Unassociated Document
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 September 27, 2006 or
| o |
Transition
report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
________ to _________.
|
Commission
File No. 0-14311
EACO
CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
|
Florida
No.
|
59-2597349
|
|
State
of Incorporation
|
Employer
Identification
No.
|
1500
NORTH LAKEVIEW AVENUE
ANAHEIM,
CALIFORNIA 92807
Address
of Principal Executive Offices
Registrant's
Telephone No. (714) 876-2490
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one.)
| |
Large
Accelerated Filer
Accelerated
Filer
Non-accelerated
Filer
|
o
o
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
|
Title
of each class
|
|
Number
of shares
outstanding
|
|
Common
Stock $.01 par value
|
|
3,910,264
As
of November 15,
2006
|
EACO
Corporation
Condensed
Consolidated Statements of Operations
|
(Unaudited)
|
|
Quarters
Ended
|
|
Nine
Months Ended
|
|
|
|
|
Sept
27,
2006
|
|
Sept
28,
2005
|
|
Sept
27,
2006
|
|
Sept
28,
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Rental
revenue
|
|
$
|
157,500
|
|
$
|
46,800
|
|
$
|
571,700
|
|
$
|
112,300
|
|
|
Total
revenues
|
|
|
157,500
|
|
|
46,800
|
|
|
571,700
|
|
|
112,300
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
70,800
|
|
|
61,900
|
|
|
218,500
|
|
|
145,100
|
|
|
General
and administrative expenses
|
|
|
446,600
|
|
|
310,000
|
|
|
1,169,600
|
|
|
769,000
|
|
|
Provision
for loss on note receivable and bad debt expense
|
|
|
3,107,900
|
|
|
—
|
|
|
3,103,200
|
|
|
—
|
|
|
Loss
on disposition of equipment
|
|
|
8,400
|
|
|
—
|
|
|
26,300
|
|
|
—
|
|
|
Total
costs and expenses
|
|
|
3,633,700
|
|
|
371,900
|
|
|
4,517,500
|
|
|
914,100
|
|
|
Loss
from operations
|
|
|
(3,476,000
|
)
|
|
(325,100
|
)
|
|
(3,945,800
|
)
|
|
(801,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
gain (loss)
|
|
|
137,800
|
|
|
56,000
|
|
|
25,200
|
|
|
58,100
|
|
|
Net
interest and other income
|
|
|
73,700
|
|
|
225,900
|
|
|
525,500
|
|
|
275,500
|
|
|
Interest
expense
|
|
|
(143,900
|
)
|
|
(34,900
|
)
|
|
(343,000
|
)
|
|
(104,500
|
)
|
|
Loss
from continuing operations before income taxes
|
|
|
(3,408,400
|
)
|
|
(78,100
|
)
|
|
(3,738,100
|
)
|
|
(572,700
|
)
|
|
Benefit
for income taxes
|
|
|
1,031,000
|
|
|
29,400
|
|
|
1,143,500
|
|
|
215,700
|
|
Loss
from continuing operations
|
|
|
(2,377,400
|
)
|
|
(48,700
|
)
|
|
(2,594,600
|
)
|
|
(357,000
|
)
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from (loss) discontinued operations,
net of income tax
|
|
|
—
|
|
|
(151,500
|
) |
|
—
|
|
|
132,300
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) on sale of discontinued
operations, net of income
tax
|
|
|
—
|
|
|
7,567,700
|
|
|
(116,600
|
)
|
|
10,393,300
|
|
|
Net
income (loss)
|
|
|
(2,377,400
|
)
|
|
7,416,200
|
|
|
(2,711,200
|
)
|
|
10,168,600
|
|
Undeclared
cumulative preferred stock
dividend
|
|
|
(19,100
|
)
|
|
(19,100
|
)
|
|
(57,300
|
)
|
|
(57,400
|
)
|
| Gain
(loss) from discontinued operations |
|
|
— |
|
|
7,416,200 |
|
|
(116,600 |
) |
|
10,525,600 |
|
Net
income (loss) available (attributable)
to common shareholders
|
|
$
|
(2,396,500
|
)
|
$
|
7,348,400
|
|
$
|
(2,768,500
|
)
|
$
|
10,111,200
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(0.61
|
)
|
$
|
(0.01
|
)
|
$
|
(0.68
|
)
|
$
|
(0.09
|
)
|
|
Discontinued
operations
|
|
|
(0.00
|
)
|
|
1.90
|
|
|
(0.03
|
)
|
|
2.71
|
|
|
Net
Income (loss)
|
|
$
|
(0.61
|
)
|
$
|
1.89
|
|
$
|
(0.71
|
)
|
$
|
2.62
|
|
Basic
weighted average common shares
outstanding
|
|
|
3,906,800
|
|
|
3,889,000
|
|
|
3,906,800
|
|
|
3,884,300
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Diluted
income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
|
(0.61 |
) |
$
|
(0.01 |
) |
$
|
(0.68 |
) |
$
|
(0.08 |
) |
|
Discontinued
operations
|
|
|
(0.00 |
) |
|
1.69
|
|
|
(0.03 |
) |
|
2.52 |
|
| Net
income (loss) |
|
$
|
(0.61 |
) |
$ |
1.68 |
|
$
|
(0.69 |
) |
$ |
2.44 |
|
|
Diluted
weighted average common shares
outstanding
|
|
|
3,906,800
|
|
|
4,379,900
|
|
|
3,906,800
|
|
|
4,172,800 |
|
See
accompanying notes to condensed consolidated
financial statements.
