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 June 28, 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 August 1, 2006
2
EACO Corporation
Condensed Consolidated Statements of Operations
(Unaudited) Quarters Ended Six Months Ended
-------------------- ------------------
June 28, June 29, June 28, June 29,
2006 2005 2006 2005
Revenues:
Rental revenue $182,100 $32,800 $414,000 $65,600
---------- ----------- --------- ----------
Total revenues 182,100 32,800 414,000 65,600
---------- ----------- --------- ----------
Cost and expenses:
Depreciation and amortization 74,300 35,800 147,700 83,100
General and administrative
expenses 317,300 242,400 685,500 462,900
Loss on disposition of
equipment 900 - 17,900 -
---------- ----------- --------- ----------
Total costs and expenses 392,500 278,200 851,100 546,000
---------- ----------- --------- ----------
Loss from operations (210,400) (245,400) (437,100) (480,400)
Investment gain (loss) 52,900 2,100 (112,500) 2,100
Interest and other income 133,700 28,600 451,800 49,500
Interest expense (78,000) (34,800) (199,100) (69,700)
---------- ----------- --------- ----------
Loss before income taxes (101,800) (249,500) (296,900) (498,500)
Benefit for income taxes 38,200 213,200 112,500 213,200
---------- ----------- --------- ----------
Loss from continuing
operations (63,600) (36,300) (184,300) (285,300)
Discontinued operations:
Income from discontinued
operations, net of income
tax -- 2,579,200 -- 3,086,400
Loss on sale of discontinued
operations, net of income
tax (116,600) -- (116,600) --
---------- ----------- --------- ----------
Net income (loss) (180,200) 2,542,900 (300,900) 2,801,100
Undeclared cumulative preferred
stock dividend (19,100) (19,100) (38,200) (38,300)
---------- ----------- --------- ----------
Net income (loss) available
(attributable) to common
shareholders ($199,300) $2,523,800 ($339,100) $2,762,800
========== =========== ========== ==========
Basic income (loss) per share
Continuing operations (0.02) ($0.01) ($0.05) ($0.08)
Discontinued operations (0.03) 0.66 (0.03) 0.79
---------- ----------- --------- ----------
Net Income (loss) ($0.05) $0.65 ($0.08) $0.71
========== =========== ========= ==========
Basic weighted average common
shares outstanding 3,906,800 3,881,900 3,906,800 3,881,900
3
Diluted income (loss) per share
Continuing operations (0.02) ($0.01) ($0.05) ($0.08)
Discontinued operations (0.03) 0.63 (0.03) 0.78
---------- ---------- --------- ----------
Net income (loss) ($0.05) $0.62 ($0.08) $0.70
========== ========== ========== ==========
Diluted weighted average common
shares outstanding 3,906,800 4,072,900 3,906,800 3,972,800
========== ========== ========= ==========
See accompanying notes to condensed consolidated financial
statements.
