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 March 29, 2006 or
|_| 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 |_|
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 |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Title of each class Number of shares outstanding
Common Stock 3,906,801
$.01 par value As of May 9, 2006
2
EACO Corporation
Condensed Consolidated Statements of Operations
(Unaudited) Quarters Ended
--------------------------
March 29, March 30,
2006 2005
----------- ------------
Revenues:
Rental revenue $ 231,900 $ 66,800
----------- -----------
Total revenues 231,900 66,800
----------- -----------
Cost and expenses:
Depreciation and amortization 73,400 53,100
General and administrative expenses 368,200 712,100
Loss on disposition of equipment 17,000 19,200
----------- -----------
Total costs and expenses 458,600 784,400
----------- -----------
Loss from operations (226,700) (717,600)
Investment loss (165,300) --
Interest and other income (expense) 320,300 (12,700)
Interest expense (121,100) (382,600)
----------- -----------
Loss before income taxes (192,800) (1,112,900)
Benefit (provision) for income taxes 72,100 --
----------- -----------
Loss from continuing operations (120,700) (1,112,900)
Discontinued operations:
Income from
discontinued operations -- 1,371,100
----------- -----------
Net income (loss) (120,700) 258,200
Undeclared cumulative preferred
stock dividend (19,100) (19,100)
----------- -----------
Net income (loss) available
(attributable) to common shareholders ($ 139,800) $ 239,100
=========== ===========
Basic income (loss) per share
Continuing operations ($ 0.04) ($ 0.30)
Discontinued operations -- 0.36
----------- -----------
Net Income (loss) ($ 0.04) $ 0.06
=========== ===========
Basic weighted average common
shares outstanding 3,906,800 3,790,000
3
Diluted income (loss) per share
Continuing operations ($ 0.04) ($ 0.30)
Discontinued operations -- 0.36
----------- -----------
Net income (loss) ($ 0.04) $ 0.06
=========== ===========
Diluted weighted average common
shares outstanding 3,906,800 3,790,000
See accompanying notes to condensed consolidated financial statements.
4
EACO Corporation
Condensed Consolidated Balance Sheets
March 29, December 28,
2006 2005
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,532,500 $ 3,044,700
Restricted cash - short-term 3,615,700 3,212,200
Receivables 121,000 117,400
Inventories 0 300
Prepaid and other current assets 106,500 52,600
Assets held for sale 1,995,100 1,146,100
------------ ------------
Total current assets 8,370,800 7,573,300
Restricted cash 400,000 400,000
Investments, trading 321,800 318,500
Certificate of deposit 369,500 369,500
Note receivable, net 3,569,900 3,738,300
Property and equipment:
Land 4,800,300 5,209,400
Buildings and improvements 5,558,100 6,769,700
Equipment 1,590,200 3,025,700
------------ ------------
11,948,600 15,004,800
Accumulated depreciation (2,679,200) (4,801,400)
------------ ------------
Net property and equipment 9,269,400 10,203,400
Deferred tax asset 1,838,800 1,766,700
Other assets, principally deferred charges,
net of accumulated amortization 294,400 357,100
------------ ------------
$ 24,434,600 $ 24,726,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,000 $ 10,000
Securities sold, not yet purchased 3,615,700 3,212,200
Accrued liabilities 103,100 281,500
Current portion of workers compensation benefit liability 400,000 400,000
Current portion of long-term debt 90,800 136,900
Liabilities associated with assets held for sale 1,933,600 1,057,100
------------ ------------
Total current liabilities 6,152,200 5,097,700
Deferred rent 305,800 329,700
Deposit liability 24,300 29,300
Workers compensation benefit liability 461,500 773,600
Long-term debt 2,594,300 3,466,400
Deferred tax liability 2,978,000 2,978,000
------------ ------------
Total liabilities 12,516,100 12,674,700
Shareholders' equity:
Preferred stock of $.01 par; authorized 10,000,000
shares; outstanding 36,000 shares at
March 29, 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
March 29, 2006 and December 28, 2005 39,100 39,000
Additional paid-in capital 10,932,600 10,932,300
Retained Earnings 946,400 1,086,200
Accumulated other comprehensive income -- (6,100)
------------ ------------
Total shareholders' equity 11,918,500 12,052,100
------------ ------------
$ 24,434,600 $ 24,726,800
============ ============
See accompanying notes to condensed consolidated financial statements.
