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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter ended June 30, 2004
Commission File No. 0-14311
EACO Corporation
(Registrant)
Incorporated under the laws of IRS Employer Identification
Florida No. 59-2597349
2113 FLORIDA BOULEVARD
NEPTUNE BEACH, FLORIDA 32266
Registrant's Telephone No. (904) 249-4197
Family Steak Houses of Florida, Inc.
(Former Name of Registrant)
Indicate by check mark whether the registrant 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_____ No__X__
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes_____ No__X__
Title of each class Number of shares outstanding
Common Stock 3,881,901
$.01 par value As of August 4, 2004
EACO Corporation
Consolidated Results of Operations
(Unaudited) For The Quarters Ended For The Six Months Ended
--------------------------------------------------
June 30, July 2, June 30, July 2,
2004 2003 2004 2003
--------------------------------------------------
Revenues:
Sales $9,959,200 $9,567,400 $20,218,500 $20,295,500
Vending revenue 47,600 56,100 96,600 107,200
---------- ----------- ----------- -----------
Total revenues 10,006,800 9,623,500 20,315,100 20,402,700
---------- ----------- ----------- -----------
Cost and expenses:
Food and beverage 3,840,600 3,619,200 7,691,900 7,718,500
Payroll and benefits 3,138,500 2,887,700 6,032,000 6,090,000
Depreciation and amortization 491,300 508,200 981,900 1,023,600
Other operating expenses 1,789,100 1,607,500 3,220,300 3,180,200
General and administrative expenses 527,700 542,400 1,155,300 1,143,700
Franchise fees 295,600 382,500 666,800 811,700
Asset valuation charge --- --- 594,200 ---
Loss on store closings and disposition
of equipment 58,600 39,400 93,000 73,900
---------- ----------- ----------- -----------
10,141,400 9,586,900 20,435,400 20,041,600
---------- ----------- ----------- -----------
(Loss) earnings from operation (134,600) 36,600 (120,300) 361,100
Investment (loss) gain (13,100) (19,300) 10,800 (26,500)
Interest and other income 26,900 19,900 69,000 93,300
(Loss) gain on sale of property (32,100) 9,400 (32,100) 9,400
Interest expense (418,500) (441,100) (829,500) (887,200)
---------- ----------- ----------- -----------
Loss before income taxes (571,400) (394,500) (902,100) (449,900)
Provision for income taxes -- -- -- --
---------- ----------- ----------- -----------
Net loss ($571,400) ($394,500) ($902,100) ($449,900)
========== =========== =========== ===========
Basic loss per share ($0.15) ($0.11) ($0.24) ($0.12)
========== =========== =========== ===========
Basic weighted average common
shares outstanding 3,771,000 3,706,200 3,744,000 3,706,200
========== =========== =========== ===========
Diluted loss per share ($0.15) ($0.11) ($0.24) ($0.12)
========== =========== =========== ===========
Diluted weighted average common
shares outstanding 3,771,000 3,706,200 3,744,000 3,706,200
========== =========== =========== ===========
2
EACO Corporation
Consolidated Balance Sheets
(Unaudited) June 30, December 31,
2004 2003
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $45,100 $2,287,800
Investments 2,400 32,600
Receivables 206,500 110,600
Inventories 254,600 300,400
Prepaid and other current assets 566,600 500,500
----------- -----------
Total current assets 1,075,200 3,231,900
Certificate of deposit 300,000 10,000
Property and equipment:
Land 7,310,000 7,310,000
Buildings and improvements 25,241,700 22,858,000
Equipment 12,268,900 11,509,200
Construction in progress 77,100 388,300
----------- -----------
44,897,700 42,065,500
Accumulated depreciation (18,222,900) (17,713,500)
----------- -----------
Net property and equipment 26,674,800 24,352,000
Property held for sale 703,800 2,288,800
Other assets, principally deferred charges,
net of accumulated amortization 825,000 924,000
----------- -----------
$29,578,800 $30,806,700
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,054,700 $1,121,900
Construction accounts payable 154,800 ---
Securities sold, not yet purchased -- 1,187,400
Accrued liabilities 1,811,400 1,801,700
Current of workers compensation liability 646,000 646,000
Current portion of long-term debt 753,800 718,400
Current portion of obligation under capital lease 71,900 30,900
----------- -----------
Total current liabilities 4,492,700 5,506,300
Deferred rent 63,400 47,500
Deposit liability 23,300 31,300
Workers compensation benefit liability 435,400 469,800
Long-term debt 16,331,300 17,470,700
Deferred gain 1,204,800 1,240,300
Obligation under capital lease 3,986,000 2,279,800
----------- -----------
Total liabilities 26,536,800 27,045,700
Shareholders' equity:
Preferred stock of $.01 par; authorized
10,000,000 shares; none issued
Common stock of $.01 par; authorized
4,000,000 shares;
outstanding 3,881,900 shares 38,800 37,100
Additional paid-in capital 10,063,100 9,869,600
Accumulated deficit (7,061,500) (6,159,100)
Accumulated other comprehensive income 1,600 13,400
----------- -----------
Total shareholders' equity 3,042,000 3,761,000
----------- -----------
$29,578,800 $30,806,700
=========== ===========
See accompanying notes to consolidated financial statements.