EACO
Corporation
Condensed
Consolidated Balance Sheets
| |
|
|
|
|
|
| |
|
September
27,
2006
(Unaudited)
|
|
December
28,
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,064,700
|
|
$
|
3,044,700
|
|
|
Restricted
cash - short-term
|
|
|
928,000
|
|
|
3,212,200
|
|
|
Receivables,
net
|
|
|
143,900
|
|
|
117,400
|
|
|
Inventories
|
|
|
—
|
|
|
300
|
|
|
Prepaid
and other current assets
|
|
|
46,400
|
|
|
52,600
|
|
|
Assets
held for sale
|
|
|
2,641,100
|
|
|
1,146,100
|
|
|
Total
current assets
|
|
|
4,824,100
|
|
|
7,573,300
|
|
| |
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
400,000
|
|
|
400,000
|
|
|
Investments,
trading
|
|
|
903,200
|
|
|
318,500
|
|
|
Certificate
of deposit
|
|
|
369,500
|
|
|
369,500
|
|
|
Note
receivable, net
|
|
|
573,200
|
|
|
3,738,300
|
|
| |
|
|
|
|
|
|
|
|
Property
and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
4,800,300
|
|
|
5,209,400
|
|
|
Buildings
and improvements
|
|
|
5,558,100
|
|
|
6,769,700
|
|
|
Equipment
|
|
|
1,589,300
|
|
|
3,025,700
|
|
|
|
|
|
11,947,700
|
|
|
15,004,800
|
|
|
Accumulated
depreciation
|
|
|
(2,801,400
|
)
|
|
(4,801,400
|
|
|
Net
property and equipment
|
|
|
9,146,300
|
|
|
10,203,400
|
|
| |
|
|
|
|
|
|
|
|
Deferred
tax asset, net
|
|
|
2,978,000
|
|
|
1,766,700
|
|
Other
assets, principally deferred charges, net of accumulated
amortization
|
|
|
552,000
|
|
|
357,100
|
|
|
|
|
$
|
19,746,300
|
|
$
|
24,726,800
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
104,000
|
|
$
|
10,000
|
|
|
Securities
sold, not yet purchased
|
|
|
928,000
|
|
|
3,212,200
|
|
|
Accrued
liabilities
|
|
|
230,900
|
|
|
281,500
|
|
|
Current
portion of workers compensation benefit liability
|
|
|
400,000
|
|
|
400,000
|
|
|
Current
portion of long-term debt
|
|
|
78,100
|
|
|
136,900
|
|
|
Liabilities
associated with assets held for sale
|
|
|
2,545,600
|
|
|
1,057,100
|
|
|
Total
current liabilities
|
|
|
4,286,600
|
|
|
5,097,700
|
|
|
Deferred
rent
|
|
|
275,000
|
|
|
329,700
|
|
|
Deposit
liability
|
|
|
89,500
|
|
|
29,300
|
|
|
Workers
compensation benefit liability
|
|
|
256,900
|
|
|
773,600
|
|
|
Long-term
debt
|
|
|
2,570,600
|
|
|
3,466,400
|
|
|
Deferred
tax liability
|
|
|
2,978,000
|
|
|
2,978,000
|
|
|
Total
liabilities
|
|
|
10,456,600
|
|
|
12,674,700
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock of $.01 par; authorized 10,000,000 shares; outstanding 36,000
shares
at September 27, 2006 and December 28, 2005 (liquidation value
$900,000)
|
|
|
400
|
|
|
400
|
|
Common
stock of $.01 par;authorized 8,000,000 shares; outstanding 3,906,801
shares at September 27, 2006 and December 28, 2005
|
|
|
39,000
|
|
|
39,000
|
|
|
Additional
paid-in capital
|
|
|
10,932,600
|
|
|
10,932,300
|
|
|
Retained
earnings (deficit)
|
|
|
(1,682,300
|
)
|
|
1,086,200
|
|
|
Accumulated
other comprehensive income
|
|
|
—
|
|
|
(6,100
|
)
|
|
Total
shareholders' equity
|
|
|
9,289,700
|
|
|
12,052,100
|
|
|
|
|
$
|
19,746,300
|
|
$
|
24,726,800
|
|
See
accompanying notes to condensed consolidated financial statements.
EACO
Corporation
Condensed
Consolidated Statements of Cash Flows
|
(Unaudited)
|
|
Nine
Months
Ended
|
|
|
|
|
September
27,
|
|
September
28,
|
|
|
|
|
2006
|
|
2005
|
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(2,711,200
|
)
|
$
|
10,168,600
|
|
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
165,800
|
|
|
1,053,700
|
|
|
Net
gains on investments
|
|
|
(19,200
|
)
|
|
(58,100
|
)
|
|
Loss
on disposition of equipment
|
|
|
(6,400
|
)
|
|
(3,800
|
)
|
|
Loss
on disposition of property held for sale
|
|
|
116,600
|
|
|
—
|
|
|
Amortization
of loan fees
|
|
|
52,800
|
|
|
48,600
|
|
|
Amortization
of deferred gain
|
|
|
(54,700
|
)
|
|
(40,300
|
)
|
|
Amortization
of deferred rent
|
|
|
17,100 |
|
|
—
|
|
|
Amortization
of below market leases
|
|
|
(24,000 |
) |
|
—
|
|
|
Loss
from closing restaurants
|
|
|
(26,300 |
) |
|
—
|
|
|
Note
receivable discount
|
|
|
—
|
|
|
299,100
|
|
|
Amortization
of note receivable discount
|
|
|
(56,100
|
)
|
|
(18,700
|
)
|
|
Provision
for loss on note receivable and bad debt expense
|
|
|
3,103,200
|
|
|
—
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(26,500
|
)
|
|
(74,600
|
)
|
|
Deferred
tax assets
|
|
|
(1,143,500
|
)
|
|
—
|
|
|
Inventories
|
|
|
300
|
|
|
232,200
|
|
|
Restricted cash |
|
|
— |
|
|
(400,000 |
) |
|
Note
receivable
|
|
|
— |
|
|
(4,000,000 |
) |
|
Prepaids
and other current assets
|
|
|
6,200
|
|
|
394,200
|
|
|
Investments
|
|
|
(523,200
|
)
|
|
—
|
|
|
Other
assets
|
|
|
(284,900
|
)
|
|
(2,500
|
)
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
94,000
|
|
|
(1,026,700
|
)
|
|
Securities
sold, not yet purchased
|
|
|
(2,340,400
|
)
|
|
—
|
|
|
Accrued
liabilities
|
|
|
(50,600
|
)
|
|
(1,335,400
|
)
|
|
Deferred
gain
|
|
|
—
|
|
|
66,000
|
|
|
Deferred
rent
|
|
|
—
|
|
|
(79,200
|
)
|
|
Deposit
liability
|
|
|
60,200
|
|
|
24,000
|
|
|
Liabilities
associated with assets held for
sale
|
|
|
(17,400
|
)
|
|
—
|
|
|
Workers
compensation benefit liability
|
|
|
(516,700
|
)
|
|
(290,100
|
)
|
|
Deferred
