FLANIGANS ENTERPRISES INC 10-K

ITEM 9A. CONTROLS AND PROCEDURES . Evaluation of Disclosure Controls and Procedures Based on evaluations as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer, with the participation of our management team, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective to ensure that information the Company is required to disclose in reports that it files or submits under the Securities Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. 51 Table of Contents Management’s Assessment on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Management, including our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the Company's internal control over financial reporting. This evaluation was based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013 (“COSO”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of October 3, 2020, our internal control over financial reporting was effective. Limitations on the Effectiveness of Controls and Permitted Omission from Management’s Assessment Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can only provide reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K. ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. The information required by Item 10 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year. The information under the heading “Executive Officers” in Part I of this Form 10-K is also incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION . The information required by Item 11 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year. 52 Table of Contents ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The information required by Item 12 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. The information required by Item 13 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. The information required by Item 14 is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission no later than 120 days from the end of our 2020 fiscal year. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . (a)(1) Financial Statements See Part II, Item 8, “Financial Statements and Supplementary Data” for Financial Statements included with this Annual Report on Form 10-K. (a)(2) Financial Statement Schedules All other schedules have been omitted because the required information is not applicable or the information is included in the consolidated financial statements or the Notes thereto. (a)(3) Exhibits The exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual Report. Incorporated by Reference Exhibit Number Exhibit Description Form Date Number Filed Herewith 2 Plan of Reorganization, Amended Disclosure Statement, Amended Plan of Reorganization, Modification of Amended Plan of Reorganization, Second Modification of Amended Plan of Reorganization, Order Confirming Plan of Reorganization SB-2 5/5/1987 2 53 Table of Contents 3 Restated Articles of Incorporation, adopted January 9, 1984 10-K 12/29/1982 3 10(a)(1) Employment Agreement with Joseph G. Flanigan* DEF14A 1/27/1988 10(a)(1) 10(a)(2) Form of Employment Agreement between Joseph G. Flanigan and the Company (as ratified and amended by the stockholders at the 1988 annual meeting is incorporated herein by reference).* 10-K 10(a)(1) 10(c) Consent Agreement regarding the Company's Trademark Litigation 8-K 4/10/1985 10( c) 10(d) King of Prussia(#850)Partnership Agreement* 8-K 4/10/1985 10(d) 10(o) Management Agreement for Atlanta, Georgia, (#600)* 10-K 10/3/1992 10(o) 10(p) Settlement Agreement with Former Vice Chairman of the Board of Directors (re #5) 10-K 10/3/1992 10(p) 10(q) Hardware Purchase Agreement and Software License Agreement for restaurant point of sale system. 10-KSB 10/2/1993 10(q) 10(a)(3) Key Employee Incentive Stock Option Plan DEF14A 1/26/1994 10(a)(3) 10( r) Limited Partnership Agreement of CIC Investors #13, Ltd,. between Flanigan's Enterprises, Inc., as General Partner and fifty percent owner of the limited partnership, and Hotel Properties, LTD. * 10-KSB 9/30/1995 10(r) 10(s) Form of Franchise Agreement between Flanigan's Enterprises, Inc. and Franchisees. * 10-KSB 9/30/1995 10(s) 10(t) Licensing Agreement between Flanigan's Enterprises, Inc. and James B. Flanigan, dated November 4, 1996, for non-exclusive use of the service mark "Flanigan's" in the Commonwealth of Pennsylvania. * 10-KSB 9/28/1996 10(t) 54 Table of Contents 10(u) Limited Partnership Agreement of CIC Investors #15 Ltd., dated March 28, 1997, between B.D. 15 Corp. as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as a limited partner owning twenty five percent of the limited partnership. * 10-KSB 9/27/1997 10(u) 10(v) Limited Partnership Agreement of CIC Investors #60 Ltd., dated July 8, 1997, between Flanigan's Enterprises, Inc., as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as limited partner owning forty percent of the limited partnership. * 10-KSB 9/27/1997 10(v) 10(w) Stipulated Agreed Order of Dismissal upon Mediation with former franchisee. 10-KSB 9/27/1997 10(w) 10(x) Limited Partnership Agreement of CIC Investors #70, Ltd. dated February 1999 between Flanigan's Enterprises, Inc. as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as limited partner owning forty percent of the limited partnership. * 10-KSB 10/02/1999 10(x) 10(y) Limited Partnership Agreement of CIC Investors #80, Ltd., dated May 2001, between Flanigan's Enterprises, Inc. as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc., as limited partner owning twenty five percent of the limited partnership. * 10-KSB 9/29/2001 10(y) 10(z) Limited Partnership Agreement of CIC Investors #95, Ltd., dated July 2001, between Flanigan's Enterprises, Inc., as General Partner and numerous limited partners, including Flanigan's Enterprises, Inc. as limited partner owning twenty eight percent of the limited partnership. * 10-KSB 9/29/2001 10(z) 55 Table of Contents 10(bb) Limited Partnership Agreement of CIC Investors #65, Ltd., dated June 24, 2004, between Flanigan’s Enterprises, Inc., as General Partner, and numerous limited partners, including Flanigan’s Enterprises, Inc. as limited partner owning twenty six percent of the limited partnership. * 10-K 10/2/2004 10(bb) 10(cc) Amended and Restated Limited Partnership Certificate and Agreement of CIC Investors #13, Ltd., dated March 1, 2006, between Flanigan’s Enterprises, Inc., as General Partner, Flanigan’s Management Services, Inc. and numerous limited partners, including Flanigan’s Enterprises, Inc. as limited partner owning thirty nine percent of the limited partnership. * 10-K 9/30/2006 10(cc) 10(dd) Limited Partnership Agreement of CIC Investors #50, Ltd., dated October 17, 2006, between Flanigan’s Enterprises, Inc., as General Partner, Flanigan’s Management Services, Inc. and numerous limited partners, including Flanigan’s Enterprises, Inc. as limited partner owning sixteen percent of the limited partnership. * 10-K 9/29/2007 10(dd) 10(ee) Limited Partnership Agreement of CIC Investors #55, Ltd., dated December 12, 2006, between Flanigan’s Enterprises, Inc., as General Partner, Flanigan’s Management Services, Inc. and numerous limited partners, including Flanigan’s Enterprises, Inc. as limited partner owning forty eight percent of the limited partnership. * 10-K 9/29/2007 10(ee) 56 Table of Contents 10(ff) Limited Partnership Agreement of CIC Investors #90, Ltd., dated January 18, 2012, between Flanigan’s Enterprises, Inc., as General Partner, Flanigan’s Management Services, Inc. and numerous limited partners, including Flanigan’s Enterprises, Inc. as limited partner owning five percent of the limited partnership. * 10-K 9/29/2012 10(ff) 13 Registrant's Form 10-K constitutes the Annual Report to Shareholders for the fiscal year ended October 3, 2020. X 21(a) Company's subsidiaries are set forth in this Annual Report on Form 10-K. X 31.1 Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended of Chief Executive Officer . X 31.2 Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended of Chief Financial Officer. X 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer. X 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer. X * Compensatory plan or arrangement. List of XBRL documents as exhibits 101 ITEM 16. FORM 10-K SUMMARY None. 57 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FLANIGAN'S ENTERPRISES, INC. By: /s/ JAMES G. FLANIGAN II JAMES G. FLANIGAN II Chief Executive Officer Date: 1/15/2021 By: /s/ JEFFREY D. KASTNER JEFFREY D. KASTNER Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) Date: 1/15/2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their capacities and on the dates indicated. /s/ JAMES G. FLANIGAN II Chairman of the Board, Date: 1/15/2021 James G. Flanigan II Chief Executive Officer, and Director /s/ JEFFREY D. KASTNER Chief Financial Officer, Date: 1/15/2021 Jeffrey D. Kastner Secretary and Director /s/ AUGUST BUCCI Chief Operating Officer Date: 1/15/2021 August Bucci and Director /s/ MICHAEL B. FLANIGAN Director Date: 1/15/2021 Michael B. Flanigan /s/ PATRICK J. FLANIGAN Director Date: 1/15/2021 Patrick J. Flanigan /s/ CHRISTOPHER O’NEIL Vice President of Package Date: 1/15/2021 Christopher O’Neil Operations and Director 58 Table of Contents /s/ MARY ELIZABETH BENNETT Director Date: 1/15/2021 Mary Elizabeth Bennett /s/ CHRISTOPHER J. NELMS Director Date: 1/15/2021 Christopher J. Nelms /s/ JOHN P. FOSTER Director Date: 1/15/2021 John P. Foster 59 Table of Contents F LANIGAN’S E NTERPRISES, I NC. AND S UBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 3, 2020 AND SEPTEMBER 28, 2019 Table of Contents F LANIGAN’S E NTERPRISES, I NC. AND S UBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-1 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets F-2 Statements of Income F-3 Statements of Stockholders’ Equity F-4 Statements of Cash Flows F-5 – F-6 Notes to Financial Statements F-7 - F-37 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Flanigan’s Enterprises, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Flanigan’s Enterprises, Inc. (the “Company”) as of October 3, 2020 and September 28, 2019, the related consolidated statements of income, stockholders’ equity and cash flows for each of the two years in the period ended October 3, 2020 and September 28, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 3, 2020 and September 28, 2019, and the results of its operations and cash flows for each of the two years in the period ended October 3, 2020, in conformity with accounting principles generally accepted in the United States of America. Adoption of New Accounting Standard As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for leases due to the adoption of ASU No. 2016-02, Leases (Topic 842), as amended, effective September 29, 2019, using the modified retrospective approach. