EACO CORP - Quarter Report: 2009 April (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 April 1,
2009
o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTO 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 (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o 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
April 28, 2009
|
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)
|
Three
Months Ended
|
||||||||
|
April
1, 2009
|
April
2, 2008
|
|||||||
|
Revenues:
|
||||||||
|
Rental
Revenue
|
$ | 260,900 | $ | 299,000 | ||||
|
Total
Revenues
|
260,900 | 299,000 | ||||||
|
Operating
Expenses:
|
||||||||
|
Depreciation
and amortization
|
148,100 | 203,100 | ||||||
|
General
and administrative expenses
|
368,700 | 499,900 | ||||||
|
Loss
on disposal of equipment
|
146,400 | -- | ||||||
|
Total
operating expenses
|
663,200 | 703,000 | ||||||
|
Loss
from operations
|
(402,300 | ) | (404,000 | ) | ||||
|
Investment
gain
|
-- | 95,700 | ||||||
|
Gain
on extinguishment of obligation under capital lease
|
949,300 | -- | ||||||
|
Interest
and other income
|
4,100 | 62,800 | ||||||
|
Interest
expense
|
(259,000 | ) | (216,600 | ) | ||||
|
Income
(loss) from continuing operations
|
292,100 | (462,100 | ) | |||||
|
Discontinued
operations:
|
||||||||
|
Loss
from discontinued operations, net of income tax
|
-- | (596,200 | ) | |||||
|
Net
income (loss) attributable to common shareholders
|
$ | 292,100 | $ | (1,058,300 | ) | |||
|
Basic
income (loss) per share
|
||||||||
|
Continuing
operations
|
$ | 0.07 | $ | (0.12 | ) | |||
|
Discontinued
operations
|
-- | (0.15 | ) | |||||
|
Net
income (loss)
|
$ | 0.07 | $ | (0.27 | ) | |||
|
Basic
weighted average common shares outstanding
|
3,910,264 | 3,910,264 | ||||||
|
Diluted
income (loss) per share
|
||||||||
|
Continuing
operations
|
$ | 0.06 | $ | (0.12 | ) | |||
|
Discontinued
operations
|
-- | (0.15 | ) | |||||
|
Net
income (loss)
|
$ | 0.06 | $ | (0.27 | ) | |||
|
Basic
and diluted weighted average common shares outstanding
|
4,910,264 | 3,910,264 | ||||||
See
accompanying notes to condensed financial statements.
- 2
-
EACO
Corporation
Condensed
Balance Sheets
|
April
1, 2009
(Unaudited)
|
December 31,
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 13,600 | $ | 2,300 | ||||
|
Receivables,
net
|
56,600 | 1,100 | ||||||
|
Prepaid
and other current assets
|
99,900 | 98,400 | ||||||
|
Total
current assets
|
170,100 | 101,800 | ||||||
|
Certificate
of deposit, pledged
|
791,400 | 789,200 | ||||||
|
Property
and equipment:
|
||||||||
|
Land
|
5,682,800 | 5,682,800 | ||||||
|
Building
and improvements
|
5,946,900 | 5,838,700 | ||||||
|
Equipment
|
1,483,800 | 2,398,900 | ||||||
| 13,113,500 | 13,920,400 | |||||||
|
Accumulated
depreciation
|
(2,639,700 | ) | (3,176,500 | ) | ||||
|
Net
property and equipment
|
10,473,800 | 10,743,900 | ||||||
|
Other
assets, principally deferred charges, net of accumulated
amortization
|
602,800 | 630,800 | ||||||
| $ | 12,038,100 | $ | 12,265,700 | |||||
|
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
||||||||
|
Current
Liabilities:
|
||||||||
|
Accounts
payable
|
456,200 | $ | 318,000 | |||||
|
Accrued
expenses
|
177,200 | 140,800 | ||||||
|
Due
to related party
|
2,199,200 | 1,430,500 | ||||||
|
Current
portion of workers compensation liability
|
159,600 | 159,600 | ||||||
|
Current
portion of long-term debt and obligation under capital
lease
|
239,000 | 250,100 | ||||||
|
Total
current liabilities
|
3,231,200 | 2,299,000 | ||||||
|
Deferred
rent
|
300 | 24,200 | ||||||
|
Deposit
liability
|
115,000 | 115,000 | ||||||
|
Workers
compensation liability
|
3,376,900 | 3,442,500 | ||||||
|
Long-term
debt
|
7,409,100 | 7,465,600 | ||||||
|
Obligations
under capital lease
|
1,563,300 | 2,869,200 | ||||||
|
Total
liabilities
|
15,695,800 | 16,215,500 | ||||||
|
Shareholders'
deficit:
|
||||||||
|
Preferred
stock of $0.01 par; authorized 10,000,000 shares;
|
||||||||
|
outstanding
36,000 shares at April 1, 2009 and
December
31, 2008 (liquidation value $900,000)
|
400 | 400 | ||||||
|
Common
stock of $.01 par; authorized 8,000,000 shares;
|
||||||||
|
outstanding 3,910,264
shares at April 1, 2009
and
December 31, 2008
|
39,000 | 39,000 | ||||||
|
Additional
paid-in capital
|
10,932,300 | 10,932,300 | ||||||
|
Accumulated
deficit
|
(14,629,400 | ) | (14,921,500 | ) | ||||
|
Total
shareholders' deficit
|
(3,657,700 | ) | (3,949,800 | ) | ||||
| $ | 12,038,100 | $ | 12,265,700 | |||||
See
accompanying notes to condensed financial statements.
