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. Except as required by law,
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 44 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 nine months ended
May 31, 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. 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. Therefore, the Company generally
recognizes revenue at the time of product shipment.
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 nine months ended May 31, 2013 or 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
(“ASC 740”) 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
May 31, 2013 and 2012 (unaudited)
Distribution Sales and Gross Profit
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
$
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution sales
|
|
$
|
31,124
|
|
|
$
|
30,019
|
|
|
$
|
1,105
|
|
|
3.7
|
%
|
Cost of goods sold
|
|
|
22,273
|
|
|
|
21,417
|
|
|
|
856
|
|
|
|
4.0
|
|
Gross profit
|
|
$
|
8,851
|
|
|
$
|
8,602
|
|
|
$
|
249
|
|
|
|
|
|
Gross profit %
|
|
|
28.4
|
%
|
|
|
28.7
|
%
|
|
|
|
|
|
|
0.3
|
%
|
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 May 31, 2013 (“Q3 2013”) as compared to the prior year period was largely due to increased unit sales, resulting
from an increase in sales headcount, growing from 296 salespeople at May 31, 2012 to 323 salespeople at May 31, 2013, a 9% increase.
Rental Income and Gross Profit ($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31
|
|
|
$
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
$
|
244
|
|
|
$
|
314
|
|
|
$
|
(70
|
)
|
|
|
(22.3
|
)%
|
Cost of rental operations
|
|
|
132
|
|
|
|
188
|
|
|
|
(56
|
)
|
|
|
(29.8
|
)
|
Gross profit
|
|
$
|
112
|
|
|
$
|
126
|
|
|
$
|
(14
|
)
|
|
|
|
|
Gross profit %
|
|
|
45.9
|
%
|
|
|
40.1
|
%
|
|
|
|
|
|
|
(5.8
|
)%
|
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
the lease and vacated the premises. On December 1, 2012, the Company obtained a replacement tenant for the property. The replacement
tenant pays a lower monthly rent than the previous tenant. In addition, the Company completed the sale of the Deland Property in
January 2013 and the Brooksville Property in April 2013 resulting in a decrease in rental revenue from those two properties.
Selling, General and Administrative
Expenses ($ in thousands)
|
|
Three Months Ended May 31,
|
|
|
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
7,708
|
|
|
$
|
6,826
|
|
|
$
|
882
|
|
|
|
12.9
|
%
|
Percent of distribution sales
|
|
|
24.8
|
%
|
|
|
22.7
|
%
|
|
|
|
|
|
|
2.1
|
%
|
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 Q3 2013 increased from Q3 2012 largely due to increased salaries and salary related expenses as the Company
increased sales headcount by 27 employees, or 9%, in Q3 2013 as compared to Q3 2012. The sale of the Orange Park Property would
similarly reduce our rental revenues further.
Non-Operating Income (Expense) ($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
$
|
|
|
%
|
|
Other income (expense):
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
(Loss) gain on sale of trading securities
|
|
$
|
64
|
|
|
$
|
(17
|
)
|
|
$
|
81
|
|
|
|
476.5
|
%
|
Unrealized gain on trading securities
|
|
|
21
|
|
|
|
68
|
|
|
|
(47
|
)
|
|
|
(69.1
|
)
|
Gain on asset disposal
|
|
|
240
|
|
|
|
--
|
|
|
|
240
|
|
|
|
100.0
|
|
Interest expense, net
|
|
|
(158
|
)
|
|
|
(185
|
)
|
|
|
27
|
|
|
|
14.6
|
|
Other income (expense), net
|
|
$
|
167
|
|
|
$
|
(134
|
)
|
|
$
|
301
|
|
|
|
|
|
Other income (expense), net as a percent of distribution sales
|
|
|
0.5
|
%
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
0.9
|
%
|
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 Q3 2013, the Company recognized approximately
$85,000 in net realized and unrealized gain. The Company experienced net realized and unrealized gains of approximately $51,000
during Q3 2012. Gains in the current period were due to increases in the value of the Company’s holdings. Gains in the prior
year quarter were
primarily due to an increase in the value of several of the positions the Company
was holding at that time. The gain on asset disposal was the result of the sale of the Brooksville Property in April 2013.