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provides a reasonable basis for our opinion. /s/ Marcum llp Marcum llp We have served as the Company’s auditor since 1999. Fort Lauderdale, FL January 15, 2021 F- 1 Table of Contents F LANIGAN’S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 3, 2020 AND SEPTEMBER 28, 2019 (rounded to the nearest thousandth, except share amounts) ASSETS 2020 2019 Current Assets: Cash and cash equivalents $ 29,922,000 $ 13,672,000 Prepaid income taxes 74,000 55,000 Other receivables 681,000 870,000 Inventories 3,624,000 3,292,000 Prepaid expenses 2,207,000 1,704,000 Total current assets 36,508,000 19,593,000 Property and Equipment, Net 46,003,000 46,187,000 Construction in progress 981,000 1,292,000 46,984,000 47,479,000 Right-of-use asset, finance leases 4,749,000 — Right-of-use asset, operating leases 22,150,000 — 26,899,000 — Investment in Limited Partnerships 621,000 231,000 Other Assets: Liquor licenses 630,000 630,000 Deferred tax assets 352,000 249,000 Leasehold interests, net 200,000 296,000 Other 290,000 277,000 Total other assets 1,472,000 1,452,000 Total assets $ 112,484,000 $ 68,755,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 9,238,000 $ 8,532,000 Due to franchisees 3,142,000 2,553,000 Current portion of long-term debt 5,094,000 1,983,000 Finance lease liability, current 4,772,000 — Operating lease liability, current 3,116,000 — Deferred rent — 61,000 Total current liabilities 25,362,000 13,129,000 Long-Term Debt, Net of Current Portion 21,229,000 11,097,000 Operating lease liability, non current 20,337,000 — Total liabilities 66,928,000 24,226,000 Commitments and Contingencies Equity: Flanigan's Enterprises, Inc. stockholders' equity Common stock, $.10 par value; 5,000,000 shares authorized; 4,197,642 shares issued; 1,858,647 outstanding for years ended 2020 and 2019 420,000 420,000 Capital in excess of par value 6,240,000 6,240,000 Retained earnings 38,848,000 37,738,000 Treasury stock, at cost, 2,338,995 shares for the years ended 2020 and 2019 (6,077,000 ) (6,077,000 ) Total Flanigan's Enterprises, Inc. stockholders' equity 39,431,000 38,321,000 Noncontrolling interests 6,125,000 6,208,000 Total equity 45,556,000 44,529,000 Total liabilities and equity $ 112,484,000 $ 68,755,000 F- 2 Table of Contents F LANIGAN’S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years Ended October 3, 2020 and September 28, 2019 (rounded to the nearest thousandth, except share and per share amounts) 2020 2019 Revenues: Restaurant food sales $ 68,685,000 $ 71,814,000 Restaurant bar sales 15,967,000 22,476,000 Package store sales 26,276,000 19,327,000 Franchise-related revenues 1,260,000 1,610,000 Other operating income 109,000 213,000 Rental income 680,000 762,000 112,977,000 116,202,000 Costs and Expenses: Cost of merchandise sold: Restaurants and lounges 28,518,000 33,078,000 Package goods 19,192,000 14,058,000 Payroll and related costs 35,399,000 35,873,000 Occupancy costs 7,040,000 6,054,000 Selling, general and administrative expenses 19,917,000 20,823,000 110,066,000 109,886,000 Income from Operations 2,911,000 6,316,000 Other Income (Expense): Interest expense (836,000 ) (708,000 ) Interest and other income 49,000 54,000 Insurance recovery, net of casualty loss — 602,000 (787,000 ) (52,000 ) Income Before Provision for Income Taxes 2,124,000 6,264,000 Benefit (Provision) for Income Taxes 60,000 (887,000 ) Net Income 2,184,000 5,377,000 Less: Net Income Attributable to Noncontrolling Interests (1,074,000 ) (1,729,000 ) Net Income Attributable to Flanigan's Enterprises, Inc. Stockholders $ 1,110,000 $ 3,648,000 Net Income Per Common Share: Basic and Diluted $ 0.60 $ 1.96 Weighted Average Shares and Equivalent Shares Outstanding: Basic and Diluted 1,858,647 1,858,647 F- 3 Table of Contents F LANIGAN’S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 3, 2020 AND SEPTEMBER 28, 2019 (rounded to nearest thousandth, except share amounts) Common Stock Capital in Treasury Stock Excess of Retained Noncontrolling Shares Amount Par Value Earnings Shares Amount Interests Total Balance, September 28, 2019 4,198 $ 420 $ 6,240 $ 37,738 2,339 $ (6,077 ) $ 6,208 44,529 Net income — — — 1,110 — — 1,074 2,184 Distributions to noncontrolling interests — — — — — — (1,157 ) (1,157 ) Balance, October 3, 2020 4,198 420 6,240 38,848 2,339 (6,077 ) 6,125 45,556 Balance September 29, 2018: 4,198 420 6,240 34,610 2,339 (6,077 ) 6,149 41,342 Net income — — — 3,648 — — 1,729 5,377 Distributions to noncontrolling interests — — — — — — (1,665 ) (1,665 ) Purchase of noncontrolling interests — — — — — — (5 ) (5 ) Dividends paid — — — (520 ) — — — (520 ) Balance, September 28, 2019 4,198 $ 420 $ 6,240 $ 37,738 2,339 $ (6,077 ) $ 6,208 $ 44,529 F- 4 Table of Contents F LANIGAN’S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 3, 2020 AND SEPTEMBER 28, 2019 (rounded to nearest thousandth) 2020 2019 Cash Flows from Operating Activities: Net income $ 2,184,000 $ 5,377,000 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Depreciation and amortization 3,144,000 2,919,000 Amortization of leasehold interests 96,000 121,000 Amortization of operating lease right-of-use asset 3,050,000 — Gain/loss on sale/abandonment of property and equipment 53,000 87,000 Insurance recovery, net of casualty loss — 118,000 Amortization of deferred loan costs 33,000 33,000 Deferred income taxes (103,000 ) 363,000 Deferred rent — (13,000 ) Income from unconsolidated limited partnership (7,000 ) (20,000 ) Changes in operating assets and liabilities: (Increase) decrease in: Prepaid income taxes (19,000 ) 202,000 Other receivables 57,000 (264,000 ) Inventories (332,000 ) (222,000 ) Prepaid expenses 930,000 1,271,000 Other assets 305,000 120,000 Increase (decrease) in: Accounts payable and accrued expenses 590,000 (964,000 ) Lease liabilities (1,785,000 ) — Due to franchisees 589,000 499,000 Net cash and cash equivalents provided by operating activities 8,785,000 9,627,000 Cash Flows from Investing Activities: Purchase of property and equipment (2,259,000 ) (4,284,000 ) Purchase of construction in progress (379,000 ) (1,058,000 ) Deposit on purchase of fixed assets (446,000 ) (411,000 ) Proceeds from sale of fixed assets 64,000 36,000 Insurance recovery 132,000 1,068,000 Distributions from unconsolidated limited partnership 22,000 40,000 Investment in limited partnership (405,000 ) — Net cash and cash equivalents used in investing activities (3,271,000 ) (4,609,000 ) Cash Flows from Financing Activities: Payments of long-term debt (2,540,000 ) (2,820,000 ) Proceeds from long-term debt 14,433,000 250,000 Dividends paid — (520,000 ) Distributions to noncontrolling interests (1,157,000 ) (1,665,000 ) Purchase of noncontrolling interests — (5,000 ) Net cash and cash equivalents provided by (used in) financing activities 10,736,000 (4,760,000 ) Net Increase in Cash and Cash Equivalents 16,250,000 258,000 Cash and Cash Equivalents, Beginning 13,672,000 13,414,000 Cash and Cash Equivalents, Ending $ 29,922,000 $ 13,672,000 F- 5 Table of Contents F LANIGAN’S ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (rounded to nearest thousandth) 2020 2019 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 836,000 $ 708,000 Income taxes $ 61,000 $ 322,000 Supplemental Disclosure for Non-Cash Investing and Financing Activities: Financing of insurance contracts $ 1,317,000 $ 1,041,000 Purchase deposits transferred to property and equipment $ 118,000 $ 595,000 Purchase deposits transferred to construction in progress $ 10,000 $ 386,000 Construction in progress transferred to property and equipment $ 700,000 $ 3,165,000 Insurance recovery receivable $ — $ 132,000 Finance lease liabilities arising from right-of-use asset $ 4,772,000 $ — Operating lease liabilities arising from right-of-use asset $ 25,177,000 — F- 6 Table of Contents F LANIGAN’S E NTERPRISES, I NC. AND S UBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED OCTOBER 3, 2020 AND SEPTEMBER 28, 2019 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Capitalization The Company was incorporated in 1959 and operates in South Florida as a chain of full-service restaurants and package liquor stores. Restaurant food and beverage sales make up the majority of our total revenue. As of October 3, 2020, we (i) operated 27 units consisting of restaurants, package liquor stores and combination restaurants/package liquor stores that we either own or have operational control over and partial ownership in; and (ii) franchise an additional five units, consisting of two restaurants, (one of which we operate) and three combination restaurants/package liquor stores. With the exception of one restaurant we operate under the name “The Whale’s Rib”, and in which we do not have an ownership interest, 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”. The Company’s Articles of Incorporation, as amended, authorize us to issue and have outstanding at any one time 5,000,000 shares of common stock at a par value of $0.10 per share. We operate under a 52-53 week year ending the Saturday closest to September 30. Our fiscal year 2020 is comprised of a 53-week period and our fiscal year 2019 is comprised of a 52-week period. Principles of Consolidation The consolidated financial statements include the accounts of the Company and our subsidiaries, all of which are wholly owned, and the accounts of the eight limited partnerships in which we act as general partner and have controlling interests. All significant intercompany transactions and balances have been eliminated in consolidation. Noncontrolling interests in consolidated subsidiaries are included in the consolidated balance sheets as a separate component of equity. We report consolidated net income inclusive of both the Company’s and the noncontrolling interests’ share, as well as amounts of consolidated net income (loss) attributable to each of the Company and the noncontrolling interests. Use of Estimates The consolidated financial statements and related disclosures are prepared in conformity with accounting principles generally accepted in the United States. We are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the F- 7 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Use of Estimates (Continued) disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the period reported. These estimates include assessing the estimated useful lives of tangible assets, the recognition of deferred tax assets and liabilities and estimates relating to the calculation of incremental borrowing rates and length of leases associated with right-of-use assets and corresponding liabilities. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in our consolidated financial statements in the period they are determined to be necessary. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. Cash and Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Inventories Our inventories, which consist primarily of package liquor products, are stated at the lower of average cost or net realizable value. Liquor Licenses In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350, “ Intangibles - Goodwill and Other ”, our liquor licenses are indefinite lived assets, which are not being amortized, but are tested annually for impairment (see Note 10). Property and Equipment Our property and equipment are stated at cost. We capitalize expenditures for major improvements and depreciation commences when the assets are placed in service. We record depreciation on a straight-line basis over the estimated useful lives of the respective assets. We charge maintenance and repairs, which do not improve or extend the life of the respective assets, to expense as incurred. When we dispose of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Our estimated useful lives range from three to five years for vehicles and three to seven years for furniture and equipment. Leasehold improvements are currently being amortized over the shorter of the life of the lease or the life of the asset up to a maximum of 20 years. Our building and building improvements of our corporate offices in Fort Lauderdale, Florida; our building and building improvements of our construction office/warehouse in Fort Lauderdale, Florida; our combination restaurant and package liquor store in Hallandale, Florida; our restaurants in N. Miami and Fort Lauderdale, Florida; our package store in N. Miami, Florida, our shopping center in Miami, Florida and property in Fort Lauderdale, Florida, all of which we own, are being depreciated over forty years. F- 8 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Leasehold Interests Our purchase of an existing restaurant location usually includes a lease to the business premises. As a result, a portion of the purchase price is allocated to the leasehold interest. We capitalize the cost of the leasehold interest and amortization commences upon our assumption of the lease. We amortize leasehold interests on a straight line basis over the remaining term of the lease. Investment in Limited Partnerships We use the consolidation method of accounting when we have a controlling interest in other companies and limited partnerships. We use the equity method of accounting when we have significant influence and an interest between twenty to fifty percent in other companies and limited partnerships, but do not exercise control. Under the equity method, our original investments are recorded at cost and are adjusted for our share of undistributed earnings or losses. All significant intercompany profits are eliminated. Concentrations of Credit Risk Financial instruments that potentially subject us to concentrations of credit risk are cash and cash equivalents. Cash and Cash Equivalents We maintain deposit balances with financial institutions which balances may, from time to time, exceed the federally insured limits, which are $250,000 for interest and non-interest bearing accounts. We have not experienced any losses in such accounts. Major Suppliers Throughout our fiscal years 2020 and 2019, we purchased substantially all of our food products from one major supplier pursuant to a master distribution agreement which entitled us to receive certain purchase