3
Consolidated Statements of Cash Flows
(Unaudited) For the Six Months Ended
------------------------
June 30, July 2,
2004 2003
---------- -----------
Operating activities:
Net loss ($902,100) ($449,900)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 981,900 1,023,600
Asset valuation charge 594,200 --
Net realized (gains) losses on investments (700) 26,500
Amortization of loan fees 40,600 34,200
Loss on disposition of property held for sale 32,100 ---
Amortization of deferred gain (35,500) (35,400)
Loss (gain) on disposition of property and equipment 32,100 (125,100)
(Decrease) increase in:
Receivables (95,900) (24,600)
Inventories 45,800 (5,900)
Prepaids and other current assets (46,100) 18,000
Other assets (8,400) 11,800
(Decrease) increase in:
Accounts payable (67,200) (53,900)
Construction accounts payable 154,800 ---
Accrued liabilities 9,700 (99,300)
Deferred rent 15,900 15,900
Deposit liability (8,000) 24,000
Workers compensation benefit liability (34,400) 9,300
---------- -----------
Net cash provided by operating activities 708,800 369,200
---------- -----------
Investing activities:
Purchase of investments (1,700,000) (349,500)
Principal receipts on mortgages receivable --- 342,000
Proceeds from sale of investments 184,600 280,400
Proceeds from securities sold not yet purchased 57,000 572,600
Net proceeds from sale of property held for sale 1,552,900 ---
Proceeds from sale of property and equipment --- 1,796,000
Capital expenditures (2,102,200) (343,900)
---------- -----------
Net cash ( used in) provided by investing activities (2,007,700) 2,297,600
---------- -----------
Financing activities:
Payments on long-term debt and obligations under capital leases (1,119,100) (1,788,300)
Proceeds from the issuance of common stock 175,300 --
---------- -----------
Net cash used in financing activities (943,800) (1,788,300)
---------- -----------
Net (decrease) increase in cash and cash equivalents (2,242,700) 878,500
Cash and cash equivalents - beginning of period 2,287,800 1,679,600
---------- -----------
Cash and cash equivalents - end of period $45,100 $2,558,100
========== ===========
Noncash investing and financing activities:
Net change in unrealized gain $12,200 ($17,600)
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the six months for interest $821,400 $982,000
========== ===========
Building acquired under capital lease $1,762,300 --
========== ===========
See accompanying notes to consolidated financial statements.
4
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
EACO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts
of EACO Corporation (the "Company"), (formerly Family Steak
Houses of Florida, Inc.) and its wholly-owned subsidiary.
All significant intercompany profits, transactions and
balances have been eliminated.
The accompanying unaudited 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 30, 2004 are not necessarily
indicative of the results that may be expected for the fiscal
year ending December 29, 2004. 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
31,2003.
Note 2. Loss Per Share
Basic loss per share for the thirteen and twenty-six weeks
ended June 30, 2004 and July 2, 2003 were computed based on
the weighted average number of common shares outstanding
during the respective period. Diluted loss per share for
those periods have been computed based on the weighted
average number of common shares outstanding, giving effect
to all dilutive potential common shares that were
5
outstanding during the period. Dilutive shares are
represented by shares under option and stock warrants. Due
to the Company's net losses for the thirteen weeks ended
June 30, 2004, and July 2, 2003, and for the twenty-six
weeks ended June 30, 2004 and July 2, 2003, all potentially
dilutive securities are antidilutive and have been excluded
from the computation of diluted earnings per share for
those periods.