- 3
-
EACO
Corporation
Condensed
Statements of Cash Flows
|
(Unaudited)
|
|
|||||||
|
Three
Months Ended
|
||||||||
|
April
1, 2009
|
April
2, 2008
|
|||||||
|
Operating
activities:
|
||||||||
|
Net
income (loss)
|
$ | 292,100 | $ | (1,058,300 | ) | |||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
148,100 | 203,100 | ||||||
|
Net
gain on investments
|
-- | (95,800 | ) | |||||
|
Gain
on debt extinguishment
|
(949,300 | ) | -- | |||||
|
Loss
on disposal of equipment
|
146,400 | -- | ||||||
|
Amortization
of deferred rent
|
-- | (24,000 | ) | |||||
|
Amortization
of loss on contract
|
-- | (13,100 | ) | |||||
|
Decrease
(increase) in:
|
||||||||
|
Receivables
|
(55,500 | ) | (39,900 | ) | ||||
|
Prepaid
and other current assets
|
(1,500 | ) | (29,700 | ) | ||||
|
Investments
|
(2,200 | ) | (150,300 | ) | ||||
|
Other
assets
|
3,600 | (31,100 | ) | |||||
|
Increase
(decrease) in:
|
||||||||
|
Accounts
payable
|
271,100 | (53,600 | ) | |||||
|
Securities
sold, not yet purchased
|
-- | (255,700 | ) | |||||
|
Accrued
liabilities
|
36,400 | (1,732,900 | ) | |||||
|
Deposit
liability
|
-- | 9,000 | ||||||
|
Due
to related party
|
88,700 | -- | ||||||
|
Deferred
rent
|
(23,900 | ) | -- | |||||
|
Workers
compensation liability
|
(65,600 | ) | (57,700 | ) | ||||
|
Net
cash used in operating activities
|
(111,600 | ) | (3,330,000 | ) | ||||
|
Investing
activities:
|
||||||||
|
Restricted
cash
|
-- | 1,186,500 | ||||||
|
Net
cash provided by investing activities
|
-- | 1,186,500 | ||||||
|
Financing
activities:
|
||||||||
|
Payments
on long-term debt
|
(55,300 | ) | (45,500 | ) | ||||
|
Payment
on capital lease
|
(1,800 | ) | (200 | ) | ||||
|
Payment
on capital lease obligation settlement
|
(500,000 | ) | -- | |||||
|
Proceeds
from issuance of related party debt
|
680,000 | 1,824,600 | ||||||
|
Payment
on related party debt
|
-- | (425,000 | ) | |||||
|
Net
cash provided by financing activities
|
122,900 | 1,353,900 | ||||||
|
Net
change in cash and cash equivalents
|
11,300 | (789,600 | ) | |||||
|
Cash
and cash equivalents – beginning of year
|
2,300 | 1,030,600 | ||||||
|
Cash
and cash equivalents - end of period
|
$ | 13,600 | $ | 241,000 | ||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Cash
paid for interest
|
$ | 209,300 | $ | 191,800 | ||||
See
accompanying notes to condensed financial statements.
- 4
-
EACO
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
April 1,
2009
(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 April 1, 2009 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 results of operations for the quarter
ended April 1, 2009 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 30, 2009. 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 December 31, 2008 filed on
April 2, 2009.
