Except for the historical information contained herein, the following discussion
contains forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors that may cause our actual results to differ
materially from those expressed or implied by such forward-looking statements.
We discuss such risks, uncertainties and other factors throughout this report
and specifically under the captions "Risk Factors". In addition, the following
discussion and analysis should be read in conjunction with the 2020 Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere in this report.
OVERVIEW
Financial Information Concerning Industry Segments
Our business is conducted principally in two segments: the restaurant segment
and the package liquor store segment. Financial information broken into these
two principal industry segments for the two fiscal years ended October 3, 2020
and September 28, 2019 is set forth in the Consolidated Financial Statements
which are attached hereto.
General
As of October 3, 2020, Flanigan's Enterprises, Inc., a Florida corporation,
together with its subsidiaries ("we", "our", "ours" and "us" as the context
requires), (i) operated 27 units, consisting of restaurants, package liquor
stores and combination restaurants/package liquor stores that we either own or
have operational control over and partial ownership in; and (ii) franchises an
additional five units, consisting of two restaurants (one of which we operate)
and three combination restaurants/package liquor stores.
Franchised Units. In exchange for our providing management and related services
to our franchisees and granting them the right to use our service marks
"Flanigan's Seafood Bar and Grill" and "Big Daddy's Liquors", our franchisees
(four of which are franchised to members of the family of our Chairman of the
Board, officers and/or directors), are required to (i) pay to us a royalty equal
to 1% of gross package liquor sales and 3% of gross restaurant sales; and (ii)
make advertising expenditures equal to between 1.5% to 3% of all gross sales
based upon our actual advertising costs allocated between stores, pro-rata,
based upon gross sales.
Affiliated Limited Partnership Owned Units. We manage and control the operations
of the eight restaurants owned by limited partnerships, except the Fort
Lauderdale, Florida restaurant which is managed and controlled by a related
franchisee. Accordingly, the results of operations of all limited partnership
owned restaurants, except the Fort Lauderdale, Florida restaurant are
consolidated with our results of operations for accounting purposes. The results
of operations of the Fort Lauderdale, Florida restaurant are accounted for by us
utilizing the equity method.
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RESULTS OF OPERATIONS
REVENUES (in thousands):
53 Weeks Ended 52 Weeks Ended
Oct. 3, 2020 Sept. 28, 2019
Sales
Restaurant, food $ 68,685 61.9% $ 71,814 63.2%
Restaurant, bar 15,967 14.4% 22,476 19.8%
Package goods 26,276 23.7% 19,327 17.0%
Total 110,928 100.0% 113,617 100.0%
Franchise related revenues 1,260 1,610
Other operating income 109 213
Rental income 680 762
Total Revenues $ 112,977 $ 116,202
Comparison of Fiscal Years Ended October 3, 2020 and September 28, 2019
Revenues.Total revenue for our fiscal year 2020 decreased $3,225,000 or 2.78% to
$112,977,000 from $116,202,000 for our fiscal year 2019. The decrease in total
revenue was due primarily to the negative impact of COVID-19 on our operations.
Due to COVID-19, from mid-March 2020 through mid-May 2020, we ceased all dining
and bar services at all of our restaurants, limiting service to take-out and
delivery only of food, and implemented reduced hours at our retail package
liquor stores. From mid-May 2020 through the beginning of July 2020, there was a
gradual elimination of restrictions on our restaurant operations, permitting us
to, among other things, provide dining for outdoor seating patrons with
appropriate social distancing and provide dining for indoor patrons at up to 50%
capacity (depending on the location of the restaurant), but with no bar service
and increased operating hours at our package liquor stores. From the beginning
of July 2020 through the beginning of September 2020, we ceased dine-in service
at all of our Miami-Dade County, Florida restaurants, (two Company-owned and six
limited partnership owned restaurants). Since the beginning of September 2020,
we have been offering both food and bar options at all of our restaurants,
including those located in Miami-Dade County, Florida, with appropriate social
distancing and dine-in service at up to 100% capacity, including outdoor dining.
The negative effect of COVID-19 on our operations was partially offset by the
fifty-third week in our fiscal year 2020, the 2019 Price Increases (defined
below) and increased package liquor store sales. Effective June 16, 2019 we
increased certain menu prices for our bar offerings to target an increase to our
total bar revenues of approximately 6.2% annually and effective June 23, 2019 we
increased certain menu prices for our food offerings to target an increase to
our total food revenues of approximately 3.4% annually, (the "2019 Price
Increases"). We expect that total revenue for our fiscal year 2021 will decrease
due to our operations being adversely impacted by COVID-19. We expect that Store
#19 will remain closed during our fiscal year 2021 and accordingly do not expect
to generate any revenue from it.
Restaurant Food Sales. Restaurant revenue generated from the sale of food,
including non-alcoholic beverages, at restaurants (food sales) totaled
$68,685,000 for our fiscal year 2020 as compared to $71,814,000 for our fiscal
year 2019. The decrease in restaurant food sales for our fiscal year 2020 as
compared to restaurant food sales during our fiscal year 2019 is attributable to
the negative effects of COVID-19 on our operations, partially offset by the
fifty-third week in our fiscal year 2020 and the 2019 Price Increases.
