UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 1, 2017

 

OR

o		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 Number)
5059 N.E. 18th Avenue, Fort Lauderdale, Florida	33334
(Address of principal executive offices)	Zip Code

 

(954) 377-1961

(Registrant's telephone number, including area code)

 

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 ý No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its Corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý Noo

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ý
Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ Noý

 

On May 16, 2017, 1,858,647 shares of Common Stock, $0.10 par value per share, were outstanding.

 

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

 

INDEX TO FORM 10-Q

 

PART I. FINANCIAL INFORMATION
ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME	1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS	3
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	7
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS	13
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	23
ITEM 4.  CONTROLS AND PROCEDURES	24
PART II. OTHER INFORMATION	24
ITEM 1.  LEGAL PROCEEDINGS	25
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	25
ITEM 6. EXHIBITS	25

 

SIGNATURES

LIST XBRL DOCUMENTS

 

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” the “Company” and “Flanigan’s” mean Flanigan's Enterprises, Inc. and its subsidiaries (unless the context indicates a different meaning).

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

 

 

		Thirteen Weeks Ended								Twenty Six Weeks Ended
		April 1, 2017				April 2, 2016				April 1, 2017				April 2, 2016
REVENUES:
Restaurant food sales		$	17,281			$	16,874			$	33,505			$	32,253
Restaurant bar sales			5,302				5,484				10,363				10,387
Package store sales			4,191				3,994				8,869				8,354
Franchise related revenues			408				411				786				803
Rental income			152				120				311				266
Owner’s fee			37				37				75				75
Other operating income			62				54				118				114
			27,433				26,974				54,027				52,252
COSTS AND EXPENSES:
Cost of merchandise sold:
Restaurant and lounges			8,008				7,819				15,470				14,940
Package goods			2,993				2,837				6,347				5,948
Payroll and related costs			8,410				8,319				16,555				16,040
Occupancy costs			1,356				1,345				2,706				2,637
Selling, general and administrative expenses			4,571				4,676				9,381				9,358
			25,338				24,996				50,459				48,923
Income from Operations			2,095				1,978				3,568				3,329
OTHER INCOME (EXPENSE):
Interest expense			(152	)			(138	)			(285	)			(284	)
Interest and other income			33				11				74				37
			(119	)			(127	)			(211	)			(247	)
Income before Provision for Income Taxes			1,976				1,851				3,357				3,082
Provision for Income Taxes			(467	)			(432	)			(746	)			(712	)
Net Income			1,509				1,419				2,611				2,370
Less: Net income attributable to noncontrolling interests			(462	)			(545	)			(899	)			(872	)
Net Income attributable to stockholders		$	1,047			$	874			$	1,712			$	1,498

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

 

(Continued)

 

 

		Thirteen Weeks Ended								Twenty Six Weeks Ended
		April 1, 2017				April 2, 2016				April 1, 2017				April 2, 2016
Net Income Per Common Share:
Basic and Diluted		$	0.56			$	0.47			$	0.92			$	0.81
Weighted Average Shares and Equivalent Shares Outstanding
Basic and Diluted			1,858,647				1,858,647				1,858,647				1,858,647

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

APRIL 1, 2017 (UNAUDITED) AND OCTOBER 1, 2016

(in thousands)

 

 

 

ASSETS

 

		April 1, 2017				October 1, 2016
CURRENT ASSETS:
Cash and cash equivalents		$	10,621			$	10,174
Prepaid income taxes			—				180
Due from franchisees			—				62
Other receivables			419				627
Inventories			2,897				2,633
Prepaid expenses			1,875				1,274
Deferred tax asset			237				381
Total Current Assets			16,049				15,331
Property and Equipment, Net			40,352				38,138
Construction in Progress			1,550				15
			41,902				38,153
Investment in Limited Partnership			238				212
OTHER ASSETS:
Liquor licenses			630				630
Deferred tax asset			929				862
Leasehold purchases, net			599				660
Other			546				553
Total Other Assets			2,704				2,705
Total Assets		$	60,893			$	56,401

 

 

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

APRIL 1, 2017 (UNAUDITED) AND OCTOBER 1, 2016

(in thousands)

 

(Continued)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

		April 1, 2017				October 1, 2016
CURRENT LIABILITIES:
Accounts payable and accrued expenses		$	8,053			$	7,790
Income taxes payable			83				—
Due to franchisees			1,959				2,098
Current portion of long term debt			1,453				1,466
Deferred rent			95				102
Total Current Liabilities			11,643				11,456
Long Term Debt, Net of Current Maturities			11,784				8,626
Deferred Rent, Net of Current Portion			—				—
Equity:
Flanigan’s Enterprises, Inc. Stockholders’ Equity
Common stock, $.10 par value, 5,000,000       shares authorized; 4,197,642 shares issued			420				420
Capital in excess of par value			6,240				6,240
Retained earnings			30,090				28,750
Treasury stock, at cost, 2,338,995 shares       at April 1, 2017 and 2,338,995       shares at October 1, 2016			(6,077	)			(6,077	)
Total Flanigan’s Enterprises, Inc.       stockholders’ equity			30,673				29,333
Noncontrolling interest			6,793				6,986
Total equity			37,466				36,319
Total liabilities and equity		$	60,893			$	56,401

 

See accompanying notes to unaudited condensed consolidated financial statements.

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE TWENTY SIX WEEKS ENDED APRIL 1, 2017 AND APRIL 2, 2016

(in thousands)

 

 

		April 1, 2017				April 2, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	2,611			$	2,370
Adjustments to reconcile net income to net cash and    cash equivalents provided by operating activities:
Depreciation and amortization			1,263				1,266
Amortization of leasehold interests			61				61
Loss on abandonment of property and equipment			13				44
Amortization of deferred loan costs			18				—
Deferred income tax			77				191
Deferred rent			(7	)			(7	)
Income from unconsolidated limited partnership			(36	)			(13	)
Changes in operating assets and liabilities:      (increase) decrease in
Due from franchisees			62				—
Other receivables			(270	)			91
Prepaid income taxes			180				—
Inventories			(264	)			(500	)
Prepaid expenses			598				442
Other assets			40				3
Increase (decrease) in:
Accounts payable and accrued expenses			263				450
Income taxes payable			83				(64	)
Due to franchisees			(139	)			1,006
Net cash and cash equivalents provided by operating activities			4,553				5,340
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment and construction in progress			(4,326	)			(2,196	)
Deposit on property and equipment			(254	)			(141	)
Distributions from unconsolidated limited         Partnership			10				27
Net cash and cash equivalents used in investing activities			(4,570	)			(2,310	)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

FLANIGAN'S ENTERPRISES, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE TWENTY SIX WEEKS ENDED APRIL 1, 2017 AND APRIL 2, 2016

(in thousands)

 

(Continued)

 

		April 1, 2017				April 2, 2016
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long term debt			(908	)			(1,054	)
Deferred loan costs			(86	)			—
Proceeds from long-term debt			2,922				—
Dividends paid			(372	)			(343	)
Purchase of noncontrolling limited partnership           Interests			—				(10	)
Distributions to limited partnerships’           noncontrolling interests			(1,092	)			(1,030	)
Net cash and cash equivalents provided by (used in) financing activities			464				(2,437	)
Net Increase in Cash and      Cash Equivalents			447				593
Beginning of Period			10,174				9,267
End of Period		$	10,621			$	9,860
Supplemental Disclosure for Cash Flow Information:      Cash paid during period for:
Interest		$	285			$	285
Income taxes		$	402			$	586
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Financing of insurance contracts		$	1,199			$	914
Purchase deposits transferred to property and equipment		$	699			$	211

 

See accompanying notes to unaudited condensed consolidated financial statements

 

FLANIGAN’S ENTERPRISES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

APRIL 1, 2017

 

 

(1) BASIS OF PRESENTATION:

 

The accompanying condensed consolidated financial information for the periods ended April 1, 2017 and April 2, 2016 are unaudited. Financial information as of October 1, 2016 has been derived from the audited financial statements of the Company, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated have been included. For further information regarding the Company's accounting policies, refer to the Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K for the year ended October 1, 2016. Operating results for interim periods are not necessarily indicative of results to be expected for a full year.

