances indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of undiscounted cash flow over the remaining lives of the intangible assets in measuring their recoverability. (4) INCOME TAXES: The Company accounts for its income taxes using SFAS No. 109, "Accounting for Income Taxes". Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. The components of the Company's provision for income taxes, which is all current, for the fiscal years ended 1997 and 1998 are as follows: 1997 1998 --------- --------- Federal $ 8,000 $ 29,000 State 5,000 4,000 --------- ---------- $ 13,000 $ 33,000 ========= ========== 48 A reconciliation of income tax computed at the statutory federal rate to income tax expense is as follows:
1997 1998 --------- --------- Tax provision at the statutory rate of 34% $ 376,000 $ 483,000 State income taxes, net of federal income tax benefit 3,000 3,000 Change in valuation allowance (383,000) (489,000) Other 17,000 36,000 --------- --------- $ 13,000 $ 33,000 ========= =========
In fiscal 1991 and prior years, the Company generated loss carryforwards for both financial statement and tax purposes. At October 3, 1998, the available tax loss carryforward is approximately $1,400,000, which expires between 2002 and 2006. In addition to net operating loss carryforwards, the Company has deferred tax assets amounting to approximately $428,000 at October 3, 1998, which arise primarily due to depreciation recorded at different rates for tax and book purposes, and capital leases, allowances for uncollectible amounts and accruals for potential uninsured claims, all recorded for financial reporting purposes but not recognized for tax purposes. Because realization of the total amount of available net deferred tax assets, including net operating loss carryforwards, is not "more likely than not", a valuation allowance has been provided as follows:
Deferred tax item Tax Effect Tax Effect 1997 1998 ----------- ----------- Book/tax differences in property and equipment $ 268,000 $ 321,000 Receivable allowances 42,000 -- Leases, capitalized for books only 77,000 65,000 Accruals for potential uninsured claims 34,000 -- Discount on damages payable (37,000) (22,000) Other, net 43,000 64,000 Net operating loss carryforward, tax effected 1,045,000 555,000 Valuation allowance (1,472,000) (983,000) ----------- ----------- $ -- $ -- =========== ===========
49 (5) LEASES: The Company leases a substantial portion of the land and buildings used in its operations under leases with initial terms expiring between 1999 and 2049. Renewal options are available on many of the leases. In certain instances, lease rentals are subject to cost-of-living increases or fair market rental appraisals and/or sales overrides. Certain properties are subleased through various expiration dates. Leased property under capital leases is amortized on a straight-line basis over the lease term, and interest expense (which is based on the Company's incremental borrowing rate at the inception of the lease) is accrued on the basis of the outstanding capital lease obligation. Rentals relating to operating leases are expensed currently. Future minimum lease payments under capital leases and noncancellable operating leases, including leases under which the Company is contingently liable, and noncancellable sublease income are as follows:
Capital Operating Sublease Leases Leases Income 1999 109,000 1,178,000 598,000 2000 77,000 924,000 549,000 2001 55,000 454,000 352,000 2002 32,000 261,000 180,000 2003 32,000 261,000 180,000 Thereafter 203,000 2,137,000 1,311,000 --------- ---------- ---------- Total $ 508,000 $5,215,000 $3,170,000 ========== ========== Less - Amount representing interest (189,000) --------- Present value of minimum lease payments $ 319,000 =========
Total rent expense for all operating leases (including those with an initial term of less than one year and net of subleases) was $622,000 and $672,000 in 1997 and 1998, respectively, and is included in "Occupancy costs" in the accompanying consolidated statements of income. Aggregate annual rentals under leases with related parties, net of applicable sublease income, were approximately $251,000 in 1997 and 1998. Remaining rental commitments included in future minimum rental payments required under these leases are approximately $405,000 as of October 3, 1998. 50 (6) RECEIVABLES: Receivables, net of allowances for uncollectible amounts and deferred gains, consists of the following at September 27, 1997 and October 3, 1998:
1997 1998 --------- --------- Notes and mortgages receivable from unrelated parties, bearing interest at rates ranging from 9% to 15% and due in varying installments through 2002 $ 129,000 $ 107,000 Notes and mortgages receivable from related parties, bearing interest at rates ranging from 10% to 14% and due in varying installments through 2007 221,000 198,000 Various noninterest-bearing receivables currently due 124,000 273,000 --------- --------- 474,000 578,000 Less - Deferred gains (102,000) (97,000) Allowance for uncollectible amounts (124,000) -- --------- --------- 248,000 481,000 Amount representing current portion 80,000 320,000 --------- --------- $ 168,000 $ 161,000 ========= =========