4
EACO Corporation
Condensed Consolidated Balance Sheets
June 28, December 28,
2006 2005
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $1,632,900 $3,044,700
Restricted cash - short-term 2,502,100 3,212,200
Receivables 110,500 117,400
Inventories 0 300
Prepaid and other current assets 70,500 52,600
Assets held for sale 1,126,300 1,146,100
---------- -----------
Total current assets 5,442,300 7,573,300
Restricted cash 400,000 400,000
Investments, trading 696,400 318,500
Certificate of deposit 369,500 369,500
Note receivable, net 3,588,600 3,738,300
Property and equipment:
Land 4,800,300 5,209,400
Buildings and improvements 5,558,100 6,769,700
Equipment 1,589,300 3,025,700
----------- -----------
11,947,700 15,004,800
Accumulated depreciation (2,748,200) (4,801,400)
----------- -----------
Net property and equipment 9,199,500 10,203,400
Deferred tax asset 1,947,000 1,766,700
Other assets, principally deferred charges,
net of accumulated amortization 273,100 357,100
----------- -----------
$21,916,400 $24,726,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $110,900 $10,000
Securities sold, not yet purchased 2,502,100 3,212,200
Accrued liabilities 84,500 281,500
Current portion of workers compensation
benefit liability 400,000 400,000
Current portion of long-term debt 81,700 136,900
Liabilities associated with assets held for
sale 1,029,200 1,057,100
----------- -----------
Total current liabilities 4,208,400 5,097,700
Deferred rent 281,900 329,700
Deposit liability 23,300 29,300
Workers compensation benefit liability 116,700 773,600
Long-term debt 2,589,000 3,466,400
Deferred tax liability 2,978,000 2,978,000
----------- -----------
Total liabilities 10,197,300 12,674,700
Shareholders' equity:
Preferred stock of $.01 par; authorized
10,000,000 shares; outstanding 36,000
shares at June 28, 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 June 28, 2006
and December 28, 2005 39,000 39,000
Additional paid-in capital 10,932,600 10,932,300
Retained Earnings 747,100 1,086,200
Accumulated other comprehensive income --- (6,100)
----------- -----------
Total shareholders' equity 11,719,100 12,052,100
----------- -----------
$21,916,400 $24,726,800
=========== ===========
See accompanying notes to condensed consolidated financial
statements.
5
EACO Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited) Six Months Ended
------------------------------
June 28, June 29,
2006 2005
------------ ------------
Operating activities:
Net income (loss) ($300,900) $2,801,100
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 147,700 987,100
Net (gains) losses on investments 112,500 (2,200)
Loss on disposition of equipment -- 27,400
Loss on disposition of property
held for sale 186,500 --
Amortization of loan fees 35,300 48,000
Amortization of deferred gain (47,800) (40,300)
Amortization of deferred rent -- 15,900
Amortization of note receivable discount (37,300) --
Decrease (increase) in:
Receivables 6,900 11,800
Deferred tax assets (180,300) (3,061,800)
Inventories 300 (16,300)
Prepaids and other current assets (17,900) 800
Investments (325,900) --
Other assets 11,600 (15,600)
Increase (decrease) in:
Accounts payable 100,900 84,400
Securities sold, not yet purchased (811,100) --
Accrued liabilities (197,000) (276,900)
Deferred gain 66,000
Deposit liability (6,000) 24,000
Liabilities with assets held for
sale (16,800)
Workers compensation benefit
liability (656,900) (137,100)
---------- -----------
Net cash provided by (used in) operating
activities (1,996,900) 516,300
---------- -----------
Investing activities:
Net purchases of investments -- (69,500)
Restricted cash 710,000 --
Proceeds from securities sold, not yet
purchased -- 66,500
Capital expenditures -- (987,800)
Store cash within assets held for sale -- (23,200)
Principal receipts on note receivable 187,000 --
Proceeds from sale of property held for sale 750,000 --
Expenses from sale of property held for sale (54,700) --
Expenses from closing of restaurants (6,400) --
---------- ----------
Net cash provided by (used in) investing
activities 1,585,900 (1,014,000)
---------- ----------
Financing activities:
Proceeds from sale-leaseback (21,100) 2,600,000
Payments on long-term debt (932,600) (1,404,000)
Payment of sale-leaseback costs -- (160,000)
Preferred stock dividend (38,200) (38,300)
Payment on capital lease (8,900) (22,800)
---------- ----------
Net cash provided by (used in) financing
activities (1,000,800) 974,900
---------- ----------
Net increase (decrease) in cash and cash
equivalents (1,411,800) 477,200
Cash and cash equivalents - beginning of
period 3,044,700 151,100
---------- ----------
Cash and cash equivalents - end of period $1,632,900 $ 628,300
========== ==========
Building acquired under capital lease $ -- $1,475,000
========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the six months for interest $195,900 $868,900
========== ==========
See accompanying notes to condensed consolidated financial
statements.