 

The condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and the accounts of the eight limited partnerships in which we act as general partner and have controlling interests. All intercompany balances and transactions have been eliminated. Non-controlling interest represents the limited partners’ proportionate share of the net assets and results of operations of the eight limited partnerships.

 

These condensed consolidated financial statements include estimates relating to performance based officers’ bonuses. The estimates are reviewed periodically and the effects of any revisions are reflected in the financial statements in the period they are determined to be necessary. Although these estimates are based on management’s knowledge of current events and actions it may take in the future, they may ultimately differ from actual results.

 

(2) EARNINGS PER SHARE:

 

We follow Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Section 260 - “Earnings per Share”. This section provides for the calculation of basic and diluted earnings per share. The data on Page 2 shows the amounts used in computing earnings per share and the effects on income and the weighted average number of shares of potentially dilutive common stock equivalents. As of April 1, 2017 and April 2, 2016, no stock options were outstanding.

 

(3) RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

 

Adopted

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 provides authoritative guidance related to the presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as a direct deduction from the carrying value of debt. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

 

(3) RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

     (Continued)

 

Adopted (Continued)

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation: Amendments to the Consolidation Analysis” to modify the analysis that companies must perform in order to determine whether a legal entity should be consolidated. ASU 2015-02 simplifies current guidance by reducing the number of consolidation models; eliminating the risk that a reporting entity may have to consolidate based on a fee arrangement with another legal entity; placing more weight on the risk of loss in order to identify the party that has a controlling financial interest; reducing the number of instances that related party guidance needs to be applied when determining the party that has a controlling financial interest; and changing rules for companies in certain industries that ordinarily employ limited partnership or variable interest entity structures. ASU 2015-02 is effective for public companies for fiscal years beginning after December 15, 2015 and interim periods within those fiscal periods. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

 

Issued

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-15 “Classification of Certain Cash Receipts and Cash Payments”.  This ASU addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, “Statement of Cash Flows”, and other Topics. ASU 2016-15 is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840.  ASU 2016-02 is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet.  ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of income.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted.  ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical expedients.  We are currently assessing the adoption date and the potential impact of adopting ASU 2016-02 on our financial statements and related disclosures.

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 requires that all deferred tax liabilities and tax assets be classified as non-current in a classified balance sheet, rather than separating such deferred taxes into current and non-current amounts, as is required under current guidance. ASU 2015-17 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2016 and may be applied either prospectively or retrospectively. We are currently assessing the adoption date and the potential impact of adopting ASU 2015-17 on our financial statements and related disclosures.

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers,” (ASU 2014-09), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles when it becomes effective. The new standard was originally effective for interim and annual periods in fiscal years beginning after December 15, 2016. In July 2015,

 

(3) RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

     (Continued)

 

Issued (Continued)

 

the FASB affirmed its proposal for a one year deferral of the effective date. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

(4) INVESTMENT IN REAL PROPERTY

 

During the second quarter of our fiscal year 2017, we acquired for $2.47 million cash at closing, vacant real property (the “Property”), which is contiguous to the real property we own where our new package liquor store located at 13185 Biscayne Boulevard, North Miami, Florida, (Store #20P) and our restaurant located at 13205 Biscayne Boulevard, North Miami, Florida, (Store #20R) operate. To fund the cash at closing, we borrowed $2.0 million using our Credit Line (defined below at Note 7(c)) and used cash on hand for the remainder. The Property will provide for a larger parking lot to be used by our customers.

(5) EXECUTION OF NEW LEASE FOR EXISTING LOCATION

 

Weston, Florida

 

During the second quarter of our fiscal year 2017, we renewed our lease with an unrelated third party for the restaurant we own located at 2460 Weston Road, Weston, Florida (Store #95) for a period of five (5) years from October 1, 2017 through September 30, 2022, with two (2) five (5) year renewal options, under the same terms and conditions, except an increase in the percentage rent.

 

(6) 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.

 

(7) DEBT:

 

(a) Re-Financing of Corporate Offices

 

During the first quarter of our fiscal year 2017, we re-financed the mortgage loan encumbering our corporate offices located at 5059 N.E. 18^th Avenue, Fort Lauderdale, Florida 33334, which mortgage loan was and continues to be extended and held by an unaffiliated third party lender. The refinanced mortgage loan is in the original principal amount of $840,000 and bears interest at the fixed rate of 4.65% per annum. The mortgage loan is amortizable over a fifteen (15) year period, with our current monthly payment of principal and interest totaling $6,519. The entire principal balance and all accrued but unpaid interest are due on December 28, 2031.

 

During the second quarter of our fiscal year 2017, we terminated the interest rate swap agreement we entered into July, 2010 which related to the re-financed mortgage loan encumbering our corporate offices located at 5059 N.E. 18^th Avenue, Fort Lauderdale, Florida 33334. The interest rate swap agreement required us to pay interest for a seven (7) year period at a fixed rate of 5.11% on an initial amortizing notional principal amount of $935,000, while receiving interest for the same period at LIBOR, Daily Floating Rate, plus 2.25%, on the same amortizing notional principal amount. We paid an $8,500 pre-payment penalty to the lender in connection with the termination of the interest rate swap agreement.

 

(b) Financing of Office and Warehouse Space

 

During the first quarter of our fiscal year 2017, we borrowed the sum of $822,500 from an unaffiliated third party lender (the “$822,500 Loan”). The proceeds of the $822,500 Loan will be used for working capital. Our repayment obligations under the $822,500 Loan are secured by a first mortgage on our office and warehourse located at 1290 East Commercial Boulevard, Oakland Park, Florida 33334 and our warehouse located at 4990 N.E. 12^th Avenue, Oakland Park, Florida 33334. The $822,500 Loan bears interest at the fixed rate of 4.65% per annum and is amortizable over a fifteen (15) year period, with our current monthly payment of principal and interest totaling $6,384. The entire principal balance and all accrued but unpaid interest are due on December 28, 2031.