The majority of the notes and mortgages receivable represent amounts owed to the Company for store operations which were sold. Unless a significant amount of cash is received on the sale, a pro rata portion of the gain is deferred and recognized only as payments on the notes and mortgages are received by the Company. Any losses on sales of stores are recognized currently. During both fiscal 1997 and 1998, $6,000 of deferred gains was recognized on collections of such notes receivable. Receivables at October 3, 1998 mature as follows: 1999 320,000 2000 45,000 2001 47,000 2002 53,000 2003 14,000 Thereafter 99,000 --------- $ 578,000 ========= 51 (7) INVESTMENT IN JOINT VENTURES: During the first quarter of fiscal year 1996, the Company began operating a restaurant in Miami, Florida, under the "Flanigan's Seafood Bar and Grill" servicemark as general partner and fifty percent owner of a limited partnership established for such purpose. During the third quarter of fiscal year 1997, a related party formed a limited partnership to own a certain franchise in Fort Lauderdale, Florida, through which it raised the necessary funds to renovate the restaurant. The Company is a twenty-five percent limited partner in the franchise. Other related parties, including but not limited to, officers and directors of the Company and their families, are also investors. During the fourth quarter of fiscal year 1997, the Company formed a limited partnership and raised funds through a private offering to purchase the assets of a restaurant in Surfside, Florida and renovate the same for operation under the "Flanigan's Seafood Bar and Grill" servicemark. The Company acts as general partner of the limited partnership and is also a forty percent limited partner. Other related parties, including but not limited to officers and directors of the Company and their families are also investors. The following is a summary of condensed unaudited financial information pertaining to the Company's joint venture investments: 9/27/97 10/3/98 ---------- ---------- Current assets $1,374,000 $ 205,000 Noncurrent assets 1,936,000 2,960,000 Current liabilities 176,000 324,000 Noncurrent liabilities 629,000 589,000 Revenues 3,258,000 6,083,000 Income from operations 2,118,000 3,345,000 Net income 419,000 854,000 52 (8) ACCRUED AND OTHER CURRENT LIABILITIES: Accrued and other current liabilities consist of the following at September 27, 1997 and October 3, 1998: 1997 1998 ---------- ---------- Property taxes $ 72,000 $ 115,000 Salaries and wages 340,000 231,000 Franchisee advance funds 57,000 44,000 Potential uninsured claims 101,000 101,000 Investment in joint venture 439,000 -- Other 295,000 261,000 ---------- ---------- $1,304,000 $ 752,000 ========== ========== Franchisee advance funds represent cash balances held by the Company on behalf of franchisees (see Note 11) for inventory purchases to be made as part of the Company-sponsored cooperative buying program. (9) LONG-TERM DEBT: Long-term debt consists of the following at September 27, 1997 and October 3, 1998:
1997 1998 ---------- ---------- Mortgages payable, secured by land, bearing interest at 8% payable in monthly installments of principal and interest, maturing in April 2007 $ 480,000 $ 353,000 Note payable to various employees, related and unrelated parties, secured by various receivables, bearing interest at 12%, payable in monthly installments of principal and interest, maturing in July 2002 366,000 306,000 Note payable, secured by vehicles, bearing interest at 8.5%, payable in monthly installments of principal and interest, maturing in September 2000 50,000 -0-
53
1997 1998 ---------- ---------- Note payable, Barnett Bank, secured by Liquor license bearing interest at the prime rate, payable in quarterly installments of principal, monthly interest payments maturing in December 2000 -0- 375,000 ------- ---------- 896,000 1,034,000 Less - Current portion (84,000) (241,000) -------- ---------- $812,000 $ 793,000 ======== ==========