income tax liability
|
|
|
—
|
|
|
1,199,200
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(4,123,800
|
)
|
|
6,156,200
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Net
purchases of investments
|
|
|
—
|
|
|
(129,500
|
)
|
|
Restricted
cash
|
|
|
2,284,200
|
|
|
—
|
|
|
Proceeds
from securities sold, not yet purchased
|
|
|
—
|
|
|
2,753,200
|
|
|
Capital
expenditures
|
|
|
—
|
|
|
(2,352,400
|
)
|
|
Principal
receipts on note receivable
|
|
|
187,000
|
|
|
—
|
|
|
Proceeds
from sale of property held for sale
|
|
|
750,000
|
|
|
16,876,300
|
|
|
Proceeds
from sale of property and equipment
|
|
|
—
|
|
|
1,326,200
|
|
|
Net
cash provided by investing activities
|
|
|
3,183,500
|
|
|
18,473,800
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sale-leaseback
|
|
|
(18,900
|
)
|
|
2,600,000
|
|
|
Payments
on long-term debt
|
|
|
(954,600
|
)
|
|
(13,859,800
|
)
|
|
Payment
of sale-leaseback costs
|
|
|
—
|
|
|
(160,000
|
)
|
|
Preferred
stock dividend
|
|
|
(57,300
|
)
|
|
(57,400
|
)
|
|
Payment
on capital lease
|
|
|
(8,900
|
)
|
|
(29,200
|
)
|
|
Stock
options exercised
|
|
|
—
|
|
|
29,300
|
|
|
Net
cash used in financing activities
|
|
|
(1,039,700
|
)
|
|
(11,477,100
|
)
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,980,000
|
)
|
|
13,152,900
|
|
|
Cash
and cash equivalents - beginning of period
|
|
|
3,044,700
|
|
|
151,100
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
1,064,700
|
|
$
|
13,304,000
|
|
|
Building
acquired under capital lease
|
|
$
|
—
|
|
$
|
1,475,000
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the nine months for interest
|
|
$
|
205,500
|
|
$
|
1,022,200
|
|
See
accompanying notes to condensed consolidated financial statements.
EACO
CORPORATION
NOTES
TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
27, 2006
(Unaudited)
Note
1. Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the interim financial information instructions
to
Form 10-Q, and do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for the
interim periods have been included. Operating results for the thirteen and
thirty-nine week periods ended September 27, 2006 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 27,
2006. For further information, refer to the financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 2005.
The
condensed consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany profits,
transactions and balances have been eliminated.
Note
2. Discontinued
Operations
In
accordance with Statement of Financial Accounting Standards (“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 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.
On
June
30, 2005 (the first day of the Company’s third quarter of 2005), the Company
completed the sale of substantially all of its operating restaurants to Banner
Buffets, LLC (“Banner” or “the Buyer”). The sale of sixteen restaurant
businesses, premises, equipment and other assets used in restaurant operations
was made pursuant to an asset purchase agreement dated February 22, 2005. Prior
to this transaction, no material relationship existed between the Company and
Banner. The total purchase price was approximately $29,950,000, consisting
of
$25,950,000 in cash at closing and a promissory note for $4,000,000. Prior
to September 15, 2006, the note accrued interest at 8.0% payable monthly
and was partially secured by restaurant equipment. (see Note 5). The
Buyer also assumed obligations under capital leases of approximately $4.5
million.
The
sale
transaction between the Company and Banner is summarized as
follows:
|
Proceeds
from sale
|
|
$
|
29,950,000
|
|
| |
|
|
|
|
|
Transaction
expenses:
|
|
|
|
|
|
Legal
fees
|
|
|
294,400
|
|
|
Investment
banker fees
|
|
|
21,200
|
|
|
Other
divestment related costs
|
|
|
141,600
|
|
| |
|
|
|
|
|
Total
transaction expenses
|
|
|
457,200
|
|
| |
|
|
|
|
|
Net
proceeds
|
|
|
29,492,800
|
|
|
Net
assets sold
|
|
|
|
)
|
|
|
|
|
|
|
|
Unamortized
discount on note receivable (See Note 5)
|
|
|
|
)
|
| |
|
|
|
|
|
Gain
on sale before income tax
|
|
|
11,728,300
|
|
|
Estimated
income tax (*)
|
|
|
|
)
|
| |
|
|
|
|
|
Gain
on sale after income tax
|
|
$
|
10,393,300
|
|
(*)
Represents the effect of $4,304,400 in estimated taxes from the transaction,
net
of the change in the Company’s deferred tax asset valuation allowance of
$2,969,400, principally the utilization of net operating losses (“NOL’s”), in
connection with the sale. The change in the deferred tax asset valuation
allowance was recognized in the second quarter.
Due
to
the asset sale, the Company has exited the restaurant business and the results
of the sixteen restaurants sold were segregated from continuing operations
in
the Condensed Consolidated Statements of Operations and reported as discontinued
operations. The Company has restricted cash of $400,000 in escrow set aside
for
the potential payment of broker commissions which are currently subject to
litigation. See Note 9 - Legal Matters. The ultimate amount of gain recognized
on the asset sale may be reduced based on the outcome of such
litigation.