6
EACO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 28, 2006
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and
the interim financial information instructions to Form 10-Q, and
do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation of the results for the interim periods
have been included. Operating results for the thirteen and twenty-
six week periods ended June 28, 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
7
applicable, and meeting other criteria. When all of these
criteria are met, the component is then classified as "held for
sale" and its operations are reported as discontinued operations.
On June 30, 2005 (the first day of the Company's third quarter of
2005), the Company completed the sale of substantially all of its
operating restaurants to Banner Buffets, LLC ("Banner" or "the
Buyer"). The sale of sixteen restaurant businesses, premises,
equipment and other assets used in restaurant operations was made
pursuant to an asset purchase agreement dated February 22, 2005.
Prior to this transaction, no material relationship existed
between the Company and Banner. The total purchase price was
approximately $29,950,000, consisting of $25,950,000 in cash at
closing and a promissory note for $4,000,000. 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 Matters. The ultimate amount of gain recognized on the
asset sale may be reduced based on the outcome of such
litigation.
On April 28, 2006, the Company completed the sale of one of its
real estate holdings in Tampa, Florida to Kendall & Taylor
Properties, LLC ("Kendall"). The real estate holdings had no
operations during the quarter and six months ended June 28, 2006.
The sale between the Company and Kendall is summarized as
follows:
Proceeds from sale $750,000
Transactions expenses
Broker fees 45,000
Other divestment related cost 9,700
-------
Total transaction expenses 54,700
-------
Net proceeds 695,300
Net assets sold (881,800)
-------
Loss on sale before income tax benefit (186,500)
Estimated income tax benefit 69,900
-------
8
Loss on sale after income tax benefit ($116,600)
For the quarter and six months ended June 29, 2005, operating
results of the discontinued operations are summarized below:
Quarter Ended Six Months Ended
June 29, June 29,
2005 2005
------------------ -------------------
Revenues $9,085,900 $19,161,300
Costs and expenses (8,997,700) (18,152,100)
Interest and other income 48,800 51,300
Interest expense (406,400) (822,700)
----------- ------------
Income before income taxes (269,400) 237,800
Income tax benefit (expense) 2,848,600 2,848,600
----------- ------------
Income (loss) from discontinued
operations, net of income taxes $2,579,200 $3,086,400
=========== ============
Assets and liabilities of discontinued operations are as follows:
<c>
June 28, December 28,
2006 2005
--------------- ---------------
Assets
Current assets $ --- $ 19,000
Property and equipment, net 1,126,300 1,127,100
----------- -----------
Total assets held for sale $1,126,300 $ 1,146,100
----------- -----------
Liabilities
Current liabilities $ 1,300 $ 20,300
Deferred rent 87,000 87,000
Obligations under capital lease 940,900 949,800
----------- -----------
Total liabilities associated
with assets held for sale $ 1,029,200 $ 1,057,100
----------- -----------
The remaining assets held for sale and associated liabilities
included in the unaudited balance sheet as of June 28, 2006
relate to one restaurant that was included in the sale to Banner,
where the Company's landlord did not consent to the assignment of
the Company's lease; accordingly, the Company still maintains the
assets and liabilities of the restaurant and Banner operates the
restaurant under a management agreement. With respect to this
restaurant, the Company and Banner agreed to continue to pursue
assignment of the lease and Banner is obligated to buy the assets
subject to the lease pursuant to a purchase option under the
terms of the lease, between September and November 2006.
