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BDL > SEC Filings for BDL > Form 10-K on 28-Dec-2011All Recent SEC Filings

Show all filings for FLANIGANS ENTERPRISES INC

Form 10-K for FLANIGANS ENTERPRISES INC


28-Dec-2011

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 2011 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 1, 2011 and October 2, 2010 is set forth in the consolidated financial statements which are attached hereto.

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General

At October 1, 2011, we (i) operated 24 units, (excluding the adult entertainment club referenced in (ii) below), 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; (ii) own but do not operate one adult entertainment club; and (iii) franchise an additional five units, consisting of one restaurant and four combination restaurants/package liquor stores, (one restaurant of which we operate).

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 (five 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.s

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.

Results of Operations



REVENUES (in thousands):
                                   Fifty Two                Fifty Two
                                  Weeks Ended              Weeks Ended
                                  Oct. 1, 2011             Oct. 2, 2010
Sales
Restaurant, food             $ 45,951        64.8 %   $ 44,354        64.6 %
Restaurant, bar                11,814        16.7 %     11,363        16.6 %
Package goods                  13,141        18.5 %     12,898        18.8 %
Total                          70,906       100.0 %     68,615       100.0 %
Franchise related revenues      1,023                    1,076
Owner's fee                       161                      165
Other operating
  income                          219                      137
Total Revenues               $ 72,309                 $ 69,993

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Comparison of Fiscal Years Ended October 1, 2011 and October 2, 2010

Revenues.Total revenue for our fiscal year 2011 increased $2,316,000 or 3.31% to $72,309,000 from $69,993,000 for our fiscal year 2010.

Restaurant Food Sales. Restaurant revenue generated from the sale of food, including non-alcoholic beverages, at restaurants totaled $45,951,000 for our fiscal year 2011 as compared to $44,354,000 for our fiscal year 2010. Comparable weekly restaurant food sales (for restaurants open for all of our fiscal years 2011 and 2010, which consists of seven restaurants owned by us and eight restaurants owned by affiliated limited partnerships) was $808,000 and $780,000 for our fiscal years 2011 and 2010, respectively, an increase of 3.59%. Comparable weekly restaurant food sales for Company owned restaurants only was $325,000 and $311,000 for our fiscal years 2011 and 2010, respectively, an increase of 4.50%. Comparable weekly restaurant food sales for affiliated limited partnership owned restaurants only was $483,000 and $469,000 for our fiscal years 2011 and 2010, respectively, an increase of 2.99%. We increased menu prices during the fourth quarter of our fiscal year 2011 to offset higher food costs and overall expenses.

Restaurant Bar Sales. Restaurant revenue generated from the sale of alcoholic beverages at restaurants totaled $11,814,000 for our fiscal year 2011 as compared to $11,363,000 for our fiscal year 2010. Comparable weekly restaurant bar sales (for restaurants open for all of our fiscal years 2011 and 2010, which consists of seven restaurants owned by us and eight restaurants owned by affiliated limited partnerships) was $205,000 and $199,000 for our fiscal years 2011 and 2010, respectively, an increase of 3.02%. Comparable weekly restaurant bar sales for Company owned restaurants only was $79,000 and $78,000 for our fiscal years 2011 and 2010, respectively, an increase of 1.28%. Comparable weekly restaurant bar sales for affiliated limited partnership owned restaurants only was $126,000 and $121,000 for our fiscal years 2011 and 2010, respectively, an increase of 4.13%. We increased our bar liquor prices during the fourth quarter of our fiscal year 2010.

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Package Liquor Store Sales. Revenue generated from sales of liquor and related items at package liquor stores totaled $13,141,000 for our fiscal year 2011 as compared to $12,898,000 for our fiscal year 2010, an increase of $243,000 or 1.88%. The weekly average of same store package liquor store sales, which includes all nine (9) Company owned package liquor stores, was $253,000 for our fiscal year 2011 as compared to $248,000 for our fiscal year 2010, an increase of 2.02%.

