EACO CORP - Quarter Report: 2008 July (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x Quarterly report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended July 2,
2008
o Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
transition period from _______ to _______
Commission
File No. 000-14311
EACO
CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
|
Florida
|
59-2597349
|
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
1500 NORTH LAKEVIEW
AVENUE
ANAHEIM,
CALIFORNIA 92807
(Address
of Principal Executive Offices)
(714)
876-2490
(Registrant’s
Telephone No.)
Indicate
by check mark whether the registrant has (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes x No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer o Accelerated
filer o Non-accelerated
filer o Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As of
August 13, 2008
|
Title
of each class
|
Number
of shares outstanding
|
|
|
Common
Stock, $.01 par value
|
3,910,264
|
PART
I
FINANCIAL
INFORMATION
Item
1. Financial Statements
EACO
Corporation
Condensed
Statements of Operations
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Quarters
Ended
|
Six
Months Ended
|
|||||||||||||||
|
July
2,
2008
|
June
27,
2007
|
July
2,
2008
|
June
27,
2007
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Rental
Revenue
|
$ | 349,400 | $ | 194,000 | $ | 648,400 | $ | 428,100 | ||||||||
|
Total
Revenues
|
349,400 | 194,000 | 648,400 | 428,100 | ||||||||||||
|
Cost
and Expenses:
|
||||||||||||||||
|
Depreciation
and amortization
|
153,700 | 123,000 | 356,800 | 212,200 | ||||||||||||
|
General
and administrative expenses
|
460,000 | 519,100 | 959,900 | 844,300 | ||||||||||||
|
Loss
on disposal of assets
|
-- | -- | -- | 226,100 | ||||||||||||
|
Total
costs and expenses
|
613,700 | 642,100 | 1,316,700 | 1,282,600 | ||||||||||||
|
Loss
from operations
|
(264,300 | ) | (448,100 | ) | (668,300 | ) | (854,500 | ) | ||||||||
|
Investment
gain (loss)
|
-- | (98,600 | ) | 95,700 | (203,300 | ) | ||||||||||
|
Interest
and other income
|
85,600 | 16,300 | 148,400 | 45,900 | ||||||||||||
|
Interest
expense
|
(256,100 | ) | (107,800 | ) | (472,700 | ) | (190,600 | ) | ||||||||
|
Loss
from continuing operations
|
(434,800 | ) | (638,200 | ) | (896,900 | ) | (1,202,500 | ) | ||||||||
|
Discontinued
operations:
|
||||||||||||||||
|
Loss
from discontinued operations, net of income tax
|
-- | (360,000 | ) | (596,200 | ) | (423,200 | ) | |||||||||
|
Net
loss
|
(434,800 | ) | (998,200 | ) | (1,493,100 | ) | (1,625,700 | ) | ||||||||
|
Undeclared
cumulative preferred stock dividend
|
(19,100 | ) | (19,100 | ) | (19,100 | ) | (38,200 | ) | ||||||||
|
Net
loss attributable to common shareholders
|
(453,900 | ) | (1,017,300 | ) | (1,512,200 | ) | (1,663,900 | ) | ||||||||
|
Basic
and diluted loss per share continuing operations
|
$ | (0.11 | ) | $ | (0.17 | ) | $ | (0.22 | ) | $ | (0.32 | ) | ||||
|
Discontinued
operations
|
(0.00 | ) | (0.09 | ) | (0.15 | ) | (0.11 | ) | ||||||||
|
Net
loss
|
$ | (0.11 | ) | $ | (0.26 | ) | $ | (0.37 | ) | $ | (0.43 | ) | ||||
|
Basic
and diluted weighted average common shares outstanding
|
3,910,264 | 3,906,800 | 3,910,264 | 3,906,800 | ||||||||||||
See
accompanying notes to condensed financial statements.
- 2
-
EACO Corporation
Condensed
Balance Sheets
|
July
2, 2008
(Unaudited)
|
January
2,
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 7,200 | $ | 1,030,600 | ||||
|
Restricted
cash- short-term
|
-- | 1,186,500 | ||||||
|
Receivables,
net
|
112,600 | 6,500 | ||||||
|
Prepaid
and other current assets
|
155,000 | 145,500 | ||||||
|
Total
current assets
|
274,800 | 2,369,100 | ||||||
|
Investments,
trading
|
-- | 290,700 | ||||||
|
Certificate
of deposit
|
1,158,400 | 1,148,500 | ||||||
|
Property
and equipment:
|
||||||||
|
Land
|
5,682,800 | 5,682,800 | ||||||
|
Building
and improvements
|
7,896,600 | 7,896,600 | ||||||
|
Equipment
|
2,398,900 | 2,398,900 | ||||||
| 15,978,300 | 15,978,300 | |||||||
|
Accumulated
depreciation
|
(2,980,300 | ) | (2,672,700 | ) | ||||
|
Net
property and equipment
|
12,998,000 | 13,305,600 | ||||||
|
Other
assets, principally deferred charges, net of accumulated
amortization
|
978,300 | 884,400 | ||||||
| $ | 15,409,500 | $ | 17,998,300 | |||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY (DEFICIT)
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
$ | 266,300 | $ | 341,200 | ||||
|
Securities
sold, not yet purchased
|
-- | 786,500 | ||||||
|
Accrued
liabilities
|
188,600 | 2,425,600 | ||||||
|
Due
to related party
|
939,300 | -- | ||||||
|
Current
portion of workers compensation benefit liability
|
265,600 | 132,100 | ||||||
|
Current
portion of long-term debt
|
216,400 | 173,500 | ||||||
|
Current
portion of obligation under capital lease
|
4,600 | 700 | ||||||
|
Current
portion of accrued loss on sublease contract
|
186,500 | 81,100 | ||||||
|
Total
current liabilities
|
2,067,300 | 3,940,700 | ||||||
|
Deferred
rent
|
72,100 | 120,000 | ||||||
|
Deposit
liability
|
179,400 | 156,900 | ||||||
|
Workers
compensation benefit liability
|
3,404,600 | 3,669,900 | ||||||
|
Long-term
debt
|
7,546,600 | 6,473,100 | ||||||
|
Obligations
under capital lease
|
2,873,800 | 2,877,900 | ||||||
|
Accrued
loss on sublease contract
|
657,900 | 639,800 | ||||||
|
Total
liabilities
|
16,801,700 | 17,878,300 | ||||||
|
Shareholders'
equity (deficit):
|
||||||||
|
Preferred
stock of $0.01 par; authorized 10,000,000 shares;
|
||||||||
|
outstanding
36,000 shares at July 2, 2008 and January
2, 2008
(liquidation
value $900,000)
|
400 | 400 | ||||||
|
Common
stock of $.01 par; authorized 8,000,000 shares;
|
||||||||
|
outstanding 3,910,264
shares at July 2, 2008 and January 2, 2008
|
39,000 | 39,000 | ||||||
|
Additional
paid-in capital
|
10,932,600 | 10,932,300 | ||||||
|
Accumulated
deficit
|
(12,364,200 | ) | (10,851,700 | ) | ||||
|
Total
shareholders' equity (deficit)
|
(1,392,200 | ) | 120,000 | |||||
| $ | 15,409,500 | $ | 17,998,300 | |||||
See
accompanying notes to condensed financial statements.