discounts, rebates and advertising allowances that are recorded as a reduction of cost of merchandise sold in periods in which they are earned. We believe that several other alternative vendors are available, if necessary. Throughout our fiscal years 2020 and 2019, we purchased the majority of our alcoholic beverages from three local distributors. Each distributor has exclusive rights from the manufacturers to sell specific brands in given areas, so unless the exclusive distribution rights are transferred to another vendor, there are no alternate distributors available. F- 9 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Revenue Recognition Revenue related to food, bar and package sale are recorded at the point of sale. Royalty-related revenues, which are 1% of package sales and 3% of restaurant sales, are recorded as income on a weekly basis, in arrears. We report our sales net of sales tax. Pre-opening Costs As new restaurants open, our income from operations will be adversely affected due to our obligation to fund pre-opening costs are those typically associated with the opening of a new restaurant and generally include payroll costs associated with the new restaurant opening, rent and promotional costs. We expense pre-opening costs as incurred. Advertising Costs Our advertising costs are expensed as incurred. Advertising costs incurred during our fiscal years ended October 3, 2020 and September 28, 2019 were approximately ($113,000) and $97,000 respectively. Advertising costs incurred during our fiscal year ended October 3, 2020 were a credit as a result of lower advertising costs during the fiscal year due to COVID-19 and advertising allowances. General Liability Insurance We have general liability insurance which incorporates a deductible of $10,000 per occurrence for both us and the limited partnerships. Our insurance carrier is responsible for $1,000,000 coverage per occurrence above our deductible, up to a maximum aggregate of $2,000,000 per year. During our fiscal year ended October 3, 2020, we were able to purchase excess liability insurance, whereby our excess insurance carrier is responsible for $10,000,000 coverage above our primary general liability insurance coverage. We are un-insured against liability claims in excess of $11,000,000 per occurrence and in the aggregate. Our general policy is to settle only those legitimate and reasonable claims asserted and to aggressively defend and go to trial, if necessary, on frivolous and unreasonable claims. Under our current liability insurance policy, any expense incurred by us in defending a claim, including attorney's fees, are a part of our $10,000 deductible. Fair Value of Financial Instruments The respective carrying value of certain of our on-balance-sheet financial instruments approximated their fair value. These instruments include cash and cash equivalents, other F- 10 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Financial Instruments (Continued) receivables, accounts payables, accrued expenses and debt. We have assumed carrying values to approximate fair values for those financial instruments, which are short-term in nature or are receivable or payable on demand. We estimated the fair value of debt based on current rates offered to us for debt of comparable maturities and similar collateral requirements. In accordance with FASB ASC Topic 820-10-50-1, we utilized a valuation model to determine the fair value of our swap agreements. As the valuation models for the swap agreements were based upon observable inputs, they are classified as Level 2 (see Note 14). Derivative Instruments We account for derivative instruments in accordance with FASB ASC Topic 815-10-05-4, “ Accounting for Derivative Instruments and Hedging Activities” as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. In accordance with FASB ASC Topic 815-10-05-4, derivative instruments are recognized as assets or liabilities in the Company’s consolidated balance sheets and are measured at fair value. We recognize all changes in fair value through earnings unless the derivative is determined to be an effective hedge. We currently have two derivatives which we have designated as effective hedges (See Note 14). Income Taxes We account for our income taxes using FASB ASC Topic 740, “ Income Taxes ”, which requires the recognition of deferred tax liabilities and assets for expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We follow the provisions regarding Accounting for Uncertainty in Income Taxes, which require the recognition of a financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We applied these changes to tax positions for our fiscal years ending October 3, 2020 and September 28, 2019. We had no material unrecognized tax benefits and no adjustments to our financial position, results of operations or cash flows were required. Generally, federal, state and local authorities may examine the Company’s tax returns for three years from the date of filing and the current and prior three years remain subject to examination as of October 3, 2020. We do not expect that unrecognized tax benefits will increase within the next twelve months. We recognize accrued interest and penalties related to uncertain tax positions as income tax expense. F- 11 Table of Contents NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Long-Lived Assets We continually evaluate whether events and circumstances have occurred that may warrant revision of the estimated life of our intangible and other long-lived assets or whether the remaining balance of our intangible and other long-lived assets should be evaluated for possible impairment. If and when such factors, events or circumstances indicate that intangible or other long-lived assets should be evaluated for possible impairment, we will determine the fair value of the asset by making an estimate of expected future cash flows over the remaining lives of the respective assets and compare that fair value with the carrying value of the assets in measuring their recoverability. In determining the expected future cash flows, the assets will be grouped at the lowest level for which there are cash flows, at the individual store level. Earnings Per Share We follow FASB ASC Topic 260 - “ Earnings per Share .” This section provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution. Earnings per share are computed by dividing income available to common stockholders by the basic and diluted weighted average number of common shares. Recently Adopted and Recently Issued Accounting Pronouncements Effective September 29, 2019, we adopted Accounting Standards Codification 842, Leases (“ASC 842”). The new guidance requires that lease arrangements be presented on the lessee’s balance sheet by recording a right-of-use asset and a lease liability equal to the present value of the related future minimum lease payments. We adopted the standard in the first quarter of fiscal 2020, using the modified retrospective approach. Upon adoption, the Company recorded a right-of-use asset of $27.8 million and a lease liability of $27.8 million. At October 1, 2020 the Company decreased the operating lease right-of-use asset by $2.6 million and the operating lease right-of-use liability by $2.6 million with the reclassification of an operating lease to a finance lease due to the exercise of a purchase option subsequent to the end of our fiscal year 2020. The Company recorded a finance lease right-of-use asset of $4.8 million and a finance lease liability of $4.8 million. We elected the transition package of practical expedients, under which the Company does not have to reassess (1) whether any expired or existing contracts are leases, or contain leases, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. In addition, we made an accounting policy election to exclude leases with an initial term of 12 months or less from the balance sheet. This standard had a material impact on the Condensed Consolidated Statements of Income due to the escalations of rent in the extensions but did not have a material impact on the Condensed Consolidated Statement of Cash Flows. Issued There are no recently issued accounting pronouncements that we have not yet adopted that we believe will have a material effect on our financial statements. F- 12 Table of Contents NOTE 2. PROPERTY AND EQUIPMENT 2020 2019 Furniture and equipment $ 12,381,000 $ 11,767,000 Leasehold improvements 25,355,000 23,841,000 Land and land improvements 21,289,000 21,222,000 Building and improvements 19,455,000 19,121,000 Vehicles 1,635,000 1,547,000 80,115,000 77,498,000 Less accumulated depreciation and amortization (34,112,000 ) (31,311,000 ) 46,003,000 46,187,000 Construction in progress 981,000 1,292,000 $ 46,984,000 $ 47,479,000 Depreciation and amortization expense for the fiscal years ended October 3, 2020 and September 28, 2019 was approximately $3,144,000 and $2,919,000, respectively. NOTE 3. LEASEHOLD INTERESTS 2020 2019 Leasehold interests, at cost $ 3,024,000 $ 3,024,000 Less accumulated amortization 2,824,000 2,728,000 $ 200,000 $ 296,000 Future leasehold amortization as of October 3, 2020 is as follows: 2021 $ 82,000 2022 33,000 2023 22,000 2024 22,000 2025 22,000 Thereafter 19,000 Total $ 200,000 NOTE 4. INVESTMENTS IN LIMITED PARTNERSHIPS We have invested with others (some of whom are affiliated with our officers and directors) in nine limited partnerships which own and operate nine South Florida based restaurants under our service mark “Flanigan’s Seafood Bar and Grill”. In addition to being a limited partner in these limited partnerships, we are the sole general partner of eight of these limited partnerships and manage and control the operations of the restaurants except for the restaurant located in Fort Lauderdale, Florida where we only hold a limited partnership interest. Generally, the terms of the limited partnership agreements provide that until the investors’ cash investment in a limited partnership (including any cash invested by us) is returned in full, the limited partnership distributes to the investors annually out of available cash from the operation of the restaurant, as a return of capital, up to 25% of the cash invested in the limited F- 13 Table of Contents NOTE 4. INVESTMENTS IN LIMITED PARTNERSHIPS (Continued) 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 and one-half (1/2) to the investors (including us) prorata based upon the investors’ investment, as a return of capital. Once all of the investors (including us) have received, in full, amounts equal to their cash invested, an annual management fee becomes payable to us equal to one-half (½) of cash available to be distributed, with the other one half (½) of available cash distributed to the investors (including us) as a profit distribution, pro-rata based upon the investors’ investment. As of October 3, 2020, limited partnerships owning eight (8) restaurants, (Surfside, Florida, Kendall, Florida, West Miami, Florida, Pinecrest, Florida, Wellington, Florida, Miami, Florida, Pembroke Pines, Florida and Davie, 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 our receipt of distributable amounts from the limited partnerships, we receive a fee equal to 3% of gross sales for use of our “Flanigan’s Seafood Bar and Grill” service mark, which use is authorized only while we act as general partner. This 3% fee is “earned” when sales are made by the limited partnerships and is paid weekly, in arrears. Surfside, Florida We are the sole general partner and a 46% limited partner in this limited partnership which has owned and operated a restaurant in Surfside, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since March 6, 1998. 33.3% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. This limited partnership has returned to its investors all of their initial cash invested and we receive an annual management fee equal to one-half (½) of the cash available for distribution by the limited partnership. This entity is consolidated in the accompanying financial statements. Kendall, Florida We are the sole general partner and a 41% limited partner in this limited partnership which has owned and operated a restaurant in Kendall, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since April 4, 2000. 