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 2011 increased $2,804,000 or 4.22% to $69,182,000 from $66,378,000 for our fiscal year 2010. 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 2012 due primarily to an expected general increase in food costs, including an increase in our cost of ribs. Operating costs and expenses increased as a percentage of total sales to approximately 95.68% in our fiscal year 2011 from 94.84% in our fiscal year 2010.

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

Restaurant Food and Bar Sales. Gross profit for food and bar sales for our fiscal year 2011 increased to $37,857,000 from $36,570,000 for our fiscal year 2010. 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 65.54% for our fiscal year 2011 and 65.64% for our fiscal year 2010. We anticipate that our gross profit for restaurant food and bar sales will increase during our fiscal year 2012 due primarily to an increase in menu prices instituted in the fourth quarter of our fiscal year 2011, offset by a general increase in food costs, including an increase in our cost of ribs during calendar year 2012.

Package Liquor Store Sales. Gross profit for package liquor store sales for our fiscal year 2011 increased to $4,381,000 from $4,319,000 for our fiscal year 2010. Our gross profit margin (calculated as gross profit reflected as a percentage of package liquor store sales) for package liquor store sales was 33.34% for our fiscal year 2011 and 33.49% for our fiscal year 2010. We anticipate the gross profit margin for package store sales to decrease throughout our fiscal year 2012 due to our inability to purchase "close out" and inventory reduction merchandise from wholesalers.

Payroll and Related Costs. Payroll and related costs for our fiscal year 2011 increased $1,044,000 or 5.05% to $21,712,000 from $20,668,000 for our fiscal year 2010 due primarily to increases in payroll taxes, including unemployment tax. We anticipate that our payroll and related costs will increase through our fiscal year 2012 due primarily to a 4.9% increase in the Florida minimum wage to take effect January 1, 2012. Payroll and related costs as a percentage of total sales was 30.03% in our fiscal year 2011 and 29.53% of total sales in our fiscal year 2010.

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Occupancy Costs. Occupancy costs (consisting of rent, common area maintenance, repairs, real property taxes and amortization of leasehold interests) for our fiscal year 2011 increased $98,000 or 2.35% to $4,264,000 from $4,166,000 for our fiscal year 2010. We anticipate that our occupancy costs will decrease through our fiscal year 2012 as a result of our purchase of the shopping center in Kendall, Florida and the elimination of rent from a limited partnership owned restaurant located therein (Store #70) upon consolidation.

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 2011 increased $720,000 or 5.21% to $14,538,000 from $13,818,000 for our fiscal year 2010. Selling, general and administrative expenses increased as a percentage of total sales in our fiscal year 2011 to 20.11% as compared to 19.74% in our fiscal year 2010. We anticipate that our selling, general and administrative expenses will increase through our fiscal year 2012 across all categories.

Depreciation and Amortization. Depreciation and amortization for our fiscal year 2011 increased $112,000 or 4.56% to $2,570,000 from $2,458,000 for our fiscal year 2010. As a percentage of revenue, depreciation and amortization expense was 3.55% of revenue for our fiscal year 2011 and 3.51% of revenue for our fiscal year 2010.

Interest Expense, Net. Interest expense for our fiscal year 2011 increased $132,000 to $615,000 from $483,000 for our fiscal year 2010. Interest expense increased during our fiscal year 2011 primarily due to the interest paid on the mortgages associated with the purchase of the real property upon which our restaurant located at 2600 West Davie Boulevard, Fort Lauderdale, Florida (Store #22) and our combination restaurant and package liquor store located at 13205 Biscayne Boulevard, North Miami, Florida (Store #20) operate, during the fourth quarter of our fiscal year 2010 and the first quarter of our fiscal year 2011, respectively.