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 June 28, 2006 are summarized
below:
June 28,
2006
-------------
Deferred tax assets:
Net operating loss $1,184,000
Federal and state tax credits 694,200
Accruals not currently deductible 548,300
Excess of book over tax depreciation 214,700
----------
2,641,200
Valuation allowance (694,200)
----------
Total deferred tax assets 1,947,000
----------
Deferred tax liabilities:
Unrealized gain (loss)on investment 2,978,000
----------
Net deferred tax liability $1,031,000
==========
Note 4. Earnings (Loss) Per Share
The following table provides details of the calculation of
basic and diluted income (loss) per common share:
<s> <c>
Quarter Ended Six Months Ended
June 28, June 29, June 28, June 29,
2006 2005 2006 2005
------------------------ ----------------------
EPS from continuing operations -
basic:
Loss from continuing
operations $ (63,600) $(36,300) $ (184,300) $ (285,300)
Less: preferred stock
dividends (19,100) (19,100) (38,200) (38,300)
10
Income (loss) from continuing
operations for basic
EPS computation $ (82,700) $(55,400) $ (222,500) $ (323,600)
=========== =========== =========== ==========
Weighted average shares outstanding
for basic EPS computation 3,906,800 3,881,900 3,906,800 3,881,900
=========== =========== =========== ==========
Earnings (loss) per common share from
Continuing operations -
basic $ (0.02) $(0.01) $ (0.05) $ (0.08)
=========== =========== =========== ==========
EPS from continuing operations -
diluted:
Loss from continuing
operations (63,600) $(36,300) $ (184,300) $ (285,300)
Less: preferred stock
dividends (19,100) (19,100) (38,200) (38,300)
Income (loss) from continuing
operations ----------- ---------- ----------- ----------
For diluted EPS computation (82,700) (55,400) (222,500) (323,600)
=========== ========== =========== ==========
Weighted average shares outstanding
For diluted EPS computation 3,906,800 4,072,900 3,906,800 3,972,800
========== =========== =========== ===========
Earnings (loss) per common shares from
Continuing operations -
diluted (0.02) (0.01) (0.05) (0.08)
=========== =========== =========== ===========
Due to the Company's net losses for the quarter and six months
ended June 28, 2006, potentially dilutive securities totaling
1,000,000 shares for both periods are antidilutive and have been
excluded from the computation of diluted earnings per share for
those periods.
Note 5. Note Receivable
The note receivable arose from the prior year sale to Banner, has
a current outstanding balance of $3,813,000 and is carried net of
unamortized discount totaling $224,400. 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. See also Note 12 - Subsequent Events.
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
11
note. For the six months ended June 28, 2006, interest income
recognized on the Banner note was $176,500, including $37,400 of
the unamortized discount recognized as interest income. The
amount of the unamortized discount at June 28, 2006 was $224,400.
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 June 28, 2006 and December 28, 2005.
Accumulated amortization related to deferred financing costs
was $28,500 and $26,700 as of June 28, 2006 and December 28,
2005, respectively. Amortization expense was $900 and
$10,800 for the quarters ended June 28, 2006 and June 29,
2005, respectively. Amortization expense was $1,800 and
$48,000 for the six months ended June 28, 2006 and June 29,
2005, respectively. The decrease in 2006 was due to the
reduction of the gross carrying cost resulting from the
Asset Sale. Amortization expense for each of the next five
years is expected to be $3,500.
Note 7. Investments
Investments consist of securities held for sale and securities
sold, not yet purchased. Prior to and as of December 28, 2005,
the Company classified its existing marketable equity securities
as available for sale in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." Subsequent to December 28, 2005, the Company
12
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.
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 June 28, 2006, the Company's total obligation
for these securities sold, not yet purchased was $2,502,100,
compared to $3,212,200 at December 28, 2005. The Company
recognized net losses on securities sold, not yet purchased
of $35,000 and $0 in the quarters ended June 28, 2006 and
June 29, 2005, respectively. The Company recognized net
losses on securities sold, not yet purchased of $77,000 and
$0 in the six months ended June 28, 2006 and June 29, 2005,
respectively.
Note 8. Reclassifications
Certain items in the prior interim financial statements have
been reclassified to conform to the 2006 presentation.
