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 November
30, 2012
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.
000-14311
EACO CORPORATION
(Exact name of registrant as specified in
its charter)
Florida
|
59-2597349
|
(State of Incorporation)
|
(I.R.S. Employer
Identification No.)
|
1500 NORTH LAKEVIEW AVENUE
ANAHEIM, CALIFORNIA 92807
(Address of Principal Executive Offices)
(714) 876-2490
(Registrant’s Telephone No.)
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
x
No
o
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated
filer
o
Non-accelerated filer
o
Smaller
reporting company
x
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
As of January 13, 2013, 4,861,590 shares of the registrant’s
common stock were outstanding.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
EACO Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except for share and per
share information)
(Unaudited)
|
|
Three Months Ended
November 30,
|
|
|
|
2012
|
|
|
2011
|
|
Distribution sales
|
|
$
|
29,119
|
|
|
$
|
26,150
|
|
Cost of goods sold
|
|
|
21,064
|
|
|
|
18,878
|
|
Gross profit from distribution operations
|
|
|
8,055
|
|
|
|
7,272
|
|
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
|
141
|
|
|
|
311
|
|
Cost of rental operations
|
|
|
95
|
|
|
|
193
|
|
Gross profit from rental operations
|
|
|
46
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
7,260
|
|
|
|
6,530
|
|
Total operating expenses
|
|
|
7,260
|
|
|
|
6,530
|
|
Income from operations
|
|
|
841
|
|
|
|
860
|
|
|
|
|
|
|
|
|
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
Gain on sale of trading securities
|
|
|
33
|
|
|
|
—
|
|
Unrealized (loss) gain on trading securities
|
|
|
(55
|
)
|
|
|
193
|
|
Interest expense, net
|
|
|
(167
|
)
|
|
|
(181
|
)
|
Total non-operating (expense) income
|
|
|
(189
|
)
|
|
|
12
|
|
Net income before income taxes
|
|
|
652
|
|
|
|
872
|
|
Provision for income taxes
|
|
|
269
|
|
|
|
247
|
|
Net income
|
|
|
383
|
|
|
|
625
|
|
Cumulative preferred stock dividend
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
364
|
|
|
$
|
606
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
4,861,590
|
|
|
|
4,861,590
|
|
See accompanying notes to condensed consolidated
financial statements.
EACO Corporation and Subsidiaries
Consolidated Statements of Comprehensive
Income
(in thousands)
(unaudited)
|
|
Three Months Ended
November 30,
|
|
|
|
2012
|
|
|
2011
|
|
Net income
|
|
$
|
383
|
|
|
$
|
625
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
Foreign translation gain
|
|
|
100
|
|
|
|
224
|
|
Total comprehensive income
|
|
$
|
483
|
|
|
$
|
849
|
|
EACO Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share information)
|
|
November 30, 2012
|
|
|
August 31,
2012
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,139
|
|
|
$
|
2,568
|
|
Restricted cash, current
|
|
|
831
|
|
|
|
—
|
|
Trade accounts receivable, net
|
|
|
14,046
|
|
|
|
13,972
|
|
Inventory, net
|
|
|
13,074
|
|
|
|
12,189
|
|
Marketable securities, trading
|
|
|
398
|
|
|
|
197
|
|
Prepaid expenses and other current assets
|
|
|
472
|
|
|
|
464
|
|
Assets held for sale
|
|
|
2,012
|
|
|
|
2,016
|
|
Deferred tax asset, current
|
|
|
265
|
|
|
|
290
|
|
Total current assets
|
|
|
33,237
|
|
|
|
31,696
|
|
|
|
|
|
|
|
|
|
|
Non-current Assets:
|
|
|
|
|
|
|
|
|
Restricted cash, non-current
|
|
|
549
|
|
|
|
548
|
|
Real estate properties held for leasing, net
|
|
|
7,710
|
|
|
|
7,758
|
|
Equipment and leasehold improvements, net
|
|
|
1,332
|
|
|
|
1,106
|
|
Deferred tax asset
|
|
|
2,053
|
|
|
|
2,111
|
|
Other assets, principally deferred charges, net of accumulated amortization
|
|
|
788
|
|
|
|
1,110
|
|
Total assets
|
|
$
|
45,669
|
|
|
$
|
44,329
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
10,352
|
|
|
$
|
9,519
|
|
Accrued expenses and other current liabilities
|
|
|
1,850
|
|
|
|
2,482
|
|
Securities sold short, at fair value
|
|
|
831
|
|
|
|
—
|
|
Liabilities of discontinued operations – short-term
|
|
|
146
|
|
|
|
146
|
|
Liabilities of assets held for sale
|
|
|
1,163
|
|
|
|
1,113
|
|
Current portion of long-term debt
|
|
|
430
|
|
|
|
555
|
|
Total current liabilities
|
|
|
14,772
|
|
|
|
13,815
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities:
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations – long-term
|
|
|
2,528
|
|
|
|
2,567
|
|
Deposit liability
|
|
|
73
|
|
|
|
147
|
|
Long-term debt
|
|
|
12,939
|
|
|
|
12,907
|
|
Total liabilities
|
|
|
30,312
|
|
|
|
29,436
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, $0.01 par value per share; 10,000,000 shares authorized; 36,000 shares outstanding at November 30, 2012 and August 31, 2012 (liquidation value $900)
|
|
|
1
|
|
|
|
1
|
|
Common stock, $0.01 par value per share; 8,000,000 shares authorized; 4,861,590 shares outstanding at November 30, 2012 and August 31, 2012
|
|
|
49
|
|
|
|
49
|
|
Additional paid-in capital
|
|
|
12,378
|
|
|
|
12,378
|
|
Accumulated other comprehensive income
|
|
|
578
|
|
|
|
478
|
|
Retained earnings
|
|
|
2,351
|
|
|
|
1,987
|
|
Total shareholders’ equity
|
|
|
15,357
|
|
|
|
14,893
|
|
Total liabilities and shareholders’ equity
|
|
$
|
45,669
|
|
|
$
|
44,329
|
|
See accompanying notes to condensed consolidated
financial statements.