Income Tax Provision ($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
$
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
138
|
|
|
$
|
811
|
|
|
$
|
(673
|
)
|
|
|
(83.0
|
)%
|
Percent of pre-tax net income
|
|
|
9.7
|
%
|
|
|
45.9
|
%
|
|
|
|
|
|
|
(36.2
|
)%
|
The provision for income taxes decreased
by approximately $673,000 in the three months ended May 31, 2013 over the prior year period. This was a result of the release of
the Company’s reserves with regards to its California net operating losses. Prior to 2013, the State of California had suspended
the use of carryover net operating losses being deducted from current year income. This has been reinstated in 2013 allowing the
Company to recognize its California net operating loss assets.
The Company has used nearly all of its
Federal net operating losses and anticipates those losses to be exhausted in the fiscal year ending August 31, 2014.
Comparison of the Nine Months Ended
May 31, 2013 and 2012 (unaudited)
Distribution Sales and Gross Profit
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
$
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution sales
|
|
$
|
88,566
|
|
|
$
|
83,283
|
|
|
$
|
5,283
|
|
|
|
6.3
|
%
|
Cost of goods sold
|
|
|
63,719
|
|
|
|
60,197
|
|
|
|
3,522
|
|
|
|
5.6
|
|
Gross profit
|
|
$
|
24,847
|
|
|
$
|
23,086
|
|
|
$
|
1,761
|
|
|
|
|
|
Gross profit %
|
|
|
28.1
|
%
|
|
|
27.7
|
%
|
|
|
|
|
|
|
0.4
|
%
|
Distribution
sales related to the Distribution Operations segment increased in the nine months ended May 31, 2013 as compared to the prior year
period largely due to increased unit sales, resulting from an increase in sales headcount of 9% in the nine months ended May 31,
2013 as compared to the nine months ended May 31, 2012.
The Company added one sales office in the latter half of the fiscal
year ended August 31, 2012 (“fiscal 2012”). This office contributed to sales in the first nine months of the current
fiscal year ending August 31, 2013 (“fiscal 2013”), but not in the first nine months of fiscal 2012.
Rental Income and Gross Profit ($
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended May 31,
|
|
|
$
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
$
|
582
|
|
|
$
|
937
|
|
|
$
|
(355
|
)
|
|
|
(37.9
|
)%
|
Cost of rental operations
|
|
|
319
|
|
|
|
481
|
|
|
|
(162
|
)
|
|
|
(33.7
|
)
|
Gross profit
|
|
$
|
263
|
|
|
$
|
456
|
|
|
$
|
(193
|
)
|
|
|
|
|
Gross profit %
|
|
|
45.2
|
%
|
|
|
48.7
|
%
|
|
|
|
|
|
|
(3.5
|
)%
|
Rental revenue and the related cost
of rental operations decreased from the nine months ended May 31, 2012 to the nine months ended May 31, 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. In addition, the Company sold the Deland Property in January 2013 and the Brooksville
Property in April 2013 resulting in a decrease in rental revenue from those two properties for the current year period.
Selling, General and Administrative
Expenses ($ in thousands)
|
|
Nine Months Ended May 31,
|
|
|
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
$ Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
22,318
|
|
|
$
|
20,150
|
|
|
$
|
2,168
|
|
|
|
10.8
|
%
|
Percent of distribution sales
|
|
|
25.2
|
%
|
|
|
24.2
|
%
|
|
|
|
|
|
|
1.0
|
%
|
SG&A in the
nine months ended May 31, 2013 increased from the nine months ended May 31, 2012 largely due to increased salaries and salary related
expenses as the Company increased sales headcount by 9% in the first nine months of fiscal 2013 as compared to the first nine months
of fiscal 2012.
Non-Operating Income (Expense) ($
in thousands)
|
|
Nine Months Ended May 31,
|
|
|
$
|
|
|
%
|
|
Other income (expense):
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
(Loss) gain on sale of trading securities
|
|
$
|
(14
|
)
|
|
$
|
45
|
|
|
$
|
(59
|
)
|
|
|
(131.1
|
)%
|
Unrealized (loss) gain on trading securities
|
|
|
(20
|
)
|
|
|
353
|
|
|
|
(373
|
)
|
|
|
(105.7
|
)
|
Gain on asset disposal
|
|
|
780
|
|
|
|
--
|
|
|
|
780
|
|
|
|
100.0
|
|
Interest expense, net
|
|
|
(491
|
)
|
|
|
(544
|
)
|
|
|
(53
|
)
|
|
|
(9.7
|
)
|
Other income (expense), net
|
|
$
|
255
|
|
|
$
|
(146
|
)
|
|
$
|
401
|
|
|
|
|
|
Other income (expense), net as a percent of distribution sales
|
|
|
0.3
|
%
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
0.5
|
%
|
During the nine months ended May 31,
2013, the Company recognized approximately $34,000 in net realized and unrealized losses on trading securities. The Company experienced
net realized and unrealized gains on trading securities of approximately $398,000 during the nine months ended May 31, 2012. Losses
in the current period were due to decreases in the value of the Company’s holdings, primarily as a result of short positions.