Comparable weekly restaurant food sales (for restaurants, subject to closures
for COVID-19, open for all of our fiscal years 2020 and 2019, which consists of
nine restaurants owned by us, (excluding Store #19 which was closed for our
fiscal years 2020 and 2019 due to a fire on October 2, 2018) and eight
restaurants owned by affiliated limited partnerships) was $1,287,000 and
$1,379,000 for our fiscal years 2020 and 2019, respectively, a decrease of
6.67%. Comparable weekly restaurant food sales for Company-owned restaurants
only was $649,000 and $696,000 for our fiscal years 2020 and 2019, respectively,
a decrease of 6.75%. Comparable weekly restaurant food sales for affiliated
limited partnership owned restaurants only was $638,000 and $683,000 for our
fiscal years 2020 and 2019, respectively, a decrease of 6.59%. We expect that
restaurant food sales, including non-alcoholic beverages, for our fiscal year
2021 will decrease due to the negative effects of COVID-19 on our operations.
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Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic
beverages at restaurants totaled $15,967,000 for our fiscal year 2020 as
compared to $22,476,000 for our fiscal year 2019. The decrease in restaurant bar
sales for our fiscal year 2020 as compared to restaurant bar sales during our
fiscal year 2019 is attributable to the negative effects of COVID-19 on our
operations, partially offset by the fifty third week in our fiscal year 2020 and
the 2019 Price Increases. Comparable weekly restaurant bar sales (for
restaurants, open (except, however, when closed due to government directives in
fiscal year 2020) for all of our fiscal years 2020 and 2019, which consists of
nine restaurants owned by us, (excluding Store #19 which was closed for our
fiscal years 2020 and 2019 due to a fire on October 2, 2018) and eight
restaurants owned by affiliated limited partnerships) was $301,000 and $432,000
for our fiscal years 2020 and 2019, respectively, a decrease of 30.32%.
Comparable weekly restaurant bar sales for Company-owned restaurants only was
$135,000 and $197,000 for our fiscal years 2020 and 2019, respectively, a
decrease of 31.47%. Comparable weekly restaurant bar sales for affiliated
limited partnership owned restaurants only was $166,000 and $235,000 for our
fiscal years 2020 and 2019, respectively, a decrease of 29.36%. We expect that
restaurant bar sales, including non-alcoholic beverages, for our fiscal year
2021 will decrease due to the negative effects of COVID-19 on our operations.
Package Liquor Store Sales. Revenue generated from sales of liquor and related
items at package liquor stores totaled $26,276,000 for our fiscal year 2020 as
compared to $19,327,000 for our fiscal year 2019, an increase of $6,949,000 or
35.95%. This increase was primarily due to increased package liquor store
traffic despite COVID-19 and because of the opening of our new retail package
liquor store (Store #45) located in Kendall, Florida during the first quarter of
our fiscal year 2020. The weekly average of same store package liquor store
sales, which includes eight (8) Company-owned package liquor stores, (excluding
Store #19, which was closed for our fiscal years 2020 and 2019 due to a fire on
October 2, 2018 and also excluding Store #45, which opened for business on
October 10, 2019), was $462,000 and $372,000 for our fiscal years 2020 and 2019
respectively, an increase of 24.19%. We anticipate that revenue generated from
the sale of liquor and related items at package liquor stores for our fiscal
year 2021 will increase when compared to our fiscal year 2020 due to what
appears to be an increased demand for package liquor store products resulting
from COVID-19.
Operating Costs and Expenses. Operating costs and expenses, (consisting of cost
of merchandise sold, payroll and related costs, occupancy costs and selling,
general and administrative expenses), for our fiscal year 2020 increased
$180,000 or 0.16% to $110,066,000 from $109,886,000 for our fiscal year 2019.
The minimal increase was primarily due to cost cutting measures we have
implemented since mid-March 2020 to reduce and/or control costs because of the
negative effects of COVID-19 on our operations. We expect our operating costs
and expenses will increase for our fiscal year 2021 as cost cutting measures are
reversed. Operating costs and expenses increased as a percentage of total sales
to approximately 97.42% in our fiscal year 2020 from 94.56% in our fiscal year
2019.
Gross Profit. Gross profit is calculated by subtracting the cost of merchandise
sold from sales.
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Restaurant Food and Bar Sales. Gross profit for restaurant food and bar sales
for our fiscal year 2020 decreased to $56,134,000 from $61,212,000 for our
fiscal year 2019. Our gross profit margin for restaurant food and bar sales
(calculated as gross profit reflected as a percentage of restaurant food and bar
sales), was 66.31% for our fiscal year 2020 and 64.92% for our fiscal year 2019.
Gross profit margin for restaurant food and bar sales increased during our
fiscal year 2020 when compared to our fiscal year 2019 due to the inclusion of a
10% take-out charge on restaurant food sales, offset by the negative effects of
COVID-19 on our restaurant bar operations and higher gross profit margin items
as well as higher food costs. If we can maintain the same level of our take out
charges on restaurant food sales, we expect that our gross profit margin for
restaurant food and bar sales will increase during our fiscal year 2021 for the
same reasons.