Long-term debt at October 3, 1998 matures as follows: Year Amount ---- --------- 1999 $ 241,000 2000 251,000 2001 137,000 2002 90,000 2003 12,000 Thereafter 303,000 ---------- $1,034,000 ========== 54 (10) COMMITMENTS AND CONTINGENCIES: Guarantees The Company is contingently liable for annual rentals in the amount of approximately $494,000 at October 3, 1998, for lease obligations in connection with the assignment of leases on stores sold. In the event of default under any of these agreements, the Company will have the right to repossess the premises. Employment Agreement On June 3, 1987, the Company entered into an employment agreement (the "Employment Agreement") with the Chairman of the Board, which was ratified by the stockholders at the Company's 1988 annual meeting. The Employment Agreement provides, among other things, for annual compensation of $150,000, through December 31, 1998, renewable annually, as well as a bonus based on the Company's cash flow, as defined. Subsequent to year end, the Employment Agreement was renewed through December 31, 1999. This Employment Agreement was amended in January 1997 to redefine a bonus equal to 15% of the Company's annual pre-tax income in excess of $650,000 and to grant stock options (discussed in Note 13). For fiscal year 1997, a bonus of $78,000 was earned and in fiscal year 1998 a bonus of $116,000 was earned under the amended Employment Agreement. The Employment Agreement further provides that in the event of termination, the Chairman of the Board would be entitled to a maximum payment of $450,000. Litigation The Company is a party to various litigation matters incidental to its business. Certain claims, suits and complaints arising in the ordinary course of business have been filed or are pending against the Company. Certain states have "liquor liability" laws which allow a person injured by an "intoxicated person" to bring a civil suit against the business (or social host) who had served intoxicating liquors to an already "obviously intoxicated person". 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. The Company is self-insured against liability claims in excess of $1,000,000. The extent of this coverage varies by year. Certain liquor liability suits are still in the discovery stage, and the potential liability to the Company has not been determined. The Company has accrued for potential losses based on estimates received from legal counsel and historical experience. Such accrual is included in "Accrued and other current liabilities" in the accompanying consolidated financial statements. 55 (11) FRANCHISE PROGRAM: At October 3, 1998, seven stores were operated under franchise agreements. Under the franchise agreements, the Company agrees to provide guidance, advice and management assistance to the franchisees. The Company also agrees to sponsor and manage cooperative buying groups on behalf of the franchisees for the purchase of inventory. The franchise agreements provide for fees to the Company of approximately 3% of gross sales. Of the seven franchised stores, five are owned or operated by related parties. When received, initial franchise fees are deferred and recognized ratably as payments are received on the related notes. The Company is not currently offering or accepting new franchises. (12) DUE TO PENNSYLVANIA LIMITED PARTNERSHIP: Through September 20, 1996, the Company operated a club in Pennsylvania through a limited partnership (the "Partnership") in which the Company acted as the general partner. On September 20, 1996, the Partnership's assets were sold for approximately $500,000. Liabilities to the limited partners and remaining liabilities of the Partnership are included as "Due to Pennsylvania limited partnership" in the accompanying consolidated balance sheets. Although the Statutes of Limitations has passed, there remains one law suit which has not been settled. Upon settlement, the balance of the liability will be paid to the limited partners. (13) STOCK OPTION PLANS: Employment Agreement - Chairman of the Board During fiscal 1992, additional options to purchase up to 46,540 shares were granted to the Chairman at an exercise price of $2.25 per share which expired February 27, 1997. Exercise prices at the dates of grant equaled the then fair market value of the Company's common stock; therefore, no related compensation expense was recorded. On February 25, 1994, the Chairman's option exercise prices on the additional options were increased from $2.25 to $6.50, and the expiration date was extended to February 27, 2002. In January 1997, the Company amended the Chairman's Employment Agreement. The amendment grants the Chairman an additional option to acquire 4.99% of the common stock of the Company outstanding as of the date of exercise, but not less than 45,350 shares, at the option price of $4.95 per share, representing the fair value at that date. The options expire December 31, 2001. 56 Key Employee Incentive Stock Option Plan In December 1993, the Board of Directors approved a Key Employee Incentive Stock Option Plan, which reserved and authorized the issuance of 100,000 shares of the Company's common stock to eligible employees. At the Company's 1994 annual meeting, the stockholders approved this plan. The stock options vest over a period of one year. At October 3, 1998, options for all of the shares of common stock that were reserved for issuance to the Key Employee Incentive Stock Option Plan had been issued. Changes in outstanding incentive stock options for common stock are as follows: 1997 1998 ------- ------- Outstanding at beginning of year 146,540 191,890 Options granted 45,350 -- Options exercised -- 22,900 ------- ------- Outstanding at end of year 191,890 168,990 ======= ======= Exercisable at end of year 191,890 168,990 ======= ======= Weighted average option exercise price information for fiscal years 1997 and 1998 is as follows: 1997 1998 -------- -------- Outstanding at beginning of year $ 4.51 $ 4.61 Granted during the year 4.95 -- Exercised during the year -- 3.46 -------- ----- Outstanding at end of year 4.61 4.77 -------- ----- Exercisable at end of year $ 4.61 $ 4.77 57 Significant options groups outstanding at October 3, 1998 and related weighted average price and life information are as follows:
Grant Options Options Exercise Remaining Date Outstanding Exercisable Price Life (years) -------- ----------- ----------- ------- ------------ 2/25/94 46,540 46,450 $ 6.50 4 yrs 4/19/94 33,100 52,000 $ 3.50 1 yr 12/21/95 26,000 30,000 $ 3.25 2 yrs 3/14/96 18,000 18,000 $ 4.38 3 yrs 1/08/97 45,350 45,350 $ 4.95 3 yrs
The Company applies APB No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation for the Company's stock-based compensation plans been determined pursuant to SFAS No. 123, the Company's net income and earnings per share for 1997 would have decreased accordingly. There is no impact on net income or earnings per share for the year ended 1998 as a result of the application of SFAS No. 123, as no options were granted during the current year. Using the Black-Scholes option pricing model for all options granted after January 1, 1995, the Company's pro forma weighted average fair value of options granted, with related assumptions, are as follows: 1997 -------- Pro forma net income $ 1,017 Pro forma earnings per share (basic) $ 1.09 Pro forma earnings per share (diluted) $ 1.01 Pro forma weighted average fair value of options granted $ 1.81 Expected life (years) 5 Risk-free interest rate 5.9% Expected volatility 39% 58 (14) INCOME PER COMMON SHARE: Net income per common share is calculated by dividing net income by the weighted average number of shares and share equivalents outstanding.
1997 1998 ----------------------- ----------------------- Basic Diluted Basic Diluted --------- --------- --------- --------- Weighted average shares outstanding 907,000 907,000 915,000 915,000 Incremental shares after application of the treasury stock method or modified treasury stock method, as applicable -- 20,000 -- 95,000 --------- --------- --------- --------- Shares used in calculation of net income per common share 907,000 927,000 915,000 1,010,000 ========= ========= ========= =========
(15) RELATED PARTY TRANSACTIONS: In fiscal 1990, the Company's Chairman and a relative formed a corporation to manage one of the Company's franchised stores. The corporation continues to manage the franchised store. During fiscal 1997 and 1998 respectively, the Company incurred legal fees of approximately $96,000 and $105,000 (in salary) for services provided by a member of the Board of Directors. Effective September 30, 1996, one franchised combination package store and restaurant terminated its franchise agreement. The franchise was sold to a related third party (the "First Purchaser"), with the Company's agreement to manage the franchise for this related party. Subsequent to the sale of the franchise, the Company accepted the offer of another franchisee (the "Manager"), also a related party, to purchase the Company's right to manage the franchise for the sum of $150,000, consisting of $50,000 cash and a $100,000 note receivable. Additionally, the Manager formed a limited partnership which purchased the franchise from the First Purchaser. The Company recognized $150,000 of income in fiscal 1997, which is included in "Sale of management rights" in the accompanying 1997 consolidated statement of income. The Company also purchased a 25% interest in the limited partnership. Also see Notes 5, 6, 7, 9, 10, 11 and 13 for additional related party transactions. 59 (16) BUSINESS SEGMENTS: The Company operates principally in two segments - retail package stores and restaurants. The operation of package stores consists of retail liquor sales. Information concerning the revenues and operating income for the years ended September 27, 1997 and October 3, 1998, and identifiable assets for the two segments in which the Company operates, are shown in the following table. Operating income is total revenue less cost of merchandise sold and operating expenses relative to each segment. In computing operating income, none of the following items have been included: interest expense, other non-operating income and expense and income taxes. Identifiable assets by segment are those assets that are used in the Company's operations in each segment. Corporate assets are principally cash and notes and mortgages receivable. The Company does not have any operations outside of the United States and intersegment transactions are not material.