Note 3. 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, and initial franchise rights - 18 months
beginning January 1, 2004 in connection with the Company's
decision to terminate its franchise agreement.
The gross carrying amount of the deferred financing costs was
$905,500 and $924,000 as of June 30, 2004 and December 31, 2003,
respectively. Accumulated amortization related to deferred
financing costs was $230,400 and $216,200 as of June 30, 2004
and December 31, 2003, respectively. Amortization expense was
$28,600 and $22,200 for the three-month periods ended June 30,
2004 and July 2, 2003, respectively. Amortization expense was
$40,600 and $34,200 for the six-month periods ended June 30,
2004 and July 2, 2003, respectively. Amortization expense for
each of the next five years is expected to be $46,200.
The gross carrying amount of the initial franchise rights was
$354,700 as of June 30, 2004 and December 31, 2003. Accumulated
amortization related to initial franchise rights was $246,300
and $179,800 as of June 30, 2004 and December 31, 2003,
respectively. Amortization expense was $38,800 and $22,200 for
the three-month periods ended June 30, 2004 and July 2, 2003,
respectively. Amortization expense was $66,500 and $34,200 for
the six-month periods ended June 30, 2004 and July 2, 2003,
respectively. Franchise rights will be fully amortized by June
30, 2005.
Note 4. Reclassifications
Certain items in the prior period financial statements have
been reclassified to conform to the 2004 presentation.
6
Note 5. Stock Based Compensation
The Company accounts 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 grant of
stock options and restricted stock. The exercise price of each
option equals the market price of the Company's stock on the
date of the grant. Options vest in one-quarter increments over
a four-year period starting on the date of the grant. An
option's maximum term is ten years. See Note 9 "Common
Shareholders' Equity" in the Company's Annual Report for the
year ended December 31, 2003 for additional information
regarding the Company's stock options.
Pursuant to the disclosure requirements of Statement of
Financial Accounting Standards "SFAS" 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". the
following table provides an expanded reconciliation for all
periods presented:
Three Months Ended Six Months Ended
June 30, 2004 July 2, 2003 June 30, 2004 July 2, 2003
------------------ ----------------
Net (loss) earnings, as reported $(571,400) $(394,500) $(902,100) $(449,900)
Add: Stock based compensation
expense included in net
income, net of tax --- --- --- ---
Deduct: Total stock-based
compensation expense
determined under fair value,
net of tax (800) (2,200) (1,600) (4,500)
--------- ---------- ----------- ---------
Pro forma net loss $(572,200) $(396,700) $(903,700) $(454,400)
========= ========= ========== ==========
(Loss) per share - basic
and diluted as reported $(0.15) $(0.11) $(0.24) $(0.12)
Pro forma $(0.15) $(0.11) $(0.24) $(0.12)
Note 6. Employee Benefit Plans
In conjunction with the Financial Accounting Standards
Board "FASB" revision of SFAS No. 132, Employer's
Disclosures about Pensions and Other Post-retirement
Benefits, issued in December 2003, the following describes
the Company's benefit plan.
Employees of the Company participate in a profit sharing
and retirement plan covering substantially all full-time
employees at least twenty-one years of age and with more
than one year of service. The plan was established in
August 1991. Contributions are made to the plan at the
discretion of the Company's Board of Directors. No profit-
7
sharing contributions have been made since the inception of
the plan.
The profit sharing plan includes a 401(k) feature by which
employees can contribute, by payroll deduction only, a
portion of their annual compensation not to exceed $13,000
in 2004.
The plan provides for a Company matching contribution of
$.25 per dollar of the first 6% of employee contributions.
The Company's matching contribution was $9,000 and $10,500
for the quarters ended June 30, 2004 and 2003 respectively
and $18,000 and $21,000 for the six months ended June 30,
2004 and 2003 respectively.
Note 7. Subsequent Event
On September 1, 2004, the Company completed a private
placement of cumulative convertible preferred stock with
Glen Ceiley, its Chairman and CEO, which provided $900,000
cash to the Company. The stock has a stated dividend rate
of 8.5%, payable quarterly in arrears when declared and is
cumulative. The stock is convertible to common stock at
$.90 per share. In addition, the stock is redeemable at
any time at $27.50 per share and has a liquidating
preference of $25 per share.