Net Income Attributable to Stockholders. Net income attributable to stockholders for our fiscal year 2011 decreased $230,000 or 13.70% to $1,449,000 from $1,679,000 for our fiscal year 2010. As a percentage of sales, net income for our fiscal year 2011 is 2.00%, as compared to 2.40% in our fiscal year 2010. During our fiscal year 2011, we recognized income of $231,000, offset by income tax of $67,000, from the sale of our interest, as guarantor, of a nine (9) year leasehold interest. Without giving effect to the above non-recurring item, our net income attributable to stockholders for our fiscal year 2011 would have decreased $394,000 or 23.47% to $1,285,000.

New Limited Partnership Restaurants

During our fiscal years 2011 and 2010, we did not have a new restaurant location in the development stage and did not recognize any pre-opening costs.

While we currently have no new restaurants under development, if we are to open new restaurants, our income from operations will be adversely affected due to our obligation to fund pre-opening costs, including but not limited to pre-opening rent for the new locations. We believe that our current cash on hand, together with our expected cash generated from operations will be sufficient to fund our operations and capital expenditures for at least the next twelve months.

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Trends

During the next twelve months, we expect that our gross profit for restaurant food and bar sales will increase due primarily to an increase in menu prices instituted during the fourth quarter of our fiscal year 2011, offset by a general increase in food costs, including an increase in our cost of ribs during calendar year 2012. We expect package store sales to remain stable, although we expect the gross profit margin for package store sales to decrease due to our inability to purchase "close out" and inventory reduction merchandise from wholesalers. We expect higher food costs and higher overall expenses to adversely affect our net income. We also increased our advertising to attract and retain our customers against increased competition. With these menu price increases, we plan to limit further menu price increases as long as possible, but continue to face increased competition and expect higher food costs and higher overall expenses, which will adversely affect our net income. We may be required to raise menu prices wherever competitively possible.

Although we have no new restaurant in development, we continue to search for new locations to open restaurants and thereby expand our business, but we are now looking for locations that will not require an extensive and costly renovation. Any new locations will likely be opened using 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 our cash on hand and positive cash flow from operations. As of October 1, 2011, we had cash of approximately $4,264,000, a decrease of $2,183,000 from our cash balance of $6,447,000 as of October 2, 2010. The decrease in cash as of October 1, 2011 was primarily due to (i) our expending approximately $1,750,000 for the cash portion of the purchase price required to close on the purchase of the real property and building where our combination restaurant and package liquor store located at 13205 Biscayne Boulevard, North Miami, Florida, (Store #20) operates, offset by $850,000 we borrowed from a related third party at the end of the first quarter, which loan is secured by a mortgage on the real property and building; and (ii) our expending approximately $1,261,000 for renovations to one (1) existing Company owned restaurant. Management believes that the Company's current cash availability from its cash on hand and the expected cash from operations will be sufficient to fund operations and capital expenditures for at least the next twelve months.

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Cash Flows


                                                                        Fiscal Years
                                                                     2011          2010
                                                                       (in thousands)
Net cash and cash equivalents  provided by operating activities   $   4,352     $   7,122
Net cash and cash equivalents  used in investing activities          (4,172 )      (2,958 )
Net cash and cash equivalents  used in financing activities          (2,363 )      (2,297 )
Net increase (decrease) in cash and equivalents                      (2,183 )       1,867
Cash and equivalents, beginning of year                               6,447         4,580
Cash and equivalents, end of year                                 $   4,264     $   6,447

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 and equipment of $4,586,000, (including $122,000 of which was financed and $28,000 of deposits recorded in other assets as of October 2, 2010), during our fiscal year 2011, including $1,261,000 for renovations to one (1) existing Company owned restaurant. During our fiscal year 2010, we acquired property and equipment of $5,005,000, (including $1,896,000 of which was financed, $99,000 of which was the non-cash purchase of the assets of the franchised restaurant and $36,000 of deposits recorded in other assets as of October 3, 2009), during our fiscal year 2010, including $1,028,000 for renovations to four (4) existing Company owned restaurants. All of our owned units require periodic refurbishing in order to remain competitive. The cost of this refurbishment in our fiscal year 2011 was $1,261,000 for renovations to one (1) existing Company owned restaurant. We anticipate the cost of this refurbishment in our fiscal year 2012 will be approximately $600,000, which funds will be provided from operations.