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
December 31, 2008, and had a working capital deficit of approximately $2,197,000
at that date. As of April 1, 2009, the Company’s working capital
deficit increased to $3,061,100. The cash balance at April 1, 2009
was $13,600. The cash outflows through March 2010 are estimated to
total approximately $1,187,000, which will generate an estimated negative cash
balance of $1,184,000 in the next twelve months.
These
circumstances raise substantial doubt about the Company’s ability to continue as
a going concern. The accompanying financial statements do not include
any adjustments that might be necessary if the Company is unable to continue as
a going concern.
Management
has taken actions to address these matters, such as receiving bridge loans as
described below; however, there can be no assurance that improvement in
operating results will occur or that the Company will successfully implement its
plans. In the event cash flow from operations is not sufficient, it is possible
that the Company may require additional sources of financing in order to
maintain its current operations. These 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.
In each
of the first three months of 2009, the Company received bridge loans
from Bisco Industries (“Bisco”), an affiliated company that is wholly-owned and
controlled by the Company’s Chairman and Chief Executive Officer, Glen F.
Ceiley, in the amount of $680,000, accruing interest at 7.5%
annually. The bridge loan 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 each note, maturing in June
through August 2009. The Company expects the loans can be extended
beyond six months.
Revenue
Recognition
The
Company recognizes revenues in accordance with Staff Accounting Bulleting
(“SAB”) No. 104, Revenue
Recognition, when all of the following conditions exist: (a) persuasive
evidence of an arrangement exists as in the form of a lease document; (b)
delivery has occurred, or services have been provided; (c) the Company’s price
to the buyer is fixed or determinable; and (d) collectability is reasonably
assured. The Company leases its properties to tenants under operating
leases with terms of over one year. Some of these leases contain
scheduled rent increases. The Company records 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”)
No. 13, “Accounting for Leases” .
Receivables
from tenants are carried net of the allowance for uncollectible
accounts. An allowance is maintained for estimated losses resulting
from the inability of tenants to meet their contractual obligations under their
lease agreements. We determine the adequacy of this allowance by
continually evaluating individual tenant’s receivables considering the tenant’s
financial condition and security deposits and current economic
conditions. An allowance for uncollectible accounts of approximately
$26,300 and $53,400 as of April 1, 2009 and December 31, 2008,
respectively, was determined to be necessary to reduce receivables to our
estimate of the amount recoverable.
Fair
Value Measurements
The
Company adopted SFAS No. 157, “Fair Value Measurements”, in the
first quarter of fiscal 2008. SFAS 157 was amended in February 2008 by the
Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS
No. 157-1, “Application of FASB Statement No. 157 to FASB Statement
No. 13 and Its Related Interpretive Accounting Pronouncements That Address
Leasing Transactions”,
and by FSP FAS 157-2, “Effective Date of FASB Statement
No. 157”, which
delayed the Company’s application of SFAS 157 for nonrecurring nonfinancial
assets and liabilities until January 1, 2009. FAS 157 was further amended
in October 2008 by FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active”, which clarifies the
application of SFAS 157 to assets participating in inactive
markets.
Implementation
of SFAS 157 did not have a material effect on the Company’s results of
operations or financial position and had no effect on the Company’s existing
fair-value measurement practices. However, SFAS 157 requires disclosure of a
fair-value hierarchy of inputs the Company uses to value an asset or a
liability. The three levels of the fair-value hierarchy are described as
follows:
- 5
-
EACO
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
April 1,
2009
(Unaudited)
Level 1:
Quoted prices (unadjusted) in active markets for identical assets and
liabilities. For the Company, Level 1 inputs include price and marketable
securities that are actively traded.
Level 2:
Inputs other than Level 1 that are observable, either directly or indirectly.
For the Company, Level 2 inputs include real estate sales comparisons obtained
through third-party broker quotes used in determining the fair values of the
Company’s real estate properties.
Level 3:
Unobservable inputs. Beginning January 1, 2009, Level 3 inputs may be
required for the determination of fair value associated with certain
nonrecurring measurements of nonfinancial assets and liabilities. Level 3 inputs
include estimates of property cash flow projections used in the determining the
fair value of the Company’s real estate properties.
Reclassification
Certain
reclassifications have been made to the prior years’ financial statements to
conform to the current period presentation.