Note 9. Legal Matters
In connection with the sale to Banner in fiscal 2005, a broker
has demanded a commission payment of $3.5 million. The Company
has filed suit against the broker in an effort to expedite a
resolution of the claim. The Company agreed to place $400,000 in
escrow in connection with the claim. In addition, in August
2005, the Company was sued by another broker who claims that a
commission of $749,000 is payable to him as a result of the sale
transaction. The Company is vigorously defending both of these
claims. Due to the fact that management cannot predict the
outcome or the possible payments, if any, awarded under these
legal proceedings, no charge to earnings has been made in the
accompanying financial statements.
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 and six-
months ended June 29, 2005:
<c>
Quarter Ended Six Months Ended
June 29, 2005 June 29, 2005
------------------ -------------------
Net earnings (loss), as reported $2,542,900 2,801,100
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) $2,542,900 2,801,100
Undeclared cumulative preferred
stock dividend (19,100) (38,200)
------------ -------------
Earnings (loss) per share
Basic as reported $ 0.65 $ 0.71
Basic pro forma $ 0.65 $ 0.71
Diluted as reported $ 0.62 $ 0.70
Diluted pro forma $ 0.62 $ 0.70
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
14
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.
Stock option transactions for our stock plan for the six-months
ended June 28, 2006 are summarized as follows:
Number Weighted Weighted
of Average Average
Options Exercise Remaining
Price Life
Outstanding at December 28, 2005 32,500 2.08 2.68
Granted - - -
Forfeited - - -
Exercised - - -
-------
Outstanding at June 28, 2006 32,500 2.08 2.68
=======
Options exercisable at June 28,
2006 32,500 2.08 2.68
======
The following table summarizes information about fixed stock
options outstanding at June 28, 2006:
Year Exercise Options Options Weighted
Granted Price Outstanding Exercisable Average
Remaining
Line (In
years)
1996 2.81 2,000 2,000 1.0
1997 3.28 2,000 2,000 2.0
1999 2.00 25,000 25,000 3.8
1999 1.50 3,500 3,500 3.9
------ ------
32,500 32,500
====== ======
During the six-months ended June 28, 2006, the Company awarded no
stock options and thus, recorded no compensation expense related
to stock options after the adoption of SFAS No. 123(R). In
addition, there were no option awards modified, repurchased, or
cancelled after December 28, 2005. During the six-months ended
June 28, 2006, no stock options were exercised, and therefore, no
cash was received from stock option exercises.
Note 11. Preferred Stock
The Company has outstanding 36,000 shares of Series A
Cumulative Convertible Preferred Stock with a dividend rate
of 8.5%. For the three and six months ended June 28, 2006,
the Board of Directors declared and the Company paid
15
dividends in the amount of 19,100 and 38,200 respectively.
In the quarter ended June 28, 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 June 28, 2006 was $19,100.
Note 12. Subsequent Events
When the Company sold its 16 restaurants to Banner Buffets LLC
("Banner") as of June 30, 2005, the Company received back
Banner's Promissory Note ("Note") in the principal amount of
$4,000,000. The Note bears interest at 8.0% per annum payable
monthly. Principal payments of $1,500,000 are due on June 30,
2007 and June 30, 2008, with all unpaid principal and interest
due on June 30, 2009. The Note is secured by restaurant
equipment at the restaurants sold to Banner. Management
estimates the value of the restaurant equipment to be less than
$1,000,000.
Banner has occasionally been late in making interest
payments but it was current as of July 31, 2006. In addition,
Banner made one $187,000 prepayment of principal required by its
lender.
On July 17, 2006, representatives of Banner came to the
Company's office to meet with management. The Banner
representatives said that cash flow pressures were going to force
them to close all of the restaurants before the weekend because
they could not make the upcoming payroll and insurance payments.
In order to protect the Company's interest in the Note, Banner
suggested several restructuring possibilities one of which would
have involved a cash payment from the Company to Banner to
provide funds to support their short-term cash operating
requirements.