5
EACO Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited) Quarters Ended
--------------------------
March 29, March 30,
2006 2005
------------ ------------
Operating activities:
Net income (loss) ($ 120,700) $ 258,200
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 73,400 500,400
Net losses on investments 165,300 --
Loss on disposition of equipment 17,000 15,200
Amortization of loan fees 17,600 37,200
Amortization of deferred gain -- (22,600)
Amortization of deferred rent (23,900) 7,900
Amortization of note receivable discount (18,600) --
Decrease (increase) in:
Receivables (3,600) (209,100)
Deferred tax assets (72,100) --
Inventories 300 (24,500)
Prepaids and other current assets (53,900) (89,300)
Investments 93,500 --
Other assets 7,900 (10,000)
Increase (decrease) in:
Accounts payable 1,000 466,600
Securities sold, not yet purchased 185,100 --
Accrued liabilities (178,400) (298,600)
Deposit liability (5,000) 800
Workers compensation benefit liability (312,100) 17,200
----------- -----------
Net cash provided by (used in) operating activities (227,200) 649,400
----------- -----------
Investing activities:
Net purchases of investments -- (69,500)
Restricted cash (403,500) --
Capital expenditures -- (521,500)
Principal receipts on note receivable 187,000 --
Expenses from closing of restaurants (6,400) --
----------- -----------
Net cash used in investing activities (222,900) (591,000)
----------- -----------
Financing activities:
Proceeds from sale-leaseback -- 2,600,000
Payments on long-term debt (38,600) (1,251,400)
Payment of sale-leaseback costs -- (160,000)
Preferred stock dividend (19,100) (19,100)
Payment on capital lease (4,400) (10,000)
----------- -----------
Net cash provided by (used in) financing activities (62,100) 1,159,500
----------- -----------
Net increase (decrease) in cash and cash equivalents (512,200) 1,217,900
Cash and cash equivalents - beginning of period 3,044,700 151,100
----------- -----------
Cash and cash equivalents - end of period $ 2,532,500 $ 1,369,000
=========== ===========
Building acquired under capital lease $ -- $ 1,475,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for interest $ 84,900 $ 431,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
6
EACO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 29, 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 quarter ended
March 29, 2006 are not necessarily indicative of the results that may be
expected for the fiscal year ending January 3, 2007. 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.
7
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. The note
accrues interest at 8.0% payable monthly and is secured by restaurant equipment
valued at less than $1 million. The Buyer also assumed obligations under capital
leases of approximately $4.5 million.
Due to the Asset Sale, the Company has exited the restaurant business and the
results of the sixteen restaurants sold have been 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 Proceedings. The ultimate
amount of gain recognized on the asset sale may be reduced based on the outcome
of such litigation.
During the quarter ended March 29, 2006, the Company decided to and entered into
a 30-day escrow to sell one of its real estate holdings, a restaurant located in
Tampa, Florida. The sale was completed on April 28, 2006. See Note 12. The
assets and liabilities associated with this property have been classified as
held for sale in the accompanying financial statements.
8
For the quarter ended March 30, 2005, operating results of the discontinued
operations are summarized below:
Quarter Ended
March 30, 2005
---------------------
Revenues $10,075,400
Costs and expenses (8,637,800)
Interest and other income 2,100
Interest expense (68,600)
-----------
Income before income taxes 1,371,100
Income tax benefit (expense) ---
-----------
Income (loss) from discontinued
operations, net of income taxes 1,371,100
===========
Assets and liabilities of discontinued operations are as follows:
March 29, December 28,
2006 2005
--------------- ---------------
Assets
Current assets $ --- $ 19,000
Property and equipment, net 1,995,100 1,127,100
----------- -----------
Total assets held for sale $1,995,100 $ 1,146,100
----------- -----------
Liabilities
Current liabilities $ 21,700 $ 20,300
Deferred rent 87,000 87,000
Long-term debt 879,600 ---
Obligations under capital lease 945,300 949,800
----------- -----------
Total liabilities associated
with assets held for sale $ 1,933,600 $ 1,057,100
----------- -----------
The assets held for sale and associated liabilities included in the unaudited
balance sheet as of March 29, 2006 relate to one restaurant which the Company
decided to sell in the first quarter of 2006 and another 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.