- 3
-
EACO
Corporation
Condensed
Statements of Cash Flows
|
(Unaudited)
|
|||||||
|
Six
Months Ended
|
|||||||
|
July
2, 2008
|
June
27, 2007
|
||||||
|
Operating
activities:
|
|||||||
|
Net
loss
|
$
|
(1,493,100
|
)
|
$
|
(1,625,700
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
and amortization
|
356,800
|
251,000
|
|||||
|
Net
(gain) loss on investments
|
(95,900
|
)
|
203,300
|
||||
|
Loss
on purchase commitment
|
--
|
238,000
|
|||||
|
Loss
on disposal of equipment
|
--
|
226,100
|
|||||
|
Amortization
of deferred rent
|
(47,900)
|
(14,600
|
)
|
||||
|
Decrease
(increase) in:
|
|||||||
|
Receivables
|
(106,100
|
)
|
434,800
|
||||
|
Prepaid
and other current assets
|
(9,500
|
)
|
(20,700)
|
||||
|
Investments
|
(154,100
|
)
|
319,000
|
||||
|
Other
assets
|
(143,100
|
)
|
(120,300
|
)
|
|||
|
Increase
(decrease) in:
|
|||||||
|
Accounts
payable
|
(74,900
|
)
|
105,600
|
||||
|
Securities
sold, not yet purchased
|
(255,700
|
)
|
80,100
|
||||
|
Accrued
liabilities
|
(2,197,300
|
)
|
35,800
|
||||
|
Deposit
liability
|
22,500
|
32,900
|
|||||
|
Loss
on contract
|
123,500
|
--
|
|||||
|
Workers
compensation benefit liability
|
(131,800
|
)
|
(299,300
|
)
|
|||
|
Net
cash used in operating activities
|
(4,206,600)
|
(154,000)
|
|||||
|
Investing
activities:
|
|||||||
|
Reduction
(increase) in restricted cash
|
1,186,500
|
(80,100
|
)
|
||||
|
Net
cash provided by (used in) investing activities
|
1,186,500
|
(80,100
|
)
|
||||
|
Financing
activities:
|
|||||||
|
Proceeds
from issuance of long-term debt
|
1,179,700
|
--
|
|||||
|
Payments
on long-term debt
|
(63,300)
|
(54,400
|
)
|
||||
|
Preferred
stock dividend
|
(19,100)
|
(38,200
|
)
|
||||
|
Payment
on capital lease
|
(200
|
)
|
(14,800
|
)
|
|||
|
Proceeds
from issuance of related party debt
|
2,474,600
|
--
|
|||||
|
Payment
on related party debt
|
(1,575,000
|
)
|
--
|
||||
|
Net
cash provided by (used in) financing activities
|
1,996,700
|
(107,400
|
)
|
||||
|
Net
decrease in cash and cash equivalents
|
(1,023,400
|
)
|
(341,500)
|
||||
|
Cash
and cash equivalents- beginning of year
|
1,030,600
|
1,196,900
|
|||||
|
Cash
and cash equivalents- end of period
|
$
|
7,200
|
$
|
855,400
|
|||
|
Supplemental
disclosures of cash flow information:
|
|||||||
|
Cash
paid for taxes
|
$
|
--
|
$
|
--
|
|||
|
Cash
paid for interest
|
$
|
440,000
|
$
|
274,500
|
|||
See
accompanying notes to condensed financial statements.
- 4
-
EACO
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
July 2,
2008
(Unaudited)
Note
1. Basis of Presentation
The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and the interim financial information instructions to Form
10-Q, and do not include all the information and notes required by GAAP for
complete financial statements. In the opinion of management, all
adjustments necessary to present fairly, in accordance with GAAP, the financial
position of Eaco Corporation (the “Company”) as of July 2, 2008 and the results
of operations and cash flows for the interim periods presented, have been made
(consisting of normal recurring accruals and reclassifications of assets held
for sale to assets held and used). The result of operations for the three months
ended July 2, 2008 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2008. For further information,
refer to the financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the fiscal year ended January 2,
2008.
The
accompanying condensed financial statements of the Company have been prepared
assuming that the Company will continue as a going concern. The Company incurred
significant losses and had negative cash flow from operations for the year ended
January 2, 2008, and had a working capital deficit of approximately $1,571,600
at that date. During the six months ended July 2, 2008, the Company
incurred further losses and had a working capital deficit of approximately
$1,792,500. The cash balance at April 2, 2008 is $7,200.
The cash
outflows through June 2009 are estimated to total approximately $1,104,400,
which will generate an estimated negative cash balance of $1,148,800 in
the next twelve months.
The
Company currently has estimated equity of $4 to $7 million in its three owned
properties, of which $2 million is encumbered by a standby letter of credit to
the Florida Self Insurers Guaranty Association (“FSIGA”) as collateral for its
workers compensation liability. The Company has the ability to sell
any or all of these properties to fund operations; however, there can be no
assurance that improvement in operating results will occur or that the Company
will successfully implement its plans.
The
Company will require additional funds in order to maintain its current
operations. In the past, short term funds have been provided by Bisco
Industries, Inc. (“Bisco”) and the option to continue borrowing from Bisco is
available. The Company’s Chief Executive Officer and Chairman of the
Board of Directors, Glen F. Ceiley, is the President and sole shareholder of
Bisco. In the long term, the Company expects any capital requirements
to be provided through the sale or refinancing of property currently
owned. Additional sources of financing may include public or private
offerings of equity or debt securities. While management believes it will have
access to these financing sources, no assurance can be given that such
additional sources of financing will be available on acceptable terms, on a
timely basis or at all.
The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
Note
2. Significant Recent Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS
No. 141(R) retains the fundamental requirements in SFAS No. 141, “Business
Combinations”, that the acquisition method of accounting be used for all
business combinations and for an acquirer to be identified for each business
combination. SFAS No. 141(R) requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in SFAS No. 141(R). In addition, SFAS No.