 

(c) Revolving Credit Line/Term Loan

 

During the first quarter of our fiscal year 2017, we closed on a secured revolving line of credit from an unaffiliated third party lender which, subject to certain conditions, entitles us to borrow, from time to time through December 28, 2017, up to $5,500,000 (the “Credit Line”). From December 28, 2016 through December 28, 2017, we are obligated to pay interest only on the outstanding balance under the Credit Line, at a rate of LIBOR, Daily Floating Rate, plus 2.25%, per annum (3.227% as of April 1, 2017). During the second quarter of our fiscal year 2017, we entered into an interest rate swap agreement to hedge the interest rate risk when the unpaid principal balance under the Credit Line converts to a term loan on December 28, 2017 and our repayment obligations thereunder become amortizable over a five year period, payable in equal monthly installments of principal and interest at the rate of 4.65% per annum, with any outstanding principal balance and all accrued but unpaid interest due on December 28, 2022. We granted our lender a first priority security interest in substantially all of our personal property assets to secure our repayment obligations under this loan. During the second quarter of our fiscal year 2017, we borrowed $2.0 million on the Credit Line and used such borrowed amounts to purchase the Property (See Note 4) and accordingly incurred, but did not pay any interest amounts. As of May 16, 2017, we have $3.5 million of credit available under the Credit Line.

 

(d) Financed Insurance Premiums

 

During the twenty six weeks ended April 1, 2017, we financed the following three (3) property and general liability insurance policies, totaling approximately $1.21 million, which property and general liability insurance includes coverage for our franchises which are not included in our consolidated financial statements:

 

(i)       For the policy year beginning December 30, 2016, our general liability insurance, excluding limited partnerships, is a one (1) year policy with our insurance carriers, including automobile and excess liability coverage. The one (1) year general liability insurance premiums, including automobile and excess liability coverage, total, in the aggregate $513,000, of which $409,000 is financed through an unaffiliated third party lender (the “Third Party Lender”). The finance agreement obligates us to repay the amounts financed together with interest at the rate of 2.95% per annum, over 10 months, with monthly payments of principal and interest, each in the amount of $42,000. The finance agreement is secured by a first priority security interest in all insurance policies, all unearned premium, return premium, dividend payments and loss payments thereof.

 

(ii) For the policy year beginning December 30, 2016, our general liability insurance for our limited partnerships is a one (1) year policy with our insurance carriers, including excess liability coverage. The one (1) year general liability insurance premiums, including excess liability coverage, total, in the aggregate $498,000, of which $398,000 is financed through the Third Party Lender. The finance agreement obligates us to repay the amounts financed, together with interest at the rate of 2.95% per annum, over 10 months, with monthly payments of principal and interest, each in the amount of $40,000. The finance agreement is secured by a first priority security interest in all insurance policies, all unearned premium, return premium, dividend payments and loss payments thereof.

 

(iii)       For the policy year beginning December 30, 2016, our property insurance is a one (1) year policy. The one (1) year property insurance premium is in the amount of $504,000, of which $404,000 is financed through the Third Party Lender. The finance agreement provides that we are obligated to repay the amounts financed, together with interest at the rate of 2.95% per annum, over 10 months, with monthly payments of principal and interest, each in the amount of approximately $41,000. The finance agreement is secured by a first priority security interest in all insurance policies, all unearned premium, return premium, dividend payments and loss payments thereof.

 

As of April 1, 2017, the aggregate principal balance owed from the financing of our property and general liability insurance policies is $769,000.

 

(8) COMMITMENTS AND CONTINGENCIES:

 

Litigation

From time to time, we are a defendant in litigation arising in the ordinary course of our business, including claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations, employment-related claims and claims from guests alleging illness, injury or other food quality, health or operational concerns. To date, none of this litigation, some of which is covered by insurance, has had a material effect on us.

(9)       SUBSEQUENT EVENTS:

Subsequent events have been evaluated through the date these condensed consolidated financial statements were issued and no events required disclosure.

 

(10) BUSINESS SEGMENTS:

 

We operate principally in two reportable segments – package stores and restaurants. The operation of package stores consists of retail liquor sales and related items. Information concerning the revenues and operating income for the thirteen weeks and twenty six weeks ended April 1, 2017 and April 2, 2016, and identifiable assets for the two reportable segments in which we operate, 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 expenses and income taxes. Identifiable assets by segment are those assets that are used in our operations in each segment. Corporate assets are principally cash and real property, improvements, furniture, equipment and vehicles used at our corporate headquarters. We do not have any operations outside of the United States and transactions between restaurants and package liquor stores are not material.

 

		(in thousands)
		Thirteen Weeks Ending April 1, 2017				Thirteen Weeks Ending April 2, 2016
Operating Revenues:
Restaurants		$	22,583			$	22,358
Package stores			4,191				3,994
Other revenues			659				622
Total operating revenues		$	27,433			$	26,974
Income from Operations Reconciled to Income After Income Taxes and Net Income Attributable to Noncontrolling Interests
Restaurants		$	2,830			$	2,774
Package stores			278				188
			3,108				2,962
Corporate expenses, net of other revenues			(1,013	)			(984	)
Income from operations			2,095				1,978
Interest expense			(152	)			(138	)
Interest and other income			33				11
Income Before Provision for Income Taxes		$	1,976			$	1,851
Provision for Income Taxes			(467	)			(432	)
Net Income			1,509				1,419
Net Income Attributable to Noncontrolling Interests			(462	)			(545	)
Net Income Attributable to Flanigan’s Enterprises, Inc.
Stockholders		$	1,047			$	874
Depreciation and Amortization:
Restaurants		$	507			$	516
Package stores			51				53
			558				569
Corporate			104				83
Total Depreciation and Amortization		$	662			$	652
Capital Expenditures:
Restaurants		$	1,381			$	383
Package stores			2,735				63
			4,116				446
Corporate			90				181
Total Capital Expenditures		$	4,206			$	627

 

		Twenty Six Weeks Ending April 1, 2017				Twenty Six Weeks Ending April 2, 2016
Operating Revenues:
Restaurants		$	43,868			$	42,640
Package stores			8,869				8,354
Other revenues			1,290				1,258
Total operating revenues		$	54,027			$	52,252
Income from Operations Reconciled to Income After Income Taxes and Net Income Attributable to Noncontrolling Interests
Restaurants		$	4,503			$	4,259
Package stores			639				526
			5,142				4,785
Corporate expenses, net of other revenues			(1,574	)			(1,456	)
Income from Operations			3,568				3,329
Interest expense			(285	)			(284	)
Interest and Other Income			74				37
Income Before Provision for Income Taxes		$	3,357			$	3,082
Provision for Income Taxes			(746	)			(712	)
Net Income			2,611				2,370
Net Income Attributable to Noncontrolling Interests			(899	)			(872	)
Net Income Attributable to Flanigan’s Enterprises, Inc.
Stockholders		$	1,712			$	1,498
Depreciation and Amortization:
Restaurants			1,011				1,011
Package stores			103				101
			1,114				1,112
Corporate			210				215
Total Depreciation and Amortization		$	1,324			$	1,327
Capital Expenditures:
Restaurants		$	1,674			$	878
Package stores			3,107				197
			4,781				1,075
Corporate			244				1,332
Total Capital Expenditures		$	5,025			$	2,407

 

		April 1,				October 1,
		2017				2016
Identifiable Assets:
Restaurants		$	28,817			$	25,758
Package store			9,555				7,663
			38,372				33,421
Corporate			22,521				22,980
Consolidated Totals		$	60,893			$	56,401

 

The Company moved assets of approximately $2,936,000, consisting primarily of land, from corporate ($233,000) and restaurant ($2,703,000) to package store ($2,936,000) to correctly report assets related to each segment.