EACO Corporation and Subsidiaries
Condensed Consolidated Statements of Cash
Flows
(in thousands)
(Unaudited)
|
|
Three Months Ended November 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
383
|
|
|
$
|
625
|
|
Adjustments to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
180
|
|
|
|
188
|
|
Bad debt recovery
|
|
|
(18
|
)
|
|
|
—
|
|
Change in inventory reserve
|
|
|
(62
|
)
|
|
|
(15
|
)
|
Net gain on trading securities
|
|
|
(22
|
)
|
|
|
(193
|
)
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
|
(56
|
)
|
|
|
6
|
|
Inventory
|
|
|
(823
|
)
|
|
|
(1,291
|
)
|
Prepaid expenses and other assets
|
|
|
305
|
|
|
|
108
|
|
Deferred tax asset
|
|
|
83
|
|
|
|
152
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
|
142
|
|
|
|
298
|
|
Accrued expenses and other current liabilities
|
|
|
(582
|
)
|
|
|
(815
|
)
|
Deposit liability
|
|
|
(74
|
)
|
|
|
—
|
|
Liabilities of discontinued operations
|
|
|
(39
|
)
|
|
|
(27
|
)
|
Net cash used in operating activities
|
|
|
(583
|
)
|
|
|
(964
|
)
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(345
|
)
|
|
|
(155
|
)
|
Purchase of marketable securities, trading
|
|
|
(179
|
)
|
|
|
(86
|
)
|
Proceeds from securities sold short
|
|
|
831
|
|
|
|
—
|
|
Increase in restricted cash
|
|
|
(832
|
)
|
|
|
(4
|
)
|
Net cash used in investing activities
|
|
|
(525
|
)
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Net borrowings (payments) on revolving credit facility
|
|
|
150
|
|
|
|
(700
|
)
|
Bank overdraft
|
|
|
691
|
|
|
|
261
|
|
Preferred dividend
|
|
|
(19
|
)
|
|
|
—
|
|
Borrowing of long-term debt
|
|
|
—
|
|
|
|
1,600
|
|
Payments on long-term debt
|
|
|
(243
|
)
|
|
|
(192
|
)
|
Net cash provided by financing activities
|
|
|
579
|
|
|
|
969
|
|
Effect of foreign currency exchange rate changes on cash and cash equivalents
|
|
|
100
|
|
|
|
224
|
|
Net decrease in cash and cash equivalents
|
|
|
(429
|
)
|
|
|
(16
|
)
|
Cash and cash equivalents - beginning of period
|
|
|
2,568
|
|
|
|
1,368
|
|
Cash and cash equivalents - end of period
|
|
$
|
2,139
|
|
|
$
|
1,352
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
169
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$
|
196
|
|
|
$
|
415
|
|
See accompanying notes to condensed consolidated
financial statements.
EACO CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
November 30, 2012
Note 1. Organization and Basis of Presentation
Organization and Merger with Bisco Industries, Inc.
EACO Corporation (“EACO”) was incorporated in the
State of Florida in September 1985.
From the inception of EACO through June 2005, EACO’s business
consisted of operating restaurants in the State of Florida. On June 29, 2005, EACO sold all of its operating restaurants
(the “Asset Sale”) including sixteen restaurant businesses, premises, equipment and other assets used in restaurant
operations.
The only remaining activity of the restaurant operations relates to the workers’ compensation
claim liability, which is presented as liabilities of discontinued operations on the Company’s balance sheets. After the
Asset Sale and prior to the acquisition of Bisco (described below),
EACO’s operations principally
consisted of managing
five real estate properties held for leasing located in Florida and California.
On March 24, 2010, EACO completed the acquisition of Bisco Industries,
Inc. (“Bisco”), a company under the common control of EACO’s majority shareholder (Glen F. Ceiley). Bisco is
a distributor of electronic components and fasteners with 43 sales offices and six distribution centers located throughout the
United States and Canada. Bisco supplies parts used in the manufacture of products in a broad range of industries, including the
aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment and marine industries.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates
include allowance for doubtful accounts receivable, slow moving and obsolete inventory reserves, recoverability of the carrying
value and estimated useful lives of long-lived assets, workers’ compensation liability and the valuation allowance against
deferred tax assets. Actual results could differ from those estimates.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company in conformity with GAAP for interim financial information and the rules and regulations
of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments
considered necessary in order to make the financial statements not misleading have been included.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations
for presentation of interim financial information. Therefore, the condensed interim financial statements should be read in conjunction
with the Company’s Annual Report on Form 10-K for the year ended August 31, 2012. The condensed consolidated balance
sheet as of August 31, 2012 and related disclosures were derived from the audited consolidated financial statements as of August 31,
2012.
Operating results for the three month period ended November 30, 2012 are not necessarily indicative
of the results that may be expected for future quarterly periods or the entire fiscal year.
Reclassification
Certain prior year amounts have been reclassified to conform
to the current year’s presentation.
Principles of Consolidation
The consolidated financial statements include the accounts of
EACO Corporation, its wholly-owned subsidiary Bisco Industries, Inc., and Bisco’s wholly-owned Canadian subsidiary, Bisco
Industries Limited (which are collectively referred to herein as the “Company”, “we”, “us”
and “our”). All significant intercompany transactions and balances have been eliminated in consolidation.
Note 2. Significant Accounting Policies
Restricted Cash
The State of Florida Division of Workers’
Compensation (the “Division”) requires self-insured companies to pledge collateral in favor of the Division in an amount
sufficient to cover the projected outstanding liability. In compliance with this requirement, the Company pledged two irrevocable
letters of credit totaling $2,713,000 as of November 30, 2012 and $2,855,000 as of August 31, 2012. These letters were secured
by certificates of deposits totaling $549,000 and $548,000 at November 30, 2012 and August 31, 2012, respectively, and the Company’s
two real estate properties in Sylmar, California (the “Sylmar Properties”).
The Company also has cash of
$831,000 at November 30, 2012 on deposit with a securities brokerage firm, which relates to the liability for short sales of
trading securities which is classified as restricted during the period the related short position is open. There was
no such restricted cash at August 31, 2012.
Trade Accounts Receivable
Trade accounts receivable are carried at original invoice amount,
less an estimate for doubtful accounts. The allowance for doubtful accounts was $217,000 and $273,000 at November 30, 2012 and
August 31, 2012, respectively.
Inventories
Inventories consist of finished goods, primarily electronic
fasteners and components stated at the lower of cost or estimated market value. Cost is determined using the average cost method.
Inventories are reported net of a reserve for slow moving or obsolete items of $910,000 and $972,000 at November 30, 2012 and August
31, 2012, respectively. The reserve is based upon management’s review of inventories on-hand over their expected future utilization
and length of time held by the Company.
Securities Sold Short
Securities sold short represent transactions
in which the Company sells a security it does not own and is obligated to deliver such security at a future date. The short sale
is recorded as a liability, and unrealized appreciation or depreciation is recorded for the difference between the proceeds received
and the fair value of the open short position. The Company records a realized gain or loss when the short position is closed. By
entering into short sales, the Company bears the market risk of an unfavorable increase in the price of the security sold short
in excess of the proceeds received. Short sales are separately presented as a liability in the statement of financial condition.