28.3% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. This limited partnership has returned to its investors all of their initial cash invested and we receive an annual management fee equal to one-half (½) of the cash available for distribution by the limited partnership. This entity is consolidated in the accompanying financial statements. West Miami, Florida We are the sole general partner and a 27% limited partner in this limited partnership which has owned and operated a restaurant in West Miami, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since October 11, 2001. 32.7% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. This limited partnership has returned to its investors all of their initial cash invested and we F- 14 Table of Contents NOTE 4. INVESTMENTS IN LIMITED PARTNERSHIPS (Continued) West Miami, Florida (continued) receive an annual management fee equal to one-half (½) of the cash available for distribution by the limited partnership. This entity is consolidated in the accompanying financial statements. Wellington, Florida We are the sole general partner and a 28% limited partner in this limited partnership which has owned and operated a restaurant in Wellington, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since May 27, 2005. 22.4% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. This limited partnership has returned to its investors all of their initial cash invested and we receive an annual management fee equal to one-half (½) of the cash available for distribution by the limited partnership. This entity is consolidated in the accompanying financial statements. Pinecrest, Florida We are the sole general partner and 45% limited partner in this limited partnership which has owned and operated a restaurant in Pinecrest, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since August 14, 2006. 20.2% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. This limited partnership has returned to its investors all of their initial cash invested and we receive an annual management fee equal to one-half (1/2) of the cash available for distribution by this limited partnership. This entity is consolidated in the accompanying financial statements. Pembroke Pines, Florida We are the sole general partner and a 24% limited partner in this limited partnership which has owned and operated a restaurant in Pembroke Pines, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since October 29, 2007. 23.8% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. This limited partnership has returned to its investors all of their initial cash invested and we receive an annual management fee equal to one-half (1/2) of the cash available for distribution by this limited partnership. This entity is consolidated in the accompanying financial statements. Davie, Florida We are the sole general partner and a 49% limited partner in this limited partnership which has owned and operated a restaurant in Davie, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since July 28, 2008. 12.3% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. This limited partnership has returned to its investors all of their initial cash invested and we receive an F- 15 Table of Contents NOTE 4. INVESTMENTS IN LIMITED PARTNERSHIPS (Continued) Davie, Florida (continued) annual management fee equal to one-half (1/2) of the cash available for distribution by this limited partnership. This entity is consolidated in the accompanying financial statements. Miami, Florida We are the sole general partner and a 5% limited partner in this limited partnership which has owned and operated a restaurant in Miami, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since December 27, 2012. 26.8% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. This limited partnership has returned to its investors all of their initial cash invested and we receive an annual management fee equal to one-half (½) of the cash available for distribution by this limited partnership. This entity is consolidated in the accompanying financial statements. Sunrise, Florida During the second quarter of our fiscal year 2019, we entered into a Lease Agreement (the “Sunrise Lease Agreement”) with a non-affiliated third party to rent approximately 6,900 square feet of commercial space in Sunrise, Florida where, subject to certain conditions, we anticipate opening a new restaurant location under our “Flanigan’s Seafood Bar and Grill” service mark. During the third quarter of our fiscal year 2019, we assigned the Sunrise Lease Agreement to a newly formed limited partnership in which we currently are (i) the sole general partner; and (ii) our wholly owned subsidiary is the sole limited partner. While there can be no assurances that we will be successful in doing so, we intend to sell limited partnership interests to third parties as well as affiliates of the Company in order to raise net proceeds, in the amount of $5,000,000, which proceeds will be used to renovate this potential restaurant location. We anticipate that the new restaurant location’s ownership and operating structure will be substantially similar to that of our other restaurants owned by limited partnerships. Fort Lauderdale, Florida A corporation, owned by a member of our Board of Directors, acts as sole general partner of a limited partnership which has owned and operated a restaurant in Fort Lauderdale, Florida under our “Flanigan’s Seafood Bar and Grill” service mark since April 1, 1997. We have a 25% limited partnership interest in this limited partnership. 31.9% of the remaining limited partnership interest is owned by persons who are either our officers, directors or their family members. We have a franchise arrangement with this limited partnership. For accounting purposes, we do not consolidate the operations of this limited partnership into our operations. This entity is reported using the equity method in the accompanying consolidated financial statements. The following is a summary of condensed unaudited financial information pertaining to our limited partnership investment in Fort Lauderdale, Florida: 2020 2019 Financial Position: Current assets $ 591,000 $ 295,000 Non-current assets 655,000 639,000 Current liabilities 562,000 187,000 Operating Results: Revenues 3,430,000 3,924,000 Gross profit 2,279,000 2,568,000 Net income 24,000 82,000 NOTE 5. INVESTMENT IN REAL PROPERTY; OPTION TO LEASE AGREEMENT: Pompano Beach, Florida F- 16 Table of Contents During the second quarter of our fiscal year 2019, we purchased from an unrelated third party the vacant real property (the “Property”), located at 2119 S.E. 9 th Street, Pompano Beach, Florida for $1,300,000 cash at closing. The Property is adjacent to property owned by a third party unaffiliated with us and leased to another third party unaffiliated with us for use as a restaurant (the “Adjacent Property”). At closing, we executed an Option to Lease Agreement to lease the Adjacent Property for a 50 year term commencing in November, 2022. We will either (i) sublease the building on the Adjacent Property to a related franchisee for operation as a “Flanigan’s Seafood Bar and Grill” restaurant and use the Property as parking; or (ii) renovate the building on the Adjacent Property for operation as a “Flanigan’s Seafood Bar and Grill” restaurant and use the Property as parking. If we renovate this new restaurant location on the Adjacent Property, we plan to raise funds using our limited partnership ownership model. NOTE 6. EXECUTION OF LEASES FOR NEW LOCATIONS: Miramar, Florida (“Flanigan’s Seafood Bar and Grill”) During fourth quarter of our fiscal year 2019, we entered into a Lease Agreement for a non-affiliated restaurant location in a shopping center in Miramar, Florida. The shopping center is currently in the developmental stage and the Lease Agreement is still contingent upon our receipt of delivery of the leased premises by August 28, 2021. We plan to assign the Lease Agreement to a limited partnership in which (i) we will be the sole general partner; and (ii) a wholly owned subsidiary will be the limited partner. While there can be no assurances that we will be successful in doing so, we intend to sell limited partnership interests to third parties as well as affiliates of the Company in order to raise net proceeds, in an amount to be determined, which proceeds will be used to renovate this potential restaurant location. We anticipate that the new restaurant location’s ownership and operating structure will be substantially similar to that of our other restaurants owned by limited partnerships. Any amounts we advance to the limited partnership will be applied as a credit to limited partnership equity in the limited partnership we may acquire (which equity shall be purchased at the same price and upon the same terms as other equity investors). If we do not acquire equity in the limited partnership for at least $250,000, any excess amounts advanced by us will be reimbursed to us by the limited partnership without interest. Through October 3, 2020, we have no advances to the limited partnership. Miramar, Florida (“Big Daddy’s Liquors”) During the fourth quarter of our fiscal year 2019, we entered into a Lease Agreement for a non-affiliated package liquor store location in a shopping center in Miramar, Florida, directly adjacent to the new non-affiliated restaurant location. The shopping center is currently in the developmental stage and the Lease Agreement is still contingent upon our receipt of delivery of the leased premises by August 28, 2021. The new package liquor store location will be Company owned. NOTE 7. MORTGAGE / FINANCED INSURANCE PREMIUMS: (a) Mortgage on Real Property On November 27, 2019, our wholly owned subsidiary, Flanigan’s Calusa Center, LLC, re-financed its mortgage loan with an unrelated third party lender, increasing the principal amount borrowed from $2.72 million to $7.21 million. The principal balance and all accrued interest of the mortgage loan that had been outstanding matured November 30, 2019. The re-financed mortgage loan earns interest at the fixed annual rate of 3.86%, is amortized over twenty (20) years, requires us to pay monthly payments of principal and interest in the amount of $43,373 with the entire principal balance and all accrued interest due in November 2026. We intend to use the excess funds we received from the re-financing of this mortgage loan (approximately $4.4 million) for working capital. F- 17 Table of Contents (b) Financed Insurance Premiums During our fiscal year 2020, we bound and financed through an unrelated third party lender the premiums on the following property, general liability, excess liability and terrorism insurance policies: (i) For the policy year beginning December 30, 2019, our general liability insurance, excluding limited partnerships, is a one (1) year policy, including automobile and excess liability coverage. The annual premium for this insurance coverage is $418,000; (ii) For the policy year beginning December 30, 2019, our general liability insurance for our limited partnerships is a one (1) year policy, including excess liability coverage. The annual premium for this insurance coverage is $459,000; (iii) For the policy year beginning December 30, 2019, our property insurance is a one (1) year policy and the annual premium for this insurance coverage is $561,000 ; (iv) For the policy year beginning December 30, 2019, our excess liability insurance is a one (1) year policy and the annual premium for this insurance coverage is $360,000; and (v) For the policy year beginning December 30, 2019, our terrorism insurance is a one (1) year policy and the annual premium for this insurance coverage is $12,000. Of the $1,810,000 annual premium amounts, which includes coverage for our franchises which are not included in our consolidated financial statements, we financed $1,656,000 through an unaffiliated third party lender. The finance agreement obligates us to repay the amounts financed together with interest at the rate of 2.55% per annum, over 11 months, with monthly payments of principal and interest, each in the amount of $153,000 . The finance agreement is secured by a first priority security interest in all insurance policies, all unearned premium, return premiums, dividend payments and loss payments thereof. As of October 3, 2020, the aggregate principal balance owed to the third party lender from the financing of our insurance policies is $365,000, excluding amounts which are reimbursed by our franchises for insurances covering their operations, but including the annual premiums for boiler insurance ($2,000) and directors and officers liability insurance ($34,000), which were added to the finance agreement during the third quarter of our fiscal year 2020 and are financed over the balance of the term of the same. F- 18 Table of Contents (c) Paycheck Protection Loans During the third quarter of our fiscal year 2020, we, certain of the entities owning the limited partnership stores (the “LP’s”), franchised stores (the “Franchisees”), as well as the store we manage but do not own (the “Managed Store”) (collectively, the “Borrowers”), applied for and received loans from an unrelated third party lender pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) enacted March 27, 2020, in the aggregate principal amount of approximately $13.1 million, (the “PPP Loans”), of which approximately: (i) $5.9 million was loaned to us; (ii) $4.1 million was loaned to 8 of the LP’s ; (iii) $2.6 million was loaned to 5 of the Franchisees; and (iv) $0.5 million was loaned to the Managed Store. The PPP Loans to the Franchisees and the Managed Store are not included in our consolidated financial statements. The PPP Loans, which are in the form of Notes issued by each of the Borrowers, mature two years from the date of funding (dates ranging from May 5, 2022 to May 11, 2022) and bear interest at a rate of 1.00% per annum, payable monthly commencing approximately six months from the date of issuance of the Notes (issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be prepaid by the applicable Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loans will be available to the respective Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, including rent and interest on mortgages and other debt obligations incurred before February 15, 2020. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds of the PPP Loans are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. No assurance can be given that the Borrowers will obtain forgiveness of the PPP Loans in whole or in part. With respect to any portion of any of the PPP Loans that is not forgiven under the terms of the PPP, such amounts will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the applicable PPP Note and cross-defaults on any other loan with the Lender or other creditors. NOTE 8. CORONAVIRUS PANDEMIC: In March 2020, a novel strain of coronavirus was declared a global pandemic and a National Public Health Emergency. The novel coronavirus pandemic and related “shelter-in-place” orders and other governmental mandates relating thereto (collectively, “COVID-19”) adversely affected and will, in all likelihood continue to adversely affect, our restaurant operations and financial results for the foreseeable future. Due to COVID-19, from mid-March 2020 through mid-May 2020, we ceased all dining and bar services at all of our restaurants, limiting service to take-out and delivery only of food, and implemented reduced hours at our retail package liquor stores. From mid-May 2020 through the beginning of July 2020, there was a gradual elimination of restrictions on our restaurant operations, permitting us to, among other things, provide dining for outdoor seating patrons with appropriate social distancing and provide dining for indoor patrons at up to 50% capacity (depending on the location of the restaurant), but with no bar service and increased operating hours at our package liquor stores. From the beginning of July 2020 through the beginning of September 2020, we ceased dine-in service at all of our Miami-Dade County, Florida restaurants, (two Company-owned and six limited partnership owned restaurants). Since the beginning of September 2020, we have been offering both food and bar options at all of our restaurants, including those located in Miami-Dade County, Florida, with appropriate social distancing and dine-in service at up to 100% capacity, including outdoor dining. F- 19 Table of Contents Due to COVID-19, we implemented (i) certain cost cutting measures including material layoffs at our restaurants and reduced corporate personnel salaries; and (ii) a number of changes to our operations such as the establishment of an in-house delivery service and an adjustment to our traditional staffing model to meet customer demand. We have been in regular contact with our suppliers and while to date we have not experienced significant disruptions in our supply chain, we could see future disruptions should the impacts of COVID-19 extend for a considerable amount of time. To support our employees, we have implemented work from home support, increased sanitization of high touch, high traffic areas in our restaurants, retail package liquor stores and corporate offices, provided personal protective equipment for our employees and increased the frequency of personal hygiene practices. From March 29, 2020 through May 9, 2020, the salaries of all our non-executive corporate office personnel were reduced by 20%, the base salaries of our Chief Operating Officer and Chief Financial Officer were each reduced by 50% and our Chief Executive Officer waived his base salary, representing salary savings of approximately $135,000 during this period. Our employee headcount as of fiscal year end 2020 was 1,804 persons reduced from 1,870 persons as of our fiscal year end 2019. In addition and also due to COVID-19, we did not make any quarterly distributions to our limited partners for the quarter ended March 31, 2020. For each of the quarters ended June 30, 2020 and September 30, 2020, we made quarterly distributions to our limited partners equal to one-half (½) of the amounts that would have been distributed for the quarter ended March 31, 2020. During the third quarter of fiscal year end 2020, the United States government passed a $2.0 trillion Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) designed primarily to help keep businesses running during and after the COVID-19 pandemic. The CARES Act included provisions for certain deductions and tax credits, filing deadline extensions, filing payment deadlines and making available certain grant money to assist businesses. This CARES ACT allowed us to take advantage of credits, deferments, and deductions, and PPP Loans (described below) during the third quarter of our fiscal year 2020. As a result, during the third and fourth quarter of 2020, we reversed certain of our cost cutting measures, including (i) reinstating employees laid off at our restaurants in anticipation of resuming dine-in service, (ii) restoring corporate personnel and executive salaries and (iii) paying prior salary reductions. During the third quarter of our fiscal year 2020, we, certain of the entities owning the limited partnership stores (the “LP’s”), franchised stores (the “Franchisees”) as well as the store we manage but do not own (the “Managed Store”), (collectively, the “Borrowers”), applied for and received loans from an unrelated third party lender pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) enacted March 27, 2020, in the aggregate principal amount of approximately $13.1 million, (the “PPP Loans”), of which approximately: (i) $5.9 million was loaned to us; (ii) $4.1 million was loaned to 8 of the LP’s; (iii) $2.6 million was loaned to 5 of the Franchisees; and (iv) $0.5 million was loaned to the Managed Store. The PPP Loans to the Franchisees and the Managed Store are not included in our consolidated financial statements. Due to our receipt of the PPP Loans, we reversed certain cost cutting measures, including reinstating employees laid off at our restaurants in anticipation of resuming dine-in service and restoring corporate personnel salaries. F- 20 Table of Contents The PPP Loans, which are in the form of Notes issued by each of the Borrowers, mature two years from the date of funding (dates ranging from May 5, 2022 to May 11, 2022) and bear interest at a rate of 1.00% per annum, payable monthly commencing approximately six months from the date of issuance of the Notes (issuance dates ranging from April 30, 2020 to May 6, 2020). The Notes may be prepaid by the applicable Borrower at any time prior to maturity with no prepayment penalties. Proceeds from the PPP Loans have been used and are available to the respective Borrower to fund designated expenses, including certain payroll costs, group health care benefits and other permitted expenses, including rent and interest on mortgages and other debt obligations incurred before February 15, 2020. Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds of the PPP Loans are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration under the PPP. No assurance can be given that the Borrowers will obtain forgiveness of the PPP Loans in whole or in part. With respect to any portion of any of the PPP Loans that is not forgiven under the terms of the PPP, such amounts will be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things, payment defaults, breaches of the provisions of the applicable PPP Note and cross-defaults on any other loan with the Lender or other creditors. We do not believe COVID-19 has had a material adverse effect on our access to supplies or labor, although there can be no assurance that there will not be a significant adverse impact on our supply chain or access to labor in the future. We are actively monitoring our food suppliers to assess how they are managing their operations to mitigate supply flow and food safety risks. To ensure we mitigate potential supply availability risk, we are building additional inventory back stock levels when appropriate and we have also identified alternative supply sources in key product categories including but not limited to food, sanitation and safety supplies. Prior to obtaining the PPP Loans, we were in compliance with the financial covenants contained in our loans with our unrelated third party institutional lender (the “Institutional Lender”) under which as of October 3, 2020, we owe in the aggregate, approximately $12,209,000 (the “Institutional Loans”). We determined that as of the end of the third quarter of our fiscal year 2020, we were not in compliance with our financial covenants contained in the Institutional Loans related to the Rent Adjusted Funded Debt to EBITDA Ratio because our consolidated debt during the third quarter of our fiscal year 2020 increased due to our repayment obligations under the PPP Loans (the “Covenant Breach’). Pursuant to the terms of the Institutional Loans, the Covenant Breach, grants the Institutional Lender the right to exercise certain remedies under the Institutional Loans, including the right to accelerate the indebtedness owed by us to the Institutional Lender thereunder. On August 10, 2020, we received a written waiver of the Covenant Breach from the Institutional Lender, which, among other things, waives the Covenant Breach through June 30, 2021. As of October 3, 2020, we are in compliance with the financial covenants contained in our loans with our Institutional Lender. There can be no assurances that we will be in compliance with our financial covenants thereafter due to, among other things, that our results of operations will likely continue to be materially impacted by the COVID-19 pandemic. Absent a waiver, failure to be in compliance with our financial covenants would constitute a default under the Institutional Loans with our Institutional Lender when reported. Such a default, if not cured or waived, would allow the Institutional Lender to accelerate the maturity of the indebtedness we owe under the Institutional Loans, making it due and payable at the time. If maturity of the Institutional Loans were accelerated, it would have a material adverse impact on our consolidated financial statements and results of operations. F- 21 Table of Contents NOTE 9. CASUALTY LOSS: During the first quarter of our fiscal year 2019, our combination package liquor store and restaurant located at 2505 N. University Drive, Hollywood, Florida (Store #19) was damaged by a fire and was forced to close. Due to the damage caused by the fire, we determined that Store #19 should be demolished and rebuilt and as a result, the package liquor store and restaurant were closed for at least our fiscal years 2020 and 2019. We had insurance coverage of $1,975,000, in the aggregate, which our insurance carrier paid. We sustained a loss of $1,373,000 on our building and business personal property, against which we received insurance proceeds of $1,200,000 resulting in a loss of $173,000. We had a gain of $775,000 on our business interruption