Debt

As of the end of our fiscal year 2011, we had debt of $8,757,000, as compared to $8,053,000 as of the end of our fiscal year 2010.

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Subsequent to the end of our fiscal year 2011, we borrowed $1,600,000 from a non affiliated third party lender, (the "$1.6M Term Loan"), as the cash to close on our purchase of the real property and buildings where our limited partnership restaurant at 12790 SW 88th Street, Miami, Florida (Store #70) is located and to insure that we have adequate working capital and cash reserves. The $1.6M Term Loan is in the principal amount of $1,600,000 and bears interest at a variable interest rate equal to the BBA LIBOR Rate (Adjusted Periodically), plus 2.25%. We entered into an interest rate swap agreement to hedge the interest rate risk, which fixed the interest rate on the term loan at 3.43% per annum throughout the term of the loan. The $1.6M Term Loan is payable interest only for three (3) months and then is fully amortized over forty five (45) months, with our monthly payment of principal and interest, totaling $38,000. We granted our lender a security interest in substantially all of our assets as collateral to secure our repayment obligations under our term loan.

Subsequent to the end of our fiscal year 2011, Flanigan's Calusa Center, LLC, our wholly owned limited liability company, borrowed $4,500,000 from a non-affiliated third party lender, (the "$4.5M Mortgage"), which we guaranteed, as a part of the purchase price of the real property and buildings where our limited partnership restaurant at 12790 SW 88thStreet, Miami, Florida (Store #70) is located. The $4.5M Mortgage Loan is in the original principal amount of $4,500,000 and bears interest at a variable rate equal to the BBA LIBOR Rate (Adjusted Periodically) plus 2.25%. We entered into an interest rate swap agreement to hedge the interest rate risk as to $3,750,000 of the principal amount, (the "$3.75M Hedged Amount"), which fixed the interest rate as to that portion of the principal amount of the $4.5M Mortgage Loan at 4.51% per annum throughout the term of the loan. The $4.5M Mortgage Loan is amortized over twenty (20) years, with our current monthly payment of principal and interest as to the $3.75M Hedged Amount, each in the amount of $23,700 and with our current monthly payment of principal and interest as to that portion of the principal amount not fixed by the interest rate swap agreement, ($750,000), payable at a variable interest rate, (2.49% as of November 30, 2011). The entire principal balance and all accrued but unpaid interest is due on December 1, 2019.

We repaid long term debt, including auto loans, financed insurance premiums and mortgages in the amount of $1,350,000 and $1,075,000 in our fiscal years 2011 and 2010, respectively.

Financed Insurance Premiums

(i) For the policy year beginning December 30, 2009, our property insurance was a two (2) year policy with our insurance carrier. The two (2) year property insurance premium, in the amount of $631,000, was financed in full through an unaffiliated third party lender. The finance agreement was amortized over 20 months and was paid in full during the fourth quarter of our fiscal year 2010.

(ii) For the policy year beginning December 30, 2010, our property insurance is a three (3) year policy with our insurance carrier. The three (3) year property insurance premium is in the amount of $894,000, of which $727,000 is financed through an unaffiliated third party lender. The finance agreement provides that we are obligated to repay the amounts financed, together with interest at the rate of 4.89% per annum, over 30 months, with monthly payments of principal and interest, each in the amount of approximately $25,000. The finance agreement is secured by a 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, 2010, 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 $244,000, of which $195,000 was financed through the same unaffiliated third party lender. The finance agreement obligated us to repay the amounts financed together with interest at the rate of 2.99% per annum, over 9 months, with monthly payments of principal and interest, each in the amount of $23,000 and was paid in full during the fourth quarter of our fiscal year 2011. The finance agreement was secured by a security interest in all insurance policies, all unearned premium, return premium, dividend payments and loss payments thereof.

