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, as well as the planned sale of certain of our real estate properties. 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 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 rental
properties in Florida and California, and the Distribution Operations segment, which consists of Bisco’s electronic components
and fastener distribution business, and is alternatively referred to in this report as the Bisco segment. 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.
Revenues
derived from the Bisco segment represented approximately 99% of the company's total revenues for the three and six months ended
February 28, 2013 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 or six months ended February 28, 2013 or February 29, 2012.
Deferred Tax Assets
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
February 28, 2013 and February 29, 2012 (unaudited)
Distribution Sales and Gross Profit
($ in thousands)
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution sales
|
|
$
|
28,323
|
|
|
$
|
27,114
|
|
|
$
|
1,209
|
|
|
|
4.5
|
%
|
Cost of goods sold
|
|
|
20,382
|
|
|
|
19,846
|
|
|
|
536
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
7,941
|
|
|
$
|
7,268
|
|
|
$
|
673
|
|
|
|
|
|
Gross profit %
|
|
|
28.0
|
%
|
|
|
26.8
|
%
|
|
|
|
|
|
|
1.2
|
%
|
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 February 28, 2013 (“Q2 2013”) as compared to the prior year period was largely due to increased
unit sales, resulting from an increase in sales headcount of 8% in the three months ended February 28, 2013 as compared to the
three months ended February 29, 2012 (“Q2 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 286 salespeople at February 29, 2012 to 308 salespeople at February 28, 2013, an 8% increase.
Rental Income and Gross Profit ($
in thousands)
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
$
|
197
|
|
|
$
|
312
|
|
|
$
|
(115
|
)
|
|
|
(36.9
|
)%
|
Cost of rental operations
|
|
|
92
|
|
|
|
100
|
|
|
|
8
|
|
|
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
105
|
|
|
$
|
212
|
|
|
$
|
(107
|
)
|
|
|
|
|
Gross profit %
|
|
|
53.3
|
%
|
|
|
67.9
|
%
|
|
|
|
|
|
|
(14.6
|
)%
|
During the first quarter of the fiscal
year ending August 31, 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. In addition, on January 25, 2013, the Company sold the Deland
Property resulting in a loss of rental revenue related to that property. Furthermore, the Company anticipates it will complete
the sale of the Brooksville Property in April 2013 and has engaged a broker to sell the Orange Park Property. As such, the Company
anticipates rental revenues from its rental properties will continue to decline in future periods.
Selling, General and Administrative
Expenses ($ in thousands)
|
|
Three Months Ended
|
|
|
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
$ Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
7,350
|
|
|
$
|
6,850
|
|
|
$
|
500
|
|
|
|
7.3
|
%
|
Percent of distribution sales
|
|
|
26.0
|
%
|
|
|
25.3
|
%
|
|
|
|
|
|
|
0.7
|
%
|
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 Q2 2013 increased from Q2 2012 largely due to increased salaries and salary related expenses as the Company
increased sales headcount by 22 employees, or 8%, in Q2 2013 as compared to Q2 2012.
Non-operating Income (Expense) ($
in thousands)
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Change
|
|
|
Change
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on sale of trading securities
|
|
$
|
(111
|
)
|
|
$
|
62
|
|
|
$
|
(173
|
)
|
|
|
(279.0
|
)%
|
Unrealized gain on trading securities
|
|
|
14
|
|
|
|
92
|
|
|
|
(78
|
)
|
|
|
(84.8
|
)
|
Gain on asset disposal
|
|
|
540
|
|
|
|
—
|
|
|
|
540
|
|
|
|
100.0
|
|
Interest expense, net
|
|
|
(166
|
)
|
|
|
(178
|
)
|
|
|
12
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
277
|
|
|
$
|
(24
|
)
|
|
$
|
(301
|
)
|
|
|
|
|
Other income (expense), net as a percent of distribution sales
|
|
|
1.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
1.0
|
%
|
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 Q2 2013, the Company recognized approximately
$97,000 in net realized and unrealized loss. The Company experienced net realized and unrealized gains of approximately $154,000
during Q2 2012. Losses in the current period were due to decreases in the value of the Company’s holdings, primarily in its
short positions. Gains in the prior year quarter were
primarily due to an increase in the value of several
of the positions the Company was holding at that time.