141(R) requires acquisition costs and restructuring costs that the acquirer
expected but was not obligated to incur to be recognized separately from the
business combination, therefore, expensed instead of part of the purchase price
allocation. SFAS No. 141(R) will be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
adoption is prohibited. The Company expects to adopt SFAS No. 141(R) to any
business combinations with an acquisition date on or after January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment to ARB No. 51.” SFAS No. 160
changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS No. 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Early adoption is
prohibited. The Company is currently evaluating the impact SFAS No. 160 may have
on its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS No. 157 does not require any
new fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after December 15, 2007. The Company plans to adopt SFAS
No. 157 beginning in the first quarter of fiscal 2008. The adoption of SFAS
No. 157 did not have a significant impact on the Company’s financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 expands the scope
of specific types of assets and liabilities that an entity may carry at fair
value on its statement of financial position, and offers an irrevocable option
to record the vast majority of financial assets and liabilities at fair value,
with changes in fair value recorded in earnings. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The adoption of SFAS
No. 159 did not have a significant impact on the Company’s financial
statements.
- 5
-
EACO
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
July 2,
2008
(Unaudited)
Note
3. Investments
Prior to
the quarter ended April 2, 2008, investments consisted of trading securities and
securities sold, not yet purchased. The Company holds no such
investments at July 2, 2008, as the Company liquidated all of its investment
holdings in the quarter ended April 2, 2008.
These
securities were carried at fair market value, with unrealized gains and losses
reported in the statement of operations as a component of other income
(expense). Gains or losses on securities sold were based on the
specific identification method. The results for the quarter ended July 2, 2008
and June 27, 2007 included realized loss from the sale of marketable securities
of $0 and $233,000, respectively, and unrealized gain of $0 and $135,000,
respectively. The results for the six months ended July 2, 2008 and
June 27, 2007, included realized gain from the sale of marketable securities of
$12,500 and loss of $227,000, respectively, and unrealized loss of $447,500 and
gain of $23,000, respectively.
A primary
investment strategy used by the Company in 2008 and 2007 consisted of the
short-selling of securities, which resulted in obligations to purchase
securities at a later date. As of July 2, 2008, the Company had no
obligation for these securities sold and not yet purchased compared to $786,500
at January 2, 2008. The Company recognized net loss on securities
sold, not yet purchased of $0 and net losses of $227,000 for the quarters ended
July 2, 2008 and June 27, 2007, respectively. The company recognized net gain on
securities sold, not yet purchased of $530,800 and net loss of $204,000 for the
six months ended July 2, 2008 and June 27, 2007, respectively.
Note
4. Other Assets
Other
assets are summarized as follows:
|
July
2, 2008 (unaudited)
|
January
2,
2008
|
|||||||
|
Leasehold
origination costs
|
$
|
321,300
|
$
|
318,100
|
||||
|
Loan
fees
|
208,800
|
172,100
|
||||||
|
Tenant
improvements
|
210,700
|
210,700
|
||||||
|
Deferred
commissions and fees
|
212,000
|
232,500
|
||||||
|
Deferred
rent
|
320,400
|
203,100
|
||||||
|
Other
assets
|
500
|
10,000
|
||||||
|
1,273,700
|
1,146,500
|
|||||||
|
Less
accumulated amortization
|
(295,400
|
)
|
(262,400
|
)
|
||||
|
$
|
978,300
|
$
|
884,400
|
|||||
Amortization
expense was $24,900 and $25,000 for the quarters ended July 2, 2008 and June 27,
2007, respectively, and $49,000 and $48,300 for the six months ended July 2,
2008 and June 27, 2007, respectively.
Note
5. Sublease Contracts and Related Matters
On March
19, 2008, the Company signed a sublease agreement with a third party for the
sublease of the Fowler Property, which was vacant at last fiscal
year-end. The Company obtained the landlord’s consent to the sublease
during the quarter-ended April 2, 2008, at which time the sublease became
effective. The rental income is $22,500 monthly which escalates at 6%
every two years. The sublease term is for two years with a twelve
year renewal option. The monthly sublease income will be
approximately $8,000 less than the monthly lease payments. The
sublease allows for a $100,000 rent credit to be given to the subtenant in order
for the subtenant to perform necessary repairs on the property, specifically to
replace the roof and air conditioning. The Company had recorded an
accrual for the shortfall between the lease payments and sublease income in the
amount of $151,000 in accordance with the Financial Accounting Standards Board
(“FASB”) Technical Bulletin No. 79-15, “Accounting for Loss on a Sublease Not
Involving the Disposal of a Segment.”
On March
21, 2008, the Company entered into an agreement for an option to purchase the
Fowler Property from the current landlord for $3.13 million. Upon
evaluation of the purchase, the Company transferred its option to purchase the
Fowler Property to Glen Ceiley, CEO and Chairman of the Boards, on May 16,
2008. Due to the Company’s current liquidity, it would have been
difficult for the Company to provide the required down payment for the
purchase.
As of
July 2, 2008, the Company has an accrued loss on sublease contracts of $844,000
consisting of the loss on the Fowler Property of $151,000 and an accrued loss on
the Deland Property of $693,000.
Management
is continuing to evaluate whether the carrying value of the properties are
recoverable and expects to complete their evaluation before the next quarterly
filing, and such evaluation may result in further losses.
- 6
-
EACO
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
July 2,
2008
(Unaudited)
Note
6. Accrued Liabilities
Accrued
liabilities are summarized as follows:
|
July
2, 2008
(unaudited)
|
January
2,
2008
|
|||||
|
Property
taxes
|
$
|
--
|
$
|
15,700
|
||
|
Accrued
settlements with broker
|
--
|
2,317,700
|
||||
|
Legal
and accounting
|
35,300
|
52,600
|
||||
|
Unearned
rental revenue
|
93,600
|
36,300
|
||||
|
Other
|
59,700
|
3,300
|
||||
|
$
|
188,600
|
$
|
2,425,600
|
|||
Note
7. Workers’ Compensation Liability
Prior to
the Asset Purchase (defined below) the Company self-insured workers’
compensation losses up to certain limits. The liability for workers’
compensation claims represents an estimate of the present value of the ultimate
cost of uninsured losses which are unpaid as of the balance sheet dates. The
estimate is continually reviewed and adjustments to the Company’s estimated
claim liability, if any, are reflected in current operations. The workers’
compensation benefit liability was $3,670,200 and $3,802,000 at July 2, 2008 and
January 2, 2008, respectively.
After the
sale of substantially all of the Company’s restaurant assets (the “Asset Sale”)
to Banner Buffets, LLC (“Banner”) pursuant to that certain Asset Purchase
Agreement dated February 22, 2005, the Company terminated its self-insurance
program, and no further claims were incurred after June 29, 2005.
The State
of Florida Division of Workers’ Compensation (“the Division”) requires
self-insured companies to pledge collateral in favor of the Division in an
amount sufficient to cover the Company’s projected outstanding liability. In
compliance with this requirement, in July 2004, the Company provided the
Division with a $1 million letter of credit from a bank with an expiration date
of May 30, 2008. In May 2008, the letter of credit was renewed for one year with
an expiration date of May 30, 2009. Based upon the bank’s evaluation of the
Company’s credit and to avoid collateralization requirements, the letter of
credit is guaranteed on behalf of the Company by Bisco Industries, Inc.