The Company responded that it would not make a cash payment
to Banner but would consider other proposals and requested that
Banner submit them in writing. Banner indicated that such other
proposals might include a request for the Company to subordinate
its Note to other Banner financing arrangements or a request for
the Company to discount the note which would result in reduced
future Note payments to the Company. As of August 4, 2006, the
Company had not received a proposal from Banner. At the date of
the meeting, Banner had closed 3 of the 16 restaurants it had
purchased from the Company. At July 26, 2006, the Company
believes that Banner has closed 1 additional restaurant but is
operating the remainder.
16
The Company has always expected that the funds to repay the
Note would come from the successful operation of the purchased
restaurants. Company management will closely monitor payments
under the Note and the operations of Banner and will consider any
proposals that Banner may make with respect to the Note. The
interest payment under the Note due on August 1, 2006 had not
been paid as of August 11 and the Company has sent a demand for
payment.
On July 4, 2006, the Company entered into a lease agreement
with NES Real Estate Management, Inc for the lease of one of
the recently acquired income-producing properties in Sylmar,
California (previously occupied by Affholder). The lease is
a 10-year lease to commence on October 1, 2006 and end on
September 30, 2016 with base rent of $37,000/month with
annual rent increase starting with October 1, 2007 thru
October 1, 2014.
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.
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 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
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 shall be recognized in earnings
effective December 29, 2005.
17
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 JUNE 28, 2006 VERSUS JUNE 29, 2005
The Company experienced an increase of 455% in rental
revenue during the second quarter of 2006 compared to the second
quarter of 2005, due to the acquisition of rental property in
Sylmar, California during the fourth quarter of 2005.
Depreciation and amortization expenses increased 107% due to
the acquisition of the Sylmar, California property. General and
administrative expenses, such as payroll, payroll related costs
and insurance, increased 30.9% due to increases in legal and
other professional fees versus the second quarter of 2005.
Interest and other income increased to $133,700 due to
the interest received on the $4,000,000 note receivable from
Banner.
Interest expense increased to $78,000 in the second quarter
of 2006 from $34,800 in the same quarter of 2005, due to the
acquisition of the Sylmar property and rising interest rates.
The Company recognized an income tax benefit of $72,100 and
$2,848,600 for the quarter ended July 28, 2006 and June 29, 2005,
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
18
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
second quarter of 2006 included realized losses from the sale of
marketable securities of $80,200 and unrealized gains of
$133,100. During the second quarter of 2005 the company had
realized gains from the sale of marketable securities of $2,100
and no unrealized gains or losses.
As previously reported, all significant restaurant
operations were sold on June 30, 2005. All income and
expense items related to those restaurants were reclassified
as income from discontinued operations for the second
quarter of 2005.
The net loss was $180,200 in the second quarter of 2006,
compared to net income of $2,542,900 in the second quarter of
2005. Loss per share for the quarter was 5 cents in 2006
compared to earnings per share of 65 cents in 2005.
SIX MONTHS ENDED JUNE 28, 2006 VERSUS JUNE 29, 2005
The Company experienced an increase of 531% in rental
revenue during the first six months of 2006 compared to the first
six months of 2005, due to the acquisition of rental property in
Sylmar, California during the fourth quarter of 2005.
Depreciation and amortization expenses increased 78% due to
the acquisition of the Sylmar, California property. General and
administrative expenses, such as payroll, payroll related costs
and insurance, increased 48.1% due to increases in legal and
other professional fees in the first six months of 2006 versus
the first six months of 2005, as well as, expenses related to
closing the corporate offices in Florida and moving them to
Anaheim, California.
Interest and other income increased to $451,800 due to
the interest received on the $4,000,000 note receivable
19
from Banner and a settlement made with a tenant from one of the
Company's properties that vacated the premises prior to the
completion of their lease term.
Interest expense increased to $199,100 in the first six
months of 2006 from $69,700 in the first six months of 2005, due
to the acquisition of the Sylmar property and rising interest
rates.
The Company recognized an income tax benefit of $108,100
and $2,848,600 for the six months ended July 28, 2006 and June
29, 2005, respectively.