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Reported financial results may not be indicative of the financial results of future periods. All non-historical information contained in the following discussion constitutes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Words such as “anticipates, appears, expects, trends, intends, hopes, plans, believes, seeks, estimates, may, will,” and variations of these words or similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve a number of risks and uncertainties, including but not limited to customer demand and competitive conditions. Factors that could cause actual results to differ materially are included in, but not limited to, those identified in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Annual Report on our Form 10-K for the fiscal year ended October 1, 2016 and in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may reflect events or circumstances after the date of this report.

 

OVERVIEW

 

At April 1, 2017, we (i) operated 25 units, (excluding the adult entertainment club referenced in (ii) below), consisting of restaurants, package stores and combination restaurants/package stores that we either own or have operational control over and partial ownership in; (ii) own but do not operate one adult entertainment club; and (iii) franchise an additional five units, consisting of two restaurants, (one restaurant of which we operate), and three combination restaurants/package stores. The table below provides information concerning the type (i.e. restaurant, package store or combination restaurant/package liquor store) and ownership of the units (i.e. whether (i) we own 100% of the unit; (ii) the unit is owned by a limited partnership of which we are the sole general partner and/or have invested in; or (iii) the unit is franchised by us), as of April 1, 2017 and as compared to April 2, 2016 and October 1, 2016. With the exception of “The Whale’s Rib”, a restaurant we operate but do not own, all of the restaurants operate under our service mark “Flanigan’s Seafood Bar and Grill” and all of the package liquor stores operate under our service mark “Big Daddy’s Liquors”.

 

Types of Units		April 1, 2017				October 1, 2016				April 2, 2016
Company Owned:
Combination package and restaurant			4				4				4
Restaurant only			6				6				6
Package store only			5				5				5
Company Operated Restaurants Only:
Limited Partnerships			8				8				8
Franchise			1				1				1
Unrelated Third Party			1				1				1
Company Owned Club:			1				1				1
Total Company Owned/Operated Units			26				26				26
Franchised Units			5				5				5	(1)

Notes:

(1) We operate a restaurant for one (1) franchisee. This unit is included in the table both as a franchised restaurant, as well as a restaurant operated by us.

Franchise Financial Arrangement: 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 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.

Limited Partnership Financial Arrangement: We manage and control the operations of all restaurants owned by limited partnerships, except the Fort Lauderdale, Florida restaurant which is owned by a related franchisee. Accordingly, the results of operations of all limited partnership owned restaurants, except the Fort Lauderdale, Florida restaurant are consolidated into our operations for accounting purposes. The results of operations of the Fort Lauderdale, Florida restaurant are accounted for by us utilizing the equity method. In general, until the investors’ cash investment in a limited partnership (including any cash invested by us and our affiliates) is returned in full, the limited partnership distributes to the investors annually out of available cash from the operation of the restaurant up to 25% of the cash invested in the limited partnership, with no management fee paid to us. Any available cash in excess of the 25% of the cash invested in the limited partnership distributed to the investors annually, is paid one-half (½) to us as a management fee, with the balance distributed to the investors. Once the investors in the limited partnership have received, in full, amounts equal to their cash invested, an annual management fee is payable to us equal to one-half (½) of cash available to the limited partnership, with the other one half (½) of available cash distributed to the investors (including us and our affiliates). As of April 1, 2017, limited partnerships owning five (5) restaurants, (Surfside, Florida, Kendall, Florida, West Miami, Florida, Pinecrest, Florida and Wellington, Florida locations), have returned all cash invested and we receive an annual management fee equal to one-half (½) of the cash available for distribution by the limited partnership. In addition to receipt of distributable amounts from the limited partnerships, we receive a fee equal to 3% of gross sales for use of the service mark “Flanigan’s Seafood Bar and Grill”.

 

RESULTS OF OPERATIONS

		-----------------------Thirteen Weeks Ended-----------------------
		April 1, 2017								April 2, 2016
		Amount (In thousands)				Percent				Amount (In thousands)				Percent
Restaurant food sales		$	17,281				64.55			$	16,874				64.03
Restaurant bar sales			5,302				19.80				5,484				20.81
Package store sales			4,191				15.65				3,994				15.16
Total Sales		$	26,774				100.00			$	26,352				100.00
Franchise related revenues			408								411
Rental income			152								120
Owner’s fee			37								37
Other operating income			62								54
Total Revenue		$	27,433							$	26,974

 

		-----------------------Twenty Six Weeks Ended-----------------------
		April 1, 2017								April 2, 2016
		Amount (In thousands)				Percent				Amount (In thousands)				Percent
Restaurant food sales		$	33,505				63.53			$	32.253				63.25
Restaurant bar sales			10,363				19.65				10,387				20.37
Package store sales			8,869				16.82				8,354				16.38
Total Sales		$	52,737				100.00			$	50,994				100.00
Franchise related revenues			786								803
Rental income			311								266
Owner’s fee			75								75
Other operating income			118								114
Total Revenue		$	54,027							$	52,252

 

Comparison of Thirteen Weeks Ended April 1, 2017 and April 2, 2016.

 

Revenues. Total revenue for the thirteen weeks ended April 1, 2017 increased $459,000 or 1.70% to $27,433,000 from $26,974,000 for the thirteen weeks ended April 2, 2016 due primarily to increased menu prices and to a lesser extent increased restaurant traffic. Effective February 7, 2016 we increased menu prices for our bar offerings to increase our bar revenues by approximately 3.0% and effective February 15, 2016 we increased menu prices for our food offerings to increase our food revenues by approximately 3.7% (the “Price Increases”).

 

Restaurant Food Sales. Restaurant revenue generated from the sale of food including non-alcoholic beverages, at restaurants (food sales) totaled $17,281,000 for the thirteen weeks ended April 1, 2017 as compared to $16,874,000 for the thirteen weeks ended April 2, 2016. The increase in restaurant revenue from the sale of food at restaurants for the thirteen weeks ended April 1, 2017 as compared to the thirteen weeks ended April 2, 2016 is primarily due to the Price Increases and to a lesser extent increased restaurant traffic. Comparable weekly food sales (for restaurants open for all of the second quarter of our fiscal year 2017 and the second quarter of our fiscal year 2016, which consists of ten restaurants owned by us and eight restaurants owned by affiliated limited partnerships) was $1,329,000 and $1,298,000 for the thirteen weeks ended April 1, 2017 and April 2, 2016, respectively, an increase of 2.39%. Comparable weekly food sales for Company owned restaurants was $713,000 and $698,000 for the second quarter of our fiscal year 2017 and the second quarter of our fiscal year 2016, respectively, an increase of 2.15%. Comparable weekly food sales for affiliated limited partnership owned restaurants was $616,000 and $600,000 for the second quarter of our fiscal year 2017 and the second quarter of our fiscal year 2016, respectively, an increase of 2.67%.