1997 1998 ------------ ------------ OPERATING REVENUES: Retail package stores $ 6,681,000 $ 6,901,000 Restaurants 12,535,000 13,519,000 Other revenues 1,104,000 1,347,000 ------------ ------------ Total operating revenues $ 20,320,000 $ 21,767,000 ============ ============ INCOME FROM OPERATIONS RECONCILED TO INCOME BEFORE INCOME TAXES: Operating income: Retail package stores $ 448,000 $ 173,000 Restaurants 1,224,000 1,378,000 ------------ ------------ 1,672,000 1,551,000 Corporate expenses, net of other revenues (620,000) (167,000) ------------ ------------ Operating income 1,052,000 1,384,000 Interest expense, net of interest income (102,000) (131,000) Other 156,000 168,000 ------------ ------------ Income before income taxes $ 1,106,000 $ 1,421,000 ============ ============ IDENTIFIABLE ASSETS: Retail package stores $ 1,944,000 $ 2,006,000 Restaurants 2,969,000 3,090,000 ------------ ------------ 4,913,000 5,096,000 Corporate 3,469,000 3,947,000 ------------ ------------ Consolidated totals $ 8,382,000 $ 9,043,000 ============ ============
60
1997 1998 ----------- ----------- CAPITAL EXPENDITURES: Retail package stores $ 85,000 $ 4,000 Restaurants 1,288,000 672,000 ----------- ----------- 1,373,000 676,000 Corporate 95,000 132,000 ----------- ----------- Total capital expenditures $ 1,468,000 $ 808,000 =========== =========== DEPRECIATION AND AMORTIZATION: Retail package stores $ 97,000 $ 99,000 Restaurants 416,000 435,000 ----------- ----------- 513,000 534,000 Corporate 106,000 121,000 ----------- ----------- Total depreciation and amortization $ 619,000 $ 655,000 =========== ===========
(17) OTHER, NET: Other, net in the consolidated statements of income consist of the following for the years ended September 27, 1997 and October 3, 1998:
1997 1998 --------- --------- Non-franchise related rental income $ 32,000 $ 45,000 Loss on retirement of fixed assets (19,000) (37,000) Settlement of litigation -- 110,000 Insurance recovery 13,000 -- Adjustment on sale of Pennsylvania limited partnership (31,000) -- Miscellaneous 5,000 44,000 --------- --------- $ -- $ 162,000 ========= =========
61 (18) SUBSEQUENT EVENTS: Subsequent to the end of the fiscal year, the Board of Directors declared a dividend of 20 cents per share to shareholders of record on January 4, 1999, which is on February 1, 1999. During the third quarter of fiscal year 1998, the Company entered into a lease agreement for a restaurant in Kendall, Florida and a separate agreement for the purchase of the furniture, fixtures and equipment of the existing restaurant. The lease agreement and separate agreement are each contingent upon the Company applying for and receiving zoning variances from Miami-Dade County, Florida. During the first quarter of fiscal year 1999, the Company submitted its application for zoning variances to Miami-Dade County, Florida, which zoning variances were unanimously granted at a hearing on November 18, 1998. With the expiration of the applicable appeal period, the granting of the zoning variances will be final. During the first quarter of fiscal year 1999, building plans were also submitted to Miami-Dade County, Florida and it is anticipated that the building permits will be issued and construction commenced by February 1, 1999, with the renovated restaurant open for business by June 1, 1999. During the first quarter of fiscal year 1999, the Company purchased the Management Agreement of a franchisee in Deerfield Beach, Florida, which included the right to manage the franchised restaurant, effective December 1, 1998. The purchase price for the Management Agreement was $120,000, plus one half of the management fees earned by the Company throughout the term of the same. Upon the death of the former manager, the Company has the option of purchasing the right of the former manager to receive one half of the management fees earned by the Company under the Management Agreement for a purchase price of $120,000. The former manager also agreed to remain as the restaurant manager through February 1, 1999. 62
SCHEDULE II FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND OCTOBER 3, 1998 Col. A Col. B Col. C Col. D Col. E Additions Balance at Charged to Balance at Beginning Cost and Amounts End of Description of Period Expenses Written off Period ----------- --------- -------- ----------- ------ FOR THE YEAR ENDED SEPTEMBER 27, 1997 Allowance for uncollectible notes and mortgages receivable $ 163,000 $ 21,000 $ (60,000) $ 124,000 ========= ========== ========= ========= FOR THE YEAR ENDED OCTOBER 3, 1998 Allowance for uncollectible notes and mortgages receivable $ 124,000 $ -0- $(124,000) $ -0- ========= ========== ========= =========
63 EX-27 2
5 1,000 YEAR OCT-3-1998 OCT-3-1998 1,468 0 345 25 1,237 3,456 11,076 7,359 9,043 2,242 0 0 0 210 4,895 9,043 20,420 1,347 10,209 20,383 0 0 203 1,421 33 1,388 0 0 0 1,388 1.51 1.37
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