The Company has established a margin account
with the brokers lending the securities sold short. While the short sale is outstanding, the short sale proceeds may be restricted
to the extent of the fair value of the short position.
Revenue Recognition
For the Company’s distribution operations, the Company’s
shipping terms are FOB shipping point. Therefore, the Company generally recognizes revenue at the time of product shipment. Revenue
is considered to be realized or realizable and earned when there is persuasive evidence of a sales arrangement in the form of an
executed contract or purchase order, the product has been shipped (and installed when applicable), the sales price is fixed or
determinable, and collectability is reasonably assured.
The Company leases its real estate properties to tenants under
operating leases with terms generally exceeding one year. Some of these leases contain scheduled rent increases. We
record rent revenue for leases which contain scheduled rent increases on a straight-line basis over the term of the lease.
Earnings Per Common Share
Basic earnings per common share for
the three month periods ended November 30, 2012 and 2011 were computed based on the weighted average number of common shares outstanding
during each respective period. Diluted earnings per common share for those periods have been computed based on the weighted average
number of common shares outstanding, giving effect to all dilutive potential common shares that were outstanding during the respective
periods. Potential common shares represent 40,000 shares of common stock issuable upon conversion of 36,000 shares of preferred
stock (See Note 4).
Foreign Currency Translation and Transactions
Assets and liabilities recorded in functional currencies other
than the U.S. dollar (i.e. Canadian dollars for the Company’s Canadian subsidiary) are translated into U.S. dollars at the
quarter-end rate of exchange. Revenue and expenses are translated at the weighted-average exchange rates for the three months ended
November 30, 2012 and 2011. The resulting translation adjustments are charged or credited directly to accumulated other comprehensive
income. The average exchange rate for the three months ended November 30, 2012 and 2011 was $1.01 and $1.02 Canadian dollars for
one U.S. dollar, respectively.
Concentrations
Net sales to customers outside the United States were approximately
8% and 4% for the three months ended November 30, 2012 and 2011, respectively, and related accounts receivable were approximately
5% and 7% at November 30, 2012 and August 31, 2012, respectively.
No single entity accounted for more than 10% of revenues for
the three months ended November 30, 2012 or 2011.
Segment Reporting
Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision
making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief
Executive Officer. Management has evaluated its approach for making operating decisions and assessing the performance of our business
and determined that the Company has two reportable segments: Distribution Operations and Rental Real Estate Operations (See Note
6).
Note 3. Debt
The Company has a $10,000,000 line of credit agreement with
Community Bank. Borrowings under this agreement bear interest at either the 30, 60, or 90 day London Inter-Bank Offered Rate (“LIBOR”)
(0.31% and 0.44% for the 90 day LIBOR at November 30, 2012 and August 31, 2012, respectively) plus 1.75% and/or the bank’s
reference rate (3.25% at November 31, 2012 and August 31, 2012). Borrowings are secured by substantially all assets of Bisco and
are guaranteed by the Company’s Chief Executive Officer, Chairman of the Board and majority shareholder, Glen F. Ceiley.
The agreement expires on March 1, 2014.
The amounts outstanding under this line of credit as of November
30, 2012 and August 31, 2012 were $7,600,000 and $7,450,000, respectively. Availability under the line of credit was $2,400,000
and $2,550,000 at November 30, 2012 and August 31, 2012, respectively.
The line of credit agreement contains nonfinancial and financial
covenants, including the maintenance of certain financial ratios. As of November 30, 2012 and August 31, 2012, the Company was
in compliance with all covenants.
On March 10, 2011, the Company entered into a $1,000,000 term
loan agreement with Community Bank. The proceeds of the loan were used to pay down the Company’s line of credit. The term
loan is for two years and bears interest at the bank’s reference rate (3.25% at November 30, 2012 and August 31, 2012). As
of November 30, 2012, the outstanding balance of the term loan was $171,000.
In October 2002, the Company entered into a loan agreement with
GE Capital for one restaurant property owned by the Company in Orange Park, Florida (the “Orange Park Property”). The
loan requires monthly principal and interest payments totaling $10,400. Interest is at the thirty-day LIBOR rate plus 3.75% (minimum
interest rate of 7.34%). The loan is due December 2016. As of November 30, 2012, the outstanding balance due under the Company’s
loan with GE Capital was $440,000.
On November 9, 2007, the Company completed the refinance of
the Sylmar Properties in exchange for a note in the amount of $5,875,000 from Community Bank. The loan requires monthly
principal and interest payments totaling $39,658. Interest is fixed at 6%. As of November 30, 2012, the outstanding balance due
on the loan to Community Bank, collateralized by the Sylmar Property, was $5,158,000.
During 2008, the Company financed the restaurant property in
Brooksville, Florida (the “Brooksville Property”) with Zion’s Bank receiving cash of approximately $1,200,000
and a mortgage for that amount. The mortgage is for 20 years at an interest rate of 6.65% and requires monthly principal and interest
payments totaling $8,402. The outstanding balance of the loan at November 30, 2012 was $1,163,000. Such was reclassified as liabilities
of assets held for sale on the accompanying consolidated balance sheets as of November 30, 2012 and August 31, 2012.
Note 4. Earnings per Share
The following is a reconciliation of the numerators and denominators
of the basic and diluted computations for net income per share attributable to common shareholders:
|
|
For the Three Months
Ended November 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
Net income
|
|
$
|
383
|
|
|
$
|
625
|
|
Less: accrued preferred stock dividends
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Net income available for common shareholders
|
|
$
|
364
|
|
|
$
|
606
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – basic and diluted
|
|
$
|
0.08
|
|
|
$
|
0.12
|
|
For the three months ended November 30, 2012 and 2011, 40,000
potential common shares have been excluded from the computation of diluted earnings per share because their effect would have been
anti-dilutive.
Note 5. Related Party Transactions
The Company leases three buildings under operating lease agreements
from its majority stockholder. During each of the three months ended November 30, 2012 and 2011, the Company incurred approximately
$128,000 of expense related to these leases.