9
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 December 28, 2005,
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 March 29, 2006 are summarized below:
March 29, 2006
--------------
Deferred tax assets:
Net operating loss $1,075,800
Federal and state tax credits 694,200
Accruals not currently deductible 548,300
Excess of book over tax depreciation 214,700
----------
2,533,000
Valuation allowance (694,200)
----------
Total deferred tax assets 1,838,800
----------
Deferred tax liabilities:
Unrealized gain (loss)on investment 2,978,000
----------
Net deferred tax liability $1,139,200
==========
Note 4. Earnings (Loss) Per Share
The following table provides details of the calculation of basic and diluted
income (loss) per common share:
10
March 29, March 30,
2006 2005
----------- ------------
EPS from continuing operations - basic:
Income (loss) from continuing operations $ (120,700) $ 258,200
Less: preferred stock dividends (19,100) (19,100)
----------- -----------
Income (loss) from continuing operations
for basic EPS computation $ (139,800) $ 239,100
=========== ===========
Weighted average shares outstanding for
basic EPS computation 3,906,800 3,813,000
=========== ===========
Earnings (loss) per common share from
continuing operations - basic $ (0.04) $ 0.06
=========== ===========
EPS from continuing operations - diluted:
Income (loss) from continuing operations $ (120,700) $ 258,200
Less: preferred stock dividends, (19,100) (19,100)
----------- -----------
Income (loss) from continuing operations
for diluted EPS computation $ (139,800) $ 239,100
=========== ===========
Weighted average shares outstanding for
diluted EPS computation 3,906,800 3,813,000
=========== ===========
Earnings (loss) per common share from
continuing operations - diluted $ (0.04) $ 0.06
=========== ===========
Due to the Company's net losses for the quarter ended March 29, 2006,
potentially dilutive securities totaling 1,000,500 shares for the quarter ended
March 29, 2006 were antidilutive and have been excluded from the computation of
diluted earnings per share for that period.
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 is carried net of unamortized discount
totaling $243,100. See Note 2. The note bears interest at 8.0%. Interest-only
payments on the note are due until June 30, 2007, when principal payments begin
as detailed below. The note matures on June 30, 2009, and is collateralized by
restaurant equipment valued at less than $1 million.
In consideration of the note not being fully collateralized, management has
determined that the note receivable was issued at a below market interest rate,
and estimated that market conditions in effect at the date of the sale would
have resulted in an estimated market interest rate of 12% for the unsecured
portion of the note. Accordingly, all future payments due under the note have
been discounted to the date of the note, resulting in the recognition of an
unamortized discount of $299,100, which is being recognized as interest income
over the life of the note. For the three months ended March 29, 2006, interest
income recognized on the Banner note was $100,300, including $18,700 of the
unamortized discount recognized as interest income. The amount of the
unamortized discount at March 29, 2006 was $243,100.
11
During the quarter ended March 29, 2006, the Company received a $187,000 early
payment which reduced the scheduled 2007 payment to $1,313,000.
Principal contractual maturities on the note receivable are as follows:
Year Maturities
---- ----------
2007 $1,313,000
2008 1,500,000
2009 1,000,000
----------
$3,813,000
==========
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
March 29, 2006 and December 28, 2005. Accumulated amortization related to
deferred financing costs was $27,600 and $26,700 as of March 29, 2006 and
December 28, 2005, respectively. Amortization expense was $900 and $37,200 for
the quarters ended March 29, 2006 and March 30, 2005. 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 shall be accounted for at fair value at the date of
the transfer and the unrealized holding gain or loss shall be recognized in
earnings. Consequently, the unrealized loss of $6,100 at year-end was recognized
in results of operations effective December 29, 2005.
12
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 March 29, 2006, the Company's total obligation for these
securities sold, not yet purchased was $3,615,700, compared to $3,212,200 at
December 28, 2005. The Company recognized net losses on securities sold, not yet
purchased of $32,000 and $0 in the quarters ended March 29, 2006 and March 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 lawsuit. 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 awarded under these legal
proceedings, no charge to earnings has been made in the accompanying financial
statements.
13
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 March 30, 2005:
Quarter Ended
March 30, 2005
--------------
Net earnings (loss), as reported $ 258,200
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 earnings (loss) $ 258,200
Undeclared cumulative preferred
stock dividend (19,100)
---------
$ 239,100
Earnings (loss) per share - basic
and diluted as reported $ 0.06
Pro forma $ 0.06
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 Company previously
accounted for awards granted under its equity incentive plans under the
intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
and provided the required pro forma disclosures prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended. The adoption of SFAS No.
123(R) did not have a material effect on the Company's financial statements.
14
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%. In the quarter ended March 29,
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
March 29, 2006 was $19,100.
Note 12. Subsequent Events
On April 28, 2006, the Company completed the sale of one if its real estate
holdings in Tampa, Florida, which is classified as held for sale in the March
29, 2006 balance sheet, for $750,000 in cash consideration. Proceeds from the
sale were used to pay $880,000 of associated indebtedness.
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 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.