 

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages at restaurants (bar sales) totaled $5,302,000 for the thirteen weeks ended April 1, 2017 as compared to $5,484,000 for the thirteen weeks ended April 2, 2016. The decrease in restaurant revenue from bar sales at restaurants for the thirteen weeks ended April 1, 2017 as compared to the thirteen weeks ended April 2, 2016 is primarily due to new promotions to increase the sale of alcoholic beverages, including but not limited to the significant discounting of the price of draft beer manufactured for the Company by a local brewery and sold under the trade mark “Joe’s Pale Ale”, offset partially due to the Price Increases and to a lesser extent increased restaurant traffic. Comparable weekly bar sales (for restaurants open for all of the second quarter of our fiscal years 2017 and 2016, which consists of ten restaurants owned by us and eight restaurants owned by affiliated limited partnerships) was $408,000 for the thirteen weeks ended April 1, 2017 and $422,000 for the thirteen weeks ended April 2, 2016, a decrease of 3.32%. Comparable weekly bar sales for Company owned restaurants was $199,000 and $203,000 for the second quarter of our fiscal year 2017 and the second quarter of our fiscal year 2016, respectively, a decrease of 1.97%. Comparable weekly bar sales for affiliated limited partnership owned restaurants was $209,000 and $219,000 for the second quarter of our fiscal year 2017 and the second quarter of our fiscal year 2016, respectively, a decrease of 4.57%.

 

Package Store Sales. Revenue generated from sales of liquor and related items at package liquor stores (package store sales) totaled $4,191,000 for the thirteen weeks ended April 1, 2017 as compared to $3,994,000 for the thirteen weeks ended April 2, 2016, an increase of $197,000. This increase was primarily due to increased package liquor store traffic. The weekly average of same store package store sales, (which includes all nine (9) Company owned package liquor stores open for all of the second quarter of our fiscal years 2017 and 2016), was $322,000 for the thirteen weeks ended April 1, 2017 as compared to $307,000 for the thirteen weeks ended April 2, 2016, an increase of 4.89%. We expect package liquor store sales to remain stable throughout the balance of our fiscal year 2017.

 

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 the thirteen weeks ended April 1, 2017 increased $342,000 or 1.37% to $25,338,000 from $24,996,000 for the thirteen weeks ended April 2, 2016. The increase was primarily due to an expected general increase in food costs, offset by actions taken by management to reduce and/or control costs and expenses. We anticipate that our operating costs and expenses will continue to increase through our fiscal year 2017 for the same reasons. Operating costs and expenses decreased as a percentage of total revenue to approximately 92.36% in the second quarter of our fiscal year 2017 from 92.67% in the second quarter of our fiscal year 2016.

 

Gross Profit. Gross profit is calculated by subtracting the cost of merchandise sold from sales.

 

Restaurant Food Sales and Bar Sales. Gross profit for food sales and bar sales for the thirteen weeks ended April 1, 2017 increased to $14,575,000 from $14,539,000 for the thirteen weeks ended April 2, 2016. Our gross profit margin for food sales and bar sales (calculated as gross profit reflected as a percentage of restaurant food sales and bar sales), was 64.54% for the thirteen weeks ended April 1, 2017 and 65.03% for the thirteen weeks ended April 2, 2016. Our gross profit margin for restaurant food and bar sales for the thirteen weeks ended April 1, 2017 as compared to the thirteen weeks ended April 2, 2016 decreased due to higher food costs, notwithstanding the Price Increases. We anticipate that our gross profit margin for restaurant food and bar sales will decrease throughout the balance of our fiscal year 2017 due to higher food costs.

 

Package Store Sales. Gross profit for package store sales for the thirteen weeks ended April 1, 2017 increased to $1,198,000 from $1,157,000 for the thirteen weeks ended April 2, 2016. Our gross profit margin, (calculated as gross profit reflected as a percentage of package liquor store sales), for package liquor store sales was 28.58% for the thirteen weeks ended April 1, 2017 and 28.97% for the thirteen weeks ended April 2, 2016. We anticipate that the gross profit margin for package store sales will remain stable throughout the balance of our fiscal year 2017.

 

Payroll and Related Costs. Payroll and related costs for the thirteen weeks ended April 1, 2017 increased $91,000 or 1.09% to $8,410,000 from $8,319,000 for the thirteen weeks ended April 2, 2016. Higher payroll and related costs for the thirteen weeks ended April 1, 2017 were primarily due to higher restaurant sales, which require additional payroll and related costs for employees such as cooks, bartenders and servers and higher payroll costs. Payroll and related costs as a percentage of total revenue was 30.63% in the second quarter of our fiscal year 2017 and 30.84% of total revenue in the second quarter of our fiscal year 2016.

 

Occupancy Costs. Occupancy costs (consisting of rent, common area maintenance, repairs, real property taxes and amortization of leasehold purchases) for the thirteen weeks ended April 1, 2017 increased $11,000 or 0.82% to $1,356,000 from $1,345,000 for the thirteen weeks ended April 2, 2016. We anticipate that our occupancy costs will remain stable throughout the balance of our fiscal year 2017.

 

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 the thirteen weeks ended April 1, 2017 decreased $105,000 or 2.25% to $4,571,000 from $4,676,000 for the thirteen weeks ended April 2, 2016. Selling, general and administrative expenses decreased as a percentage of total revenue in the second quarter of our fiscal year 2017 to approximately 16.67% as compared to 17.33% in the second quarter of our fiscal year 2016. We anticipate that our selling, general and administrative expenses will increase throughout the balance of our fiscal year 2017 due primarily to increases across all categories.

 

Depreciation and Amortization. Depreciation and amortization expense for the thirteen weeks ended April 1, 2017 increased $10,000 or 1.53% to $662,000 from $652,000 from the thirteen weeks ended April 2, 2016. As a percentage of total revenue, depreciation and amortization expense was 2.41% of revenue in the thirteen weeks ended April 1, 2017 and 2.19% of revenue in the thirteen weeks ended April 2, 2016.

 

Interest Expense, Net. Interest expense, net, for the thirteen weeks ended April 1, 2017 increased $14,000 to $152,000 from $138,000 for the thirteen weeks ended April 2, 2016 due primarily to the financing of the construction of our office and warehouse property located at 1290 East Commercial Boulevard, Oakland Park, Florida 33334 and 4990 N.E. 12^th Avenue, Oakland Park, Florida 33334 at the end of the first quarter of our fiscal year 2017. We anticipate that interest expense will increase throughout the balance of our fiscal year 2017 due primarily to our borrowing of $2.0 million on our Credit Line during the second quarter of our fiscal year 2017, which borrowed funds were used to purchase the vacant real property which is contiguous to the real property we own where our new package liquor store located at 13185 Biscayne Boulevard, North Miami, Florida (Store #20P) and our restaurant located at 13205 Biscayne Boulevard, North Miami, Florida (Store #20R) operate.

 

Net Income Net income for the thirteen weeks ended April 1, 2017 increased $90,000 or 6.34% to $1,509,000 from $1,419,000 for the thirteen weeks ended April 2, 2016. Net income for the thirteen weeks ended April 1, 2017 increased when compared to the thirteen weeks ended April 2, 2016 primarily due the Price Increases and to a lesser extent increased restaurant traffic offset partially by higher food costs and overall expenses. As a percentage of revenue, net income for the thirteen weeks ended April 1, 2017 is 5.50%, as compared to 5.26% for the thirteen weeks ended April 2, 2016.