Package Liquor Store Sales. Gross profit for package liquor store sales for our
fiscal year 2020 increased to $7,084,000 from $5,269,000 for our fiscal year
2019, due primarily to increased package liquor store traffic which we believe
has been caused by COVID-19, as well as the opening of our new Store #45 during
the first quarter of our fiscal year 2020. Our gross profit margin (calculated
as gross profit reflected as a percentage of package liquor store sales) for
package liquor store sales was 26.96% for our fiscal year 2020 and 27.26% for
our fiscal year 2019. We anticipate that the gross profit margin for package
liquor store merchandise will decrease during our fiscal year 2021 due to higher
costs and a reduction in pricing of certain package store merchandise to be more
competitive.
Payroll and Related Costs. Payroll and related costs for our fiscal year 2020
decreased $474,000 or 1.32% to $35,399,000 from $35,873,000 for our fiscal year
2019. Lower payroll and related costs for our fiscal year 2020 were due to
certain cost cutting measures including material layoffs at our restaurants and
reduced corporate personnel salaries from mid-March 2020 through mid-May 2020
and thereafter due to an adjustment to our traditional staffing model to meet
customer demand, increased by payroll for our package liquor store in Kendall,
Florida, which opened for business during the first quarter of our fiscal year
2020. We anticipate that until our restaurant operations are restored to
pre-COVID-19 levels, of which there can be no assurance, payroll and related
costs will be less than our costs from 2019. Payroll and related costs as a
percentage of total sales was 31.33% in our fiscal year 2020 as compared to
30.87% of total sales in our fiscal year 2019.
Occupancy Costs. Occupancy costs (consisting of percentage rent, common area
maintenance, repairs, real property taxes, amortization of leasehold purchases
and rent expense associated with operating lease liabilities under ASC 842) for
our fiscal year 2020 increased $986,000 or 16.29% to $7,040,000 from $6,054,000
for our fiscal year 2019 primarily due to our adoption of ASC 842. We anticipate
that our occupancy costs will remain stable throughout our fiscal year 2021.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (consisting of general corporate expenses, including but
not limited to advertising, insurance, professional costs, clerical and
administrative overhead) for our fiscal year 2020 decreased $906,000 or 4.35% to
$19,917,000 from $20,823,000 for our fiscal year 2019. Selling, general and
administrative expenses decreased as a percentage of total sales in our fiscal
year 2020 to 17.63% as compared to 17.92% in our fiscal year 2019. We anticipate
that until our operations are restored to pre-COVID-19 levels, of which there
can be no assurance, our selling, general and administrative expenses will be
less than our expenses for our fiscal year 2020, offset by increases in expenses
across all categories.
Depreciation and Amortization. Depreciation and amortization for our fiscal year
2020, which is included in selling, general and administrative expenses,
increased $200,000 or 6.58% to $3,240,000 from $3,040,000 for our fiscal year
2019. As a percentage of revenue, depreciation and amortization expense was
2.87% of revenue for our fiscal year 2020 and 2.62% of revenue for our fiscal
year 2019.
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Interest Expense, Net. Interest expense, net, for our fiscal year 2020 increased
$128,000 to $836,000 from $708,000 for our fiscal year 2019. Interest expense,
net, increased for our fiscal year 2020 due to our borrowing of an additional
$4.5 million during the first quarter of our fiscal year 2020 on the
re-financing by our wholly owned subsidiary, Flanigan's Calusa Center, LLC, of
its mortgage loan with an unrelated third party lender, increasing the principal
amount borrowed from $2.72 million to $7.21 million and our borrowing of an
additional approximately $10.0 million during the third quarter of our fiscal
year 2020 on our PPP Loans. Interest expense, net, will increase for our fiscal
year 2021 due to our borrowing of an additional $10.0 million during the third
quarter of our fiscal year 2020 on our PPP Loans, if not forgiven.
Income Taxes. Income tax expense for our fiscal year 2020 was a benefit of
$60,000, as compared to an expense of $887,000 for our fiscal year 2019.
Net Income.Net income for our fiscal year 2020 decreased $3,193,000 or 59.38% to
$2,184,000 from $5,377,000 for our fiscal year 2019. Net income for our fiscal
year 2020 decreased when compared to net income for our fiscal year 2019 due to
the negative effects of COVID-19 on our operations, our adoption of ASC 842,
higher food costs and overall expenses, offset by our implementation of the cost
cutting measures and the 2019 Price Increases. As a percentage of sales, net
income in our fiscal year 2020 is 1.93%, as compared to 4.63% in our fiscal year
2019.
Net Income (Loss) Attributable to Stockholders. Net income attributable to
stockholders for our fiscal year 2020 decreased $2,538,000 or 69.57% to
$1,110,000 from $3,648,000 for our fiscal year 2019. Net income attributable to
stockholders for our fiscal year 2020 decreased when compared to our fiscal year
2019 primarily due to the negative effects of COVID-19 on our operations, our
adoption of ASC 842, higher food costs and overall expenses, offset by our
implementation of the cost cutting measures, increased revenue at our package
retail stores and the 2019 Price Increases. As a percentage of sales, net income
for our fiscal year 2020 is 0.98%, as compared to 3.14% for our fiscal year
2019.
New Limited Partnership Restaurants
As new restaurants open, our income from operations will be adversely affected
due to our obligation to advance pre-opening costs, including but not limited to
pre-opening rent for the new locations. During our fiscal year 2020, we had one
new restaurant location in Sunrise, Florida in the development stage. During the
fourth quarter of our fiscal year 2019, we entered leases for two spaces
adjacent to each other, to house a new "Flanigan's Seafood Bar and Grill" as
well as a "Big Daddy's Wine and Liquors" in a shopping center in Miramar,
Florida, which shopping center is currently under construction.