For
the
nine months ended September 27, 2006 and the quarter and nine months ended
September 28, 2005, operating results of the discontinued operations are
summarized below:
|
|
|
Quarter
Ended
|
|
|
|
Nine
Months Ended
|
|
|
|
|
September
28, 2005
|
|
|
|
September
27, 2006
|
|
|
Revenues
|
|
$
|
400
|
|
$
|
19,161,800
|
|
|
—
|
|
|
Costs
and expenses
|
|
|
(252,100 |
) |
|
(18,186,600 |
) |
|
— |
|
|
Interest
and other income
|
|
|
48,000 |
|
|
99,200 |
|
|
—
|
|
|
Interest
expense
|
|
|
(39,400 |
) |
|
(862,200 |
) |
|
—
|
|
|
Income
(loss) before income taxes
|
|
|
(243,100 |
) |
|
212,200 |
|
|
— |
|
|
Income
tax benefit (expense)
|
|
|
91,600 |
|
|
(79,900 |
) |
|
—
|
|
Income
(loss) from discontinued operations, net of income
taxes
|
|
$
|
(151,500
|
)
|
$
|
132,300
|
|
$ |
— |
|
Gain
on sale of discontinued operations, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) before income taxes
|
|
|
11,949,700 |
|
|
11,728,300 |
|
|
(186,500 |
) |
|
Income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
taxes
|
|
|
(4,387,500 |
) |
|
(4,304,400 |
) |
|
—
|
|
Change
in deferred tax valuation allowance
|
|
|
5,500 |
|
|
2,969,400 |
|
|
69,900
|
|
|
Income
from discontinued operations
|
|
$
|
7,416,200
|
|
$
|
10,525,600
|
|
$ |
(116,600 |
) |
Assets
and liabilities of discontinued operations are as follows:
|
|
|
September
27,
2006
|
|
|
|
| |
|
(Uaudited)
|
|
|
|
| |
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets
|
|
$
|
—
|
|
$
|
19,000
|
|
|
Property
and equipment, net
|
|
|
2,641,100
|
|
|
1,127,100
|
|
|
Total
assets held for sale
|
|
$
|
2,641,100
|
|
$
|
1,146,100
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
1,300
|
|
$
|
20,300
|
|
|
Deferred
rent
|
|
|
87,000
|
|
|
87,000
|
|
|
Obligations
under capital lease
|
|
|
2,535,600
|
|
|
949,800
|
|
Total
liabilities associated with
assets held for sale
|
|
$
|
2,545,600
|
|
$
|
1,057,100
|
|
The
remaining assets held for sale and associated liabilities included in the
unaudited balance sheet as of September 27, 2006 relate to two properties:
(i)
one restaurant that was included in the sale to Banner, where the Company’s
landlord did not consent to the assignment of the Company’s lease; accordingly,
the Company still maintains the assets and liabilities of the restaurant and
Banner operates the restaurant under a management agreement. With respect to
this restaurant, the Company and Banner agreed to continue to pursue assignment
of the lease and Banner is obligated to buy the assets subject to the lease
pursuant to a purchase option under the terms of the lease, between September
and November 2006. On September 15, 2006, Banner filed for bankruptcy protection
under Chapter 11. See Note 5. The management agreement the Company and Banner
agreed to expired on September 30, 2006. As of that date, Banner was continuing
operations in that store. The Company is currently reviewing all legal options
related to this property. (ii) oe
restaurant that was included in the sale to Banner, where the Company’s landlord
did consent to the assignment of the Company’s lease; however, did not release
the Company from liability should Banner fail to meet its obligations. In
September 2006, the bankruptcy court rejected the lease for this store, thus
releasing Banner from any further obligation and accordingly, the Company has
recorded the asset and related liabilities on the balance sheet. The Company
is
currently exploring all legal options related to this
property.
Note
3. Income
Taxes
Income
taxes are calculated using the liability method specified by
SFAS
No. 109, "Accounting for Income Taxes". Valuation allowances
are provided against deferred tax assets if it is considered
"more likely than not" that some portion or the entire
deferred tax asset will not be realized. As of September 27, 2006, a valuation
allowance of $694,200 was provided against the balance of deferred tax
assets.
Management
continuously evaluates the deferred tax valuation allowance
to determine what portion of the deferred tax asset, if
any,
may be realized in the future. Management's evaluation includes,
among other things, such factors as the history of operating
results, a substantial history of operations upon which
to
base a forecast and known transactions that will generate
enough taxable income to realize the deferred tax assets.
The
components of deferred taxes at September 27, 2006 are summarized
below:
|
|
|
September
27,
2006
|
|
|
Deferred
tax assets:
|
|
|
|
|
Net
operating loss
|
|
$
|
2,711,200
|
|
|
Federal
and state tax credits
|
|
|
694,200
|
|
|
Accruals
not currently deductible
|
|
|
548,300
|
|
|
Excess
of book over tax depreciation
|
|
|
214,700
|
|
|
|
|
|
4,168,400
|
|
|
Valuation
allowance
|
|
|
(1,190,400
|
)
|
|
Total
deferred tax assets
|
|
|
2,978,000
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
Unrealized
gain (loss)on investment
|
|
|
2,978,000
|
|
|
Net
deferred tax liability
|
|
$
|
2,978,000
|
|
Note
4. Earnings (Loss) Per
Share
The
following table provides details of the calculation of basic and diluted income
(loss) per common share:
|
|
|
Quarter
Ended
|
|
|
|
|
|
|
Sept
27,
2006
|
|
2005
|
|
|
|
|
|
|
EPS
from continuing operations - basic:
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(2,377,400
|
)
|
$
|
(48,700
|
)
|
$ |
(2,711,100 |
) |
$ |
(357,000 |
) |
|
Less:
preferred stock dividends
|
|
|
(19,100
|
)
|
|
(19,100
|
)
|
|
(57,300
|
)
|
|
(57,400
|
)
|
Loss
from continuing operations for
basic EPS computation
|
|
$
|
(2,396,500
|
)
|
$
|
(67,800
|
)
|
$ |
(2,768,400 |
) |
$ |
(414,400 |
) |
Weighted
average shares outstanding for basic EPS computation
|
|
|
3,906,800
|
|
|
3,889,000
|
|
|
3,906,800
|
|
|
3,884,300
|
|
Earnings
(loss) per common share from Continuing operations -
basic
|
|
$
|
(0.61
|
)
|
$
|
(0.01
|
)
|
|
|
|
$
|
(0.11
|
)
|
|
EPS
from continuing operations - diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$
|
(2,377,400
|
)
|
$
|
(48,700
|
)
|
$
|
(2,711,100
|
)
|
$ |
(357,000 |
) |
|
Less:
preferred stock dividends
|
|
|
(19,100
|
)
|
|
(19,100
|
)
|
|
(57,300
|
)
|
|
(57,400
|
)
|
Loss
from continuing operations for diluted EPS
computation
|
|
|
(2,396,500
|
)
|
|
(67,800
|
)
|
|
(2,768,400
|
)
|
|
(414,400
|
)
|
Weighted
average shares outstanding for diluted EPS
computation
|
|
|
3,906,800
|
|
|
4,379,900
|
|
|
3,906,800
|
|
|
4,172,800
|
|
Earnings
(loss) per common shares from continuing operations -
diluted
|
|
|
(0.61
|
)
|
|
(0.02
|
)
|
|
(0.64
|
)
|
|
(0.10
|
)
|
Due
to
the Company’s net losses for the quarter and nine months ended September 27,
2006, potentially dilutive securities totaling 1,000,000 shares for both periods
are antidilutive and have been excluded from the computation of diluted earnings
per share for those periods.