Note 6. Segment Reporting
The Company operates in two reportable business segments: Distribution
Operations and Rental Real Estate Operations. The Distribution Operations are organized and operated as Bisco Industries, Inc.,
a wholly-owned subsidiary of the Company. Management evaluates performance based on gross margins, selling, general and administrative
expenses and net income. Management also reviews the returns on the rental real estate properties, inventory, accounts receivable
and marketable securities (segment assets).
|
|
For the Three Months Ended
November 30, 2012
|
|
|
For the Three Months Ended
November 30, 2011
|
|
|
|
Rental
Real
Estate
|
|
|
Distribution
|
|
|
Total
|
|
|
Rental
Real Estate
|
|
|
Distribution
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
141
|
|
|
$
|
29,119
|
|
|
$
|
29,260
|
|
|
$
|
311
|
|
|
$
|
26,150
|
|
|
$
|
26,461
|
|
Cost of revenues
|
|
|
95
|
|
|
|
21,064
|
|
|
|
21,159
|
|
|
|
193
|
|
|
|
18,878
|
|
|
|
19,071
|
|
Gross profit
|
|
|
46
|
|
|
|
8,055
|
|
|
|
8,101
|
|
|
|
118
|
|
|
|
7,272
|
|
|
|
7,390
|
|
Selling, general and administrative expenses
|
|
|
61
|
|
|
|
7,199
|
|
|
|
7,260
|
|
|
|
92
|
|
|
|
6,438
|
|
|
|
6,530
|
|
Note 7. Subsequent Events
On January 10, 2013, the Company entered into an agreement to
sell the Deland Property for $1,100,000. The Company will receive $750,000 in cash and will carry a 2 year note at 7% interest
payable in 24 installments on the remaining $350,000. We anticipate that this transaction will close on or before January
25, 2013. As such, the associated land, building and improvements were reclassified as assets held for sale on the accompanying
consolidated balance sheets of November 30, 2012 and August 31, 2012. The Company did not carry any debt related to this
property at either November 30, 2012 or August 31, 2012.
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Cautionary Statements
This Quarterly Report on Form 10-Q contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Such statements can be identified by the use of terminology such as “anticipate,”
“believe,” “could,” “estimate,” “expect,” “forecast,” “intend,”
“may,” “plan,” “possible,” “project,” “should,” “will”
and similar words or expressions. These forward-looking statements include but are not limited to statements regarding our anticipated
revenue, expenses, profits and capital needs. These statements are based on our current expectations, estimates and projections
and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those projected
or estimated, including but not limited to adverse economic conditions, competitive pressures, unexpected costs and losses from
operations or investments, increases in general and administrative costs, our ability to maintain an effective system of internal
controls over financial reporting, potential losses from trading in securities, our ability to retain key personnel and relationships
with suppliers, the willingness of GE Capital, Community Bank or other lenders to extend financing commitments and the availability
of capital resources, repairs or similar expenditures required for existing properties due to weather or acts of God, and the other
risks set forth in “Risk Factors” in Part II, Item 1A of this report or identified from time to time in our other filings
with the SEC and in public announcements. You should not place undue reliance on these forward-looking statements that speak only
as of the date hereof. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, including
to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of
forward looking statements in this Quarterly Report should not be regarded as a representation by management or any other person
that the objectives or plans of the Company will be achieved.
Overview
EACO Corporation was organized
under the laws of the State of Florida in September 1985. From the inception of EACO through June 2005, EACO’s business consisted
of operating restaurants in the State of Florida. On June 29, 2005, EACO sold all of its operating restaurants and other assets
used in the restaurant operations. The restaurant operations are presented as discontinued operations in the accompanying condensed
consolidated financial statements. Since June 2005 until the acquisition of Bisco in March 2010, our operations have principally
consisted of managing five rental properties held for leasing in Florida and California. As a result of our March 2010 acquisition
of Bisco, we currently operate in two reportable segments: the Rental Real Estate Operations segment, which consists of managing
the five rental properties in Florida and California, and the Distribution Operations segment, which consists of the business of
Bisco and is alternatively referred to in this report as the Bisco segment.
Revenues derived
from the Bisco segment represented approximately 99% of the total revenues for the three months ended November 30, 2012 and the
year ended August 31, 2012 and is expected to continue to represent the substantial majority of the Company’s total revenues
for the foreseeable future.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. These estimates include allowance for doubtful accounts receivable, slow moving and obsolete
inventory reserves, recoverability of the carrying value and estimated useful lives of long-lived assets, workers’ compensation
liability and the valuation allowance against deferred tax assets. Actual results could differ from those estimates.
For additional description of the Company’s critical accounting policies, see Management’s Discussion and Analysis
of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended August 31,
2012 as filed with the SEC on November 26, 2012.
Long-Lived Assets
Long-lived assets (principally real estate, equipment and leasehold
improvements) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. For purposes of the impairment review, real estate properties are reviewed on an asset-by-asset
basis. Recoverability of real estate property assets is measured by a comparison of the carrying amount of each operating
property and related assets to future net cash flows expected to be generated by such assets. For measuring recoverability
of distribution operations assets, long-lived assets are grouped with other assets to the lowest level for which identifiable cash
flows are largely independent of the cash flows of other groups of assets and liabilities. If assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their estimated fair
values.
Revenue Recognition
For the Company’s distribution operations, the Company’s
shipping terms are FOB shipping point. Therefore, the Company generally recognizes revenue at the time of product shipment. Revenue
is considered to be realized or realizable and earned when there is persuasive evidence of a sales arrangement in the form of an
executed contract or purchase order, the product has been shipped (and installed when applicable), the sales price is fixed or
determinable, and collectability is reasonably assured.
The Company leases its real estate properties to tenants under
operating leases with terms generally exceeding one year. Some of these leases contain scheduled rent increases. We
record rent revenue for leases which contain scheduled rent increases on a straight-line basis over the term of the lease.
Liabilities of Discontinued Operations
When the Company was active in the
restaurant business, the Company self-insured losses for workers’ compensation claims up to certain limits. The Company exited
the restaurant business in 2005. The liability for workers’ compensation represents an estimate of the present value of the
ultimate cost of uninsured losses which are unpaid as of the balance sheet dates. This liability is presented as liabilities of
discontinued operations in the accompanying condensed consolidated balance sheets. The estimate is continually reviewed and adjustments
to the Company’s estimated liability, if any, are reflected in discontinued operations. On a periodic basis, the Company
obtains an actuarial report which estimates its overall exposure based on historical claims and an evaluation of future claims.
An actuarial evaluation was last obtained by the Company as of August 31, 2012. No changes to the estimated liability were
recorded during the three months ended November 30, 2012 or 2011.
Deferred Tax Assets
The Company’s policy for recording a valuation allowance
against deferred tax assets is considered critical. A valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize their benefit or when future deductibility is uncertain.