(“Bisco”), an affiliated company. The Company’s Chief Executive
Officer and Chairman of the Board of Directors, Glen F. Ceiley, is the President
and sole shareholder of Bisco. In addition, the Company pledged in favor of the
Division another $3,139,000 in letters of credit from various banks with
expirations in 2008 and 2009. These letters of credit are collateralized by the
equity the Company holds in its Sylmar property of $2 million and certificates
of deposit totaling $1,158,400.
Note
8. Related Party Transactions
In
January 2008, the Company borrowed, on a short-term basis, $1,824,600 from Bisco
to fund operations. The note payable accrues interest monthly at 7.5% per annum
and payment of principal and interest matured in June 2008. During June 2008, a
two month extension was granted, to revise the note payable maturity date to
August 2008.
In May
2008, the Company borrowed, on a short term basis, $550,000 from Bisco to pay
for the Horn settlement. The note payable accrues interest monthly at 7.5% per
annum and payment of principal and interest matures in October
2008.
In June
2008, the Company borrowed, on a short term basis, $100,000 from Bisco to fund
its operations. The note payable accrues interest monthly at 7.5% per annum and
principal and interest matures in November 2008. Subsequent to July 2, 2008, the
Company borrowed an additional $100,000 from Bisco to fund operations. See
discussion in Note 11, Subsequent Events.
During
the six months ended July 2, 2008, the Company made a total repayment of
$1,575,000 to Bisco. The outstanding balance at the quarter ended July 2, 2008
was $939,300.
The
Company’s accounting functions are performed by Bisco’s accounting personnel and
independent contract workers pursuant to a lease and facilities agreement. The
amounts paid to Bisco were $30,500 and $38,800 for the three months ended July
2, 2008 and June 27, 2007, respectively, and $69,800 and $72,100 for the six
month ended July 2, 2008 and June 27, 2007, respectively.
On March
21, 2008, the Company entered into a purchase agreement to purchase the Fowler
Property from the current landlord for $3.13 million. Upon evaluation of the
purchase, the Company transferred the rights to purchase the Fowler Property to
Glen Ceiley, CEO and Chairman of the Boards, on May 16, 2008. See Note 5
Sublease Contracts and Related Matters.
- 7
-
EACO
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
July 2,
2008
(Unaudited)
Note
9. Earnings (Loss) Per Share
The
following is a quarterly reconciliation of the numerators and denominators of
the basic and diluted earnings per share (EPS) computations for net loss from
continuing operations attributable to common shareholders:
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Quarters
Ended
|
Six
Months Ended
|
|||||||||||||||
|
July
2, 2008
|
June
27, 2007
|
July
2, 2008
|
June
27, 2007
|
|||||||||||||
|
EPS
from continuing operations - basic and diluted:
|
||||||||||||||||
|
Loss
from continuing operations
|
$ | (434,800 | ) | $ | (638,200 | ) | $ | (896,900 | ) | $ | (1,202,500 | ) | ||||
|
Less
preferred stock dividends
|
(19,100 | ) | (19,100 | ) | (19,100 | ) | (38,200 | ) | ||||||||
|
Loss
from continuing operations
|
||||||||||||||||
|
for
basic and diluted
|
||||||||||||||||
|
EPS
Computation
|
$ | (453,900 | ) | $ | (657,300 | ) | $ | (916,000 | ) | $ | (1,240,700 | ) | ||||
|
Weighted
average shares outstanding for basic and diluted EPS
computation
|
3,910,264 | 3,906,800 | 3,910,264 | 3,906,800 | ||||||||||||
|
Loss
per common share from continuing operations - basic and
diluted
|
$ | (0.11 | ) | $ | (0.17 | ) | $ | (0.22 | ) | $ | (0.32 | ) | ||||
Note
10. Commitments and Contingencies
Legal
Matters
In
connection with the Asset Sale, a broker demanded a commission payment of $3.5
million. The Company filed suit against the broker in an effort to expedite a
resolution of the claim. The Company agreed to place $400,000 in escrow in
connection with the lawsuit. In December 2007, a final judgment was made by the
court in favor of the broker for approximately $2,317,000. As a result of the
judgment and subsequent settlement agreement (described below) between the
Company and the broker, the $400,000 in escrow was returned to the Company in
January 2008. On January 22, 2008, the Company and the broker, among others,
entered into a written settlement agreement whereby the Company, without
admitting liability, agreed to pay the broker the amount of $2.317 million in
satisfaction of the final judgment. The settlement amount was paid in January
2008. In March 2008, the court ruled the Company owed an additional $46,200 in
reimbursements related to legal costs incurred by the broker. That
amount was paid during the quarter ended April 2, 2008 and is included in
discontinued operations in the accompanying condensed statement of operations
for the three months ended April 2, 2008.
In August
2005, the Company was sued by another broker who claimed that a commission of
$749,000 was payable to him as a result of the Asset Sale. On May 9, 2008, the
Company reached a settlement agreement with the broker whereby the Company,
without admitting liability, agreed to pay the broker $550,000 which was accrued
for as of and for the three months ended April 2, 2008 and included in
discontinued operations in the condensed statement of operations. On May 13,
2008, payment of the settlement was made by way of a short term loan from Bisco,
see Note 7, Related Party Transactions. Such amount is included in the
amount due to related party at the quarter ended July 2, 2008.
Note
11. Subsequent Events
Subsequent
to July 2, 2008, the Company borrowed an additional $100,000 from Bisco to fund
operations. The note payable accrues interest at 7.5% per annum and
is due in January 2009.
- 8
-
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Critical
Accounting Policies
Revenue
Recognition
The
Company leases its properties to tenants under operating leases with terms of
over one year. Some of these leases contain scheduled rent increases. We
record rent revenue for leases which contain scheduled rent increases on a
straight-line basis over the term of the lease, in accordance with Statement of
Financial Accounting Standards (“SFAS”) SFAS No. 13, “Accounting for
Leases.”
Receivables
are carried net of an allowance for uncollectible receivables. An allowance is
maintained for estimated losses resulting from the inability of any tenants to
meet their contractual obligations under their lease agreements. We determine
the adequacy of this allowance by continually evaluating each tenant’s
receivables considering the tenant’s financial condition and security deposits,
and current economic conditions. An allowance for uncollectible accounts of
approximately $27,400 was determined to be necessary with regards to the
outstanding rent amount due the Company from the tenant of one of its stores
that has declared bankruptcy. It is unclear whether any of these funds will be
collected during the bankruptcy proceedings.