The results for the first six months of 2006 included
realized losses from the sale of marketable securities of $82,300
and unrealized losses of $30,200. During the first six months of
2005 the company had realized gains from the sale of marketable
securities of $2,100 and no unrealized gains or losses.
As previously reported, all significant restaurant
operations were sold on June 30, 2005. All income and
expense items related to those restaurants were reclassified
as income from discontinued operations for the second
quarter of 2005.
The net loss was $300,900 in the first six months of 2006,
compared to net income of $2,801,100 in the first six months of
2005. Loss per share for the six months was 8 cents in 2006
compared to earnings per share of 71 cents in 2005.
Effective April 1, 2006, the Company's corporate office was
moved from Neptune Beach, Florida to Anaheim, California. The
Company is leasing space from Bisco Industries, Inc.("Bisco"),
the wholly owned company of the Company's Chairman of the Board
of Directors and Chief Executive Officer, Glen Ceiley. The
Company has also entered into an agreement with Bisco whereas
Bisco will provide accounting and other administrative services
to the Company in exchange for a fee. Through June 28, 2006,
Bisco had billed the Company $27,500.
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
20
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 June 28, 2006, the Company had total cash and
cash equivalents of $4,135,000. Of this total, $4,035,800
was invested in brokerage money market accounts. However,
$2,502,100 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 June 28, 2006. Accordingly, the Company will
require this cash to cover the short sales liability, and
therefore the $2,502,100 is not available for the Company's
use and is classified as restricted. The balance of the
cash in the brokerage accounts is available for use by the
Company.
The Company purchased a property in November 2005 (the
"California Property") for $8.3 million. The transaction
was structured as a like-kind exchange transaction under
Section 1031 of the Internal Revenue Code, which resulted in
the deferral of an estimated $1 million in income taxes
payable from the Asset Sale. The Company assumed a loan on
the property for $1.8 million with a variable interest rate
equal to prime. The property includes one industrial tenant
with rental income of approximately $240,000 per year. As
of April 30, 2006 one of the tenants vacated the premises at
the expiration of their lease term, as anticipated before
purchase of the property. The Company has since leased this
property to a new tenant at a substantially higher monthly
rental amount. Rent commences on October 1, 2006.
21
At June 28, 2006, the Company had working capital of
$1,233,900 compared to $2,475,600 at December 28, 2005. The
decrease was due to workers compensation claims paid during the
first six months of 2006. Cash used in operating activities was
$2,051,600 in the first six months of 2006 compared to cash
provided by operations of $516,300 in the first six months of
2005, primarily due to the net loss in the first six months of
2006 compared to the net income in the first six months 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 second quarter of 2006.
Undeclared dividends as of June 28, 2006 were $19,100.
The Company is required to pledge collateral for its
workers' compensation self insurance liability with the Florida
Self Insurers Guaranty Association. The Company increased this
collateral by $69,500 during the first quarter of 2005, and now
has a total of $1.37 million pledged collateral. Bisco
Industries, Inc. ("Bisco") provides $1 million of this
collateral. EACO Corporation's Chairman of the Board of
Directors and Chief Executive Officer, Glen Ceiley, is the
President of Bisco.
After the asset sale, the Company terminated its self-
insurance program. No further claims were incurred after June
29, 2005. The Company's liability for Workers' Compensation is
expected to decrease and the Company should be able to reduce its
required collateral deposits accordingly.
The Company has entered into a loan agreement with GE
Capital and assumed a loan with Citizen's Bank pertaining to the
California Property. As of June 28, 2006, the outstanding
balance due under the Company's loan with GE Capital was $889,600
and with Citizen's Bank was $1,781,000. The weighted
22
average interest rate for these loans is 8.2% for the quarter
ended June 28, 2006.
The GE Capital loan agreements contain various restrictions
on fixed charge coverage ratios, determined both on aggregate and
individual restaurant levels. As of December 28, 2005, the
Company was not in compliance with one of the debt covenants.