In accordance with Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes,” the
Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In
making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance. ASC 740
further states that forming a conclusion that a valuation allowance is not required is difficult when there is negative evidence
such as cumulative losses and/or significant decreases in operations. As a result of the Company’s disposal, in
June 2005, of significant business operations, management concluded that a valuation allowance should be recorded against certain
federal and state tax credits. The utilization of these credits requires sufficient taxable income after consideration of net operating
loss utilization.
Results of Operations
Comparison of the Three Months Ended
November 30, 2012 and 2011 (unaudited)
Distribution Sales and Gross Profit
($ in thousands)
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
November 30, 2012
|
|
|
November 30, 2011
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution sales
|
|
$
|
29,119
|
|
|
$
|
26,150
|
|
|
$
|
2,969
|
|
|
|
11.4
|
%
|
Cost of goods sold
|
|
|
21,064
|
|
|
|
18,878
|
|
|
|
(2,186
|
)
|
|
|
(11.6
|
)
|
Gross profit
|
|
$
|
8,055
|
|
|
$
|
7,272
|
|
|
$
|
783
|
|
|
|
|
|
Gross profit %
|
|
|
27.7
|
%
|
|
|
27.8
|
%
|
|
|
|
|
|
|
(0.1
|
)%
|
Distribution sales related to the Distribution
Operations segment consist primarily of sales of component parts and fasteners, but also include, to a lesser extent, kitting charges
and special order fees, and freight charges by the Company to its customers. The increase in distribution sales in the three months
ended November 30, 2012 (“Q1 2013”) as compared to the prior year period was largely due to increased unit sales, resulting
from an increase in sales headcount of 10% in the three months ended November 30, 2012 as compared to the three months ended November
30, 2011 (“Q1 2012”).
Additionally, the Company’s sales
force is divided into Sales Focus Teams (“SFTs”). These teams generally focus the majority of their time on specific
industries, product lines and/or geographic regions and are designed to assist the Company in increasing market share in specific
areas and, as a result, increase sales. The Company’s SFTs were supported by an increase in salespeople, with the Company
growing from 272 salespeople at November 30, 2011 to 298 salespeople at November 30, 2012, a 10% increase.
Rental Income and Gross Profit
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
November 30, 2012
|
|
|
November 30, 2011
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
$
|
141
|
|
|
$
|
311
|
|
|
$
|
(170
|
)
|
|
|
(54.7
|
)%
|
Cost of rental operations
|
|
|
95
|
|
|
|
193
|
|
|
|
98
|
|
|
|
50.8
|
|
Gross profit
|
|
$
|
46
|
|
|
$
|
118
|
|
|
$
|
(72
|
)
|
|
|
|
|
Gross profit %
|
|
|
32.6
|
%
|
|
|
37.9
|
%
|
|
|
|
|
|
|
(5.3
|
)%
|
During Q1 2013 the tenant leasing one
of the Company’s Sylmar Properties exercised an early exit clause of their lease and vacated the premises. On December 1,
2012, the Company signed a replacement tenant in the property. The replacement tenant is at a lower monthly rental rate than the
previous tenant.
Selling, General and Administrative
Expenses ($ in thousands)
|
|
Three Months Ended
|
|
|
|
|
|
%
|
|
|
|
November 30, 2012
|
|
|
November 30, 2011
|
|
|
$ Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
7,260
|
|
|
$
|
6,530
|
|
|
$
|
730
|
|
|
|
11.2
|
%
|
Percent of distribution sales
|
|
|
24.9
|
%
|
|
|
25.0
|
%
|
|
|
|
|
|
|
0.1
|
%
|
Selling, general and administrative
expense (“SG&A”) consists primarily of payroll and related expenses for the Company’s sales and administrative
staff, professional fees including accounting, legal and technology costs and expenses, and sales and marketing costs for the Distribution
Operations. SG&A in Q1 2013 increased from Q1 2012 largely due to increased salaries and salary related expenses as the Company
increased sales headcount by 26 employees, or 10%, in Q1 2013 as compared to Q1 2012.
Non-operating Income (Expense)
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
November 30, 2012
|
|
|
November 30, 2011
|
|
|
Change
|
|
|
Change
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of trading securities
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
|
100.0
|
%
|
Unrealized (loss) gain on trading securities
|
|
|
(55
|
)
|
|
|
193
|
|
|
|
(248
|
)
|
|
|
(128.5
|
)
|
Interest expense, net
|
|
|
(167
|
)
|
|
|
(181
|
)
|
|
|
14
|
|
|
|
(7.7
|
)
|
Other (expense) income, net
|
|
$
|
(189
|
)
|
|
$
|
12
|
|
|
$
|
(201
|
)
|
|
|
|
|
Other (expense) income, net as a percent of distribution sales
|
|
|
0.6
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
(0.6
|
)%
|
Other income (expense), net primarily
consists of income or losses on investments in short-term marketable equity securities of publicly-held corporations and interest
related to the Company’s line of credit and other long-term debt. The Company’s investment strategy consists of both
long and short positions, as well as utilizing options designed to improve returns. During Q1 2013, the Company recognized $22,000
in net realized and unrealized loss. The Company experienced net realized and unrealized gains of $193,000 during Q1 2012. Losses
in the current period were due to decreases in the value of the Company’s holdings, primarily in its short positions. Gains
in the prior year quarter were
primarily due to an increase in the value of several of the positions
the Company was holding at that time.
Income Tax Provision ($ in thousands)
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
November 30, 2012
|
|
|
November 30, 2011
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
269
|
|
|
$
|
247
|
|
|
$
|
22
|
|
|
|
8.9
|
%
|
Percent of pre-tax net income
|
|
|
41.3
|
%
|
|
|
28.3
|
%
|
|
|
|
|
|
|
13.0
|
%
|
The provision for income taxes increased
by $22,000 in the three month period ended November 30, 2012 over the prior year period. This was a result of higher estimated
taxable income in the current quarter as compared to the prior year period and a decrease in the valuation allowance recognized
in the current period as compared to the prior year period.
Liquidity and Capital Resources
The Company has a $10,000,000 line of credit agreement with
Community Bank. Borrowings under this agreement bear interest at either the 30, 60, or 90 day London Inter-Bank Offered Rate (“LIBOR”)
(0.31% and 0.44% for the 90 day LIBOR at November 30, 2012 and August 31, 2012, respectively) plus 1.75% and/or the bank’s
reference rate (3.25% at November 30, 2012 and August 31, 2012). Borrowings are secured by substantially all assets of Bisco and
are guaranteed by the Company’s Chief Executive Officer, Chairman of the Board and majority shareholder, Glen F. Ceiley.
The agreement continues through March 1, 2014.