Note
2. Significant Recent Accounting Pronouncements
In
December 2007, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)
No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R establishes
principles and requirements for how an acquirer in a business combination: 1)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; 2) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and 3) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R is
effective for business combinations beginning the first annual reporting period
on or after December 15, 2008. Therefore, the Company expects to adopt SFAS 141R
for any business combinations entered into beginning in 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends Accounting
Research Bulletin No. 51, “Consolidated Financial Statements” to establish
accounting and reporting standards for a noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity and should be reported as equity in the consolidated
financial statements, rather than in the liability or mezzanine section between
liabilities and equity. SFAS 160 also requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
Adoption of SFAS 160 did not have a material impact on the Company’s
consolidated financial position or results of operations.
In May
2008, the FASB issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 162”). This statement is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements of
nongovernmental entities that are presented in conformity with GAAP. This
statement will be effective 60 days following the U.S. Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board amendment
to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” The adoption of this Statement is not expected
to have a material impact on the Company’s consolidated financial position or
results of operations.
In April
2009, the FASB Staff Position (“FSP”) 107-1 (“FSP 107-1”) amended SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments”, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. FSP 107-1
also amended Accounting Principals Board (“APB”) Opinion No. 28, “Interim
financial Reporting” to require disclosures in summarized financial information
at interim reporting periods. FSP 107-1 becomes effective for interim reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009 if a company also elects to FSP FAS 157-4,
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Indentifying Transactions That Are
Not Orderly”, and FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments”. Management is evaluating the impact this FSP
will have on the Company’s financial statement disclosures.
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 April 1, 2009, 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 April 2, 2008
included realized gains from the sale of marketable securities of $12,400 and
unrealized losses of $447,500.
A primary
investment strategy used by the Company in 2008 consisted of the short-selling
of securities, which resulted in obligations to purchase securities at a later
date. As of April 2, 2008, the Company had no obligation for these
securities sold and not yet purchased as all of these positions were closed in
the quarter ended April 2, 2008. The Company recognized net gains on
securities sold, not yet purchased of $530,800 for the quarter ended April 2,
2008.
- 6
-
EACO
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
April 1,
2009
(Unaudited)
Note
4. Dispositions
On June
1, 2004, the Company entered into an agreement with a third party restaurant
operator to lease restaurant equipment from the Company. The
agreement called for rental payments to be made to the Company of $3,000 per
month, with a $30,000 lump sum payment due at the end of the agreement in May
2009. At that time, the equipment would become the property of the
lessee. During 2008, the lessee defaulted on the terms of the lease
agreement. In the first quarter of 2009, the Company decided to not
pursue any legal action against the lessee, as the Company believes that the
costs of legal action would outweigh the benefits received. The
Company recorded a loss of $5,000 related to the disposition of this
equipment.
On March
27, 2009, the Company reached an agreement with the landlord of one of its
capital leases (Fowler Property, located in Tampa, Florida). The Company
provided a lump sum payment of $500,000 for the release from further obligations
under such lease which resulted in a net gain of $949,300. Payment of
the $500,000 was made by Bisco, a related party, and that amount is included in
due to related party in the accompanying condensed balance sheet at April 1,
2009. The note related to this payment accrues interest at 7.5% and
is due in September 2009. Concurrent with the release from the capital lease
obligation, the Company wrote-off the assets under capital lease on
its books resulting in a loss on the disposition of the building and equipment
of $141,400.
Note
5. Workers’ Compensation Liability
Prior to
the Asset Sale (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 liability was approximately $3,537,000 and $3,602,000 at
April 1, 2009 and December 31, 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. The current expiration date of that letter is 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. In addition, the Company pledged in
favor of the Division another $2,769,500 in letters of credit from various banks
with expirations in 2009. These letters of credit are collateralized by the
equity the Company holds in its Sylmar property which approximates $2 million
and certificates of deposit totaling $791,400, which includes accrued interest
through April 1, 2009.
Note
6. Related Party Transactions
In July
2004, the Company provided a $1 million letter of credit to help cover the
Company’s projected outstanding workers’ compensation liability. The
letter of credit is guaranteed on behalf of the Company by Bisco. The cost
of the letter of credit is approximately $20,000 per year, which is reimbursed
by the Company to Bisco.
The
Company’s Chairman and Chief Executive Officer is the personal guarantor on two
Company loans secured by reral estate payable to two banks (the $5,756,000 loan
from Community Bank entered into in December 2007 and the $1,202,000 loan from
Zion’s Bank entered into in April 2008).
The
Company currently has a management agreement with Bisco, whereby Bisco provides
administration and accounting services. During the quarters ended
April 1, 2009 and April 2, 2008, the Company paid Bisco approximately $36,000
and $39,000, respectively, for those services. Such amounts are
included in general and administrative expenses in the accompanying condensed
statements of operations. The amounts due to Bisco at April 1, 2009
and December 31, 2008 were approximately $64,000 and $27,000, respectively and
are included in due to related party in the accompanying condensed balance
sheets.