Note
5. Note
Receivable
The
note
receivable arose from the prior year sale to Banner, has a current outstanding
balance of $3,813,000 and was being carried net of unamortized discount totaling
$205,700 at September 15, 2006, prior to the Banner bankruptcy. See Notes 2
and 5. See Note 2. Interest-only payments on the note were due until June 30,
2007, when principal payments were scheduled to begin. The note was scheduled
to
mature on June 30, 2009, and was partially collateralized by
restaurant equipment (the current estimated value is $573,200).
On
September 15, 2006, Banner filed for bankruptcy protection under Chapter 11.
Banner has failed to make required interest payments on the note beginning
with
the payment due on August 1, 2006. Accrued interes income of $67,600 is included
in Receivables, net at September 27, 2006, which is fully reserved due to the
uncertainty of Banner's ability to pay.
The
Company has always expected that the funds to repay the Note would come from
the
successful operation of the purchased restaurants. Per bankruptcy filings,
Banner does not appear to have available cash to maintain the operations of
the
remaining restaurants. Banner has negotiated to sell nine of the sixteen
restaurants to a third party. Eaco received, subsequent to quarter end, $200,000
in repayment of the Note from the sale of such equipment on those nine
locations. See Note 12.
The
Company has taken possession of the equipment at three of the remaining seven
stores. In addition, Banner is still operating in several of the remaining
seven locations; however, as previously discussed, it is unclear as to the
duration Banner can maintain operations.
Based
upon the foregoing facts, Eaco has recorded a provision for
loss to reduce the carrying amount of the Note to the estimated value
of the equipment collaterized in the remaining seven stores. this
provision totalling $3,034,100 is reflected in the statement of operations
as an
operating expense in the third quarter.
Note
6. Other
Assets
Other
assets consist principally of deferred charges, which are amortized on a
straight-line basis. Deferred charges and related amortization periods are
as
follows: financing costs - term of the related loan.
The
gross
carrying amount of the deferred financing costs was $71,900 as of September
27,
2006 and December 28, 2005. Accumulated amortization related to deferred
financing costs was $29,400 and $26,700 as of September 27, 2006 and December
28, 2005, respectively. Amortization expense was $900 and $600 for the quarters
ended September 27, 2006 and September 28, 2005, respectively. Amortization
expense was $2,700 and $48,600 for the nine months ended September 27, 2006
and
September 28, 2005, respectively. The decrease in 2006 was due to the reduction
of the gross carrying cost resulting from the Asset Sale. Amortization expense
for each of the next five years is expected to be $3,500.
Note
7. Investments
Investments
consist of securities held for sale and securities sold, not yet purchased.
Prior to and as of December 28, 2005, the Company classified its existing
marketable equity securities as available for sale in accordance with the
provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt and Equity Securities.” Subsequent
to December 28, 2005, the Company changed its pattern of investing to purchasing
investments for the purpose of trading them often with the objective of
generating profits on short-term differences in price. The change in the pattern
indicated above triggered a change in the classification of the Company’s
investments, from the “available-for-sale” category to “trading” effective
December 29, 2005. Pursuant to SFAS No. 115, the transfer of investments between
categories of investments was accounted for at fair value at the date of the
transfer and the unrealized holding gain or loss was recognized in earnings.
Consequently, the unrealized loss of $6,100 at year-end was recognized in
results of operations effective December 29, 2005.
A
primary
investment strategy used by the Company in 2005 and 2006 consisted of
short-selling of securities, which results in obligations to purchase securities
at a later date. As of September 27, 2006, the Company’s total obligation for
these securities sold, not yet purchased was $928,000, compared to $3,212,200
at
December 28, 2005. The Company recognized gains on securities sold, not yet
purchased of $68,400 and $56,000 in the quarters ended September 27, 2006 and
September 28, 2005, respectively. The Company recognized net losses on
securities sold, not yet purchased of $8,600 and gains of $56,000 in the nine
months ended September 27, 2006 and September 28, 2005,
respectively.
Note
8. Reclassifications
Certain
items in the prior interim financial statements have been reclassified to
conform to the 2006 presentation.
Note
9. Legal
Matters
In
connection with the sale to Banner in fiscal 2005, a broker has demanded a
commission payment of $3.5 million. The Company has 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 claim. In addition, in August
2005, the Company was sued by another broker who claims that a commission of
$749,000 is payable to him as a result of the sale transaction. The Company
is
vigorously defending both of these claims. Due to the fact that management
cannot predict the outcome or the possible payments, if any, awarded under
these
legal proceedings, no charge to earnings has been made in the accompanying
financial statements.
Note
10. Stock Based
Compensation
Prior
to
December 31, 2005, the Company accounted for stock-based compensation utilizing
the intrinsic value method under Accounting Principles Board No. 25 (APB 25),
“Accounting for Stock Issued to Employees”. The Company’s long-term incentive
plan provides for the granting stock options and restricted stock. The exercise
price of each option equals the market price of the Company’s stock on the date
of grant. Options vest in one-quarter increments over a four-year period
starting on the date of grant. An option’s maximum term is 10 years. See Note 10
“Common Shareholders’ Equity” in the Company’s Annual Report for the year ended
December 28, 2005 for additional information regarding the Company’s stock
options.
In
December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based
Compensation - Transition and Disclosure”. Pursuant to the disclosure
requirements of SFAS 148, the following table provides an expanded
reconciliation for the quarter ended September 28, 2005:
|
|
|
Quarter
Ended
September
28, 2005
|
|
Nine
Months Ended
September
28, 2005
|
|
|
Net
income (loss), as reported
|
|
$
|
7,367,500
|
|
$
|
10,168,600
|
|
Add:
Stock based compensation expense included
in net income, net
of tax
|
|
|
—
|
|
|
|
|
Deduct:
Total stock-based compensation
expense determined
under fair value, net
of tax
|
|
|
|
|
|
|
|
|
Pro
forma net income (loss)
|
|
|
7,367,500
|
|
|
10,168,600
|
|
Undeclared
cumulative preferred stock
dividend
|
|
|
(19,100
|
)
|
|
(57,400
|
)
|
|
Earnings
(loss) per share
|
|
|
|
|
|
|
|
|
Basic
as reported
|
|
$
|
1.89
|
|
$
|
2.62
|
|
|
Basic
pro forma
|
|
$
|
1.89
|
|
$
|
2.62
|
|
|
Diluted
as reported
|
|
$
|
1.68
|
|
$
|
2.44
|
|
|
Diluted
pro forma
|
|
$
|
1.68
|
|
$
|
2.44
|
|
Effective
January 1, 2006, the Company adopted the provision of SFAS No. 123(R),
“Share-Based Payments.” SFAS No. 123(R) requires employee stock options and
rights to purchase shares under stock participation plans to be accounted for
under the fair value method and requires the use of an option pricing model
for
estimating fair value. Accordingly, share-based compensation is measured at
grant date, based on the fair value of the award. The adoption of SFAS No.