Income Tax Provision ($ in thousands)
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
332
|
|
|
$
|
203
|
|
|
$
|
129
|
|
|
|
63.5
|
%
|
Percent of pre-tax net income
|
|
|
34.1
|
%
|
|
|
33.5
|
%
|
|
|
|
|
|
|
0.6
|
%
|
The provision for income taxes increased
by approximately $129,000 in the three months ended February 28, 2013 over the prior year period. This was a result of higher estimated
taxable income in the current quarter as compared to the prior year period.
Comparison of the Six Months Ended
February 28, 2013 and February 29, 2012 (unaudited)
Distribution Sales and Gross Profit
($ in thousands)
|
|
Six Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution sales
|
|
$
|
57,442
|
|
|
$
|
53,264
|
|
|
$
|
4,178
|
|
|
|
7.8
|
%
|
Cost of goods sold
|
|
|
41,446
|
|
|
|
38,780
|
|
|
|
2,666
|
|
|
|
6.9
|
|
Gross profit
|
|
$
|
15,996
|
|
|
$
|
14,484
|
|
|
$
|
1,512
|
|
|
|
|
|
Gross profit %
|
|
|
27.8
|
%
|
|
|
27.2
|
%
|
|
|
|
|
|
|
0.6
|
%
|
Distribution
sales related to the Distribution Operations segment increased in the six months ended February 28, 2013 as compared to the prior
year period largely due to increased unit sales, resulting from an increase in sales headcount of 8% in the six months ended February
28, 2013 as compared to the six months ended February 29, 2012.
The Company added one sales office in the latter half of
fiscal 2012. This office contributed to sales in the first half of the current fiscal year ending August 31, 2013, but not in the
first half of fiscal 2012.
Rental Income and Gross Profit ($
in thousands)
|
|
Six Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
$
|
338
|
|
|
$
|
623
|
|
|
$
|
(285
|
)
|
|
|
(45.7
|
)%
|
Cost of rental operations
|
|
|
187
|
|
|
|
293
|
|
|
|
(106
|
)
|
|
|
(36.2
|
)
|
Gross profit
|
|
$
|
151
|
|
|
$
|
330
|
|
|
$
|
(179
|
)
|
|
|
|
|
Gross profit %
|
|
|
44.7
|
%
|
|
|
53.0
|
%
|
|
|
|
|
|
|
(8.3
|
)%
|
Rental revenue and the related cost
of rental operations decreased from the six months ended February 29, 2012 to February 28, 2013 due primarily to the vacancy in
one of the Company’s buildings at its Sylmar Properties. The departing tenant was replaced in the second quarter at a lower
monthly rent than the previous tenant.
Selling, General and Administrative
Expenses ($ in thousands)
|
|
Six Months Ended
|
|
|
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 28, 2012
|
|
|
$ Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
14,610
|
|
|
$
|
13,324
|
|
|
$
|
1,286
|
|
|
|
9.7
|
%
|
Percent of distribution sales
|
|
|
25.4
|
%
|
|
|
25.0
|
%
|
|
|
|
|
|
|
0.4
|
%
|
SG&A in the
six months ended February 28, 2013 increased from the six months ended February 29, 2012 largely due to increased salaries and
salaries related expenses as the Company increased sales headcount 8% in the first six months of fiscal 2013 as compared to the
first six months of fiscal 2012.
Non-operating Income (Expense) ($
in thousands)
|
|
Six Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Change
|
|
|
Change
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on sale of trading securities
|
|
$
|
(78
|
)
|
|
$
|
62
|
|
|
$
|
(140
|
)
|
|
|
(225.8
|
)%
|
Unrealized (loss) gain on trading securities
|
|
|
(41
|
)
|
|
|
285
|
|
|
|
(326
|
)
|
|
|
(143.9
|
)
|
Gain on asset disposal
|
|
|
540
|
|
|
|
—
|
|
|
|
540
|
|
|
|
100.0
|
|
Interest expense, net
|
|
|
(333
|
)
|
|
|
(359
|
)
|
|
|
26
|
|
|
|
7.2
|
|
Other income (expense), net
|
|
$
|
88
|
|
|
$
|
(12
|
)
|
|
$
|
100
|
|
|
|
|
|
Other income (expense), net as a percent of distribution sales
|
|
|
0.2
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.2
|
%
|
During the six months ended February
28, 2013, the Company recognized approximately $119,000 in net realized and unrealized losses. The Company experienced net realized
and unrealized gains of approximately $347,000 during the six months ended February 29, 2012. Losses in the current period were
due to decreases in the value of the Company’s holdings, primarily as a result of short positions. Gains in the prior period
were due to increases in the value of the Company’s holdings and its investment strategy throughout that period.