Menu Price Increases and Trends
Effective June 16, 2019 we increased menu prices for our bar offerings to target
an increase to our bar revenues of approximately 6.2% annually and effective
June 23, 2019 we increased menu prices for our food offerings to target an
increase to our food revenues of approximately 3.4% annually to offset higher
food costs and higher overall expenses. Prior to these increases, we previously
raised menu prices in the fourth quarter of our fiscal year 2017.
Subsequent to the end of our fiscal year 2020, we increased menu prices for our
bar offerings (effective November 29, 2020) to target an increase of our bar
revenues of approximately 1.83% annually and we increased menu prices for our
food offerings (effective December 6, 2020) to target an increase to our food
revenues of approximately 2.45% annually to offset higher food costs and higher
overall expenses.
COVID-19 has and will continue to materially and adversely affect our restaurant
business for what may be a prolonged period of time. This damage and disruption
has resulted from events and factors that were impossible for us to predict and
are beyond our control. As a result, and despite experiencing increased sales
and traffic at certain of our package liquor stores, COVID-19 has materially
adversely affected our results of operations for our fiscal year 2020 and will,
in all likelihood, impact our results of operations, liquidity and/or financial
condition for our fiscal year 2021. The extent to which our restaurant business
may be adversely impacted and its effect on our operations, liquidity and/or
financial condition cannot be accurately predicted.
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We are not actively searching for locations for the operation of new package
liquor stores, but when our attempt to expand "The Whale's Rib" restaurant
concept in Miami, Florida was abandoned, we decided that the space we had
targeted for the "The Whales Rib" would be ideal for the operation of a package
liquor store and during the fourth quarter of our fiscal year 2018, we received
governmental approval to operate a package liquor store at that location. The
new package liquor store (Store #45) located in Kendall, Florida opened for
business in October 2019. During the fourth quarter of our fiscal year 2019, we
entered a lease to house a new "Big Daddy's Wine & Liquors" package liquor store
in space adjacent to where we are planning a new "Flanigan's Seafood Bar and
Grill", restaurant in a shopping center in Miramar, Florida, which shopping
center is currently under construction.
LIQUIDITY AND CAPITAL RESOURCES
We fund our operations through cash from operations. As of October 3, 2020, we
had cash of approximately $29,922,000, an increase of $16,250,000 from our cash
balance of $13,672,000 as of September 28, 2019. During the third quarter of our
fiscal year 2020, we, certain of the entities owning the limited partnership
stores (the "LP's"), franchised stores (the "Franchisees") as well as the store
we manage but do not own (the "Managed Store") (collectively, the "Borrowers"),
applied for and received loans from an unrelated third party lender (the
"Lender") pursuant to the Paycheck Protection Program (the "PPP") under the
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") enacted
March 27, 2020, in the aggregate principal amount of approximately $13.1 million
(the "PPP Loans"), of which approximately: (i) $5.9 million was loaned to us;
(ii) $4.1 million was loaned to 8 of the LP's; (iii) $2.6 million was loaned to
5 of the Franchisees; and (iv) $0.5 million was loaned to the Managed Store.
During the first quarter of our fiscal year 2020, our wholly owned subsidiary,
Flanigan's Calusa Center, LLC, re-financed its mortgage loan with an unrelated
third party lender, increasing the principal amount borrowed from $2.72 million
to $7.21 million.
The PPP Loans, which are in the form of Notes issued by each of the Borrowers,
mature two years from the date of funding (dates ranging from May 5, 2022 to May
11, 2022) and bear interest at a rate of 1.00% per annum, payable monthly
commencing approximately six months from the date of issuance of the Notes
(issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be
prepaid by the applicable Borrower at any time prior to maturity with no
prepayment penalties. Proceeds from the PPP Loans are available to the
respective Borrower to fund designated expenses, including certain payroll
costs, group health care benefits and other permitted expenses, including rent
and interest on mortgages and other debt obligations incurred before February
15, 2020. Under the terms of the PPP, up to the entire amount of principal and
accrued interest may be forgiven to the extent the proceeds of the PPP Loans are
used for qualifying expenses as described in the CARES Act and applicable
implementing guidance issued by the U.S. Small Business Administration under the
PPP. No assurance can be given that the Borrowers will obtain forgiveness of the
PPP Loan in whole or in part.
With respect to any portion of any of the PPP Loans that is not forgiven under
the terms of the PPP, such amounts will be subject to customary provisions for a
loan of this type, including customary events of default relating to, among
other things, payment defaults, breaches of the provisions of the applicable PPP
Note and cross-defaults on any other loan with the Lender or other creditors.
Notwithstanding the negative effects of COVID-19 on our operations, we believe
that our current cash availability from our cash on hand, positive cash flow
from operations and borrowed funds will be sufficient to fund our operations and
planned capital expenditures for at least the next twelve months.
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Any future determination to pay cash dividends will be at our Board's discretion
and will depend upon our financial condition, operating results, capital
requirements and such other factors as our Board deems relevant. There can be no
assurances that any future dividends will be paid.