15
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 March 29, 2006 versus March 30, 2005
The Company experienced an increase of 247% in rental revenue during the
first quarter of 2006 compared to the first quarter of 2005, due to the
acquisition of rental property in Sylmar, California during the fourth quarter
of 2005.
Depreciation and amortization expenses increased 38.2% due to the
acquisition of the Sylmar, California property. General and administrative
expenses, such as payroll, payroll related costs and insurance, decreased 48.3%
due to the winding down of the restaurant operations the Company was involved in
during the first quarter of 2005.
Interest and other income increased to $320,300 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.
16
Interest expense decreased to $121,100 in the first quarter of 2006 from
$382,600 in the same quarter of 2005, due to the payoff of long-term debt
obligations during 2005 and 2006.
The effective income tax rate for the first three months of 2006 and 2005
was 37.5% and 0.0%, respectively.
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. 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 first quarter of 2006 included realized losses from the sale of
marketable securities of $2,000 and unrealized losses of $163,300. The Company
did not have any investment in marketable securities in the first quarter of
fiscal 2005.
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 for the first quarter of
2005.
The net loss was $120,700 in the first quarter of 2006, compared to net
income of $258,200 in the first quarter of 2005. Loss per share for the quarter
was 4 cents in 2006 compared to earnings per share of 6 cents in 2005.
17
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 requires monthly interest payments at a rate of 8.0%
through June 30, 2007, when the first principal payment of $1.5 was 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. 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 March 29, 2006, the Company had total cash and cash equivalents of
$6,148,200. Of this total, $6,055,300 was invested in brokerage money market
accounts. However, $3,615,700 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 March 29, 2006. Accordingly, the
Company will require this cash to cover the short sales liability, and therefore
the $3,615,700 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 engaged an investment banking firm in October 2005 to
investigate potential acquisitions of operating businesses or investment
opportunities. The engagement was for a limited period of time and has since
expired. There are currently no pending acquisitions and there is no assurance
that one will be completed.
The Company purchased a property in November 2005 (the "California
Property") for $8.3 million. The transaction was structured as a like-kind
exchange ("LKE") 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
believes it can replace the tenant at a rental rate higher than the former
tenant. The Company has hired a broker to lease this property at a lease rate
higher than the prior lease required.
18
At March 29, 2006, the Company had working capital of $2,130,500 compared
to $2,386,600 at December 28, 2005. The decrease was due to workers compensation
claims paid during the first quarter of 2006. Cash used in operating activities
was $211,300 in the first quarter of 2006 compared to cash provided by
operations of $649,400 in the first quarter of 2005, primarily due to the net
loss in the first quarter of 2006 compared to the net income in the first
quarter of 2005.
The Company had no capital expenditures in the first quarter of 2006. The
Company is not budgeting for any capital expenditures for 2006 except for tenant
acquisition and improvement costs associated with the California property.
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 first quarter of 2006. Undeclared dividends as of
March 29, 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
("FSIGA"). 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. Of
this amount, 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.
19
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 March 29,
2006, the outstanding balance due under the Company's loan with GE Capital was
$901,300 and with Citizen's Bank was $1,788,600. The weighted average interest
rate for these loans is 7.8% for the quarter ended March 29, 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
Effective April 30, 2006, one of the two tenants at the California property
vacated the premises at the end of their lease term. The Company is actively
pursuing a replacement tenant and has hired a broker to assist in that pursuit.
The Company is confident that a tenant can be found at a monthly lease rate
higher then that paid by the previous tenant.
20
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., the wholly owned company of the Company's Chairman of
the Board of Directors and Chief Executive Officer, Glen Ceiley. The Company can
be contacted by writing to Eaco Corporation, 1500 N. Lakeview Ave., Anaheim, CA
92807.
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 is
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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company
is a party or to which any of our properties are subject; nor are
there material proceedings known to be contemplated by any
governmental authority; nor are there material proceedings known to
the Company, pending or contemplated, in which any of our directors,
officers, affiliates or any principal security holders, or any
associate of any of the foregoing, is a party or has an interest
adverse to us, except as set forth below. 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 lawsuit. 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 plans to vigorously defend 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.
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Item 5. Other Information
None.
Item 6. Exhibits
(a) The following exhibits are filed as part of the report on Form
10-Q.
No. Exhibit
3.01 Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibit 3.01 to the Company's
Registration Statement on Form S-1, 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.)
23
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)
/s/ Glen Ceiley
----------------------------------
Date: May 19, 2006 Glen Ceiley
Chief Executive Officer
(Principal Executive Officer &
Principal Financial Officer)
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