Long
Lived Assets
The
Company’s accounting policy for the recognition of impairment losses on
long-lived assets is considered critical. The Company’s policy is to review
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For the
purpose of the impairment review, assets are tested on an individual basis. The
recoverability of the assets is measured by a comparison of the carrying value
of each asset to the future net undiscounted cash flows expected to be generated
by such asset. If such assets are considered impaired, the impairment recognized
is measured by the amount by which the carrying value of the assets exceeds the
fair value.
Workers’
Compensation Liability
The
Company’s policy for estimating its workers’ compensation liability is
considered critical. The Company previously self-insured workers’ compensation
claims losses up to certain limits. The liability for workers’ compensation
represents an estimate of the present value of the ultimate cost of uninsured
losses which are unpaid as of the balance sheet dates. The estimate is
continually reviewed and adjustments to the Company’s estimated claim liability,
if any, are reflected in current operations. On an annual basis, the Company
obtains an actuarial report which estimates its overall exposure based on
historical claims and an evaluation of future claims. The Company pursues
recovery of certain claims from an insurance carrier. Recoveries, if any, are
recognized when realization is reasonably assured.
Deferred
Tax Assets
The
Company’s policy for recording a valuation allowance against deferred tax assets
is considered critical. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before the
Company is able to realize their benefit, or that future deductibility is
uncertain. In accordance with SFAS No. 109, “Accounting for Income Taxes”, the
Company records net deferred tax assets to the extent the Company believes these
assets will more likely than not be realized. In making such
determination, the Company considers all available positive and negative
evidence, including scheduled reversals of deferred tax liabilities, projected
future taxable income, tax planning strategies and recent financial performance.
SFAS No. 109 further states that forming a conclusion that a valuation allowance
is not required is difficult when there is negative evidence, such as
significant decreases in operations. As a result of the Company’s recent
disposal of significant business operations, the Company concluded that a
valuation allowance should be recorded against federal and state net operating
losses and certain federal and state tax credits. The utilization of these items
requires sufficient taxable income.
Loss
on Sublease Contracts
The
Company’s policy for recording a loss on sublease contracts is to evaluate the
costs expected to be incurred under an operating sublease in relation to the
anticipated revenue in accordance with FASB Technical Bulletin No. 79-15,
“Accounting for Loss on a Sublease not Involving the Disposal of a Segment” if
such costs exceed anticipated revenue on the operating sublease, the Company
recognizes a loss equal to the value of the shortfall over the term of the
sublease.
- 9
-
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS
No. 141(R) retains the fundamental requirements in SFAS No. 141, “Business
Combinations”, that the acquisition method of accounting be used for all
business combinations and for an acquirer to be identified for each business
combination. SFAS No. 141(R) requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions specified in SFAS No. 141(R). In addition, SFAS No.
141(R) requires acquisition costs and restructuring costs that the acquirer
expected but was not obligated to incur to be recognized separately from the
business combination, therefore, expensed instead of part of the purchase price
allocation. SFAS No. 141(R) will be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
adoption is prohibited. The Company expects to adopt SFAS No. 141(R) to any
business combinations with an acquisition date on or after January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment to ARB No. 51.” SFAS No. 160
changes the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS No. 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Early adoption is
prohibited. The Company is currently evaluating the impact SFAS No. 160 may have
on its consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS No. 157 does not require any
new fair value measurements. SFAS No. 157 is effective for fiscal years
beginning after December 15, 2007. The Company plans to adopt SFAS
No. 157 beginning in the first quarter of fiscal 2008. The adoption of SFAS
No. 157 did not have a significant impact on the Company’s financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 expands the scope of
specific types of assets and liabilities that an entity may carry at fair value
on its statement of financial position, and offers an irrevocable option to
record the vast majority of financial assets and liabilities at fair value, with
changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The adoption of SFAS No. 159 did not
have a significant impact on the Company’s financial statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force, or “EITF”), the American Institute of Certified Public
Accountants, and the SEC did not or are not believed by management to have a
material impact on the Company’s present or future consolidated financial
statements.
Use
of Estimates
The
preparation of the condensed financial statements of the Company requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates include the Company’s
workers’ compensation liability, the depreciable lives of assets, estimated loss
on or impairment of long-lived assets and the valuation allowance against
deferred tax assets. Actual results could differ from those estimates. For a
full description of the Company’s critical accounting policies, see Management’s
Discussion and Analysis of Financial Condition and Results of Operations in the
Company’s Annual Report on Form 10-K for the year ended January 2,
2008.
Results
of Operations
Comparison
of Quarters Ended July 2, 2008 and June 27, 2007
At July
2, 2008, the Company owns two real estate properties for restaurant use, one
located in Orange Park, Florida (the “Orange Park Property”) and one in
Brooksville, Florida (the “Brooksville Property”). Both of these properties were
vacant at the fiscal year end January 2, 2008. A tenant was found for the
Brooksville Property with the lease period commencing on January 9, 2008 and
expiring in January 2013. The Orange Park Property remains vacant at July 2,
2008. The Company is obligated for capital leases of two restaurant
locations, one located in Tampa, Florida (the “Fowler Property”) and another
located in Deland, Florida (the “Deland Property”). The Deland Property is
subleased to a restaurant operator whose sublease will expire in February 2017
while the Fowler Property is leased to a subtenant, which lease commenced on
April 9, 2008. In addition, the Company owns an income producing real estate
property held for investment in Sylmar, California (the “Sylmar Property”) with
two industrial tenants.
The
Company experienced an increase of $155,400 or 80% in rental revenue during the
second quarter of 2008 compared to the second quarter of 2007, due to having
tenants in the Company’s Brooksville, Deland and Fowler Properties for all or
most of the second quarter of 2008, while these properties were vacant for all
or most of the second quarter of 2007. The additional rent income was
offset by the loss of the tenant in the Company’s Orange Park Property, due to
that tenant filing for bankruptcy at the end of 2007.
Depreciation
and amortization expenses increased $30,700 or 25% in the second quarter of 2008
compared to the second quarter of 2007, primarily due to the return of two
properties, the Fowler Property and the Deland Property, following the Banner
bankruptcy. The Fowler Property was returned to the Company in December 2007 and
was not depreciated during the second quarter of 2007. The Deland Property was
held for sale in the second quarter of 2007 and was not
depreciated.
- 10
-
General
and administrative expenses consist mainly of rent and related property
insurance expense, legal and other professional fees. General and administrative
expenses decreased $59,100 or 11% during the second quarter of 2008 as compared
to the second quarter of 2007, due mainly to a decrease in legal fees. The
Company concluded a major litigation case at the end of fiscal 2007 with a vast
amount of the legal work on that case occurring in the second quarter of
2007. There was no similar case in progress in the second quarter of
2008.
In the
quarter ended April 2, 2008, the Company liquidated all of its investment
holdings. This resulted in no gain or loss from investments in the second
quarter of 2008 versus a loss of $98,600 in the second quarter of
2007.