CASH FLOWS
Fiscal Years
2020 2019
(in thousands)
Net cash and cash equivalents provided by operating
activities
$ 8,785 $ 9,627
Net cash and cash equivalents used in investing activities (3,271 ) (4,609 )
Net cash and cash equivalents provided by (used in)
financing activities
10,736 (4,760 )
Net increase in cash and equivalents 16,250 258
Cash and equivalents, beginning of year 13,672 13,414
Cash and equivalents, end of year $ 29,922 $ 13,672
Capital Expenditures
In addition to using cash for our operating expenses, we use cash to fund the
development and construction of new restaurants and to fund capitalized property
improvements for our existing restaurants. During our fiscal year 2020, we
acquired property and equipment of $2,766,000, (of which $379,000 was for
construction in progress; $118,000 was deposits recorded in other assets; and
$10,000 was deposits transferred to construction in progress as of September 28,
2019), which amount included $278,000 for renovations to two (2) existing
limited partnership restaurant and $466,000 for renovations to five (5)
Company-owned restaurants. During our fiscal year 2019, we acquired property and
equipment of $6,323,000, (of which $1,300,000 was for the purchase of vacant
real property in Pompano Beach, Florida; $1,058,000 was for construction in
progress; $595,000 was deposits recorded in other assets; and $386,000 was
deposits transferred to construction in progress as of September 29, 2018),
which amount included $120,000 for renovations to one (1) existing limited
partnership restaurant and $559,000 for renovations to three (3) Company-owned
restaurants. We anticipate the cost of this refurbishment in our fiscal year
2021 will be approximately $950,000, excluding construction/renovations to Store
#19 (our combination package liquor store and restaurant which is being rebuilt
due to damages caused by a fire) and Store #85 (our Sunrise, Florida restaurant
location in development), which funds will be provided from operations.
Debt
As of October 3, 2020, we had long term debt of $26,323,000, as compared to
$13,080,000 as of September 28, 2019. Our long term debt increased as of October
3, 2020 as compared to September 28, 2019 due to (i) the PPP Loan to us of $5.9
million; (ii) the PPP Loans to our eight limited partnerships of $4.1 million;
(iii) the re-financing of its mortgage loan by our wholly owned subsidiary,
Flanigan's Calusa Center, LLC, increasing the principal amount borrowed from
$2.72 million to $7.21 million; and (iv) $1,317,000 for financed insurance
premiums, less any payments made on account thereof.
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Prior to obtaining the PPP Loans, we were in compliance with the financial
covenants contained in our loans with our unrelated third party institutional
lender (the "Institutional Lender") under which as of October 3, 2020, we owe in
the aggregate approximately $12,209,000 (the "Institutional Loans"). We
determined that as of the end of the third quarter of our fiscal year 2020, we
were not in compliance with our financial covenants contained in the
Institutional Loans related to the Rent Adjusted Funded Debt to EBITDA Ratio
because our consolidated debt during the third quarter of our fiscal year 2020
increased due to our repayment obligations under the PPP Loans (the "Covenant
Breach'). Pursuant to the terms of the Institutional Loans, the Covenant Breach,
grants the Institutional Lender the right to exercise certain remedies under the
Institutional Loans, including the right to accelerate the indebtedness owed by
us to the Institutional Lender thereunder. On August 10, 2020, we received a
written waiver of the Covenant Breach from the Institutional Lender, which,
among other things, waives the Covenant Breach through June 30, 2021. As of
October 3, 2020, we are in compliance with the financial covenants contained in
our loans with our Institutional Lender.
There can be no assurances that we will be in compliance with our financial
covenants thereafter due to, among other things, that our results of operations
will likely continue to be materially impacted by the COVID-19 pandemic. Absent
a waiver, failure to be in compliance with our financial covenants would
constitute a default under the Institutional Loans with our Institutional Lender
when reported. Such a default, if not cured or waived, would allow the
Institutional Lender to accelerate the maturity of the indebtedness we owe under
the Institutional Loans, making it due and payable at the time. If maturity of
the Institutional Loans were accelerated, it would have a material adverse
impact on our consolidated financial statements and results of operations.
We repaid long term debt, including auto loans, financed insurance premiums and
mortgages in the amount of $2,540,000 and $2,820,000 in our fiscal years 2020
and 2019, respectively.
(a) Mortgage on Real Property
On November 27, 2019, our wholly owned subsidiary, Flanigan's Calusa Center,
LLC, re-financed its mortgage loan with an unrelated third party lender,
increasing the principal amount borrowed from $2.72 million to $7.21 million.
The principal balance and all accrued interest of the mortgage loan that had
been outstanding matured November 30, 2019. The re-financed mortgage loan earns
interest at the fixed annual rate of 3.86%, is amortized over twenty (20) years,
requires us to pay monthly payments of principal and interest in the amount of
$43,373 with the entire principal balance and all accrued interest due in
November 2026. We intend to use the excess funds we received from the
re-financing of this mortgage loan (approximately $4.4 million) for working
capital.