The Company obtained a waiver of the debt covenant from GE
Capital.
The preceding discussion of liquidity and capital resources
contains certain forward-looking statements. Forward-looking
statements involve a number of risks and uncertainties, and in
addition to the factors discussed herein, among the other factors
that could cause actual results to differ materially are the
following: failure of facts to conform to necessary management
estimates and assumptions; the willingness of GE Capital,
Citizen's Bank or other lenders to extend financing commitments;
repairs or similar expenditures required for existing properties
due to weather or acts of God; the Company's success in selling
properties listed for sale; the economic conditions in the new
markets into which the Company expands, if any; business
conditions, such as inflation or a recession, and growth in the
general economy; and other risks identified from time to time in
the Company's SEC reports, registration statements and public
announcements.
RECENT DEVELOPMENTS
On July 17, 2006, representatives of Banner came to the
Company's office to meet with management. The Banner
representatives said that cash flow pressures were going to force
them to close all of the restaurants before the weekend because
they could not make the upcoming payroll and insurance payments.
In order to protect the Company's interest in the Note, Banner
suggested several restructuring possibilities one of which would
have involved a cash payment to Banner. See Note 12 for further
discussion.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT
MARKET RISK
There have been no significant changes in the Company's
exposure to market risk during the first fiscal quarter of 2006.
For discussion of the Company's exposure to market risk, refer to
Item 7A, Quantitative and Qualitative Disclosures about
23
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.
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
24
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 claim. In
addition, in August 2005, the Company was sued in Miami-
Dade County Circuit Court by another broker who claims
that a commission of $749,000 is payable to him as a
result of the sale to Banner. The Company 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
At the Company's annual meeting held on June 20, 2006
each of the Company's current Board members, Glen
Ceiley, Jay Conzen, Stephen Catanzaro and William Means
were re-elected to the Board.
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.)
25
3.02 Bylaws of Family Steak Houses of Florida, Inc. (Exhibit
3.02 to the Company's Registration Statement on Form 2-
1, Registration No. 33-1887, is incorporated herein by
reference.)
3.03 Articles of Amendment to the Articles of Incorporation
of Family Steak Houses of Florida, Inc. (Exhibit 3.03 to
the Company's Registration Statement on Form S-1,
Registration No. 33-1887, is incorporated herein by
reference.)
3.04 Articles of Amendment to the Articles of Incorporation
of Family Steak Houses of Florida, Inc. (Exhibit 3.04 to
the Company's Registration Statement on Form S-1,
Registration No. 33-1887, is incorporated herein by
reference.)
3.05 Amended and Restated Bylaws of Family Steak Houses of
Florida, Inc. (Exhibit 4 to the Company's Form 8-A,
filed with the Commission on March 19, 1997, is
incorporated herein by reference.)
3.06 Articles of Amendment to the Articles of Incorporation
of Family Steak Houses of Florida, Inc. (Exhibit 3 to
the Company's Form 8-A filed with the Commission on
March 19, 1997, is incorporated herein by reference.)
3.07 Articles of Amendment to the Articles of Incorporation of
Family Steak Houses of Florida, Inc. (Exhibit 3.08 to
the Company's Annual Report on Form 10-K filed with the
Commission on March 31, 1998, is incorporated herein by
reference.)
3.08 Amendment to Bylaws of Family Steak Houses of Florida,
Inc. (Exhibit 3.08 to the Company's Annual Report on
Form 10-K filed with the Commission on March 15, 2000 is
incorporated herein by reference.)
3.09 Articles of Amendment to the Articles of Incorporation of
Family Steak Houses of Florida, Inc. (Exhibit 3.09 to
the Company's Annual Report on Form 10-K filed with the
Commission on March 29, 2004 is incorporated herein by
reference.)
3.10 Articles of Amendment to the Articles of Incorporation
26
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: August 14, 2006 Glen Ceiley
Chief Executive Officer
(Principal Executive Officer &
Principal Financial Officer)