BDL

Business Context and Reporting Period

Company: Flanigan's Enterprises, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Thirteen and thirty-nine weeks ended July 3, 2010.
Business Overview: The Company operates restaurants (primarily "Flanigan's Seafood Bar and Grill"), package liquor stores ("Big Daddy's Liquors"), and an adult entertainment club. As of July 3, 2010, it operated 24 units (excluding the club) and franchised 5 additional units. The Company acts as the general partner for nine limited partnerships owning restaurant locations.

Key Financial Metrics

Note: Total Debt includes $521k current portion of long-term debt, $462k current portion of re-financed line of credit, $5,247k long-term debt, and $1,124k re-financed line of credit (long-term portion).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 5.35% ($883k) for the 13-week period and 5.89% ($2.975m) for the 39-week period compared to the prior year. This growth was primarily driven by the conversion of the Boca Raton, Florida location from a franchise to a company-owned restaurant in October 2009.
• Profitability: Net income attributable to stockholders increased 36.98% ($115k) for the 13-week period and 18.59% ($217k) for the 39-week period. Operating margins improved as operating costs decreased as a percentage of sales (94.05% vs. 96.06% for the quarter).
• Segment Performance: Restaurant food sales increased due to the Boca Raton location, though comparable weekly food sales for existing units declined slightly (0.73% for the quarter). Bar sales increased significantly (5.64% comparable weekly increase) due to a new "half-price drinks" promotion.
• Liquidity: Working capital increased 130.93% to $4.427 million, largely due to the re-classification of the line of credit from current to long-term debt following a refinancing.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued increases in food and bar sales for the remainder of fiscal 2010, driven by the Boca Raton location and promotional activities. However, same-store food sales are expected to decline due to the economic climate and competition.
• Cost Pressures: The Company expects higher food costs and overall expenses to adversely affect net income. Menu prices were raised in December 2007 and drink prices were raised in Q1 2010 and post-Q3 2010 to offset these costs.
• Capital Expenditures: The Company plans to spend approximately $565,000 on refurbishments for fiscal 2010. No new restaurants are currently under development, but the Company is searching for locations requiring minimal renovation.
• Subsequent Events:
  • Refinanced the corporate office mortgage ($935k) and converted the line of credit ($1.586m) to a term loan maturing in 2013, both hedged with interest rate swaps.
  • Purchased real property for the Fort Lauderdale restaurant (Store #22) for $1.7 million in cash.
• Risks: Ongoing litigation regarding parking rights at the corporate office (attorneys' fees paid in Q3) and a malicious prosecution suit filed by the seller of the office building. The Company also faces risks related to inflation in food, beverage, and labor costs.

Investor Verification Checklist

• Debt Structure: Verify the terms of the new term loan ($1.586m) and the refinanced mortgage ($935k), specifically the fixed interest rates (4.55% and 5.11%) and maturity dates (2013 and 2017).
• Property Acquisition: Confirm the impact of the $1.7 million cash purchase of the Fort Lauderdale property on future liquidity and working capital.
• Comparable Sales: Monitor same-store sales trends, as the Company explicitly forecasts a decline in same-store food sales despite overall revenue growth.
• Legal Contingencies: Review the status of the malicious prosecution lawsuit filed by the seller of the corporate office building.
• Noncontrolling Interests: Note that a significant portion of net income ($860k for the 39 weeks) is attributable to noncontrolling interests (limited partners), reducing the net income available to common stockholders.