(b) Financed Insurance Premiums
During our fiscal year 2020, we bound and financed through an unrelated third
party lender the premiums on the following property, general liability, excess
liability and terrorism insurance policies:
(i) For the policy year beginning December 30, 2019, our general liability
insurance, excluding limited partnerships, is a one (1) year policy,
including automobile and excess liability coverage. The annual premium for
this insurance coverage is $418,000;
(ii) For the policy year beginning December 30, 2019, our general liability
insurance for our limited partnerships is a one (1) year policy, including
excess liability coverage. The annual premium for this insurance coverage is
$459,000;
(iii) For the policy year beginning December 30, 2019, our property insurance is
a one (1) year policy and the annual premium for this insurance coverage is
$561,000;
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(iv) For the policy year beginning December 30, 2019, our excess liability
insurance is a one (1) year policy and the annual premium for this insurance
coverage is $360,000; and
(v) For the policy year beginning December 30, 2019, our terrorism insurance is a
one (1) year policy and the annual premium for this insurance coverage is
$12,000.
Of the $1,810,000 annual premium amounts, which includes coverage for our
franchises which are not included in our consolidated financial statements, we
financed $1,656,000 through an unaffiliated third party lender. The finance
agreement obligates us to repay the amounts financed together with interest at
the rate of 2.55% per annum, over 11 months, with monthly payments of principal
and interest, each in the amount of $158,000. The finance agreement is secured
by a first priority security interest in all insurance policies, all unearned
premium, return premiums, dividend payments and loss payments thereof.
As of October 3, 2020, the aggregate principal balance owed to the third party
lender from the financing of our insurance policies is $365,000, excluding
amounts which are reimbursed by our franchises for insurances covering their
operations, but including the annual premiums for boiler insurance ($2,000) and
directors and officers liability insurance ($34,000), which were added to the
finance agreement during the third quarter of our fiscal year 2020 and are
financed over the balance of the term of the same.
(c) Paycheck Protection Loans
During the third quarter of our fiscal year 2020, we, certain of the entities
owning the limited partnership stores (the "LP's"), franchised stores (the
"Franchisees"), as well as the store we manage but do not own (the "Managed
Store") (collectively, the "Borrowers"), applied for and received loans from an
unrelated third party lender pursuant to the Paycheck Protection Program (the
"PPP") under the Coronavirus Aid, Relief and Economic Security Act (the "CARES
Act") enacted March 27, 2020, in the aggregate principal amount of approximately
$13.1 million, (the "PPP Loans"), of which approximately: (i) $5.9 million was
loaned to us ; (ii) $4.1 million was loaned to 8 of the LP's ; (iii) $2.6
million was loaned to 5 of the Franchisees; and (iv) $0.5 million was loaned to
the Managed Store. The PPP Loans to the Franchisees and the Managed Store are
not included in our consolidated financial statements.
The PPP Loans, which are in the form of Notes issued by each of the Borrowers,
mature two years from the date of funding (dates ranging from May 5, 2022 to May
11, 2022) and bear interest at a rate of 1.00% per annum, payable monthly
commencing approximately six months from the date of issuance of the Notes
(issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be
prepaid by the applicable Borrower at any time prior to maturity with no
prepayment penalties. Proceeds from the PPP Loans are available to the
respective Borrower to fund designated expenses, including certain payroll
costs, group health care benefits and other permitted expenses, including rent
and interest on mortgages and other debt obligations incurred before February
15, 2020. Under the terms of the PPP, up to the entire amount of principal and
accrued interest may be forgiven to the extent the proceeds of the PPP Loans are
used for qualifying expenses as described in the CARES Act and applicable
implementing guidance issued by the U.S. Small Business Administration under the
PPP. No assurance can be given that the Borrowers will obtain forgiveness of the
PPP Loans in whole or in part.
With respect to any portion of any of the PPP Loans that is not forgiven under
the terms of the PPP, such amounts will be subject to customary provisions for a
loan of this type, including customary events of default relating to, among
other things, payment defaults, breaches of the provisions of the applicable PPP
Note and cross-defaults on any other loan with the Lender or other creditors.
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Leases
To conduct certain of our operations, we lease restaurant and package liquor
store space in South Florida from unrelated third parties. Our leases have
remaining lease terms of up to 10 years, some of which include options to renew
and extend the lease terms for up to an additional 30 years. We presently intend
to renew some of the extension options available to us and for purposes of
computing the right-of-use assets and lease liabilities required by ASC 842, we
have incorporated into all lease terms which may be extended, an additional term
of the lesser of (i) the amount of years the lease may be extended; or (ii) 15
years.
Following adoption of ASC 842, common area maintenance and property taxes are
not considered to be lease components.
The components of lease expense are as follows:
53 Weeks
Ended October 3, 2020
Operating Lease Expense, which is included in occupancy costs $ 4,521,000
Supplemental balance sheet information related to leases as follows:
Classification on the Condensed Consolidated Balance Sheet October 3, 2020
Assets
Finance lease assets $ 4,749,000
Operating lease assets 22,150,000
$ 26,899,000
Liabilities
Finance current liabilities $ 4,772,000
Operating current liabilities 3,116,000
Operating lease non-current liabilities 20,337,000
Weighted Average Remaining Lease Term:
Finance leases 0.42 Years
Operating leases 7.71 Years
Weighted Average Discount:
Finance leases 5.5%
Operating leases 5.5%
The following table outlines the minimum future lease payments for the next five
years and thereafter:
For fiscal year Operating Leases Finance Leases
2021 $ 4,246,000 $ 4,881,000
2022 2,927,000
2023 2,942,000
2024 2,975,000
2025 2,957,000
Thereafter 14,131,000
Total lease payments (Undiscounted cash flows) 30,178,000 4,881,000
Less imputed interest (6,772,000 ) (109,000 )
Total $ 23,406,000 $ 4,772,000
Total rent expense for all of our operating leases was approximately $3,963,000
in our fiscal year 2019 and is included in "Occupancy Costs" in our accompanying
consolidated statements of income. The total rent expense is comprised of the
following:
2019
Minimum Base Rent $ 3,149,000
Contingent Percentage Rent 814,000
Total $ 3,963,000
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Construction Contracts
(a) 2505 N. University Drive, Hollywood, Florida (Store #19)
During the third quarter of our fiscal year 2019, we entered into an agreement
with a third party unaffiliated architect for design and development services
totaling $77,000 for the re-build of our restaurant located at 2505 N.