Income Tax Provision ($ in thousands)
|
|
Six Months Ended
|
|
|
$
|
|
|
%
|
|
|
|
February 28, 2013
|
|
|
February 29, 2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
601
|
|
|
$
|
450
|
|
|
$
|
151
|
|
|
|
33.6
|
%
|
Percent of pre-tax net income
|
|
|
37.0
|
%
|
|
|
30.4
|
%
|
|
|
|
|
|
|
6.6
|
%
|
The provision for income taxes increased
by approximately $151,000 in the six months ended February 28, 2013 over the prior year period, which primarily resulted from higher
pre-tax income and an increase 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”)
(0.29% and 0.43% for the 90 day LIBOR at February 28, 2013 and August 31, 2012, respectively) plus 1.75% and/or the bank’s
reference rate (3.25% at February 28, 2013 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 February 28, 2013 and August 31,
2012 were approximately $8,184,000 and $7,450,000, respectively. Availability under the line of credit was approximately $1,816,000
and $2,550,000 at February 28, 2013 and August 31, 2012, respectively. The line of credit agreement contains nonfinancial and financial
covenants, including the maintenance of certain financial ratios. As of February 28, 2013 and August 31, 2012, the Company was
in compliance with all such 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 February 28, 2013 and August 31, 2012). As
of February 28, 2013, the outstanding balance of the term loan was approximately $43,000. The outstanding balance on this loan
was repaid in full in March 2013.
In October 2002, the Company refinanced with GE Capital 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 February 28, 2013, the
outstanding balance due under the Company’s loan with GE Capital was approximately $406,000. Such loan was reclassified as
liabilities of assets held for sale on the accompanying consolidated balance sheets as of February 28, 2013 and August 31, 2012.
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% per annum. As of February 28, 2013, the outstanding balance
due on the loan to Community Bank was approximately $5,183,000.
During 2008, the Company purchased and financed 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% per annum and requires monthly principal and interest payments totaling $8,402. The outstanding
balance of the loan at February 28, 2013 was approximately $1,102,000. Such loan was reclassified as liabilities of assets held
for sale on the accompanying consolidated balance sheets as of February 28, 2013 and August 31, 2012.
The Company’s Rental Real Estate Operations are funded
primarily by rents received from the tenants of its 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 provided
by operating activities was
approximately
$201,000 for the six months ended February 28, 2013
as compared with cash used of
approximately
$884,000 for the six months ended February 29, 2012.
The current period provision of cash was mainly due to current period net income and an increase in the Company’s accrued
expenses and a decrease in the Company’s deferred tax asset. This was offset by increase in the Company’s inventory
in the first half of fiscal 2013. The prior year use was also due to an increase in accounts receivable and a decrease in accrued
expenses. These amounts were offset by net income in the first half of fiscal 2012.
Cash Flows from Investing Activities
Cash used
in investing activities was
approximately
$52,000 for the six months ended February 28, 2013
as compared with cash provided by investing activities of
approximately
$356,000 for the six
months ended February 29, 2012. The current period decrease was due primarily to increased purchases of marketable securities and
an increase in restricted cash requirements related to short sales by the Company in the current period. This was offset from the
proceeds received by the sale of the short positions and the cash received on the sale of the Deland Property. This amount was
offset by the increase in the Company’s short positions resulting in no net effect on investing cash flows. The cash provided
by investing activities during the six months ended February 29, 2012 cash provided was primarily due to the sale of the Company’s
marketable securities including cash proceeds from the Company’s short positions.
Cash Flows from Financing Activities
Cash used
in financing activities for the six months ended February 28, 2013 was
approximately
$1,019,000
as compared with cash provided by financing activities of
approximately
$1,048,000 for the six
months ended February 29, 2012. Cash used in financing activities consisted mainly of paying down the Company’s long-term
debt. This was offset by cash borrowed on the Company’s revolving credit facility. The cash provided by financing activities
for the six months ended February 29, 2012 was due mainly to the Company’s borrowing on the revolving credit facility and
an increase in the Company’s bank overdraft.
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 Company’s 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 Condensed 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.