Interest
and other income increased $69,300 or 425% in the second quarter of 2008 versus
the second quarter of 2007. During the quarter ended July 2, 2008,
the Company received a reimbursement of $53,000 from the Florida Disability
Trust Fund (the “Trust Fund”) related to a worker’s compensation claim against
the Company. No further reimbursements are due relating to any other
worker’s compensation cases from the Trust Fund.
Interest
expense increased by $148,300 or 137% in the quarter ended July 2, 2008 versus
the quarter ended June 27, 2007, mainly due to the refinancing of the Sylmar
Property that occurred in the fourth quarter of 2007. The resulting
interest on the higher loan amount was more than the interest paid on the
mortgage in the second quarter of 2007.
Net loss
was $434,800 in the second quarter of 2008 compared to net loss of $1,017,300 in
the second quarter of 2007. Loss per share for the quarter was $0.11 in 2008
compared to $0.26 in 2007. The 2008 second quarter loss was due primarily to
legal and professional fees and interest expense due to the refinancing of the
Sylmar Property and new mortgage on the Brooksville Property. The loss in the
second quarter of 2007 was principally due to investment losses, legal fees and
the loss on the purchase commitment from the anticipated sale of the Deland
Property.
Comparison
of Six Months Ended July 2, 2008 and June 27, 2007
The
Company experienced an increase of $220,300 or 51% in rental revenue during the
first six months of 2008 compared to the first six months of 2007, due to the
subleasing of both the Deland Property and Fowler Property during the first and
second quarter of 2008, respectively, exceeding the loss of income from the
vacancy of the Orange Park Property.
Depreciation
and amortization expenses increased $144,600 or 68% during the first six months
of 2008 compared to the first six months of 2007 mainly due to two reasons:
first, the Fowler Property reverted back to the Company in December 2007 as a
result of the Banner bankruptcy; and second, the Deland Property was classified
as held for sale in the second quarter of 2007 and not
depreciated. Both of those properties were depreciated throughout the
first six months of 2008.
The
results for the first six months of 2008 included realized gains from the sale
of marketable securities of $104,400 and unrealized losses of
$8,700. During the first six months of 2007, the Company had
unrealized gains from the sale of marketable securities of $142,000 and realized
losses of $345,300.
Interest
and other income increased $102,500 or 223% due to the reimbursement received by
the Company from the Florida Disability Trust Fund related to a worker’s
compensation claim against the Company and the receipt of interest in the first
quarter of 2008 from the amount held in escrow related to the Lurie broker
litigation.
Interest
expense increased by $282,100 or 148% during the six months ended July 2, 2008
versus the six months ended June 27, 2007, mainly due to the refinancing of the
Sylmar Property that occurred in the fourth quarter of 2007. The
resulting interest on the higher loan amount was more than the interest paid on
the mortgage in 2007 prior to the refinancing.
Net loss
was $1,493,100 in the first six months of 2008, compared to net loss of
$1,625,700 in the first six months of 2007. Loss per share for the
six months was $0.37 cents in 2008 compared to $0.43 in 2007.
Liquidity
and Capital Resources
The
accompanying condensed financial statements of the Company have been prepared
assuming that the Company will continue as a going concern. The Company incurred
significant losses and had negative cash flow from operations for the year ended
January 2, 2008, and had a working capital deficit of approximately $1,571,600
at that date. During the six months ended July 2, 2008, the Company incurred
further losses and had a working capital deficit of approximately $1,792,500.
The cash balance at April 2, 2008 is $7,200.
The cash
outflows through June 2009 are estimated to total approximately $1,104,400,
which will generate an estimated negative cash balance of $1,148,800 in
the next twelve months.
The
Company currently has estimated equity of $4 to $7 million in its three owned
properties, of which $2 million is encumbered by a standby letter of credit to
the Florida Self Insurers Guaranty Association (“FSIGA”) as collateral for its
workers compensation liability. The Company has the ability to sell any or all
of these properties to fund operations; however, there can be no assurance that
improvement in operating results will occur or that the Company will
successfully implement its plans.
- 11
-
The
Company will require additional funds in order to maintain its current
operations. In the past, short term funds have been provided by Bisco
Industries, Inc. (“Bisco”) and the option to continue borrowing from Bisco is
available. The Company’s Chief Executive Officer and Chairman of the
Board of Directors, Glen F. Ceiley, is the President and sole shareholder of
Bisco. In the long term, the Company expects any capital requirements to be
provided through the sale or refinancing of property currently owned. Additional
sources of financing may include public or private offerings of equity or debt
securities. While management believes it will have access to these financing
sources, no assurance can be given that such additional sources of financing
will be available on acceptable terms, on a timely basis or at all.
The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
In the
first six months of 2008, the Company received bridge loans from Bisco in the
amount of approximately $2,475,000, of which $1,575,000 has been repaid. Bisco’s
sole shareholder and President is Glen F. Ceiley, the Company’s Chief Executive
Officer and Chairman of the Board. The note agreements do not provide for
regularly scheduled payments; however, any remaining outstanding principal
balance plus accrued interest is due six months from the date of the note,
although the Company has the ability to extend the loans through March
2009.
Subsequent
to year end, the Company financed the Brooksville Property, which was purchased
in December 2007 with cash proceeds from the refinance of the Sylmar Property.
The cash paid for the Brooksville Property was approximately $2,027,000, and the
Company financed approximately $1,200,000 during the quarter ended April 2,
2008. Proceeds from the financing were used to pay down the Bisco loan by
approximately $1,150,000.
On May
13, 2008, the Company borrowed an additional $550,000 from Bisco to pay the Horn
settlement amount. The loan accrues interest at 7.5% per annum and principal and
interest is due no later than November 13, 2008.
On June
11, 2008, the Company borrowed an additional $100,000 from Bisco to cover
operating cash flow requirements through July 2008. The loan accrued interest at
7.5% per annum and principal and interest is due no later than December 11,
2008.
Substantially
all of the Company’s revenues are derived from rental income. Therefore, the
Company has not carried significant receivables or inventories and the primary
working capital requirements are the repayment of debt, legal expenses and
payment on the workers’ compensation liability.
As stated
above, at July 2, 2008, the Company had a working capital deficit of $1,792,500
compared to a working capital deficit of $1,571,600 at January 2, 2008. The
decrease was due to the payment of the Lurie and Horn litigation settlements and
cash outlays for operating expenses, such as legal costs and rents. Cash used in
operating activities was $4,206,600 in the six months ended July 2, 2008,
compared to cash used in operating activities of $154,000 in the six months
ended June 27, 2007. The increase in cash used in operating
activities was primarily due to the payment of the Lurie and Horn litigation
settlements.