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 grouped on
a restaurant-by-restaurant basis. The recoverability of the
assets is measured by a comparison of the carrying value of each
restaurant's assets to future net cash flows expected to be
generated by such restaurant's 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.
8
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 2003 Annual Report on Form 10-K.
Results of Operations
Quarter Ended June 30, 2004 versus July 2, 2003
The Company experienced an increase in total sales during the
second thirteen weeks of 2004 compared to the second thirteen
weeks of 2003. Total sales increased 4.1%, due primarily to
significant sales increases from two stores remodeled under the
Company's new Whistle Junction concept. Same-store sales
(average unit sales in restaurants that have been open for at
least 18 months and operating during comparable weeks during the
current and prior year) in the second quarter of 2004 increased
9.9% from the same period in 2003, compared to a decrease of
5.5% in the second quarter of 2003 as compared to 2002. The
increase in same-store sales results primarily from significant
sales increases from two stores remodeled under the Whistle
Junction concept, an improved economy compared to 2003 and price
increases implemented by the Company since the prior year's
comparable quarter.
The operating expenses of the Company's restaurants include food
and beverage, payroll and benefits, depreciation and
amortization, and other operating expenses, which include
repairs, maintenance, utilities, supplies, advertising,
insurance, property taxes and rents. In total, food and
beverage, payroll and benefits, depreciation and amortization
and other operating expenses as a percentage of sales increased
to 93.0% or $9,259,500 in the second quarter of 2004 from 90.1%
or $8,622,600 in the same quarter of 2003, primarily as a result
of store opening costs and training costs associated with two
existing stores reopened under the Whistle Junction concept and
the opening of one new Whistle Junction restaurant. Newly
opened and reopened stores traditionally have opening expenses
ranging from $75,000 to $100,000 for training, advertising and
9
other start up expenses. In addition, they incur higher than
normal payroll expenses for a few months subsequent to opening.
Food and beverage costs as a percentage of sales increased to
38.6% in the second quarter of 2004 from 37.8% in the same
period of 2003 primarily as a result of higher beef costs in
2004 and enhanced menus initiated by the Company in connection
with the conversions to Whistle Junction. Payroll and benefits
as a percentage of sales increased to 31.5% in the second
quarter of 2004 from 30.2% in the same quarter of 2003 due to
higher initial payroll costs at converted and newly opened
Whistle Junction restaurants.
Other operating expenses as a percentage of sales increased to
18.0% in the second quarter of 2004 from 16.8% in 2003 due to
store opening expenses of $208,000 during the quarter ended June
30, 2004 from the Whistle Junction restaurants opened during the
quarter versus store opening expenses of $0 during the same
quarter in 2003. Depreciation and amortization decreased to
4.9% in 2004 from 5.3% in 2003, due to higher average store
sales in 2004.
General and administrative expenses as a percentage of sales
decreased to 5.3% in the second quarter of 2004, from 5.7% in
the second quarter of 2003, primarily due to the increase in
total sales.
The effective income tax rate for the quarters ended June 30,
2004 and July 2, 2003 was 0.0%.
Net loss for the second quarter of 2004 was $571,400, compared
to net loss of $394,500 in the second quarter of 2003. Net loss
per share was $.15 for the second quarter of 2004, compared to
net loss per share of $.11 for the second quarter of 2003.
Six Months Ended June 30, 2004 versus July 2, 2003
For the six months ended June 30, 2004, total sales were
$20,218,500 compared to $20,295,500 for the same period in 2003.
Same-store sales increased 8.5% for the six months ended June
30, 2004 from the same period in 2003.
Food and beverage costs as a percentage of sales for the six
month periods ended June 30, 2004 and July 2, 2003 were 38.0%.
Higher beef prices in 2004 were offset by sales price increases
implemented by the Company since 2003. Payroll and benefits as
10
a percentage of sales decreased to 29.8% in 2004 from 30.0% in
2003, due to the increase in same store sales.
For the six months ended June 30, 2004, other operating expenses
as a percentage of sales increased to 15.9% or $3,220,300 from
15.1% or $3,180,700 in 2003, primarily due to store opening
expenses of $261,800 from the Whistle Junction restaurants
opened during the period versus $0 in the same period of 2003.