The amount outstanding under this line of credit as of November
30, 2012 and August 31, 2012 was $7,600,000 and $7,450,000, respectively. Availability under the line of credit was $2,400,000
and $2,550,000 at November 30, 2012 and August 31, 2012, respectively.
The line of credit agreement contains nonfinancial and financial
covenants, including the maintenance of certain financial ratios. As of November 30, 2012 and August 31, 2012, the Company was
in compliance with all covenants.
On March 10, 2011, the Company entered into a $1,000,000 term
loan agreement with Community Bank. The proceeds of the loan were used to pay down the Company’s line of credit. The term
loan is for two years and bears interest at the bank’s reference rate (3.25% at November 30, 2012 and August 31, 2012). As
of November 30, 2012, the outstanding balance of the term loan was $171,000.
In October 2002, the Company entered into a loan agreement with
GE Capital for one restaurant property owned by the Company in Orange Park, Florida (the “Orange Park Property”). The
loan requires monthly principal and interest payments totaling $10,400. Interest is at the thirty-day LIBOR rate plus 3.75% (minimum
interest rate of 7.34%). The loan is due December 2016. As of November 30, 2012, the outstanding balance due under the Company’s
loan with GE Capital was $440,000.
On November 9, 2007, the Company completed the refinance of
the Sylmar Property in exchange for a note in the amount of $5,875,000 from Community Bank. The loan requires monthly
principal and interest payments totaling $39,658. Interest is fixed at 6%. As of November 30, 2012, the outstanding balance due
on the loan to Community Bank, collateralized by the Sylmar Properties, was $5,158,000.
During 2008, the Company financed the restaurant property in
Brooksville, Florida (the “Brooksville Property”) with Zion’s Bank receiving cash of approximately $1,200,000
and a mortgage for that amount. The mortgage is for 20 years at an interest rate of 6.65% and requires monthly principal and interest
payments totaling $8,402. The outstanding balance of the loan at November 30, 2012 was $1,163,000. Such was reclassified as liabilities
of assets held for sale on the accompanying consolidated balance sheets as of November 30, 2012 and August 31, 2012.
The Company’s Rental Real Estate Operations are funded
primarily by rents received from the tenants of its five rental properties. Any cash requirements in excess of the rental income
required by the Rental Real Estate Operations have historically been funded by borrowings from Bisco. These borrowings and related
interest have been eliminated in the accompanying condensed consolidated financial statements.
Cash Flows from Operating Activities
Cash used in operating activities was
$583,000 for the three months ended November 30, 2012 as compared with $964,000 for the three months ended November 30, 2011. The
current period use of cash was mainly due to an increase in inventory over the three months and a decrease in accrued expenses
due to payment of employee year-end bonuses in the current quarter. This was offset by net income and a decrease in prepaid expenses.
The prior year use was also due to an increase in inventory and decrease in accrued expenses, although those changes were higher
in the prior year period than in the current. These amounts were offset by net income in the first quarter of fiscal 2012.
Cash Flows from Investing Activities
Cash used in investing activities was
$525,000 for the three months ended November 30, 2012 as compared with $245,000 for the three months ended November 30, 2011. The
current period increase was due primarily to increased purchases of equipment by the Company in Q1 2013 as compared to Q1 2012.
The change in the restricted cash for the current year is due to the increase in restricted cash related to the Company’s
short positions in the equity markets. This amount was offset by the increase in the Company’s short positions resulting
in no net effect on investing cash flows.
Cash Flows from Financing Activities
Cash provided by financing activities
for the three months ended November 30, 2012 was $579,000 as compared with $969,000 for the three months ended November 30, 2011.
Cash provided by financing activities consisted mainly of an increase in the Company’s bank overdraft outstanding at November
30, 2012. The cash provided by financing activities for the three months ended November 30, 2011 was due mainly to the Company’s
borrowing of long-term debt.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements
that are reasonably likely to have a material current or future effect on the financial position, revenues, results of operations,
liquidity or capital expenditures.
Contractual Financial Obligations
In addition to using cash flow from operations,
the Company finances its operations through borrowings or the issuance of debt. These financial obligations are recorded
in accordance with accounting rules applicable to the underlying transactions, with the result that amounts owed under debt agreements
and capital leases are recorded as liabilities on the balance sheet while lease obligations recorded as operating leases are disclosed
in the Notes to the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and
Results of Operations in the Company’s Annual Report on Form 10-K for the year ended August 31, 2012 as filed with the SEC
on November 26, 2012.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
The Company is a smaller reporting company
as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures.
As
required by Rule 13a-15(e) and 15d-15(e) under 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 Chief Executive Officer, who
also serves as the Company’s principal financial officer. Based upon that evaluation, the Company’s Chief
Executive Officer has concluded that the Company’s disclosure controls and procedures were effective as of the end of the
period covered in this report.
Changes in internal control over financial reporting.
There
have been no changes in internal control over financial reporting during the fiscal quarter covered by this report that have materially
affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be subject to
legal proceedings and claims which arise in the normal course of our business. Any such matters and disputes could be costly and
time consuming, subject us to damages or equitable remedies, and divert our management and key personnel from our business operations.
We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually
or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial position or cash
flows.
Item 1A. Risk Factors
Our business is subject to a number of risks, some of which
are discussed below. Other risks are presented elsewhere in this report and in our other filings with the SEC, including our Annual
Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K . If any of the risks actually occur, our business, financial
condition, or results of operations could be seriously harmed. In that event, the market price for shares of our common stock may
decline, and you could lose all or part of your investment.
Changes and uncertainties in the economy have harmed and
could continue to harm our operating results.
As a result of the economic downturn and continuing economic
uncertainties, our operating results, and the economic strength of our customers and suppliers, are increasingly difficult to predict.
Our Distribution Operations sales are affected by many factors, including, among others, general economic conditions, interest
rates, inflation, liquidity in the credit markets, unemployment trends, geopolitical events, and other factors. Although we sell
our products to customers in a broad range of industries, the significant weakening of economic conditions on a global scale has
caused some of our customers to experience a slowdown that has had adverse effects on our sales and operating results. Changes
and uncertainties in the economy also increase the risk of uncollectible accounts receivable. The pricing we receive from suppliers
may also be impacted by general economic conditions. Continued and future changes and uncertainties in the economic climate in
the United States and elsewhere could have a similar negative impact on the rate and amounts of purchases by our current and potential
customers, create price inflation for our products, or otherwise have a negative impact on our expenses, gross margins and revenues,
and could hinder our growth.
If we fail to maintain an effective system of internal controls
over financial reporting or experience additional material weaknesses in our system of internal controls, we may not be able to
report our financial results accurately or timely or detect fraud, which could have a material adverse effect on the market price
of our common stock and our business.