Throughout
2008, the Company received bridge loans from Bisco in the amount of
approximately $3,041,000, including interest, of which $1,575,000 was repaid
during the fiscal year 2008, $79,100 was applicable to
interest. During the quarter ended April 1, 2009, the Company
received additional bridge loans from Bisco totaling $680,000. The
balance of the bridge loans was approximately $2,074,600 and $1,365,700 as of
April 1, 2009 and December 31, 2008, respectively. Bisco’s sole
shareholder and President is Glen F. Ceiley, the Company’s Chief Executive
Officer and Chairman of the Board. The bridge loans do not provide for regularly
scheduled payments; however, any remaining outstanding principal balance plus
accrued interest at an annual rate of 7.5% is due six months from the date of
each note. The loans have been extended by the Company beyond six
months and are due as follows: $1,365,700 due June 2009, $118,900 due
July 2009, $78,700 due August 2009 and $511,300 due September 2009.
As of
April 1, 2009, interest accrued on the outstanding bridge loans totals $28,000
and is presented as a component of due to related party on the accompanying
condensed balance sheets.
- 7
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EACO
CORPORATION
NOTES
TO CONDENSED FINANCIAL STATEMENTS
April 1,
2009
(Unaudited)
Note
7. 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)
|
||||||||
|
Three
Months Ended
|
||||||||
|
April
1, 2009
|
April
2, 2008
|
|||||||
|
Basic
EPS from continuing operations:
|
||||||||
|
Income
(loss) from continuing operations
|
$ | 292,100 | $ | (462,100 | ) | |||
|
Less
preferred stock dividends
|
-- | -- | ||||||
|
Income
(loss) from continuing operations for basic EPS
Computation
|
$ | 292,100 | $ | (462,100 | ) | |||
|
Weighted
average shares outstanding for basic EPS computation
|
3,910,264 | 3,910,264 | ||||||
|
Income
(loss) per common share from continuing operations -
basic
|
$ | 0.07 | $ | (0.12 | ) | |||
|
Diluted
EPS from continuing operations:
|
||||||||
|
Income
(loss) from continuing operations
|
$ | 292,100 | $ | (462,100 | ) | |||
|
Less
preferred stock dividends
|
-- | -- | ||||||
|
Income
(loss) from continuing operations
|
||||||||
|
for
diluted EPS Computation
|
$ | 292,100 | $ | (462,100 | ) | |||
|
Weighted
average shares outstanding for diluted EPS computation
|
4,910,264 | 3,910,264 | ||||||
|
Income
(loss) per common share from continuing operations -
diluted
|
$ | 0.06 | $ | (0.12 | ) | |||
Note
8. Commitments and Contingencies
Income
Taxes
The
Company had no material adjustments to its unrecognized tax benefits for the
quarter ended April 1, 2009.
Legal
Matters
In
January 2009, the Company defaulted on its lease of the Fowler
Property. In March 2009, the Company reached a settlement with the
owner of the Fowler Property. See Note 4.
In
January 2009, the Company defaulted on its lease of the Deland
Property. The Company has contacted the landlord and is still
awaiting resolution on the Deland Property at this time.
The
following matters related to the discontinued restaurant operations of the
Company which were sold in July 2005:
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 $2,317,000 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 quarter 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 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 6, Related
Party Transactions. Such amount is included in the amount due to related
party during the year ended December 31, 2008.
- 8
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Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Cautionary
Statements
This
Quarterly Report on Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties. Accordingly, to the extent
that this Quarterly Report contains forward-looking statements regarding the
financial condition, operating results, business prospects or any other aspect
of the Company, please be advised that the Company's actual financial condition,
operating results and business performance may differ materially from that
projected or estimated by management in forward-looking statements.
Such
differences may be caused by a variety of factors, including but not limited to
adverse economic conditions, intense competition, including intensification of
price competition and entry of new competitors and products, adverse federal,
state and local government regulation, inadequate capital, unexpected costs and
operating deficits, increases in general and administrative costs, and other
specific risks that may be alluded to in this Quarterly Report or in other
reports issued by the Company. In addition, the business and operations of the
Company are subject to substantial risks that increase the uncertainty inherent
in the forward-looking statements. The inclusion of forward looking statements
in this Quarterly Report should not be regarded as a representation by
management or any other person that the objectives or plans of the Company will
be achieved.