 

Net Income Attributable to Stockholders. Net income attributed to stockholders for the thirteen weeks ended April 1, 2017 increased $173,000 or 19.79% to $1,047,000 from $874,000 for the thirteen weeks ended April 2, 2016. Net income for the thirteen weeks ended April 1, 2017 increased when compared to the thirteen weeks ended April 2, 2016 primarily due to the Price Increases and to a lower extent increased restaurant traffic, offset partially by higher food costs and overall expenses. As a percentage of revenue, net income attributed to stockholders for the thirteen weeks ended April 1, 2017 is 3.82%, as compared to 3.24% for the thirteen weeks ended April 2, 2016.

 

Comparison of Twenty Six Weeks Ended April 1, 2017 and April 2, 2016.

 

Revenues. Total revenue for the twenty six weeks ended April 1, 2017 increased $1,775,000 or 3.40% to $54,027,000 from $52,252,000 for the twenty six weeks ended April 2, 2016 due primarily to the Price Increases and to increased restaurant traffic.

 

Restaurant Food Sales. Restaurant revenue generated from the sale of food including non-alcoholic beverages at restaurants (food sales) totaled $33,505,000 for the twenty six weeks ended April 1, 2017 as compared to $32,253,000 for the twenty six weeks ended April 2, 2016. The increase in restaurant revenue from the sale of food from restaurants for the twenty six weeks ended April 1, 2017 as compared to the twenty six weeks ended April 2, 2016 is primarily due to Price Increases and to a lesser extent increase restaurant traffic. Comparable weekly food sales (for restaurants open for all of the first and second quarters of our fiscal years 2017 and 2016, which consists of ten restaurants owned by us and eight restaurants owned by affiliated limited partnerships) was $1,289,000 and $1,240,000 for the twenty six weeks ended April 1, 2017 and April 2, 2016, respectively, an increase of 3.95%. Comparable weekly food sales for Company owned restaurants was $682,000 and $659,000 for the twenty six weeks ended April 1, 2017 and April 2, 2016, respectively, an increase of 3.49%. Comparable weekly food sales for affiliated limited partnership owned restaurants was $607,000 and $581,000 for the twenty six weeks ended April 1, 2017 and April 2, 2016, respectively, an increase of 4.48%.

 

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages at restaurants (bar sales) totaled $10,363,000 for the twenty six weeks ended April 1, 2017 as compared to $10,387,000 for the twenty six weeks ended April 2, 2016. The decrease in restaurant revenue from bar sales from restaurants for the twenty six weeks ended April 1, 2017 as compared to the twenty six weeks ended April 2, 2016 is primarily due to new promotions to increase the sale of alcoholic beverages, including but not limited the significant discounting of the price of draft beer manufactured for the Company by a local brewery and sold under the trade mark “Joe’s Pale Ale”, offset partially due to Price Increases and to a lesser extent increased restaurant traffic. Comparable weekly bar sales (for restaurants open for all of the first and second quarters of our fiscal years 2017 and 2016, which consists of ten restaurants owned by us and eight restaurants owned by affiliated limited partnerships) was $399,000 for the twenty six weeks ended April 1, 2017 and $400,000 for the twenty six weeks ended April 2, 2016, a decrease of 0.25%. Comparable weekly bar sales for Company owned restaurants was $192,000 and $190,000 for the twenty six weeks ended April 1, 2017 and April 2, 2016, respectively, an increase of 1.05%. Comparable weekly bar sales for affiliated limited partnership owned restaurants was $207,000 and $210,000 for the twenty six weeks ended April 1, 2017 and April 2, 2016, respectively, an increase of 1.43%.

 

Package Store Sales. Revenue generated from sales of liquor and related items at package stores (package store sales) totaled $8,869,000 for the twenty six weeks ended April 1, 2017 as compared to $8,354,000 for the twenty six weeks ended April 2, 2016, an increase of $515,000. This increase was primarily due to increased package liquor store traffic. The weekly average of same store package store sales, (which includes all nine (9) Company owned package liquor stores open for all of the first and second quarters of our fiscal years 2017 and 2016) was $341,000 and $321,000 for the twenty six weeks ended April 1, 2017 and April 2, 2016, respectively, an increase of 6.23%. Package liquor store sales are expected to remain stable throughout the balance of our fiscal year 2017.

 

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 the twenty six weeks ended April 1, 2017 increased $1,536,000 or 3.14% to $50,459,000 from $48,923,000 for the twenty six weeks ended April 2, 2016. The increase was primarily due to a general increase in food costs, offset by actions taken by management to reduce and/or control costs and expenses. We anticipate that our operating costs and expenses will continue to increase through our fiscal year 2017 for the same reasons. Operating costs and expenses decreased as a percentage of total revenue to approximately 93.40% for the twenty six weeks ended April 1, 2017 from 93.62% for the twenty six weeks ended April 2, 2016.

 

Gross Profit. Gross profit is calculated by subtracting the cost of merchandise sold from sales.

 

Restaurant Food Sales and Bar Sales. Gross profit for food and bar sales for the twenty six weeks ended April 1, 2017 increased to $28,398,000 from $27,700,000 for the twenty six weeks ended April 2, 2016. Our gross profit margin for food sales and bar sales (calculated as gross profit reflected as a percentage of food sales and bar sales), was 64.74% for the twenty six weeks ended April 1, 2017 and 64.96% for the twenty six weeks ended April 2, 2016. Our gross profit margin for restaurant food and bar sales for the twenty six weeks ended April 1, 2017 as compared to the twenty six weeks ended January 2, 2016 decreased due to higher food costs, notwithstanding the Price Increases. We anticipate that our gross profit margin for restaurant food and bar sales will decrease throughout the balance of our fiscal year 2017 due to higher food costs.

 

Package Store Sales. Gross profit for package store sales for the twenty six weeks ended April 1, 2017 increased to $2,522,000 from $2,406,000 for the twenty six weeks ended April 2, 2016. Our gross profit margin, (calculated as gross profit reflected as a percentage of package store sales), was 28.43% for the twenty six weeks ended April 1, 2017 compared to 28.80% for the twenty six weeks ended April 2, 2016. We anticipate that the gross profit margin for package store sales will remain stable throughout the balance of our fiscal year 2017.

 

Payroll and Related Costs. Payroll and related costs for the twenty six weeks ended April 1, 2017, increased $515,000 or 3.21% to $16,555,000 from $16,040,000 for the twenty six weeks ended April 2, 2016. Higher payroll and related costs for the twenty six weeks ended April 1, 2017 were primarily due to higher restaurant sales, which require additional payroll and related costs for employees such as cooks, bartenders and servers and higher payroll costs. Payroll and related costs as a percentage of total revenue was 30.63% for the twenty six weeks ended April 1, 2017 and 30.70% of total revenue for the twenty six weeks ended April 2, 2016.

 

Occupancy Costs. Occupancy costs (consisting of rent, common area maintenance, repairs, real property taxes and amortization of leasehold purchases) for the twenty six weeks ended April 1, 2017 increased $69,000 or 2.62% to $2,706,000 from $2,637,000 for the twenty six weeks ended April 2, 2016. We anticipate that our occupancy costs will remain stable throughout our fiscal year 2017.