We have from time to time had material weaknesses in our internal
controls over financial reporting due to deficiencies in the process related to the preparation of our financial statements, segregation
of duties, sufficient control in the area of financial reporting oversight and review, and appropriate personnel to ensure the
complete and proper application of GAAP as it relates to certain routine accounting transactions. Although we believe we have addressed
these material weaknesses, we may experience material weaknesses or significant deficiencies in the future and may fail to maintain
a system of internal control over financial reporting that complies with the reporting requirements applicable to public companies
in the United States. Our failure to address any deficiencies or weaknesses in our internal control over financial reporting or
to properly maintain an effective system of internal control over financial reporting could impact our ability to prevent fraud
or to issue our financial statements in a timely manner that presents fairly, in accordance with GAAP, our financial condition
and results of operations. The existence of any such deficiencies and/or weaknesses, even if cured, may also lead to the loss of
investor confidence in the reliability of our financial statements, could harm our business and negatively impact the trading price
of our common stock. Such deficiencies or material weaknesses may also subject us to lawsuits, investigations and other penalties.
We have incurred significant losses in the past from trading
in securities, and we may incur such losses in the future, which may also cause us to be in violation of covenants under our loan
agreements.
Bisco has historically funded its operations from cash generated
from its operations and/or by trading in marketable domestic equity securities. Bisco’s investment strategy includes taking
both long and short positions, as well as utilizing options to maximize return. This strategy can lead, and has led, to significant
losses based on market conditions and trends. We may incur losses in future periods from such trading activities, which could materially
and adversely affect our liquidity and financial condition.
In addition, unanticipated losses from our trading activities
may cause Bisco to be in violation of certain covenants under its line of credit and term loan agreements with Community Bank.
The agreements are secured by substantially all of Bisco’s assets and are guaranteed by Mr. Ceiley, our Chairman, CEO and
majority shareholder. The loan agreements contain covenants which require that, on a quarterly basis, Bisco’s losses from
trading in securities not exceed its pre-tax operating income. We cannot assure you that unanticipated losses from our trading
activities will not occur in the future, and any such losses could cause us to violate our covenants in the future or that the
bank will grant a waiver for any such default or that it will not exercise its remedies, which could include the acceleration of
the obligation’s maturity date and foreclosure on Bisco’s assets, with respect to any such noncompliance, which could
have a material adverse effect on our business and operations.
We rely heavily on our internal information systems, which,
if not properly functioning, could materially and adversely affect our business.
Our information systems have been in place for many years, and
are subject to system failures as well as problems caused by human error, which could have a material adverse effect on our business.
Many of our systems consist of a number of legacy or internally developed applications, which can be more difficult to upgrade
to commercially available software. It may be time consuming and costly for us to retrieve data that is necessary for management
to evaluate our systems of control and information flow. In the future, management may decide to convert our information systems
to a single enterprise solution. Such a conversion, while it would enhance the accessibility and reliability of our data, could
be expensive and would not be without risk of data loss, delay or business interruption. Maintaining and operating these systems
requires continuous investments. Failure of any of these internal information systems or material difficulties in upgrading these
information systems could have material adverse effects on our business and our timely compliance with our reporting obligations.
We may not be able to attract and retain key personnel.
Our future performance will depend to a significant extent upon
the efforts and abilities of certain key management and other personnel, including Glen Ceiley, our Chairman of the Board and Chief
Executive Officer, as well as other executive officers and senior management of Bisco. The loss of service of one or more of our
key management members could have a material adverse effect on our business.
We do not have long-term supply agreements or guaranteed
price or delivery arrangements with the majority of our suppliers.
In most cases, we have no guaranteed price or delivery arrangements
with our suppliers. Consequently we may experience inventory shortages on certain products. Furthermore, our industry occasionally
experiences significant product supply shortages and customer order backlogs due to the inability of certain manufacturers to supply
products as needed. We cannot assure you that suppliers will maintain an adequate supply of products to fulfill our orders on a
timely basis, at a recoverable cost, or at all, or that we will be able to obtain particular products on favorable terms or at
all. Additionally, we cannot assure you that product lines currently offered by suppliers will continue to be available to us.
A decline in the supply or continued availability of the products of our suppliers, or a significant increase in the price of those
products, could reduce our sales and negatively affect our operating results.
Our supply agreements are generally terminable at the suppliers’
discretion.
Substantially all of the agreements we have with our suppliers,
including our authorized distributor agreements, are terminable with little or no notice and without any penalty. Suppliers that
currently sell their products through us could decide to sell, or increase their sales of, their products directly or through other
distributors or channels. Any termination, interruption or adverse modification of our relationship with a key supplier or a significant
number of other suppliers would likely adversely affect our operating income, cash flow and future prospects.
The competitive pressures we face could have a material adverse
effect on our business.
The market for our products and services is very competitive.
we compete for customers with other distributors, as well as with many of our suppliers. A failure to maintain and enhance our
competitive position could adversely affect our business and prospects. Furthermore, our efforts to compete in the marketplace
could cause deterioration of gross profit margins and, thus, overall profitability. Some of our competitors may have greater financial,
personnel, capacity and other resources or a more extensive customer base than we do.
Our strategy of expanding into new geographic areas is risky
and could be costly.
One of our primary growth strategies for our Distribution Operations
segment is to grow our business through the opening of sales offices in new geographic markets. Based on our analysis of demographics
in the United States, Canada and Mexico, we currently estimate there is potential market opportunity in North America to support
additional sales offices. We cannot guarantee that our estimates are accurate or that we will open enough offices to capitalize
on the full market opportunity or that any new offices will be successful. In addition, a particular local market’s ability
to support a sales office may change because of a change due to competition, or local economic conditions.
We may be unable to meet our goals regarding new office openings.
Our growth, in part, is primarily dependent on our ability to
attract new customers. Historically, the most effective way to attract new customers has been opening new sales offices. Our current
business strategy focuses on opening a specified number of new sales offices each year, and quickly growing each new sales office.
Given the current economic slowdown, we may not be able to open or grow new offices at our projected rates or hire the qualified
sales personnel necessary to make such new offices successful. Failure to do so could negatively impact our long-term growth and
market share.
Opening sales offices in new markets presents increased risks
that may prevent us from being profitable in these new locations, and/or may adversely affect our operating results.