University Drive, Hollywood, Florida (Store #19) which has been closed since
October 2018 due to damages caused by a fire, of which $62,000 has been paid.
Additionally, during the third quarter of our fiscal year 2019, we entered into
an agreement with a third party unaffiliated general contractor for site work at
this location totaling $1,618,000, (i) to connect the real property where this
restaurant operated (Store #19) to city sewer and (ii) to construct a new
building on the adjacent parcel of real property for the operation of a package
liquor store. During our fiscal year 2020, we agreed to change orders to the
agreement for additional construction services increasing the total contract
price by $112,000 to $1,730,000, of which $-0- has been paid through October 3,
2020. Subsequent to the end of our fiscal year 2020, we agreed to additional
change orders to the agreement for additional construction services increasing
the total contract price by $28,000 to $1,757,000 of which $64,000 has been
paid.
(b) 14301 W. Sunrise Boulevard, Sunrise, Florida (Store #85)
During the third quarter of our fiscal year 2019, we also entered into an
agreement with a third party unaffiliated design group for design and
development services of our new location at 14301 W. Sunrise Boulevard, Sunrise,
Florida 33323 (Store #85) for a total contract price of $122,000. During our
fiscal year 2020, we agreed upon amendments to the $122,000 Contract for
additional design and development services which had the effect of increasing
the total contract price by $18,000 to $140,000, of which $106,000 has been paid
through October 3, 2020. Additionally during the fourth quarter of our fiscal
year 2020, we entered into an agreement with a third party unaffiliated general
contractor for interior renovations at this location totaling $1,236,000, of
which $-0- has been paid through October 3, 2020. Subsequent to October 3, 2020,
$111,000 has been paid.
Purchase Commitments/Supply
In order to fix the cost and ensure adequate supply of baby back ribs for our
restaurants, on November 9, 2020, we entered into a purchase agreement with our
current rib supplier, whereby we agreed to purchase approximately $6,420,000 of
baby back ribs during calendar year 2021 from this vendor at a fixed cost.
While we anticipate purchasing all of our rib supply from this vendor, we
believe there are several other alternative vendors available, if needed.
Flanigan's Fish Company, LLC
During the third quarter of our fiscal year 2020, we temporarily suspended the
operation of our Flanigan's Fish Company, LLC, a Florida limited liability
company ("FFC") due to the decrease in demand for imported fresh fish caused by
restrictions placed upon the operation of our restaurants due to COVID-19,
relying instead on outside fresh fish purveyors. The suspension of operations
lasted approximately 5 ½ weeks, after which we resumed operations. As of October
3, 2020, FFC supplies certain of the fish to all of our restaurants. Since we
hold the controlling interest of FFC, the balance sheet and operating results of
this entity are consolidated into the accompanying financial statements of the
Company. Sales and purchases of fish are recognized in restaurant food sales and
restaurant and lounges (cost of merchandise sold), respectively, in the
consolidated statements of income at the time of sale to the restaurant. In
addition, the 49% of FFC owned by the unrelated third party is recognized as
noncontrolling interest in our consolidated financial statements.
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Purchase of Limited Partnership Interests
During our fiscal year 2020, we did not purchase any limited partnership
interests. During our fiscal year 2019, we purchased from one limited partner
(who is not an officer, director or family member of officers or directors) a
limited partnership interest of 0.63% in a limited partnership which owns a
restaurant, for a purchase price of $4,800.
Working Capital
The table below summarizes our current assets, current liabilities and working
capital as of the end of our fiscal years 2020 and 2019:
Oct. 3, 2020 Sept. 28, 2019
(in thousands)
Current assets $ 36,508 $ 19,593
Current liabilities 25,362 13,129
Working capital 11,146 6,464
Our working capital as of our fiscal year ended October 3, 2020 increased
$4,682,000 or 72.43% to $11,146,000 from $6,464,000 as of September 28, 2019 due
to the cash received from (i) the PPP Loan to us of $5.9 million; (ii) the PPP
Loans to our eight limited partnerships of $4.1 million; and (iii) the
re-financing of its mortgage loan by our wholly owned subsidiary, Flanigan's
Calusa Center, LLC, increasing the principal amount borrowed from $2.72 million
to $7.21 million, offset by $1,281,000 due to our adoption of ASC 842. During
our fiscal year 2019, we used working capital of approximately $1,300,000 to
close on our purchase of the vacant parcel of property located at 2119 S.E. 9th
Street, Pompano Beach, Florida.
While there can be no assurance due to, among other things, unanticipated
expenses or unanticipated decline in revenues, or both, we believe that our cash
on hand, cash flow from operations and funds available from our borrowings will
adequately fund operations, debt reductions and planned capital expenditures
throughout our fiscal year 2021.