Gains in the prior year period were due to increases in the value of the Company’s holdings and its investment strategy throughout
that period. The gain on asset disposal was a result of the sale of the Deland and Brooksville Properties.
Income Tax Provision ($ in thousands)
|
|
Nine Months Ended
May 31,
|
|
|
$
|
|
|
%
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
739
|
|
|
$
|
1,261
|
|
|
$
|
(522
|
)
|
|
|
(41.4
|
)%
|
Percent of pre-tax net income
|
|
|
24.3
|
%
|
|
|
38.8
|
%
|
|
|
|
|
|
|
(14.5
|
)%
|
The provision for income taxes decreased
by approximately $522,000 in the nine months ended May 31, 2013 over the prior year period. This was a result of the release of
the Company’s reserves with regards to its California net operating losses. Prior to 2013, the State of California had suspended
the use of carryover net operating losses being deducted from current year income. This has been reinstated in 2013 allowing the
Company to recognize the California net operating loss assets.
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 (i) the 30, 60 or 90 day LIBOR (0.27% and 0.43% for the
90 day LIBOR at May 31, 2013 and August 31, 2012, respectively) plus 1.75% and/or (ii) the bank’s reference rate (3.25% at
May 31, 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, 2015.
The amounts outstanding under this line of credit as of May 31, 2013 and August 31, 2012 were approximately $6,465,000 and $7,450,000,
respectively. Availability under the line of credit was approximately $3,535,000 and $2,550,000 at May 31, 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 May 31, 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 term loan required monthly payments of $43,083 for two years and accrued interest at the
bank’s reference rate (3.25% at May 31, 2013 and August 31, 2012). The outstanding balance on this loan was repaid in full
in March 2013.
In October 2002, the Company refinanced and entered into a loan
agreement with GE Capital for the Orange Park Property. The loan requires monthly principal and interest payments totaling
$10,400 through December 2016. Interest is at the thirty-day LIBOR rate plus 3.75% (minimum interest rate of 7.34%). As of May
31, 2013, the outstanding balance due under the Company’s loan with GE Capital was approximately $394,000. Such loan was
reclassified as liabilities of assets held for sale on the accompanying consolidated balance sheets as of May 31, 2013 and August
31, 2012 (See Note 7).
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 through December 2014. Interest is fixed at 6% per annum. As of May 31, 2013,
the outstanding balance due on the loan to Community Bank was approximately $5,066,000.
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
$251,000 for the nine months ended May 31, 2013 as
compared with cash provided of
approximately
$1,079,000 for the nine months ended May 31, 2012.
The current period provision of cash was mainly due to current period net income and an increase in the Company’s inventory
and a decrease in the Company’s trade accounts payable. The prior year provision was due to the Company’s net income
along with a decrease in the deferred tax asset and an increase in trade accounts payable. These amounts were offset by an increase
in trade accounts receivable and inventory.
Cash Flows from Investing Activities
Cash provided
by investing activities was
approximately
$2,235,000 for the nine months ended May 31, 2013 as
compared with cash provided by investing activities of
approximately
$760,000 for the nine months
ended May 31, 2012. The current period provision was due primarily to the sale of the Deland and Brooksville Properties. This was
offset by the purchase of property and equipment by the Company, primarily for newly renovated office space at the Company’s
corporate headquarters in Anaheim, CA. The cash provided by investing activities during the nine months ended May 31, 2012 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 nine months ended May 31, 2013 was
approximately
$2,797,000 as
compared with cash provided by financing activities of
approximately
$721,000 for the nine months
ended May 31, 2012. Cash used in financing activities in the current period consisted mainly of paying down the Company’s
long-term debt. The cash provided by financing activities for the nine months ended May 31, 2012 was due mainly to an increase
in the Company’s bank overdraft due to a higher amount of outstanding checks at the period end.
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. 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.