Our new sales offices do not typically achieve operating results
comparable to our existing offices until after several years of operation. The added expenses relating to payroll, occupancy, and
transportation costs can impact our ability to leverage earnings. In addition, offices in new geographic areas face additional
challenges to achieving profitability. In new markets, we have less familiarity with local customer preferences and customers in
these markets are less familiar with our name and capabilities. Entry into new markets may also bring us into competition with
new, unfamiliar competitors. These challenges associated with opening new offices in new markets may have an adverse effect on
our business and operating results.
We may not be able to identify new products and products
lines, or obtain new product on favorable terms and prices or at all.
Our success depends in part on our ability to develop product
expertise and identify future products and product lines that complement existing products and product lines and that respond to
our customers’ needs. We may not be able to compete effectively unless our product selection keeps up with trends in the
markets in which we compete.
Our ability to successfully attract and retain qualified
sales personnel is uncertain.
Our success depends in large part on our ability to attract,
motivate, and retain a sufficient number of qualified sales employees, who understand and appreciate our strategy and culture and
are able to adequately represent us to our customers. Qualified individuals of the requisite caliber and number needed to fill
these positions may be in short supply in some areas, and the turnover rate in the industry is high. If we are unable to hire and
retain personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our
culture and product knowledge, our sales could be materially adversely affected. Additionally, competition for qualified employees
could require us to pay higher wages to attract a sufficient number of employees. An inability to recruit and retain a sufficient
number of qualified individuals in the future may also delay the planned openings of new offices. Any such delays, material increases
in existing employee turnover rates, or increases in labor costs, could have a material adverse effect on our business, financial
condition or operating results.
We generally do not have long-term sales contracts with our
customers.
Most of our sales are made on a purchase order basis, rather
than through long-term sales contracts. A variety of conditions, both specific to each customer and generally affecting each customer’s
industry, may cause customers to reduce, cancel or delay orders that were either previously made or anticipated, go bankrupt or
fail, or default on their payments. Significant or numerous cancellations, reductions, delays in orders by customers, losses of
customers, and/or customer defaults on payment could materially adversely affect our business.
Increases in the costs of energy, shipping and raw materials
used in our products could impact our cost of goods and distribution and occupancy expenses, which would result in lower operating
margins.
Costs of raw materials used in our products and energy costs
have been rising during the last several years, which has resulted in increased production costs for our suppliers. These suppliers
typically look to pass their increased costs along to us through price increases. The shipping costs for our distribution operation
have risen as well. While we typically try to pass increased supplier prices and shipping costs through to our customers or to
modify our activities to mitigate the impact, we may not be successful. Failure to fully pass these increased prices and costs
through to our customers or to modify our activities to mitigate the impact would have an adverse effect on our operating margins.
The Company’s Chairman and CEO holds almost all of
our voting stock and can control the election of directors and significant corporate actions.
Glen Ceiley, our Chairman and CEO, owns approximately 99% of
our outstanding voting stock. Mr. Ceiley is able to exert significant influence over the outcome of almost all corporate matters,
including significant corporate transactions requiring a stockholder vote, such as a merger or a sale of the Company or our assets.
This concentration of ownership and influence in management and board decision-making could also harm the price of our common stock
by, among other things, discouraging a potential acquirer from seeking to acquire shares of our common stock (whether by making
a tender offer or otherwise) or otherwise attempting to obtain control of the Company.
Sales of our common stock by Glen Ceiley could cause the
price of our common stock to decline.
There is currently no established trading market for our common
stock, and the volume of any sales is generally low. As of November 30, 2012, the number of shares held by non-affiliates of Mr.
Ceiley or Bisco is less than 55,000 shares. If Mr. Ceiley sells or seeks to sell a substantial number of his shares of our common
stock in the future, the market price of our common stock could decline. The perception among investors that these sales may occur
could produce the same effect.
Inclement weather and other disruptions to the transportation
network could impact our distribution system.
Our ability to provide efficient shipment of products to our
customers is an integral component of our overall business strategy. Disruptions at distribution centers or shipping ports may
affect our ability to both maintain core products in inventory and deliver products to our customers on a timely basis, which may
in turn adversely affect our results of operations. In addition, severe weather conditions could adversely impact demand for our
products in particularly hard hit regions.
Our advertising and marketing efforts may be costly and may
not achieve desired results.
We incur substantial expense in connection with our advertising
and marketing efforts. Postage represents a significant advertising expense for us because we generally mail fliers to current
and potential customers through the U.S. Postal Service. Any future increases in postal rates will increase our mailing expenses
and could have a material adverse effect on our business, financial condition and results of operations.
We may not have adequate or cost-effective liquidity or capital
resources.
Our ability to satisfy our cash needs depends on our ability
to generate cash from operations and to access our line of credit and the capital markets, which are subject to general economic,
financial, competitive, legislative, regulatory and other factors that are beyond our control. We may need to satisfy our cash
needs through external financing. However, external financing may not be available on acceptable terms or at all.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior
Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On January 10, 2013, the Company entered into an agreement
to sell the Deland Property for $1,100,000 to Chens Family Investments, LLC. The Company will receive $750,000 in cash
and will carry a 2 year note at 7% interest payable in 24 installments on the remaining $350,000. We anticipate that
this transaction will close on or before January 25, 2013. As such, the associated land, buildings and improvements
were reclassified as assets held for sale on the accompanying consolidated balance sheets of November 30, 2012 and August
31, 2012. The Company did not carry any debt related to this property at either November 30, 2012 or August 31,
2012.
Item 6. Exhibits
The following exhibits are filed as part of this report on Form
10-Q.
No.
|
|
Exhibit
|
|
|
|
10.1
|
|
Commercial Contract effective September 26, 2012, as amended through October 2, 2012, by and between EACO Corporation and Ka Bun Chan (Exhibit 10.12 to the Company’s Annual Report on Form 10-K, filed with the SEC on November 26, 2012, is incorporated herein by reference)
|
31.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
|
101.INS
|
|
XBRL Instance Document
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
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: January 14, 2013
|
/s/ Glen Ceiley
|
|
Glen Ceiley
|
|
Chief Executive Officer
|
|
(Principal Executive Officer & Principal Financial Officer)
|
|
|
|
/s/ Michael Bains
|
|
Michael Bains
|
|
Controller and Assistant Secretary
|
|
(Principal Accounting Officer)
|
EXHIBIT INDEX
No.
|
|
Exhibit
|
|
|
|
10.1
|
|
Commercial Contract effective September 26, 2012, as amended through October 2, 2012, by and between EACO Corporation and Ka Bun Chan (Exhibit 10.12 to the Company’s Annual Report on Form 10-K, filed with the SEC on November 26, 2012, is incorporated herein by reference)
|
31.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
|
101.INS
|
|
XBRL Instance Document
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
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