Cash
provided by investing activities was $1,186,500 for the first six months of 2008
versus cash used of $80,100 in the first six months of 2007. During the first
quarter of 2008, the Company received $400,000 of previously restricted cash in
escrow related to the Lurie litigation. Also, during the first quarter of 2008,
the Company liquidated all of its equity holdings, including securities sold,
not yet purchased resulting in a further reduction of restricted cash of
$786,500. Cash related to these securities sold, not yet purchased was
considered restricted as it was required to repurchase the stock. During the
first six months of 2007, the Company increased its securities sold, not yet
purchased approximately $80,000 from the year ended 2006.
Net cash
provided by financing activities was $1,996,800 in the first six months of 2008
due to the proceeds received from the related party loan from Bisco of
$2,475,000, offset by the repayment during the six months of $1,575,000. The
Company also received proceeds from the financing of the Brooksville Property of
$1,179,700 during the quarter ended July 2, 2008.
In
connection with the Convertible Preferred Stock owned by the Company’s Chief
Executive Officer and Chairman of the Board, Glen Ceiley, dividends are paid
quarterly when declared by the Company’s Board of Directors. The Company paid
one quarterly dividend in the six months ended July 2, 2008. There were $19,100
of accrued undeclared dividends as of July 2, 2008.
The
Company is required to pledge collateral for its Workers’ Compensation
Self-Insurance Liability with FSIGA. The Company has a total of $1.37 million
pledged collateral. Bisco provides $1 million of this collateral. As
previously mentioned, the Company’s Chief Executive Officer and Chairman of the
Board of Directors, Glen F. Ceiley, is the President and sole shareholder of
Bisco. During 2007, the Company received a demand from the Florida Division of
Workers’ Compensation (the “Division”) to post further collateral in the amount
of $2,781,500. The Company pledged the amount by posting a standby letter of
credit. The letter of credit is collateralized by a certificate of deposit of
$769,500 and the equity the Company holds in the Sylmar Property. The Company
may be required to increase this collateral pledge from time to time in the
future, based on its workers’ compensation claim experience and various FSIGA
requirements for self-insured companies. Despite the sale of the
Company’s restaurants, the workers’ compensation will remain an ongoing
liability for the Company until all claims are paid, which will likely take many
years.
- 12
-
The
Company entered into a loan agreement with GE Capital for the Orange Park
Property in 1996. As of July 2, 2008, the outstanding balance due under the
Company’s loan with GE Capital was $781,700. In December 2007, the Company
refinanced the Sylmar Property with Community Bank. The cash proceeds were used
i) to fund the collateral required by the Division for the projected outstanding
worker’s compensation liability, ii) for payment on the purchase of the
Brooksville Property, and iii) for payment of the Lurie litigation settlement in
January 2008. As of July 2, 2008, the outstanding balance due on the Community
Bank loan was $5,772,300. In April 2008, the Company completed
financing of the Brooksville Property with Zions Bank. Proceeds of the loan were
used to partially repay the related party loan received from Bisco. The weighted
average interest rate on the Company’s loans is 6.24%.
The
preceding discussion of liquidity and capital resources contains certain
forward-looking statements. Forward-looking statements involve a number of risks
and uncertainties. Among the other factors that could cause actual results to
differ materially are the following: failure of facts to conform to necessary
management estimates and assumptions; the willingness of GE Capital, Community
Bank or other lenders to extend financing commitments; repairs or similar
expenditures required for existing properties due to weather or acts of God; the
Company’s success in selling properties listed for sale; the economic conditions
in the new markets into which the Company expands, if any; business conditions,
such as inflation or a recession, and growth in the general economy; and other
risks identified from time to time in the reports filed by the Company with the
Securities and Exchange Commission (the “SEC”), registration statements and
public announcements. The Company assumes no duty to update forward-looking
statements to reflect events or circumstances after the date of such
statements.
Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements that are reasonably likely to have
a current or future effect on the financial position, revenues, results of
operations, liquidity or capital expenditures, except for the land leases on the
restaurant properties treated as operating leases.
Contractual
Financial Obligations
In
addition to using cash flow from operations, the Company finances its operations
through the issuance of debt, and previously by entering into leases. These
financial obligations are recorded in accordance with accounting rules
applicable to the underlying transactions, with the result that some are
recorded as liabilities in the balance sheet while others are required to be
disclosed in the Notes to the consolidated financial statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations in the
Company’s Annual Report on Form 10-K for the year ended January 2,
2008.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
The
Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange
Act of 1934, as amended (the “Exchange Act”) and is not required to provide the
information required under this item.
Item
4T. Controls and Procedures
Evaluation of disclosure controls and
procedures. As required by Rule 13a-15 under the Exchange Act as of the
end of the period covered by this report, the Company conducted an evaluation of
the effectiveness of the design and operation of the Company’s disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of the Company’s management, including the Chief
Executive Officer. Based upon that evaluation, the Company’s Chief Executive
Officer has concluded that the Company’s disclosure controls and procedures are
not effective in alerting them to material information regarding the Company’s
financial statement and disclosure obligations in order to allow the Company to
meet its reporting requirements under the Exchange Act in a timely
manner.
At July
2, 2008, management identified a lack of sufficient oversight and review as well
as a lack of the appropriate number of resources to ensure the complete and
proper application of generally accepted accounting principles related to
certain routine accounting transactions. Specifically, this material weakness
resulted in errors in the preparation of the Company’s financial statements and
related disclosures.
This
material weakness, if not remediated, has the potential to cause material
misstatements in the future, with regard to routine and complex accounting
transactions.
- 13
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The
Company is in the process of developing and implementing remediation plans to
address its material weaknesses. Management has identified specific remedial
actions to address the material weakness described above:
|
·
|
Improve
the effectiveness of the accounting group by augmenting the existing
Company resources with consultants that have the technical accounting
capabilities to assist in the analysis and recording of complex accounting
transactions.
|
|
·
|
Improve
period-end closing procedures by establishing a monthly hard close process
by implementing a process that ensures the timely review and approval of
routing and complex accounting
estimates.
|
Our
management does not expect that our disclosure controls and internal controls
will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and
the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management’s override of the
control.
The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.
Changes in internal control.
There have been no changes in internal control over financial reporting
that occurred in the Company’s last fiscal quarter that have materially affected, or
are reasonably likely to materially affect internal controls over financial
reporting.
As
previously disclosed in the Company’s reports filed with the SEC, effective
April 2006, the accounting functions for the Company are performed by Bisco’s
accounting personnel and independent contract workers pursuant to a lease and
facilities agreement. Bisco is an affiliated company owned by Glen Ceiley, the
Company’s Chairman and Chief Executive Officer.
PART
II
OTHER
INFORMATION
Item
1. Legal Proceedings
From time
to time, the Company may be named in claims arising in the ordinary course of
business. Currently, no legal proceedings or claims are pending
against us or involve us that, in the opinion of the Company’s management, could
reasonably be expected to have a material adverse effect on the Company’s
business or financial condition, except as discussed below.