coverage, which when netted against our loss of $173,000 on our building and business personal property produced a gain of $602,000 during our fiscal year 2019. NOTE 10. LIQUOR LICENSES Liquor licenses, which are indefinite lived assets, are tested for impairment in September of each of our fiscal years. The fair value of liquor licenses at October 3, 2020, exceeded the carrying amount; therefore, we recognized no impairment loss. The fair value of the liquor licenses was evaluated by comparing the carrying value to recent sales for similar liquor licenses in the County issued. At October 3, 2020 and September 28, 2019, the total carrying amount of our liquor licenses was $630,000. We acquired no liquor licenses in our fiscal year 2020. NOTE 11. INCOME TAXES The components of our provision for income taxes for our fiscal years 2020 and 2019 are as follows: 2020 2019 Current: Federal $ (70,000 ) $ 261,000 State 113,000 263,000 Deferred: 43,000 524,000 Federal (88,000 ) 301,000 State (15,000 ) 62,000 (103,000 ) 363,000 $ (60,000 ) $ 887,000 F- 22 Table of Contents A reconciliation of income tax computed at the statutory federal rate to income tax expense is as follows: 2020 2019 Tax provision at the statutory rate $ 446,000 $ 1,315,000 Non-controlling interests (226,000 ) (363,000 ) State income taxes, net of federal income tax 43,000 231,000 FICA tip credit (418,000 ) (463,000 ) True up adjustment 43,000 71,000 Tax effect of rate change due to Tax Reform 13,000 51,000 Other permanent items 39,000 45,000 $ (60,000 ) $ 887,000 We have deferred tax assets which arise primarily due to depreciation recorded at different rates for tax and book purposes offset by cost basis differences in depreciable assets due to the deferral of the recognition of insurance recoveries on casualty losses for tax purposes, investments in and management fees paid by limited partnerships, accruals for potential uninsured claims, bonuses accrued for book purposes but not paid within two and a half months for tax purposes, the capitalization of certain inventory costs for tax purposes not recognized for financial reporting purposes, the recognition of revenue from gift cards not redeemed within twelve months of issuance, allowances for uncollectable receivables, unfunded limited retirement commitments and tax credit carryforwards generated as a result of the application of alternative minimum taxes. The components of our deferred tax assets at October 3, 2020 and September 28, 2019 were as follows: 2020 2019 Long-Term: Reversal of aged payables $ 18,000 $ 19,000 Capitalized inventory costs 22,000 20,000 Accrued bonuses 166,000 251,000 Accruals for potential uninsured claims 27,000 23,000 Gift cards 162,000 143,000 Limited partnership management fees (192,000 ) (325,000 ) Tip credit 7,000 — Book/tax differences in property and equipment (507,000 ) (205,000 ) Book/tax differences in operating leases 279,000 — Limited partnership investments 307,000 254,000 Accrued limited retirement 63,000 69,000 Total Deferred Tax Assets $ 352,000 $ 249,000 F- 23 Table of Contents NOTE 12. DEBT Long-Term Debt 2020 2019 Mortgage payable to unrelated third party, secured by a first mortgage on real property and improvements, bearing interest at 3.86%, amortized over twenty (20) years, payable in monthly installments of principal and interest of approximately $43,000, with a balloon payment of approximately $5,373,000 due on November 27, 2026. As of October 3, 2020, the net book value of the collateral securing this mortgage was $5,596,000. 7,070,000 2,756,000 Mortgage payable to unrelated third party, secured by first mortgage on real property and improvements, bearing interest at 7½%, amortized over twenty (20) years, payable in monthly installments of principal and interest of approximately $15,700, with a balloon payment of approximately $1,331,000 in December, 2022. As of October 3, 2020, the net book value of the collateral securing this mortgage was $2,499,000. 1,508,000 1,586,000 Mortgage payable to lender, secured by a first mortgage on real property and improvements, bearing interest at BBA LIBOR – 1 Month +2.25%, (2.39% at October 3, 2020), but with the interest fixed at 4.35% pursuant to a swap agreement, amortized over twenty (20) years, payable in monthly installments of principal and interest of approximately $8,775, with a balloon payment of approximately $858,000 on January 22, 2023. As of October 3, 2020, the net book value of the collateral securing this mortgage was $3,516,000. 1,017,000 1,062,000 Revolving credit line/term loan payable to lender, which entitled the Company to borrow, from time to time through December 28, 2017, up to $5,500,000, (the “Credit Line”), secured by a blanket lien on all Company assets, bearing interest through December 28, 2017 at LIBOR – Daily Floating Rate + 2.25%, (2.39% at October 3, 2020). Effective December 28, 2017, an interest rate swap agreement requires us to pay interest for a five (5) year period at a fixed rate of 4.61% on an initial amortizing notional principal amount of $5,500,000, while receiving interest for the same period at LIBOR, Daily Floating Rate, plus 2.25%, per annum (2.39% at October 3, 2020) on the same notional principal amount, with a final payment on December 28, 2022. On December 21, 2017, we borrowed the remaining $3,500,000 and on December 28, 2017 the entire principal balance under the Credit Line ($5,500,000) converted to the Term Loan. 2,750,000 3,575,000 F- 24 Table of Contents Mortgage payable to lender, secured by a first mortgage on real property and improvements, bearing interest at the fixed rate of 4.65% per annum, fully amortized over fifteen (15) years, payable in monthly installments of principal and interest of approximately $6,384, with a final payment on December 28, 2031. As of October 3, 2020, the net book value of the collateral securing this mortgage was $843,000. 679,000 712,000 Mortgage payable to a related party, an entity the owners of which include persons who are either our officers, directors or their family members, secured by first mortgage on real property and improvements, bearing interest at 5%, amortized over fifteen (15) years, payable in monthly installments of principal and interest of approximately $5,700, with a balloon payment of approximately $465,000 due in March, 2021. As of October 3, 2020, the net book value of the collateral securing this mortgage was $1,549,000. 483,000 523,000 Mortgage payable to lender, secured by a first mortgage on real property and improvements, bearing interest at the fixed rate of 4.65% per annum, fully amortized over fifteen (15) years, payable in monthly installments of principal and interest of approximately $6,519, with a final payment on December 28, 2031. As of October 3, 2020, the net book value of the collateral securing this mortgage was $946,000. 693,000 727,000 Mortgage payable to related party, an entity the owners of which include persons who are either our officers, directors or their family members, secured by first mortgage on real property and improvements, bearing interest at 5%, amortized over fifteen (15) years, payable in monthly installments of principal and interest of approximately $4,900, with a balloon payment of approximately $398,000 in May, 2021. As of October 3, 2020, the net book value of the collateral securing this mortgage was $2,384,000. 423,000 451,000 Financed insurance premiums, secured by all insurance policies, bearing interest at 3.85% payable in monthly installments of principal and interest in the aggregate amount of $158,000 a month through November 30, 2020. 365,000 208,000 Mortgage payable to related party, an entity the owners of which include persons who are either our officers, directors or their family members, secured by first mortgage on real property and improvements, bearing interest at 5%, amortized over fifteen (15) years, payable in monthly installments of principal and interest of approximately $6,000, with a balloon payment of approximately $484,000 due in April, 2021. As of October 3, 2020, the net book value of the collateral securing this mortgage was $1,599,000. 511,000 545,000 Mortgage payable to unrelated third party, secured by first mortgage on real property and improvements, bearing interest at 7½%, amortized over twenty (20) years, payable in monthly installments of principal and interest of approximately $7,300, with a final payment due in March, 2034. As of October 3, 2020, the net book value of the collateral securing this mortgage was $1,123,000. 743,000 768,000 F- 25 Table of Contents Mortgage payable to related third party, secured by first mortgage on real property and improvements, bearing interest at 4%, amortized over eight (8) years, payable in monthly installments of principal and interest of approximately $3,000, with a final payment due in November, 2026. As of October 3, 2020, the net book value of the collateral securing this mortgage was $524,000. 197,000 228,000 Loans from an unrelated third party lender pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) enacted March 27, 2020, in the aggregate principal amount of approximately $10.0 million, (the “PPP Loans”), of which approximately $5.9 million was loaned to us and $4.1 million was loaned to 8 of the limited partnerships. The PPP Loans, which are in the form of Notes issued by each of the Borrowers, mature two years from the date of funding (dates ranging from May 5, 2022 to May 11, 2022) and bear interest at a rate of 1.00% per annum, payable monthly commencing approximately six months from the date of issuance of the Notes (issuance dates ranging from April 30, 2020 to May 6, 2020). $ 10,036,000 — Other 45,000 75,000 Less unamortized loan costs (197,000 ) (136,000 ) 26,323,000 13,080,000 Less current portion 5,094,000 1,983,000 $ 21,229,000 $ 11,097,000 Long-term debt at October 3, 2020 matures as follows: 2021 $ 5,094,000 2022 10,060,000 2023 3,240,000 2024 457,000 2025 479,000 Thereafter 7,190,000 $ 26,520,000 Less unamortized loan costs (197,000 ) $ 26,323,000 Prior to obtaining the PPP Loans, we were in compliance with the financial covenants contained in our loans with our unrelated third party institutional lender (the “Institutional Lender”) under which as of October 3, 2020, we owe in the aggregate, approximately $12,209,000 (the “Institutional Loans”). We determined that as of the end of the third quarter of our fiscal year 2020, we were not in compliance with our financial covenants contained in the Institutional Loans related to the Rent Adjusted Funded Debt to EBITDA Ratio because our consolidated debt during the third quarter of our fiscal year 2020 increased due to our repayment obligations under the PPP Loans (the “Covenant Breach’). Pursuant to the terms of the Institutional Loans, the Covenant Breach, grants the Institutional Lender the right to exercise certain remedies under the Institutional Loans, including the right to accelerate the indebtedness owed by us to the Institutional Lender thereunder. On August 10, 2020, we received a written waiver of the Covenant Breach from the Institutional Lender, which, among other things, waives the Covenant Breach through June 30, 2021. As of October 3, 2020, we are in compliance with the financial covenants contained in our loans with our Institutional Lender. F- 26 Table of Contents There can be no assurances that we will be in compliance with our financial covenants thereafter due to, among other things, that our results of operations will likely continue to be materially impacted by the COVID-19 pandemic. Absent a waiver, failure to be in compliance with our financial covenants would constitute a default under the Institutional Loans with our Institutional Lender when reported. Such a default, if not cured or waived, would allow the Institutional Lender to accelerate the maturity of the indebtedness we owe under the Institutional Loans, making it due and payable at the time. If maturity of the Institutional Loans were accelerated, it would have a material adverse impact on our consolidated financial statements and results of operations. NOTE 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS Construction Contracts a. 2505 N. University Drive, Hollywood, Florida (Store #19) During the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated architect for design and development services totaling $77,000 for the re-build of our restaurant located at 2505 N. University