Depreciation and amortization decreased to 4.9% for the six-
month period ended June 30, 2004, compared to 5.0% in 2003.
General and administrative expenses for the six-month periods
ended June 30, 2004 and July 2, 2003 were 5.7% and 5.6% of sales
respectively. Interest expense decreased for the first six
months to $829,500 from $887,200 for the same period in 2003 due
to reductions in total debt.
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 60 days to 24 months.
Management occasionally purchases marketable securities using
margin debt. In determining whether to engage in transactions
on margin, management 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. Management 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 six months of 2004 include realized gains from
the sale of marketable securities of $10,800, compared to
realized losses of $26,500 in 2003. At June 30, 2004, the
Company had no monies invested in margin potential securities.
The Company recognized a non-cash asset valuation charge of
$594,200 in 2004 in accordance with SFAS No. 144, "Accounting
for the Impairment of or Disposal of Long-Lived Assets." The
charge was based on the assessment of one under-performing
restaurant as of March 31, 2004. The same impairment assessment
performed in 2003 indicated no impairment charge was required in
2003.
11
The effective income tax rate for the six-month periods ended
June 30, 2004 and July 2, 2003 was 0.0%.
Net loss for the six months ended June 30, 2004 was $902,100 or
$.24 per share, compared to net loss of $449,900, or $.12 per
share for the same period in 2003.
The Company's operations are subject to some seasonal
fluctuations. Revenues per restaurant generally increase from
January through April and decline from September through
December. Operating results for the quarter or six months ended
June 30, 2004 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 29, 2004.
Liquidity and Capital Resources
As of June 30, 2004, the Company had cash on hand of only
$45,100, and its ability to generate sufficient cash flow to
meet all of its obligations on a timely basis going forward was
questionable. However, the Company recently completed a
preferred stock private placement with Glen Ceiley, its Chairman
and CEO, which provided $900,000 cash to the Company. Based on
this, and the Company's continued positive same-store sales
trends, the Company projects it does have sufficient cash flow
to meets its obligations.
Substantially all of the Company's revenues are derived from
cash sales. Inventories are purchased on credit and are
converted rapidly to cash. Therefore, the Company does not carry
significant receivables or inventories and, other than repayment
of debt, working capital requirements for continuing operations
are not significant.
At June 30, 2004, cash amounted to $45,100 and the Company had a
working capital deficit of $3,417,400 compared to $2,274,400 at
December 31, 2003. Cash provided by operating activities
increased to $708,800 in the first six months of 2004 from
$369,200 in the first six months of 2003, due to timing
differences in the payments of accounts payable and accrued
liabilities.
During the six month period ended June 30, 2004, the
Company sold two of its previously closed locations for
gross sale prices totaling $1,662,500. The two stores had
an aggregate net book value of $1,585,000. Related debt of
$775,900 was paid off. Net of expenses of the sales of
12
$109,600, the Company recognized a loss of $32,100 on the
sales.
Total capital expenditures for 2004, based on present costs and
plans for capital improvements, are estimated to be
approximately $2.3 million. This amount is based on expenditures
for land, building, leasehold improvements and equipment for one
new restaurant opened in May 2004 and the remodeling of two
stores to the Whistle Junction concept completed in the first
six months of 2004, and normal recurring equipment purchases and
minor building improvements ("Capital Maintenance Items"). The
Company spent approximately $2,102,200 in the first six months
of 2004 for property and equipment. The Company anticipates
funding remaining 2004 capital expenditures from operations.
Current plans call for the Company to convert all of its
remaining stores to either the Whistle Junction concept or the
Florida Buffet concept by June 30, 2005. As of June 30, 2004,
twelve stores remain to be converted. Company management
estimates that total funds required to accomplish the conversion
of all twelve restaurants to be approximately $3,060,000. As of
June 30, 2004, management is pursuing various sources of capital
to accomplish the conversions including traditional financing,
sales leaseback transactions and refinancing existing
restaurants. No commitment for financing of the conversions has
been made as of June 30, 2004. In the event that conversion
capital is not obtained, all twelve unconverted restaurants
would be converted to the Florida Buffet concept for
approximately $20,000 per store.
Management estimates the cost of opening one new restaurant
based on current average costs to be approximately $2,900,000.