123(R) did not have a material effect on the Company’s financial
statements.
Stock
option transactions for our stock plan for the nine months ended September
27,
2006 are summarized as follows:
| |
|
Number
of Options
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Life
|
|
|
Outstanding
at December 28, 2005
|
|
|
32,500
|
|
$
|
2.08
|
|
$
|
2.68
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
7,500
|
|
|
2.33
|
|
|
2.30
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 27, 2006
|
|
|
25,000
|
|
|
2.00
|
|
|
3.80
|
|
|
Options
exercisable at September 27, 2006
|
|
|
25,000
|
|
|
2.00
|
|
|
3.80
|
|
The
following table summarizes information about fixed stock options outstanding
at
September 27, 2006:
|
Year
Granted
|
Exercise
Price
|
Options
Outstanding
|
Options
Exercisable
|
Weighted
Average Remaining Life (in years)
|
|
1999
|
2.00
|
25,000
|
25,000
|
3.80
|
During
the nine months ended September 27, 2006, the Company awarded no stock options
and thus, recorded no compensation expense related to stock options after
the
adoptions of SFAS N. 123(R). In addition, there were no option awards modified,
repurchased, or cancelled after December 28, 2005. During the nine months
ended
September 27, 2006, no stock options were exercised, and therefore, no cash
was
received from stock option exercises.
Note
11. Preferred
Stock
The
Company has outstanding 36,000 shares of Series A Cumulative Convertible
Preferred Stock with a dividend rate of 8.5%. For the three and nine months
ended September 27, 2006, the Board of Directors declared and the Company paid
dividends in the amount of 19,100 and 57,300 respectively. In the quarter ended
September 27, 2006, the Board of Directors declared and the Company paid
dividends in the amount of $19,100. The balance of undeclared cumulative
preferred dividends at September, 2006 was $19,100.
Note
12. Subsequent
Events
In
November 2006, the Company received $200,000 as payment on the Note receivable
from Banner when Banner completed the sale of nine of their restaurants to
a
third party. The proceeds related to the sale of the restaurant equipment
collaterizing the Note. See Note 5.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Critical
Accounting Policy and Use of Estimates
The
Company’s accounting policy for the recognition of impairment losses on
long— lived assets also 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 future net cash flows expected to be
generated by such assets. If such assets are considered impaired, the impairment
to be recognized is measured by the amount by which the carrying value of the
assets exceeds the fair value of the assets.
Prior
to
and as of December 28, 2005, the Company classified its existing marketable
equity securities as available for sale in accordance with the provisions of
Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for
Certain Investments in Debt and Equity Securities.” Subsequent to year-end, the
Company changed its pattern to purchasing investments for the purpose of trading
them often with the objective of generating profits on short-term differences
in
price. The change in the pattern indicated above triggered a change in the
classification of Company’s investments, from the “available-for-sale” category
to “trading”. Pursuant to SFAS No. 115, the transfer of investments between
categories shall be accounted for at fair value at the date of the transfer
and
the unrealized holding gain or loss of $6,100 was recognized in earnings
effective December 29, 2005.
The
preparation of EACO Corporation’s consolidated financial statements requires the
Company to make estimates, assumptions and judgments that affect the Company’s
assets, liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. The Company bases these estimates and assumptions on historical
data and trends, current fact patterns, expectations and other sources of
information it believes are reasonable. Actual results may differ from these
estimates under different conditions. For a full description of the Company’s
critical accounting policy, see Management’s Discussion and Analysis of
Financial Condition and Results of Operations in the Company’s 2005 Annual
Report on Form 10-K.
Results
of Operations
Quarter
Ended September 27, 2006 versus September 28, 2005
The
Company experienced an increase of 237% in rental revenue during the third
quarter of 2006 compared to the third quarter of 2005, due to the acquisition
of
rental property in Sylmar, California during the fourth quarter of
2005.
Depreciation
and amortization expenses increased 14% due to the acquisition of the Sylmar,
California property. General and administrative expenses, such as payroll,
payroll related costs and insurance, increased 44% due to increases in legal
and
other professional fees versus the third quarter of 2005.
Interest
expense increased to $143,900 in the third quarter of 2006 from $34,900 in
the
same quarter of 2005, primarily due to borrowings related to the Sylmar,
California property.
The
Company recognized income tax benefits of $1,031,000 and $29,400 for the quarter
ended September 27, 2006 and September 28, 2005, respectively. The increase
is
due to losses recognized in the third quarter of 2006.
The
Company invests a portion of its available cash in marketable securities. The
Company maintains an investment account to effect these transactions.
Investments are made based on a combination of fundamental and technical
analysis primarily using a value-based investment approach. The holding period
for investments usually ranges from 30 days to 24 months. Management also
purchases marketable securities using margin debt. In determining whether to
engage in transactions on margin, the Company’s Chairman evaluates the risk of
the proposed transaction and the relative returns offered thereby and executes
such transactions. If the market value of securities purchased on margin were
to
decline below certain levels, the Company would be required to use additional
cash from its operating account to fund a margin call in its investment account.
The Company’s Chairman reviews the status of the investment account on a regular
basis and analyzes such margin positions and adjusts purchase and sale
transactions as necessary to ensure such margin calls are not likely. The
results for the third quarter of 2006 included realized losses from the sale
of
marketable securities of $534,900 and unrealized gains of $672,600. During
the
third quarter of 2005 the company had realized gains from the sale of marketable
securities of $19,200 and no unrealized gains or losses.
As
previously reported, all significant restaurant operations were sold on June
30,
2005. All income and expense items related to those restaurants were
reclassified as income from discontinued operations beginning in the second
quarter of 2005.