As
previously disclosed in the Company’s reports filed with the SEC, in August
2005, the Company was sued in Miami-Dade County Circuit Court by Jonathan Horn
of Horn Capital Realty, who claimed that a commission of $749,000 was payable to
him as a result of the Asset Sale. On May 9, 2008, the Company, Horn Capital
Realty and Jonathan Horn, individually and as President of Horn Capital Realty,
entered into a written settlement agreement whereby the Company, without
admitting liability, agreed to pay Horn Capital Realty the amount of $550,000
and Horn Capital Realty agreed to dismiss the lawsuit. Also under the settlement
agreement, all parties mutually released each other with respect to claims
arising out of or relating to the lawsuit.
As
previously reported, the Company was involved in litigation with Florida Growth
Realty, Inc. (“FGR”) involving a claim by FGR for a commission resulting from
the Asset Sale. On December 20, 2007, the Duval County Circuit Court entered a
final judgment in connection with the litigation in the amount of $2,317,667
with interest accruing at 11% per annum pursuant to Florida law. On January 22,
2008, the Company, Glen Ceiley, individually and as Chairman and CEO of the
Company, FGR and Robert Lurie, individually and as President of FGR, entered
into a written settlement agreement whereby the Company, without admitting
liability, agreed to pay FGR the amount of $2,317,667 in satisfaction of the
final judgment and FGR agreed to immediately execute and file with the court the
Satisfaction of Judgment. Also under the settlement agreement, all
parties mutually released each other with respect to claims arising out of or
relating to the lawsuit except with respect to taxable costs of FGR arising out
of the lawsuit. In March 2008, the court ruled that such costs
totaled approximately $46,000, and the Company paid such amount during the first
quarter of 2008.
Item
1A. Risk Factors
The
Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange
Act and is not required to provide the information required under this
item.
Item
2. Unregistered Sales of Equity Securities and Use
of Proceeds
None.
- 14
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Item
3. Defaults upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
Item
6. Exhibits
The
following exhibits are filed as part of the report on Form 10-QSB.
|
No.
|
Exhibit
|
|
|
3.01
|
Articles
of Incorporation of Family Steak Houses of Florida,
Inc. (Exhibit 3.01 to the Company’s Registration Statement on
Form S-1 filed with the SEC on November 29, 1985,
Registration No. 33-1887, is incorporated herein by
reference.)
|
|
|
3.02
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.03 to the Company’s Registration
Statement on Form S-1 filed with the SEC on November 29, 1985,
Registration No. 33-1887, is incorporated herein by
reference.)
|
|
|
3.03
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.04 to the Company’s Registration Statement on
Form S-1 filed with the SEC on November 29, 1985, Registration No.
33-1887, is incorporated herein by reference.)
|
|
|
3.04
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.08 to the Company’s Annual Report on Form 10-K
filed with the SEC on March 31, 1998, is incorporated herein by
reference.)
|
|
|
3.05
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.09 to the Company’s Annual Report on Form 10-K
filed with the SEC on March 29, 2004, is incorporated herein by
reference.)
|
|
|
3.06
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc., changing the name of the corporation to Eaco Corporation
(Exhibit 3.10 to the Company’s Quarterly Report on Form 10-Q filed with
the SEC on September 3, 2004, File No. 000-14311 is incorporated herein by
reference.)
|
|
|
3.07
|
Amendment
of Articles of Amendment Designating the Preferences of Series A
Cumulative Convertible Preferred Stock $0.10 Par Value. of EACO
Corporation. (Exhibit 3.i to the Company’s Current Report on Form 8-K
filed with the SEC on September 8, 2004, File No. 000-14311 is
incorporated herein by reference.)
|
|
|
3.08
|
Amended
and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 4 to
the Company’s Form 8-A filed with the SEC on March 19, 1997, File No.
000-14311 is incorporated herein by reference.)
|
|
|
3.09
|
Amendment
to Amended and Restated Bylaws of Family Steak Houses of Florida, Inc.
(Exhibit 3.08 to the Company’s Annual Report on Form 10-K filed with the
SEC on March 15, 2000, File No. 000-14311 is incorporated herein by
reference.)
|
|
|
31.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley
Act.
|
- 15
-
SIGNATURES
Pursuant
to the requirements 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.
EACO
CORPORATION
(Registrant)
Date:
August 15,
2008 /s/ Glen
Ceiley
Glen Ceiley
Chief Executive Officer
(Principal Executive Officer &
Principal Financial Officer)
- 16
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EXHIBIT
INDEX
|
No.
|
Exhibit
|
|
|
3.01
|
Articles
of Incorporation of Family Steak Houses of Florida,
Inc. (Exhibit 3.01 to the Company’s Registration Statement on
Form S-1 filed with the SEC on November 29, 1985,
Registration No. 33-1887, is incorporated herein by
reference.)
|
|
|
3.02
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.03 to the Company’s Registration
Statement on Form S-1 filed with the SEC on November 29, 1985,
Registration No. 33-1887, is incorporated herein by
reference.)
|
|
|
3.03
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.04 to the Company’s Registration Statement on
Form S-1 filed with the SEC on November 29, 1985, Registration No.
33-1887, is incorporated herein by reference.)
|
|
|
3.04
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.08 to the Company’s Annual Report on Form 10-K
filed with the SEC on March 31, 1998, File No. 000-14311 is incorporated
herein by reference.)
|
|
|
3.05
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.09 to the Company’s Annual Report on Form 10-K
filed with the SEC on March 29, 2004, File No. 000-14311 is incorporated
herein by reference.)
|
|
|
3.06
|
Articles
of Amendment to the Articles of Incorporation of Family Steak Houses of
Florida, Inc., changing the name of the corporation to Eaco Corporation
(Exhibit 3.10 to the Company’s Quarterly Report on Form 10-Q filed with
the SEC on September 3, 2004, File No. 000-14311 is incorporated herein by
reference.)
|
|
|
3.07
|
Amendment
of Articles of Amendment Designating the Preferences of Series A
Cumulative Convertible Preferred Stock $0.10 Par Value. of EACO
Corporation. (Exhibit 3.i to the Company’s Current Report on Form 8-K
filed with the SEC on September 8, 2004, File No. 000-14311 is
incorporated herein by reference.)
|
|
|
3.08
|
Amended
and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 4 to
the Company’s Form 8-A filed with the SEC on March 19, 1997, File No.
000-14311 is incorporated herein by reference.)
|
|
|
3.09
|
Amendment
to Amended and Restated Bylaws of Family Steak Houses of Florida, Inc.
(Exhibit 3.08 to the Company’s Annual Report on Form 10-K filed with the
SEC on March 15, 2000, File No. 000-14311 is incorporated herein by
reference.)
|
|
|
31.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Securities and Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley
Act.
|
- 17
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