 

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 the twenty six weeks ended April 1, 2017 increased $23,000 or 0.25% to $9,381,000 from $9,358,000 for the twenty six weeks ended April 2, 2016. Selling, general and administrative expenses decreased as a percentage of total revenue for the twenty six weeks ended April 1, 2017 to 17.36% as compared to 17.90% for the twenty six weeks ended April 2, 2016. We anticipate that our selling, general and administrative expenses will increase throughout the balance of our fiscal year 2017 due primarily to increases across all categories.

 

Depreciation and Amortization. Depreciation and amortization expense for the twenty six weeks ended April 1, 2017 decreased $3,000 or 0.23% to $1,324,000 from $1,327,000 from the twenty six weeks ended April 2, 2016. As a percentage of total revenue, depreciation and amortization expense was 2.45% of revenue in the twenty six weeks ended April 1, 2017 and 2.29% of revenue in the twenty six weeks ended April 2, 2016.

 

Interest Expense, Net. Interest expense, net, for the twenty six weeks ended April 1, 2017 increased $1,000 to $285,000 from $284,000 for the twenty six weeks ended April 2, 2016 due primarily to the financing of our new construction office and warehouse property located at 1290 East Commercial Boulevard, Oakland Park, Florida 33334 and 4990 N.E. 12^th Avenue, Oakland Park, Florida 33334 at the end of the first quarter of our fiscal year 2017. We anticipate that interest expense will increase throughout the balance of our fiscal year 2017 due primarily to our borrowing of $2.00 million on our Credit Line during the second quarter of our fiscal year 2017, which borrowed funds were used to purchase the vacant real property which is contiguous to the real property we own where our new package liquor store located at 13185 Biscayne Boulevard, North Miami, Florida (Store #20P) and our restaurant located at 13205 Biscayne Boulevard, North Miami, Florida (Store #20R) operate.

 

Net Income. Net income for the twenty six weeks ended April 1, 2017 increased $241,000 or 10.17% to $2,611,000 from $2,370,000 for the twenty six weeks ended April 2, 2016. Net income for the twenty six weeks ended April 1, 2017 increased when compared to the twenty six weeks ended April 2, 2016 primarily due to the Price Increases and to a lesser extent increased restaurant traffic, offset partially due to higher food costs and overall expenses. As a percentage of revenue, net income for the twenty six weeks ended April 1, 2017 is 4.83%, as compared to 4.54% for the twenty six weeks ended April 2, 2016.

 

Net Income Attributable to Stockholders. Net income attributable to stockholders for the twenty six weeks ended April 1, 2017 increased $214,000 or 14.29% to $1,712,000 from $1,498,000 for the twenty six weeks ended April 2, 2016. Net income attributable to stockholders for the twenty six weeks ended April 1, 2017 increased when compared to the twenty six weeks ended April 2, 2016 primarily due to the Price Increases and to a lesser extent increased restaurant traffic, offset partially due to higher food costs and overall expenses. As a percentage of revenue, net income attributable to stockholders for the twenty six weeks ended April 1, 2017 is 3.17%, as compared to 2.87% for the twenty six weeks ended April 2, 2016.

 

New Limited Partnership Restaurants

 

As new restaurants open, our income from operations will be adversely affected if we fund pre-opening costs, including but not limited to pre-opening rent for the new locations. During the twenty six weeks ended April 1, 2017, we did not have a new restaurant location in the development stage and did not recognize any pre-opening costs.

 

Menu Price Increases and Trends

 

Effective February 7, 2016 we increased menu prices for our bar offerings to increase our bar revenues by approximately 3.0% and effective February 15, 2016 we increased menu prices for our food offerings to increase our food revenues by approximately 3.7% to offset higher food costs and higher overall expenses. The last time we increased menu prices was in the third quarter of our fiscal year 2012. During the next twelve months, we expect that restaurant and bar sales should increase as a result of increased menu prices, but gross profit for restaurant food and bar operations will decrease due to higher food costs. We anticipate that our package liquor store sales and gross profit margin for package liquor store sales will remain stable during our fiscal year 2017. We also plan to continue our increased advertising to attract and retain our customers against increased competition.

 

We do not have a new “Flanigan’s Seafood Bar and Grill” restaurant in the development stage, but continue to search for new locations to open restaurants and thereby expand our business. Although we have no agreements, agreements in principle or understandings to do so, we are attempting to expand “The Whale’s Rib” restaurant concept that we manage in Deerfield Beach, Florida through the opening of a new restaurant in Miami, Florida. We have the authority to open new restaurant locations using ‘The Whale’s Rib” concept, including its trademark, through a license arrangement with the owner. If we open new Whales Rib locations, we will probably use our limited partnership ownership model.

 

We are not actively searching for locations for the operation of new package liquor stores, but if an appropriate location for a package liquor store becomes available, we will consider it.

 

Liquidity and Capital Resources

 

We fund our operations through cash from operations. As of April 1, 2017, we had cash of approximately $10,621,000, an increase of $447,000 from our cash balance of $10,174,000 as of October 1, 2016. Our cash increased during the second quarter of our fiscal year 2017 because we borrowed $2.00 million from our Credit Line. During the second quarter of our fiscal year 2017, we used $2.74 million cash at closing, to close on the purchase of the vacant real property, which is contiguous to the real property we own where our new package liquor store located at 13185 Biscayne Boulevard, North Miami, Florida, (Store #20P) and our restaurant located at 13205 Biscayne Boulevard, North Miami, Florida (Store #20R) operate. During the second quarter of our fiscal year 2017, we also paid on March 31, 2017 a dividend of $.20 per share. During the second quarter of our fiscal year 2016, we paid on April 1, 2016 a dividend of $.18 per share. We believe that our current cash availability from our cash on hand, positive cash flow from operations and funds available on our term loan will be sufficient to fund operations and planned capital expenditures for at least the next twelve months.

 

Cash Flows

 

The following table is a summary of our cash flows for the twenty six weeks ended April 1, 2017 and April 2, 2016.

		---------Twenty Six Weeks Ended--------
		April 1, 2017				April 2, 2016
		(in Thousands)
Net cash provided by operating activities		$	4,452			$	5,340
Net cash used in investing activities			(4,570	)			(2,310	)
Net cash provided by (used in) financing activities			464				(2,437	)
Net Increase  in Cash and Cash Equivalents			447				593
Cash and Cash Equivalents, Beginning			10,174				9,267
Cash and Cash Equivalents, Ending		$	10,621			$	9,860

 

During the twenty six weeks ended April 1, 2017, our Board of Directors declared and paid a cash dividend of 20 cents per share to shareholders of record on March 17, 2017. During the twenty six weeks ended April 2, 2016, our Board of Directors declared and paid a cash dividend of 18 cents per share to shareholders of record on March 18, 2016. 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.

 

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. We acquired property, plant and equipment and construction in progress of $5,025,000, (of which $699,000 was of deposits recorded in other assets as of October 1, 2016), during the twenty six weeks ended April 1, 2017, which amount included $2.475 million for the purchase of real property, $969,000 for the construction and redevelopment of a new package store on the same, $478,000 for the construction of a catering kitchen, and $125,000 for renovations to three (3) Company owned restaurants and one Company owned package liquor store. During the twenty six weeks ended April 2, 2016, we acquired property, plant and equipment of $2,407,000, (of which $211,000 was of deposits recorded in other assets as of October 3, 2015), during the twenty six weeks ended April 2, 2016, which amount included $201,000 for one (1) limited partnership and one (1) Company owned restaurants.