Critical
Accounting Policies
Revenue
Recognition
The
Company recognizes revenues in accordance with SAB No. 104, Revenue Recognition, when all
of the following conditions exist: (a) persuasive evidence of an arrangement
exists as in the form of a lease document; (b) delivery has occurred, or
services have been provided; (c) the Company’s price to the lessee is fixed or
determinable; and (d) collectability is reasonably assured. 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 SFAS No. 13, “Accounting for Leases.”
Receivables
from tenants are carried net of an allowance for uncollectible
accounts. 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. No allowance for uncollectible accounts was determined to
be necessary at April 1, 2009.
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.
There were no impairment losses recorded during the quarter ended April 1,
2009.
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.
- 9
-
Discontinued
Operations
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company accounts for the results of operations of a
component of an entity that has been disposed or that meets all of the “held for
sale” criteria, as discontinued operations, if the component’s operations and
cash flows have been (or will be) eliminated from the ongoing operations of the
entity as a result of the disposal transaction and the Company will not have any
significant continuing involvement in the operations of the component after the
disposal transaction. The “held for sale” classification requires
having the appropriate approvals by our management, Board of Directors and
shareholders, as applicable, and meeting other criteria. When all of
these criteria are met, the component is then classified as “held for sale” and
its operations are reported as discontinued operations.
New
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”). SFAS 141R establishes principles and requirements for how an acquirer in
a business combination: 1) recognizes and measures in its financial statements
the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; 2) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase; and 3)
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141R is effective for business combinations beginning the
first annual reporting period on or after December 15, 2008. Therefore, the
Company expects to adopt SFAS 141R for any business combinations entered into
beginning in 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends Accounting
Research Bulletin No. 51, “Consolidated Financial Statements” to establish
accounting and reporting standards for a noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity and should be reported as equity in the consolidated
financial statements, rather than in the liability or mezzanine section between
liabilities and equity. SFAS 160 also requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
the noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008;
therefore, the Company expects to
adopt SFAS 160 at the beginning of 2009. Adoption of SFAS 160 did not have a
material impact on the Company’s consolidated financial position or results of
operations.
In May
2008, the FASB issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting
Principles” (“SFAS 162”). This statement is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements of
nongovernmental entities that are presented in conformity with GAAP. This
statement will be effective 60 days following the U.S. Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board amendment
to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.” The adoption of this Statement is not expected
to have a material impact on the Company’s consolidated financial position or
results of operations.
In April
2009, the FASB Staff Position (“FSP”) 107-1 (“FSP 107-1”) amended SFAS No. 107,
“Disclosures about Fair Value of Financial Instruments”, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. FSP 107-1
also amended APB Opinion No. 28, “Interim financial Reporting” to require
disclosures in summarized financial information at interim reporting periods.
FSP 107-1 becomes effective for interim reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009 if a
company also elects to FSP FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Indentifying Transactions That Are Not Orderly”, and FSP FAS 115-2 and FAS
124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”.
Management is evaluating the impact this FSP will have on the Company’s
financial statement disclosures.
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 December 31, 2008 as filed on April 2, 2009.
- 10
-
Results
of Operations
Comparison
of Quarters Ended April 1, 2009 and April 2, 2008
At April
1, 2009, the Company owned 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”). The Orange Park
Property was vacant during the first quarter ended April 1, 2009. The
Brooksville Property was occupied by a third party restaurant operator during
the quarter ended April 1, 2009. The Company is obligated for a
capital lease at another location located in Deland, Florida (the “Deland
Property”). The Deland Property was vacant during the quarter ended
April 1, 2009. For the first quarter, until March 27, 2009, the
Company was also obligated for a capital lease at a location located in
Tampa, Florida (the “Fowler Property”). On March 27, 2009, the
Company reached an agreement with the owner of that property to release the
Company from obligation under that lease for a lump sum payment of
$500,000. 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 a decrease of $38,100 or 13% in rental revenue during the
first quarter of 2009 compared to the first quarter of 2008, due to the Deland
Property being vacant during the first quarter of 2009 while occupied during the
first quarter of 2008.
Depreciation
and amortization expenses decreased $55,000 or 27% in the first quarter of 2009
compared to the first quarter of 2008. For the fiscal year ended
December 31, 2008, the Company recognized an impairment on three properties, the
Deland Property, the Fowler Property and the Brooksville
Property. The impairment lowered the values of these three assets,
decreasing the depreciable basis going forward. The first quarter of
2009 is the first quarter the assets were depreciated at their new
basis.