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(iv) For the policy year beginning December 30, 2010, 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 $198,000, of which $159,000 was financed through the same unaffiliated third party lender. The finance agreement obligated us to repay the amounts financed, together with interest at the rate of 2.99% per annum, over 9 months, with monthly payments of principal and interest, each in the amount of $17,000. The finance agreement was secured by a security agreement in all insurance policies, all unearned premium, return premium, dividend payments and loss payments thereof.

(v) For the policy year beginning December 30, 2011, 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 $286,000, of which $250,000 is financed through the same unaffiliated third party lender. The finance agreement obligates us to repay the amounts financed together with interest at the rate of 3.19% per annum, over 10 months, with monthly payments of principal and interest, each in the amount of $25,000. The finance agreement is secured by a security interest in all insurance policies, all unearned premium, return premium, dividend payments and loss payments thereof.

(vi) For the policy year beginning December 30, 2011, 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 $356,000, of which $297,000 is financed through the same unaffiliated third party lender. The finance agreement obligates us to repay the amounts financed, together with interest at the rate of 3.19% per annum, over 10 months, with monthly payments of principal and interest, each in the amount of $30,000. The finance agreement is secured by a security agreement in all insurance policies, all unearned premium, return premium, dividend payments and loss payments thereof.

As of October 1, 2011, the aggregate principal balance owed from the financing of our property and general liability insurance policies is $573,000.

Purchase Commitments

In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants during calendar year 2011, on November 30, 2010, we entered into a purchase agreement with a new rib supplier, whereby we agreed to purchase approximately $3,100,000 of baby back ribs from this vendor at a fixed cost. Pursuant to the terms of our purchase agreement, we opted to purchase the maximum supply of baby back ribs available to take advantage of the more favorable pricing, which supply we estimate will last through February, 2012. As of October 1, 2011, we still owed approximately $1,200,000 under our purchase agreement.

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In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants, on October 31, 2011, we entered into a purchase agreement with a new rib supplier, whereby we agreed to purchase approximately $3,100,000 of baby back ribs during calendar year 2012, commencing March 1, 2012, 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.

Purchase of Limited Partnership Interests

During our fiscal year 2011, we purchased from one limited partner (who is not an officer, director or family member of officers or directors) a limited partnership interest of 1.06% in one (1) limited partnership which owns a restaurant for an aggregate purchase price of $17,000. During our fiscal year 2010, we purchased from two separate limited partners (neither of whom are officers, directors or family members of officers or directors) limited partnership interests of 0.15% and 0.30%, respectively, in one (1) limited partnership which owns a restaurant for an aggregate purchase price of $10,000.

Working capital

The table below summarizes our current assets, current liabilities and working capital for our fiscal years 2011 and 2010:

                       Oct. 1      Oct. 2
  (in thousands)        2011        2010

Current assets        $ 8,293     $ 9,754

Current liabilities     6,473       6,373

Working capital         1,820       3,381

Our working capital as of October 1, 2011 decreased by 46.17% from working capital as of October 2, 2010. Our working capital decreased during our fiscal year 2011 from our working capital for our fiscal year ended October 2, 2010 primarily due to our (i) use of approximately $900,000 in connection with our acquisition of the real property and building where our combination restaurant and package liquor store located at 13205 Biscayne Boulevard, North Miami, Florida, (Store #20) operates, (ii) use of $1,261,000 for renovations to the existing Company owned restaurant located at 45 South Federal Highway, Boca Raton, Florida;(iii) use of $300,000 in connection with our acquisition of the operating assets of the existing limited partnership owned restaurant located at 950 South Dixie Highway, Stuart, Florida; and (iv) payment on January 18, 2011 of the dividend ($188,000) declared by our Board of Directors on December 22, 2010.

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 . . .

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