Drive, Hollywood, Florida (Store #19) which has been closed since October 2018 due to damages caused by a fire, of which $62,000 has been paid. Additionally, during the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated general contractor for site work at this location totaling $1,618,000, (i) to connect the real property where this restaurant operated (Store #19) to city sewer and (ii) to construct a new building on the adjacent parcel of real property for the operation of a package liquor store. During our fiscal year 2020, we agreed to change orders to the agreement for additional construction services increasing the total contract price by $112,000 to $1,730,000, of which $-0- has been paid through October 3, 2020. Subsequent to the end of our fiscal year 2020, we agreed to additional change orders to the agreement for additional price by $28,000 to $1,757,000, of which $64,000 has been paid. b. 14301 W. Sunrise Boulevard, Sunrise, Florida (Store #85) During the third quarter of our fiscal year 2019, we entered into an agreement with a third party unaffiliated design group for design and development services of our new location at 14301 W. Sunrise Boulevard, Sunrise, Florida 33323 (Store #85) for a total contract price of $122,000. During the first quarter of our fiscal year 2020, we agreed upon changes to the agreement for additional design and development services which had the effect of increasing the total contract price of the same by $18,000 to $140,000, of which $106,000 has been paid. Additionally, during the fourth quarter of our fiscal year 2020, we entered into an agreement with a third party unaffiliated general contractor for interior renovations at this location totaling $1,236,000, of which $-0- has been paid through October 3, 2020. Subsequent to October 3, 2020, $111,000 has been paid. F- 27 Table of Contents NOTE 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued) Legal Matters Our sale of alcoholic beverages subjects us to “dram shop” statutes, which allow an injured person to recover damages from an establishment that served alcoholic beverages to an intoxicated person. If we receive a judgment substantially in excess of our insurance coverage or if we fail to maintain our insurance coverage, our business, financial condition, operating results or cash flows could be materially and adversely affected. We currently have no “dram shop” claims pending. We are a party to various other claims, legal actions and complaints arising in the ordinary course of our business. It is our opinion that all such matters are without merit or involve such amounts that an unfavorable disposition would not have a material adverse effect on our financial position or results of operations. Leases To conduct certain of our operations, we lease restaurant and package liquor store space in South Florida from unrelated third parties. Our leases have remaining lease terms of up to 10 years, some of which include options to renew and extend the lease terms for up to an additional 30 years. We presently intend to renew some of the extension options available to us and for purposes of computing the right-of-use assets and lease liabilities required by ASC 842, we have incorporated into all lease terms which may be extended, an additional term of the lesser of (i) the amount of years the lease may be extended; or (ii) 15 years. Following adoption of ASC 842, common area maintenance and property taxes are not considered to be lease components. The components of lease expense are as follows: 53 Weeks Ended October 3, 2020 Operating Lease Expense, which is included in occupancy costs $ 4,521,000 Supplemental balance sheet information related to leases as follows: Classification on the Condensed Consolidated Balance Sheet October 3, 2020 Assets Finance lease assets $ 4,749,000 Operating lease assets 22,150,000 $ 26,899,000 Liabilities Finance current liabilities $ 4,772,000 Operating current liabilities 3,116,000 Operating lease non-current liabilities 20,337,000 Weighted Average Remaining Lease Term: Finance leases 0.42 Years Operating leases 7.71 Years Weighted Average Discount: Finance leases 5.5% Operating leases 5.5% F- 28 Table of Contents The following table outlines the minimum future lease payments for the next five years and thereafter: For fiscal year Operating Leases Finance Leases 2021 $ 4,246,000 $ 4,881,000 2022 2,927,000 2023 2,942,000 2024 2,975,000 2025 2,957,000 Thereafter 14,131,000 Total lease payments (Undiscounted cash flows) 30,178,000 4,881,000 Less imputed interest (6,772,000 ) (109,000 ) Total $ 23,406,000 $ 4,772,000 Total rent expense for all of our operating leases was approximately $3,963,000 in our fiscal year 2019 and is included in “Occupancy Costs” in our accompanying consolidated statements of income. The total rent expense is comprised of the following: 2019 Minimum Base Rent $ 3,149,000 Contingent Percentage Rent 814,000 Total $ 3,963,000 Purchase Commitments In order to fix the cost and ensure adequate supply of baby back ribs for our restaurants during calendar year 2021, on November 9, 2020, we entered into a purchase agreement with our current rib supplier, whereby we agreed to purchase approximately $6,420,000 of baby back ribs during calendar year 2021 from this vendor at a fixed cost. While we anticipate purchasing all of our rib supply from this vendor, we believe that several other alternative vendors are available, if necessary. During the third quarter of our fiscal year 2020, we temporarily suspended the operation of the Flanigan’s Fish Company, LLC, a Florida limited liability company (“FFC”) due to the decrease in demand for imported fresh fish caused by restrictions placed upon the operation of our restaurants due to COVID-19, relying instead on outside fresh fish purveyors. The suspension of operations lasted approximately 5 ½ weeks, after which we resumed operations. As of October 3, 2020, FFC supplies certain of the fish to all of our restaurants. Since we hold the controlling interest of FFC, the balance sheet and operating results of this entity are consolidated into the accompanying financial statements of the Company, but eliminated upon consolidation. Sales and purchases of fish are recognized in restaurant food sales and restaurant and lounges (cost of merchandise sold), respectively, in the consolidated statements of income at the time of sale to the restaurant. In addition, the 49% of FFC owned by the unrelated third party is recognized as noncontrolling interest in our consolidated financial statements. F- 29 Table of Contents NOTE 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued) Purchase of Limited Partnership Interests During our fiscal year 2020, we did not purchase any limited partnership interests. During our fiscal year 2019, we purchased from one limited partner (who is not an officer, director or family member of officers or directors) a limited partnership interest of 0.63% in a limited partnership which owns a restaurant, for a purchase price of $4,800. Franchise Program At October 3, 2020 and September 28, 2019, we were the franchisor of five units under franchise agreements. Of the five franchised stores, three are combination restaurant/package liquor stores and two are restaurants (one of which we operate). Four franchised stores are owned and operated by related parties as follows: • James G. Flanigan, our Chairman of the Board of Directors, Chief Executive Officer and President of the Company, and Michael B. Flanigan, a member of our Board of Directors and James G. Flanigan’s brother, are each a 35.24% owner of a company which has a franchise arrangement with us for the operation of a restaurant and adjacent package liquor store located in Coconut Grove, Florida (Store #18). • Patrick J. Flanigan, brother to both James G. Flanigan and Michael B. Flanigan and a member of our Board of Directors, owns 100% of a company which has a franchise arrangement with us for the operation of a combination restaurant/package liquor store located in Pompano Beach, Florida (Store #43). • Our officers and directors collectively own 30% of the shareholder interest of a company which has a franchise arrangement with us for the operation of a restaurant located in Deerfield Beach, Florida. The shareholder interest of James G. Flanigan’s family represents an additional 60% of the total invested capital in this franchised location (Store #14). • Patrick J. Flanigan is the sole general partner and a 25% limited partner in a limited partnership which has a franchise arrangement with us for the operation of a restaurant located in Fort Lauderdale, Florida. The Company is a 25% limited partner in this limited partnership and officers and directors of the Company (excluding Patrick J. Flanigan) own an additional 31.9% limited partnership interest in this franchised location (Store #15). Under the franchise agreements, we provide guidance, advice and management assistance to the franchisees. In addition and for an additional annual fee of approximately $25,000, we also act as fiscal agent for the franchisees whereby we collect all revenues and pay all expenses and distributions. We also, from time to time, advance F- 30 Table of Contents NOTE 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (Continued) Franchise Program (Continued) funds on behalf of the franchisees for the cost of renovations. The resulting amounts receivable from and payable to these franchisees are reflected in the accompanying consolidated balance sheet as either an asset or a liability. We also agree to sponsor and manage cooperative buying groups on behalf of the franchisees for the purchase of inventory. The franchise agreements provide for royalties to us of approximately 3% of gross restaurant sales and 1% of gross package liquor sales. During our fiscal years 2020 and 2019, we earned royalties of $666,000 and $751,000, respectively, from our related franchises. We are not currently offering or accepting new franchises. Employment Agreements/Bonuses As of October 3, 2020 and September 28, 2019, we had no employment agreements. Our Board of Directors approved an annual performance bonus, with 14.75% of the corporate pre-tax net income, plus or minus non-recurring items, but before depreciation and amortization in excess of $650,000 paid to the Chief Executive Officer and 5.25% paid to other members of management. Bonuses for our fiscal years 2020 and 2019 amounted to approximately $933,000 and $1,444,000, respectively. Our Board of Directors also approved an annual performance bonus, with 5% of the pre-tax net income before depreciation and amortization from our restaurants in excess of $1,875,000 and our share of the pre-tax net income before depreciation and amortization from the restaurants owned by the limited partnerships paid to the Chief Operating Officer and 5% paid to the Chief Financial Officer. Bonuses for our fiscal years 2020 and 2019 amounted to approximately $679,000 and $970,000, respectively. Management Agreements Deerfield Beach, Florida Since January 2006, we have managed “The Whale’s Rib”, a casual dining restaurant located in Deerfield Beach, Florida, pursuant to a management agreement. We paid $500,000 in exchange for our rights to manage this restaurant. The management agreement was amortized on a straight-line basis over the life of the initial term of the agreement, ten (10) years. The restaurant is owned by a third party unaffiliated with us. In exchange for providing management, bookkeeping and related services, we receive one-half (½) of the net profit, if any, from the operation of the restaurant. During the third quarter of our fiscal year 2011, the term of the management agreement was extended through January 9, 2036. For the fiscal years ended October 3, 2020 and September 28, 2019, we generated $150,000 and $375,000 of revenue respectively, from providing these management services. F- 31 Table of Contents NOTE 14. FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS We follow FASB (ASC) Topic 820, “ Fair Value Measurements and Disclosures ”, for financial assets and liabilities and for non-financial assets and liabilities that are recognized or disclosed at fair value on at least an annual basis. Topic 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, we consider the principal or most advantageous market in which it would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of non-performance. Topic 820 establishes a fair market hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Topic 820 establishes three levels of inputs that may be used to measure fair value: • Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities. • Level 2 Inputs -- Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to evaluation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. • Level 3 Inputs -- One or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation. Interest Rate Swap Agreements At October 3, 2020, we had two variable rate debt instruments outstanding that are impacted by changes in interest rates. The interest rate of both variable rate debt instruments is equal to the lender’s LIBOR Rate plus two and one-quarter percent (2.25%) per annum. The debt instruments further provide that the “LIBOR Rate” is a rate of interest equal to the British Bankers Association LIBOR Rate or successor thereto approved by the lender if the British Bankers Association is no longer making a LIBOR rate available. 