General
and administrative expenses consist mainly of rent and related property
insurance expense, legal and other professional fees. General and administrative
expenses decreased $131,200 or 30% during the first quarter of 2009 as compared
to the first quarter of 2008, due mainly to decreases in property taxes and
rent. At the end of fiscal 2007, the Company regained the lease
obligation related to the Fowler Property from its assignee, Banner Buffet
(“Banner”), who defaulted on the lease. During the first quarter
2008, the Company was required to pay property taxes and back rent related to
the default of Banner. These expenses were not required in the first
quarter of 2009.
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
first quarter of 2009 versus a gain of $95,700 in the first quarter of
2008.
Interest
expense increased by $42,400 or 20% in the quarter ended April 1, 2009 versus
the quarter ended April 2, 2008, mainly due to the financing of the Brooksville
Property that occurred in the second quarter of 2008. Interest on the
loan did not begin until after the end of the first quarter of
2008.
During
the first quarter of 2009, the Company reached an agreement with the landlord of
the Fowler Property where the landlord released the Company from all past and
future obligations for a lump sum payment of $500,000. The resulting
gain on the extinguishment of the capital lease obligation for the Fowler
Property of $949,300 was recognized in the first quarter of 2009. No
such debt extinguishment occurred in 2008.
The
Company recognized a loss upon the disposition of the asset related to the
Fowler Property of $141,400 in the first quarter of 2009. In
addition, the Company disposed of certain equipment being leased by a third
party restaurant operator who defaulted on their lease obligation related to
that equipment resulting in a further loss on disposition of equipment of
$5,000. No dispositions occurred in 2008.
Net
income was $292,100 in the first quarter of 2009 compared to net loss of
$1,058,300 in the first quarter of 2008, due to the gain on the extinguishment
of the debt related to the Fowler Property, decreased by the loss on the
disposal of the assets for the Fowler Property. Earnings per share
for the quarter was $0.07 in 2009 compared to a loss of $0.27 in
2008.
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 of $1,058,300 and had negative cash flow
from operations of $3,330,000 for the year ended December 31, 2008, and had a
working capital deficit of $2,197,200 at that date. During the
quarter ended April 1, 2009, the working capital deficit increased to
$3,061,100. The cash balance at April 1, 2009 was
$13,600.
The cash
outflows through March 2010 are estimated to total approximately $1,187,000,
which will generate an estimated negative cash balance of $1,184,700 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 an 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 management believes the Company can continue
borrowing from Bisco if necessary. 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 condensed financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern.
In 2008,
the Company received bridge loans from Bisco in the amount of approximately
$3,040,700, 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 believes the loans can be extended through June
2009.
On
January 21, 2009, the Company borrowed an additional $50,000 from Bisco to cover
fees related to renewing the lines of credit required by FSIGA with regards to
the Company’s self insured worker’s compensation program. The loan
accrues interest at 7.5% per annum and principal and interest is due no later
than July 21, 2009.
On
January 26, 2009, the Company borrowed an additional $60,000 from Bisco to cover
operating cash flow requirements through January 2009. The note
accrues interest at 7.5% per annum and principal and interest is due no later
than July 26, 2009.
On
February 17, 2009, the Company borrowed, on a short term basis, $70,000 from
Bisco to fund its operations. The note accrues interest monthly at
7.5% per annum and principal and interest is due no later than August 17,
2009.
On March
31, 2009, the Company borrowed, on a short term basis, $500,000 from Bisco to
fund the payment related to the buy out of the Fowler Property
lease. The note payable accrues interest monthly at 7.5% per annum
and principal and interest is due no later than September 30, 2009.
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
lease payments, repayment of debt, legal expenses and payment on the workers’
compensation liability.
As stated
above, at April 1, 2009, the Company had a working capital deficit of $3,061,100
compared to a working capital deficit of $2,197,200 at December 31,
2008. The increase was due to the borrowing required to pay the owner
of the Fowler Property per the terms of the settlement agreement releasing the
Company from the obligations associated with that lease, as well as additional
borrowing to fund normal operating expenses. Cash used in operating
activities was $111,600 in the quarter ended April 1, 2009, compared to cash
used in operating activities of $3,330,000 in the quarter ended April 2,
2008. The decrease in cash used in operating activities was primarily
due to the payment of two legal settlements with two brokers in the first
quarter of 2008. No such payment occurred in 2009.