During our fiscal year 2021, we plan to use certain funds on-hand, borrowed
funds and/or insurance proceeds (i) to construct a new building on a parcel of
real property which we own which is adjacent to the real property where our
combination package liquor store and restaurant located at 2505 N. University
Drive, Hollywood, Florida (Store #19) operated into which we plan to re-locate
our package liquor store and to re-build the restaurant; (ii) to exercise the
option to purchase the real property and improvements located at 5450 N. State
Road 7, North Lauderdale, Florida from which we operate our combination
"Flanigan's Seafood Bar and Grill" restaurant and "Big Daddy's Liquors" package
liquor store (Store #40); (iii) to exercise the option to purchase the real
property and improvements located at 14301 W. Sunrise Boulevard, Sunrise,
Florida which we are currently developing for a limited partnership for
operation as a "Flanigan's Seafood Bar and Grill" restaurant (Store #85); (iv)
advance the cost of renovations to develop the "Flanigan's Seafood Bar and
Grill" restaurant which we are currently developing (Store #85). There can be no
assurances as to the timing for us to construct the new building for the package
liquor store and re-build the restaurant for Store #19 or to complete the
renovations for the restaurant for Store #85.
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Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements.
Recently Adopted and Recently Issued Accounting Pronouncements
Adopted
Effective September 29, 2019, we adopted Accounting Standards Codification 842,
Leases ("ASC 842"). The new guidance requires that lease arrangements be
presented on the lessee's balance sheet by recording a right-of-use asset and a
lease liability equal to the present value of the related future minimum lease
payments. We adopted the standard in the first quarter of fiscal 2020, using the
retrospective approach. Upon adoption, the Company recorded a right-of-use asset
of $27.8 million and a lease liability of $27.8 million. At October 1, 2020, the
Company decreased the operating lease right-of-use asset by $2.6 million and the
operating lease liability by $2.6 million with the reclassification of an
operating lease to a finance lease due to the exercise of a purchase option
subsequent to the end of our fiscal year 2020. The Company recorded a finance
lease right-of-use asset of $4.8 million and a finance lease liability of $4.8
million.
We elected the transition package of practical expedients, under which the
Company does not have to reassess (1) whether any expired or existing contracts
are leases, or contain leases, (2) the lease classification for any expired or
existing leases, and (3) initial direct costs for any existing leases. In
addition, we made an accounting policy election to exclude leases with an
initial term of 12 months or less from the balance sheet. This standard had a
material impact on the Condensed Consolidated Statements of Income due to the
escalations of rent in the extensions but did not have a material impact on the
Condensed Consolidated Statement of Cash Flows. See Note 13 for further
disclosures resulting from the adoption of this new standard.
Issued
There are no recently issued accounting pronouncements that we have not yet
adopted that we believe will have a material effect on our financial statements.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note 1 to our
consolidated financial statements located in Item 8 of this Annual Report on
Form 10-K. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues, and expenses, and the related disclosures of
contingent assets and liabilities. Actual results could differ from those
estimates under different assumptions or conditions. We believe that the
following critical accounting policies are subject to estimates and judgments
used in the preparation of our consolidated financial statements:
Estimated Useful Lives of Property and Equipment
The estimates of useful lives for property and equipment are significant
estimates. Expenditures for the leasehold improvements and equipment when a
restaurant is first constructed are material. In addition, periodic refurbishing
takes place and those expenditures can be material. We estimate the useful life
of those assets by considering, among other things, expected use, life of the
lease on the building, and warranty period, if applicable. The assets are then
depreciated using a straight line method over those estimated lives. These
estimated lives are reviewed periodically and adjusted if necessary. Any
necessary adjustment to depreciation expense is made in the income statement of
the period in which the adjustment is determined to be necessary.
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Consolidation of Limited Partnerships
As of October 3, 2020, we operate eight (8) restaurants as general partner of
the limited partnerships that own the operations of these restaurants. We expect
that any expansion which takes place in opening new restaurants will also result
in us operating the restaurants as general partner. In addition to the general
partnership interest we also purchased limited partnership units ranging from 5%
to 49% of the total units outstanding. As a result of these controlling
interests, we consolidate the operations of these limited partnerships with ours
despite the fact that we do not own in excess of 50% of the equity interests.
All intercompany transactions are eliminated in consolidation. The
non-controlling interests in the earnings of these limited partnerships are
removed from net income and are not included in the calculation of earnings per
share.
Income Taxes
We account for our income taxes using FASB ASC Topic 740, "Income Taxes", which
requires among other things, recognition of future tax benefits measured at
enacted rates attributable to deductible temporary differences between financial
statement and income tax basis of assets and liabilities and to tax net
operating loss carryforwards and tax credits to the extent that realization of
said tax benefits is more likely than not. For discussion regarding our
carryforwards refer to Note 11 to the consolidated financial statements for our
fiscal year 2020.
Other Matters
Impact of Inflation
The primary inflationary factors affecting our operations are food, beverage and
labor costs. A large number of restaurant personnel are paid at rates based upon
applicable minimum wage and increases in minimum wage directly affect labor
costs. To date, inflation has not had a material impact on our operating
results, but this circumstance may change in the future if food and fuel costs
continue to rise.
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