The
net
loss
was $2,377,400 in the third quarter of 2006, compared to net income of
$7,367,500 in the third quarter of 2005. The 2006 third quarter loss was due,
primarily, to recording a provision for loss on the Note due from Banner
totaling $3,034,100. The third quarter of 2005 recognized the gain on the sale
of the restaurant properties to Banner. Loss per share for the quarter was
61
cents in 2006 compared to earnings per share of $1.89 in 2005.
Nine
Months Ended September 27, 2006 versus September 28, 2005
The
Company experienced an increase of 409% in rental revenue during the first
nine
months of 2006 compared to the first nine months of 2005, due to the acquisition
of rental property in Sylmar, California during the fourth quarter of
2005.
Depreciation
and amortization expenses increased 52% due to the acquisition of the Sylmar,
California property. General and administrative expenses, such as payroll,
payroll related costs and insurance, increased 54% due to increases in legal
and
other professional fees in the first nine months of 2006 versus the first nine
months of 2005, as well as expenses related to closing the corporate offices
in
Florida and moving them to Anaheim, California.
Interest
and other income increased to $525,500 due to the interest received on the
$4,000,000 note receivable from Banner and a settlement made with a tenant
from
one of the Company’s properties that vacated the premises prior to the
completion of their lease term.
Interest
expense increased to $343,000 in the first nine months of 2006 from $104,500
in
the first nine months of 2005, primarily due to borrowings on the Sylmar,
California propety.
The
Company recognized an income tax benefits of $1,141,400 and $215,700 for the
nine months ended September 27, 2006 and September 28, 2005,
respectively.
The
results for the nine months of 2006 included realized losses from the sale
of
marketable securities of $617,200 and unrealized gains of $623,200. During
the first nine months of 2005, the Company had realized gains from the sale
of
marketable securities of $58,100 and no unrealized gains or losses.
As
previously reported, all significant restaurant operations were sold on June
30,
2005. All income and expense items related to those restaurants were
reclassified as income from discontinued operations beginning in the third
quarter of 2005.
The
net
loss
was $2,711,100 in the first nine months of 2006, compared to net income of
$10,168,600 in the first nine months of 2005. The 2006 net loss was due,
primarily, to recording a provision for loss totaling $3,034,000 on the Note
due
from Banner. The income of 2005 recognized the gain on the sale of the
restaurant properties to Banner. Loss per share for the nine months was 64
cents
in 2006 compared to earnings per share of $2.62 in 2005.
Effective
April 1, 2006, the Company’s corporate office was moved from Neptune Beach,
Florida to Anaheim, California. The Company is leasing space from Bisco
Industries, Inc. (“Bisco”), the wholly owned company of the Company’s Chairman
of the Board of Directors and Chief Executive Officer, Glen Ceiley. The Company
has also entered into an agreement with Bisco whereas Bisco will provide
accounting and other administrative services to the Company in exchange for
a
fee. Through September 27, 2006, Bisco billed the Company $32,400.
Liquidity
and Capital Resources
Substantially
all of the Company's revenues are derived from rental income. Therefore, the
Company does not carry significant receivables or inventories and, other than
repayment of debt, working capital requirements for continuing operations are
not significant.
On
June
30, 2005, the Company completed the sale of all of its operating restaurants
(the “Asset Sale”). The total purchase price was approximately $29,950,000,
consisting of $25,950,000 in cash and a promissory note for $4,000,000. The
note
required monthly interest payments at a rate of 8.0% through June 30, 2007,
when
the first principal payment of $1.5 million is due. The Company received
$187,000 of the $1.5 million dollar payment early on March 9, 2006 lowering
the
amount due on June 30, 2007 to $1,313,000. See Note 5 for further discussion.
The Company paid off approximately $12,413,000 in loans due to GE Capital with
the proceeds from the Asset Sale in 2005. In addition to the cash proceeds,
the
Buyer assumed $4,509,000 in capital lease obligations.
As
of
September 27, 2006, the Company had total cash and cash equivalents of
$1,992,700 comprised of cash and cash equivalents of $1,064,700 and restricted
cash of $928,000, invested in brokerage money market accounts. However, $928,000
of the brokerage accounts cash resulted from the sale of securities sold, not
yet purchased (“short sales”), which is included as a liability on the Company’s
balance sheet at September 27, 2006. Accordingly, the Company will require
this
cash to cover the short sales liability, and therefore the $928,000 is not
available for the Company’s use and is classified as restricted. The balance of
the cash in the brokerage accounts is available for use by the
Company.
The
Company purchased a property in November 2005 (the “California Property”) for
$8.3 million. The transaction was structured as a like-kind exchange transaction
under Section 1031 of the Internal Revenue Code, which resulted in the deferral
of an estimated $1 million in income taxes payable from the Asset Sale. The
Company assumed a loan on the property for $1.8 million with a variable interest
rate equal to prime. The property includes one industrial tenant with rental
income of approximately $240,000 per year. As of April 30, 2006 one of the
tenants vacated the premises at the expiration of their lease term, as
anticipated before purchase of the property. The Company has since leased this
property to a new tenant at a substantially higher monthly rental amount. Rent
unde a 10 year operating lease will commence on October 1, 2006.
At
September 27, 2006, the Company had working capital of $537,500 compared to
$2,475,600 at December 28, 2005. The decrease was due to cash outlays for
workers compensation claims and other operating expenses, such as legal costs
and costs associated with moving the corporate offices from Neptune Beach,
FL to
Anaheim, CA paid during the first nine months of 2006. Cash used in operating
activities was $4,161,400 in the first nine months of 2006 compared to cash
provided by operations of $6,156,200 in the first nine months of 2005, primarily
due to the sale of the Company’s restaurants to Banner in the third quarter of
2005 and the related gain.
The
Company recorded a provision for loss on the Note due from Banner during the
third quarter of 2006. See Note 5 for further discussion of the bankruptcy
by
Banner. The Company expects to receive approximately $573,000 of the remaining
$3,813,000 due on the Note, from the disposition of the remaining collaterized
restaurant equipment held by Banner. As of November 16, 2006, the Company had
received $200,000 of the expected amount.
A
further
contingency of the Company continues to be the litigation with two brokers
claiming commissions totaling approximately $4.25 million. See Item 1 of Part
II, Legal Proceedings. While the Company continues to defend its position and
management continues to believe in a favorable outcome, the Company has
available borrowing capacity on the two California properties, required, to
cover any capital requirements associated with this case or those of any other
normal operating expenditures.