Cash
provided by investing activities was $0 for the first quarter of 2009 versus
$1,186,500 in the first quarter months of 2008. During the first
quarter of 2008, the Company received $400,000 of previously restricted cash in
escrow related to litigation that was settled at the end of fiscal
2007. 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.
Net cash
provided by financing activities was $122,900 in the first quarter of 2009 was
due to the proceeds received from the related party loan from Bisco of
$180,000. The purpose of these loans was to supply the Company with
operating cash flow for the first quarter of 2009.
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 no quarterly dividends in the quarter ended April 1,
2009. There were no accrued declared dividends as of April 1,
2009.
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.
The
Company entered into a loan agreement with GE Capital for the Orange Park
Property in 1996. As of April 1, 2009, the outstanding balance due
under the Company’s loan with GE Capital was $727,900. In December
2007, the Company refinanced the Sylmar Property with Community
Bank. As of April 1, 2009, the outstanding balance due on the
Community Bank loan was $5,724,200. 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. As of April 1, 2009, the outstanding
balance due on the Zions Bank loan was $1,199,100. The weighted
average interest rate on the Company’s loans was 6.2%.
- 12
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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 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 fiscal year ended December 31, 2008
as filed on April 2, 2009 and the Company’s Quarterly Report on Form 10-Q
included herein.
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
4. Controls and Procedures
Evaluation of disclosure controls and
procedures. The
Company maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission (the "SEC"). Based upon management's evaluation of those
controls and procedures as of the end of the fiscal quarter covered by this
quarterly report on Form 10-Q, the Chief Executive Officer of the Company
concluded that, subject to the limitations noted below, the Company's disclosure
controls and procedures (as defined in Rules 15d-15(e) under the Exchange Act)
are not effective to ensure that the information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
Management,
in assessing its disclosure controls and procedures for the quarter ended April
1, 2009, identified a lack of sufficient control in the area of financial
reporting. This control weakness allowed for material errors to our financial
reports to go undetected. Please refer to the discussion below for
more details regarding this material weakness and management’s remediation
plans.
Management
has identified a lack of sufficient oversight and review as well as a lack of
the appropriate resources to ensure the complete and proper application of
generally accepted accounting principles as it relates to certain routine
accounting transactions.
These
material weaknesses, if not remediated, have the potential to cause material
misstatements in the future, with regard to routine and complex accounting
transactions.
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 weaknesses described above:
|
·
|
Improve
the effectiveness of the accounting group by continuing to augment
existing Company resources with new personnel or consultants that have the
technical accounting capabilities to assist in the analysis, recording and
reporting of routine and 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
routine and complex accounting
estimates.
|
Our
management, including our Chief Executive Officer, 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 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.
- 13
-
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 and controlled 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.
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.
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-Q.
|
No.
|
Exhibit
|
|
|
3.1
|
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.)
|
|
|
3.2
|
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.)
|
|
|
3.3
|
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.)
|
|
|
3.4
|
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, is
incorporated herein by reference.)
|
|
|
3.5
|
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.)
|
|
|
3.6
|
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, is incorporated herein by
reference.)
|
|
|
3.7
|
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.)
|
|
|
3.8
|
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, is incorporated herein
by reference.)
|
|
|
3.9
|
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 Form 8-K filed with
the SEC September 8, 2004, is incorporated herein by
reference.)
|
|
|
10.1
|
Settlement
Agreement dated as of March 27, 2009 by and between EACO Corporation, Glen
Ceiley, Don Wagner, After Hours, LLC and Fred Wickman.
|
|
|
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.
|
- 14
-
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: May
13,
2009 /s/ Glen
Ceiley
Glen Ceiley
Chief Executive Officer
(Principal Executive Officer &
Principal Financial Officer)
- 15
-
EXHIBIT
INDEX
|
No.
|
Exhibit
|
|
|
3.1
|
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.)
|
|
|
3.2
|
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.)
|
|
|
3.3
|
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.)
|
|
|
3.4
|
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, is
incorporated herein by reference.)
|
|
|
3.5
|
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.)
|
|
|
3.6
|
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, is incorporated herein by
reference.)
|
|
|
3.7
|
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.)
|
|
|
3.8
|
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, is incorporated herein
by reference.)
|
|
|
3.9
|
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 Form 8-K filed with
the SEC September 8, 2004, is incorporated herein by
reference.)
|
|
|
10.1
|
Settlement
Agreement dated as of March 27, 2009 by and between EACO Corporation, Glen
Ceiley, Don Wagner, After Hours, LLC and Fred Wickman.
|
|
|
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.
|
- 16
-