To the extent the Company decides to open new restaurants,
management plans to fund any new restaurant construction either
by GE Capital funding, sales leaseback financing, developer-
funded leases, refinancing existing restaurants, or attempting
to get additional financing from other lenders. The Company's
ability to open new restaurants is also dependent upon its
ability to locate suitable locations at acceptable prices, and
upon certain other factors beyond its control, such as obtaining
building permits from various government agencies. The
sufficiency of the Company's cash to fund operations and
necessary Capital Maintenance Items will depend primarily on
cash provided by operating activities.
The Company has a series of loan agreements with GE Capital
Franchise Finance Corporation ("GE Capital"). As of June 30,
13
2004, the outstanding balance due under the Company's various
loans with GE Capital was $17,085,100. The weighted average
interest rate for the GE Capital loans is 7.4%.
Forward-looking Statements
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 or other lenders to extend financing commitments;
repairs or similar expenditures required for existing
restaurants due to weather or acts of God; the Company's ability
to identify and secure suitable locations on acceptable terms
and open new restaurants in a timely manner; the Company's
success in selling restaurants listed for sale; the economic
conditions in the new markets into which the Company expands;
changes in customer dining patterns; competitive pressure from
other national and regional restaurant chains and other food
vendors; business conditions, such as inflation or a recession,
and growth in the restaurant industry and general economy; and
other risks identified from time to time in the Company's SEC
reports, registration statements and public announcements.
Recent Developments
As of June 30, 2004, the Company had cash on hand of only
$45,100, and its ability to generate sufficient cash flow to
meet all of its obligations on a timely basis going forward was
questionable. However, the Company recently completed a
preferred stock private placement with Glen Ceiley, its Chairman
and CEO, which provided $900,000 cash to the Company. Based on
this, and the Company's continued positive same-store sales
trends, the Company projects it does have sufficient cash flow
to meets its obligations.
On June 17, 2004, the shareholders of the Company voted to amend
the Articles of Incorporation of the Company in order to change
the name of the Company from Family Steak Houses of Florida,
Inc. to EACO Corporation. The Company will be conducting
business under the name "Eatery Concepts".
In December 2003, the Company entered into an amendment to its
franchise agreement with Ryan's Family Steak Houses, Inc. (the
14
"Franchisor") to terminate the franchise agreement between the
two companies by June 2005. This amendment requires the Company
to convert a specific number of its Ryan's restaurants each
quarter to a new name beginning the first quarter of 2004, and
requires all of the Company's restaurants to be renamed by June
2005. As soon as each restaurant is converted, franchise fees
are no longer payable to the Franchisor. The Company was in
compliance with the requirement as of this quarter ended June
30, 2004.
The Company plans to convert a majority of its restaurants to a
new concept called "Whistle Junction". These conversions entail
a substantial remodel of the restaurant buildings designed to
look like an old train station on the exterior. The interior of
the restaurant will also feature the train theme, including an
operating model railroad running through the dining room. The
operation of the converted restaurants will continue to be a
buffet format with an upgraded menu and improved service levels.
Two Whistle Junction remodels have opened as of June 2004, and a
newly built Whistle Junction opened in May 2004.
The remainder of the Company's restaurants will be converted to
an alternate concept called the "Florida Buffet", based on
various factors including their location. As of June 2004,
three restaurants have been converted to the Florida Buffet.
Two additional restaurants will be converted to the Florida
Buffet in the third quarter of 2004. The Florida Buffet
conversions include interior and exterior changes to the
building designed to incorporate a "Florida look" theme,
although the changes are not as extensive as those for the
Whistle Junction. Menu and service enhancements are also
included in the Florida Buffet locations, designed to attract
and maintain increased customer volumes.
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 six months of 2004. For
discussion of the Company's exposure to market risk, refer to
Item 7A, Quantitative and Qualitative Disclosures about Market
Risk, contained in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2003.
15
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 Company's Chairman (who
serves as the principal executive officer), President (who
serves as the principal operating officer), Director of Finance
(who serves as the principal financial and accounting officer)
and another member of the Board of Directors. Based upon that
evaluation, the Company's Chairman, President and Director of
Finance have 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 or in other factors that could
significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to, or threatened with,
litigation from time to time, in the normal course of
its business. Management, after reviewing all pending
and threatened legal proceedings, considers that the
aggregate liability or loss, if any, resulting from
the final outcome of these proceedings will not have a
material effect on the financial position or operation
of the Company. The Company will, from time to time
when appropriate in management's estimation, record
adequate reserves in the Company's financial
statements for pending litigation.