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 entitled us to borrow, from time to time through December 28, 2017, up to $5,500,000 (the “Credit Line”), which on December 28, 2017 converted to the term loan (the “Term Loan”). F- 32 Table of Contents NOTE 14. FAIR VALUE MEASUREMENTS OF FINANCIAL INSTRUMENTS (Continued) Interest Rate Swap Agreements ( Continued) 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 two (2) interest rate swap agreements: (i) One (1) 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 October 3, 2020, 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 December, 2016, which became effective December 28, 2017, relates to the Credit Line (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 4.61% 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 October 3, 2020, the interest rate swap agreement is an effective hedging agreement and the fair value was not material. NOTE 15. COMMON STOCK Treasury Stock Purchase of Common Shares During our fiscal years 2020 and 2019, we did not purchase any shares of our common stock. As of October 3, 2020, we still have authority to purchase 65,414 shares of our common stock under the discretionary plan approved by the Board of Directors on May 17, 2007. Our current repurchase plan has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions, up to a purchase price of price of $15 per share. NOTE 16. 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 our fiscal years ended 2020 and 2019, 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 expense 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. F- 33 Table of Contents NOTE 16. BUSINESS SEGMENTS (Continued ) 2020 2019 Operating Revenues: Restaurants $ 84,652,000 $ 94,290,000 Package stores 26,276,000 19,327,000 Other revenues 2,049,000 2,585,000 Total operating revenues $ 112,977,000 $ 116,202,000 Income from Operations Reconciled to Income after Income Taxes and Net Income Attributable to Noncontrolling Interests: Restaurants $ 4,532,000 $ 8,965,000 Package stores 1,699,000 879,000 6,231,000 9,844,000 Corporate expenses, net of other revenues (3,320,000 ) (3,528,000 ) Income from Operations 2,911,000 6,316,000 Interest expense (836,000 ) (708,000 ) Interest and Other Income 49,000 54,000 Insurance recovery, net of casualty loss — 602,000 Income before provision for income taxes $ 2,124,000 $ 6,264,000 Benefit (Provision) for Income Taxes 60,000 (887,000 ) Net Income 2,184,000 5,377,000 Net Income Attributable to Noncontrolling Interests (1,074,000 ) (1,729,000 ) Net Income Attributable to Flanigan’s Enterprises, Inc, Stockholders $ 1,110,000 $ 3,648,000 Identifiable Assets: Restaurants $ 55,030,000 $ 31,077,000 Package store 13,771,000 10,540,000 68,801,000 41,617,000 Corporate 43,683,000 27,138,000 Consolidated Totals $ 112,484,000 $ 68,755,000 Capital Expenditures Restaurants $ 1,834,000 $ 3,464,000 Package stores 260,000 898,000 2,094,000 4,362,000 Corporate 672,000 1,961,000 Total Capital Expenditures $ 2,766,000 $ 6,323,000 F- 34 Table of Contents Depreciation and Amortization: Restaurants $ 2,485,000 $ 2,373,000 Package stores 355,000 274,000 2,850,000 2,647,000 Corporate 390,000 393,000 Total Depreciation and Amortization $ 3,240,000 $ 3,040,000 NOTE 17. QUARTERLY INFORMATION (UNAUDITED ) The following is a summary of our unaudited quarterly results of operations for the quarters in our fiscal years 2020 and 2019. Quarter Ended Dec. 28, 2019 March 28, 2020 June 27, 2020 Oct. 3, 2020 Revenues $ 30,941,000 $ 30,128,000 $ 23,663,000 $ 28,245,000 Income from operations 1,231,000 1,517,000 (732,000 ) 895,000 Net income (loss) attributable to stockholders 494,000 648,000 (455,000 ) 423,000 Net income (loss) per share – basic and diluted 0.27 0.35 (0.24 ) 0.22 Weighted average common stock outstanding – basic and diluted 1,858,647 1,858,647 1,858,647 1,858,647 Quarter Ended Dec. 29, 2018 March 30, 2019 June 29, 2019 Sept. 28, 2019 Revenues $ 27,894,000 $ 29,736,000 $ 29,512,000 $ 29,060,000 Income from operations 655,000 1,890,000 1,944,000 1,827,000 Net income attributable to stockholders 743,000 1,021,000 968,000 916,000 Net income per share – basic and diluted 0.40 0.55 0.52 0.49 Weighted average common stock outstanding – basic and diluted 1,858,647 1,858,647 1,858,647 1,858,647 Quarterly operating results are not necessarily representative of our operations for a full year for various reasons including the seasonal nature of both the restaurant and package store segments. F- 35 Table of Contents NOTE 18. 401(k) PLAN Effective July 2004, we began sponsoring a 401(k) retirement plan covering substantially all employees who meet certain eligibility requirements. Employees may contribute elective deferrals to the plan up to amounts allowed under the Internal Revenue Code. We are not required to contribute to the plan but may make discretionary profit sharing and matching contributions. During our fiscal years 2020 and 2019, we made discretionary contributions of $81,000 and $74,000, respectively. NOTE 19. SUBSEQUENT EVENTS Menu Price Increases Effective November 29, 2020 we increased menu prices for our bar offerings to target an increase to our bar revenues of approximately 1.83% annually and effective December 6, 2020 we increased menu prices for our food offerings to target an increase to our food revenues of approximately 2.45% annually to offset higher food costs and higher overall expenses. Prior to these increases, we previously raised menu prices in the third quarter of our fiscal year 2019. Exercise of Options to Purchase North Lauderdale, Florida (“Flanigan’s Seafood Bar and Grill”/”Big Daddy’s Liquors”) On October 7, 2014, we entered into an Amendment to Lease Agreement (the “Lease Amendment”) with a non-affiliated third party from whom we rent approximately 4,600 square feet of commercial space located at 5450 N. State Road 7, North Lauderdale, Florida where we operate a combination “Flanigan’s Seafood Bar and Grill” restaurant and “Big Daddy’s Liquors” package liquor store (Store #40). The Lease Amendment extended the term of the Lease Agreement until December 31, 2020 and granted us the option to purchase, (the “Option to Purchase”), the real property and improvements on December 31, 2020 for $1,200,000. During the fourth quarter of our fiscal year 2020 we exercised the Option to Purchase and closed on December 31, 2020. We paid all cash at closing. Sunrise, Florida (“Flanigan’s Seafood Bar and Grill”) During the second quarter of our fiscal year 2019, we entered into a Lease Agreement (the “Sunrise Lease Agreement”) with a non-affiliated third party to rent approximately 6,900 square feet of commercial space located at 14301 W. Sunrise Boulevard, Sunrise, Florida where, subject to certain conditions, we anticipate opening a new restaurant location. The Sunrise Lease Agreement grants us an option to purchase, (the “Option to Purchase”) the real property and improvements by February 28, 2021. During the third quarter of our fiscal year 2019, we assigned the Sunrise Lease Agreement, excluding the Option to Purchase, to a newly formed limited partnership. Subsequent to the end of our fiscal year 2020, we exercised the Option to Purchase and anticipate closing during the second quarter of our fiscal year 2021. We intend to pay all cash at closing. General Liability Insurance; Excess Insurance For the policy year beginning December 30, 2020, we bound general liability insurance with an unrelated third party insurance carrier which incorporates a deductible of $10,000 per occurrence for both us and the limited partnerships. Our insurance carrier is responsible for $1,000,000 coverage per occurrence above our deductible, up to a maximum aggregate of $2,000,000 per year. We were also able to bind excess liability insurance at a reasonable premium, whereby our excess insurance carrier is responsible for $10,000,000 coverage above our primary general liability insurance coverage. We are uninsured against liability claims in excess of $11,000,000 per occurrence and in the aggregate. Certain expenses incurred in defending a claim, including attorney's fees, are a part of our $10,000 deductible. Property Insurance; Windstorm Insurance; Deductibles For the policy year beginning December 30, 2020, our property insurance is a one (1) year policy with an unaffiliated third party insurance carrier, including coverage for properties leased by us and our consolidated limited partnerships, and provides for full insurance coverage for property losses, including those caused by windstorm, such as a hurricane. For property losses caused by windstorm, the property insurance has a fixed deductible of $100,000, plus 5% of all insured losses, per occurrence. For all other property losses, the property insurance has deductibles of $10,000 per location, per occurrence. F- 36 Table of Contents Financed Insurance Premiums For the policy year commencing December 30, 2020, we financed the premiums on the following property, general liability, excess liability and terrorist policies, totaling approximately $1.94 million, which property, general liability, excess liability and terrorist insurance includes coverage for our franchises which are not included in our consolidated financial statements: (i) For the policy year beginning December 30, 2020, our general liability insurance, excluding limited partnerships, is a one (1) year policy with our insurance carriers. The one (1) year general liability insurance premium is in the amount of $340,000; (ii) For the policy year beginning December 30, 2020, our general liability insurance for our limited partnerships is a one (1) year policy with our insurance carriers. The one (1) year general liability insurance premium is in the amount of $426,000; (iii) For the policy year beginning December 30, 2020, our automobile insurance is a one (1) year policy. The one (1) year automobile insurance premium is in the amount of $93,000; (iv) For the policy year beginning December 30, 2020, our property insurance is a one (1) year policy. The one (1) year property insurance premium is in the amount of $627,000; (v) For the policy year beginning December 30, 2020, our excess liability insurance is a one (1) year policy. The one (1) year excess liability insurance premium is in the amount of $443,000; (vi) For the policy year beginning December 30, 2020, our terrorist insurance is a one (1) year policy. The one (1) year terrorist insurance premium is in the amount of $5,000; and (vii) For the policy year beginning December 30, 2020, our equipment breakdown insurance is a one (1) year policy. The one (1) year equipment breakdown insurance premium is in the amount of $6,000. Of the $1,940,000 annual premium amounts, which includes coverage for our franchises which are not included in our consolidated financial statements, we financed $1,776,000 through an unaffiliated third party lender. The finance agreement obligates us to repay the amounts financed together with interest at the rate of 2.45% per annum, over 11 months, with monthly payments of principal and interest, each in the amount of $164,000. The finance agreement is secured by a first priority security interest in all insurance policies, all unearned premium, return premiums, dividend payments and loss payments thereof. Except as otherwise provided herein, subsequent events have been evaluated through the date these consolidated financial statements were issued and no other events required disclosure. F- 37