 

All of our owned units require periodic refurbishing in order to remain competitive. We anticipate the cost of this refurbishment in our fiscal year 2017 to be approximately $900,000, of which $125,000 has been spent through April 1, 2017.

 

Long Term Debt

 

As of April 1, 2017, we had long term debt of $13,237,000, as compared to $11,679,000 as of April 2, 2016, and $10,092,000 as of October 1, 2016. Our long term debt increased as of April 1, 2017 as compared to April 2, 2016 due to our borrowing $2.00 million on our Credit Line and $1,199,000 for financed insurance premiums. As of April 1, 2017, we are in compliance with the covenants of all loans with our lender.

 

As of April 1, 2017, the aggregate principal balance owed from the financing of our property and general liability insurance policies is $769,000.

 

Purchase Commitments

 

In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants, on November 5, 2016, we entered into a purchase agreement with our current rib supplier, whereby we agreed to purchase approximately $5,779,000 of baby back ribs during calendar year 2017 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.

 

Working Capital

 

The table below summarizes the current assets, current liabilities, and working capital for our fiscal quarters ended April 1, 2017, April 2, 2016 and our fiscal year ended October 1, 2016.

 

Item		April 1 2017				April 2, 2016				Oct. 1, 2016
		(in Thousands)
Current Assets		$	16,049			$	14,918			$	15,331
Current Liabilities			11,643				12,218				11,456
Working Capital		$	4,406			$	2,640			$	3,875

 

Our working capital as of April 1, 2017 increased by 66.89% from our working capital as of April 2, 2016 and increased by 13.70% from our working capital as of October 1, 2016. During the second quarter of our fiscal year 2017, we used $2,475,000 ($2,000,000 of which was borrowed from our Credit Line) to fund the purchase price on our acquisition of the vacant real property which is contiguous to the real property we own where our new package liquor store located at 13185 Biscayne Boulevard, North Miami, Florida, (Store #20P) and our restaurant located at 13205 Biscayne Boulevard, North Miami, Florida (Store #20R) operate. During the second quarter of our fiscal year 2016, we used $922,500 to purchase the real property and improvements located at 1290 East Commercial Boulevard, Oakland Park, Broward County, Florida and the vacant real property located at 4990 N.E. 12^th Avenue, Oakland Park, Broward County, 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, positive cash flow from operations and funds available on our term loan will adequately fund operations, debt reductions and planned capital expenditures throughout our fiscal year 2017.

 

Off-Balance Sheet Arrangements

 

We do not have off-balance sheet arrangements.

 

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.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We do not ordinarily hold market risk sensitive instruments for trading purposes and as of April 1, 2017 held no equity securities.

 

Interest Rate Risk

 

As part of our ongoing operations, we are exposed to interest rate fluctuations on our borrowings. As more fully described in Note 9 “Fair Value Measurements of Financial Instruments” to the Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for our fiscal year ended October 1, 2016, we use interest rate swap agreements to manage these risks. These instruments are not used for speculative purposes but are used to modify variable rate obligations into fixed rate obligations.

 

At April 1, 2017, we had three variable rate debt instruments outstanding that are impacted by changes in interest rates. In November, 2011, we financed our purchase of the real property and two building shopping center in Miami, Florida, with a $4,500,000 mortgage loan (the “$4.5M Mortgage Loan”). In January, 2013, we refinanced the mortgage loan encumbering the property where our combination package liquor store and restaurant located at 4 N. Federal Highway, Hallandale, Florida, (Store #31) operates, which mortgage loan is held by an unaffiliated third party lender (the “$1.405M Loan”). In December, 2016, we closed on a secured revolving line of credit which entitles us to borrow, from time to time through December 28, 2017, up to $5,500,000 (the “Credit Line”).

 

As a means of managing our interest rate risk on these debt instruments, we entered into interest rate swap agreements with our unrelated third party lender to convert these variable rate debt obligations to fixed rates. We are currently party to the following three (3) interest rate swap agreements:

 

(i)        The first interest rate swap agreement entered into in November, 2011 by our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, relates to the $4.5 Mortgage Loan (the “$4.5M Mortgage Loan Swap”). The $4.5M Mortgage Loan Swap requires us to pay interest for an eight (8) year period at a fixed rate of 4.51% on an initial amortizing notional principal amount of $3,750,000, while receiving interest for the same period at LIBOR – 1 Month, plus 2.25%, on the same amortizing notional principal amount. We determined that at April 1, 2017, the interest rate swap agreement is an effective hedging agreement and the fair value was not material; and

 

(ii)         The second interest rate swap agreement entered into in January, 2013 relates to the $1.405M Loan (the “$1.405M Term Loan Swap”). The $1.405M Term Loan Swap requires us to pay interest for a twenty (20) year period at a fixed rate of 4.35% on an initial amortizing notional principal amount of $1,405,000, while receiving interest for the same period at LIBOR - 1 month, plus 2.25%, on the same amortizing notional principal amount. We determined that at April 1, 2017, the interest rate swap agreement is an effective hedging agreement and the fair value was not material; and

 

(iii)        The third interest rate swap agreement entered into in December, 2016 relates to the Line of Credit (the “Line of Credit Swap”). The Line of Credit Swap requires us to pay interest for a five (5) year period, commencing December 28, 2017 at a fixed rate of 4.65% on an initial amortizing notional principal amount of $5,500,000, while receiving interest for the same period at LIBOR – 1 Month, plus 2.25%, on the same amortizing notional principal amount. We determined that at April 1, 2017, the interest rate swap agreement is an effective hedging agreement and the fair value was not material.

 

At April 1, 2017, our cash resources earn interest at variable rates. Accordingly, our return on these funds is affected by fluctuations in interest rates.

 

There is no assurance that interest rates will increase or decrease over our next fiscal year or that an increase will not have a material adverse effect on our operations.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the U.S. Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As of April 1, 2017, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934) . Based on that evaluation, management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of April 1, 2017.

 

Changes in Internal Control Over Financial Reporting

 

During the period covered by this report, we have not made any change to our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

See “Litigation” on page 11 of this Report and Item 1 and Item 3 to Part 1 of the Annual Report on Form 10-K for the fiscal year ended October 1, 2016 for a discussion of other legal proceedings resolved in prior years.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Purchase of Company Common Stock

 

During the thirteen weeks ended April 1, 2017 and April 2, 2016, we did not purchase any shares of our common stock. As of April 1, 2017, we still have authority to purchase 65,414 shares of our common stock under the discretionary plan approved by the Board of Directors at its meeting on May 17, 2007.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed with this Report:

 

	Exhibit	Description
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the  Securities Exchange Act of 1934, as amended.
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

List of XBRL documents as exhibits 101

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	FLANIGAN'S ENTERPRISES, INC.
Date: May 16, 2017	/s/ James G. Flanigan
	JAMES G. FLANIGAN, Chief Executive Officer and President
	/s/ Jeffrey D. Kastner
	JEFFREY D. KASTNER, Chief Financial Officer and Secretary
	(Principal Financial and Accounting Officer)