The
Company had capital expenditures in the third quarter of 2006 totaling $37,700
related to tenant improvements on the California property. The Company is not
budgeting for any further capital expenditures for 2006.
In
June
2004, the Company sold 145,833 shares of its Common Stock directly to Bisco
Industries, Inc. Profit Sharing and Savings Plan for a total purchase price
of
$175,000 cash. In September 2004, the Company sold 36,000 shares of the
Company’s newly authorized Series A Cumulative Convertible Preferred Stock at a
price of $25 per share, for a total purchase price of $900,000 cash. The
Preferred Stock was sold to the Company’s Chairman. Dividends are paid quarterly
when declared by the Company’s Board of Directors. The Company paid a declared
dividend of $19,100 during the third quarter of 2006. Undeclared dividends
as of
September 27, 2006 were $19,100.
The
Company is required to pledge collateral for its workers’ compensation
self-insurance liability with the Florida Self Insurers Guaranty Association.
The Company increased this collateral by $69,500 during the first quarter of
2005, and now has a total of $1.37 million pledged collateral. Bisco Industries,
Inc. (“Bisco”) provides $1 million of this collateral. EACO Corporation’s
Chairman of the Board of Directors and Chief Executive Officer, Glen Ceiley,
is
the President of Bisco.
After
the
Asset Sale, the Company terminated its self-insurance program. No further claims
were incurred after June 29, 2005. The Company’s liability for Workers’
Compensation is expected to decrease and the Company should be able to reduce
its required collateral deposits accordingly.
The
Company has entered into a loan agreement with GE Capital and assumed a loan
with Citizen’s Bank pertaining to the California Property. As of September 27,
2006, the outstanding balance due under the Company’s loan with GE Capital was
$875,000 and with Citizen’s Bank was $1,773,700. The weighted average interest
rate for these loans is 8.2% for the quarter ended September 27, 2006.
The
GE
Capital loan agreements contain various restrictions on fixed charge coverage
ratios, determined both on aggregate and individual restaurant levels. As of
December 28, 2005, the Company was not in compliance with one of the debt
covenants. The Company obtained a waiver of the debt covenant from GE Capital.
The
preceding discussion of liquidity and capital resources contains certain
forward-looking statements. Forward-looking statements involve a number of
risks
and uncertainties, and in addition to the factors discussed herein, 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, Citizen’s 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 Company’s SEC reports, registration statements and
public announcements.
Recent
Developments
On
September 15, 2006, Banner filed for bankruptcy protection under Chapter 11.
Banner has failed to make interest payments on the Note due Eaco beginning
August 1, 2006. Banner has also failed to make rental payments under the
management agreement for the lease not assigned to Banner beginning August
1,
2006. See Note 5 for further discussion.
Item
3. Qualitative and
Quantitative Disclosure about Market Risk
There
have been no significant changes in the Company’s exposure to market risk during
the first fiscal quarter of 2006. For discussion of the Company’s exposure to
market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about
Market Risk, contained in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 28, 2005 is herby incorporated by reference.
Item
4. Controls and
Procedures
(a) Evaluation
of disclosure controls and procedures.
As
required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange
Act”), as of the end of the period covered by this report, the Company carried
out 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 effective in alerting them to material information regarding
the
Company’s financial statement and disclosure obligation in order to allow the
Company to meet its reporting requirements under the Exchange Act in a timely
manner.
(b) Changes
in internal control.
There
have been no changes in internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect internal
controls over financial reporting subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses other than as noted below:
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 the Company’s
Chairman and Chief Executive Officer.
| PART
II. |
OTHER
INFORMATION
|
| Item 1. |
Legal Proceedings
Banner
has filed for bankruptcy protection under Chapter 11. The Company is
vigorously defending its
position with regards to the bankruptcy
filing.
|
| |
In
connection with the sale to Banner, a broker has demanded a commission
payment of $3.5 million. The Company filed suit against the broker
on July
11, 2005 in Duval County Circuit Court in an effort to expedite a
resolution of the claim. The Company agreed to place $400,000 in escrow
in
connection with the claim. In addition, in August 2005, the Company
was
sued in Miami-Dade County Circuit Court by another broker who claims
that
a commission of $749,000 is payable to him as a result of the sale
to
Banner. The Company is vigorously defending both of these claims. Due
to
the fact that management cannot predict the outcome or the possible
payments awarded under these legal proceedings, no charge to earnings
has
been made in the quarterly financial
statements. |
| Item 1A |
Risk
Factors
No
material changes.
|
| 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
(a) The following exhibits are filed as part
of the
report on Form 10-Q.
|
| 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, Registration No. 33-1887,
is incorporated herein by
reference.)
|
| 3.02 |
Bylaws
of Family Steak Houses of Florida, Inc. (Exhibit 3.02
to the Company’s Registration Statement on Form 2-1,
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 3.03 to the
Company’s Registration Statement on Form S-1, 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 3.04 to the
Company’s Registration Statement on Form S-1, Registration
No. 33-1887, is incorporated herein by reference.)
|
| 3.05 |
Amended
and Restated Bylaws of Family Steak Houses of Florida,
Inc. (Exhibit 4 to the Company’s Form 8-A, filed
with the Commission on March 19, 1997, is incorporated
herein by reference.)
|
| 3.06 |
Articles
of Amendment to the Articles of Incorporation of
Family Steak Houses of Florida, Inc. (Exhibit 3 to the
Company’s Form 8-A filed with the Commission on March
19, 1997, is incorporated herein by
reference.)
|
| 3.07 |
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 Commission on March 31, 1998, is incorporated herein
by
reference.)
|
| 3.08 |
Amendment
to Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.08 to
the
Company’s Annual Report on Form 10-K filed with the Commission on March
15, 2000 is incorporated herein by
reference.)
|
| 3.09 |
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 Commission on March 29, 2004 is incorporated herein
by
reference.)
|
| 3.10 |
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 Commission on September 3, 2004, is incorporated
herein by reference.)
|
| 31.01 |
Chief
Executive Officer Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
| 32.01 |
Chief
Executive Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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:
November 20, 2006 |
By: |
/s/ Glen
Ceiley |
| |
Glen
Ceiley
Chief
Executive Officer
(Principal
Executive Officer & Principal
Financial Officer)
|
| |
|