ITEM 2. CHANGES IN SECURITIES
None
16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 17, 2004, the Company held its annual
meeting of shareholders to elect directors to
serve for the upcoming year.
(b) The following table sets forth the number of
votes for and against each of the nominees for
director.
Nominee For Withheld
Glen F. Ceiley 3,349,651 22,526
Jay Conzen 3,349,811 22,666
Stephen Catanzaro 3,349,696 22,781
William Means 3,349,751 22,726
The Company is unable to determine the number of
broker non-votes.
Glen F. Ceiley, Jay Conzen, Stephen Catanzaro and
William Means were elected as directors by the
affirmative vote of a majority of the 3,372,477 shares
of the Company's common stock represented in person or
by proxy at the annual meeting of shareholders.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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. (Exhibits 3.01 to the Company's
Registration Statement on Form S-1, Registration No.
33-1887, is incorporated herein by reference.)
3.02. Bylaws of Family Steak Houses of Florida, Inc. (Exhibit
3.02 to the Company's Registration Statement on Form S-1
Registration No. 33-1887, is incorporated herein by
reference.)
17
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
of Family Steak Houses of Florida, Inc., changing the
name of the corporation to EACO Corporation.
11. Table detailing number of shares and common stock
equivalents used in the computation of basic and diluted
(loss) earnings per share.
18
13. Annual Report to Shareholders of Family Steak Houses of
Florida, Inc. on Form 10-K filed with the Commission on
March 29, 2004 is hereby incorporated by reference.
31.1 Chief Executive Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Chief Financial Officer certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Chief Financial Officer certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
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/ Edward B.Alexander
Date: September 2, 2004 Edward B.Alexander
President / COO
/s/ Stephen C. Travis
Date: September 2, 2004 Stephen C. Travis
Director of Finance
19
Exhibit 31.1
CERTIFICATIONS
I, Edward B. Alexander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
EACO Corporation.
2. Based on my knowledge, this report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have;
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiary, is made known
to us by others within those entities, particularly
during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this quarterly report our conclusions about the
effectiveness of the disclosure controls and
procedures, as of the end of the period covered by
this report based on such evaluation; and
c) disclosed in this report any change in the
registrant's internal control over financial reporting
that occurred during the registrant's most recent
20
fiscal quarter (the registrant's fourth fiscal quarter
in the case of an annual report) that has materially
affected, or is reasonably likely to materially
affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls over
financial reporting.
Date: September 2, 2004
/s/ Edward B. Alexander
Edward B. Alexander
President / COO
21
Exhibit 31.2
I, Stephen C. Travis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
EACO Corporation.
2. Based on my knowledge, this report does not
contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements
made, in light of the circumstances under which such
statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and have;
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiary, is made known
to us by others within those entities, particularly
during the period in which this report is being
prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the
effectiveness of the disclosure controls and
procedures, as of the end of the period covered by
this report based on such evaluation; and
c) disclosed in this report any change in the
registrant's internal control over financial reporting
that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter
in the case of an annual report) that has materially
22
affected, or is reasonably likely to materially
affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls over
financial reporting.
Date: September 2, 2004
/s/ Stephen C. Travis
Stephen C. Travis
Director of Finance
23
Exhibit 32.1: Certification of Periodic Reports
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the EACO Corporation's (the "Company")
Quarterly Report on Form 10-Q for the period ending June 30,
2004, as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Edward B. Alexander, Chief
Operating Officer/President of the Company, certify pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that,:
(1). The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
(2). The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
Date: September 2, 2004 By:/s/ Edward B. Alexander
Edward B. Alexander
Chief Operating Officer/
President
24
Exhibit 32.2: Certification of Periodic Reports
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the EACO Corporation's (the "Company")
Quarterly Report on Form 10-Q for the period ending June 30,
2004, as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Stephen C. Travis, Director
of Finance for the Company, certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that,:
(1). The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
(2). The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
Date: September 2, 2004 By:/s/ Stephen C. Travis
Stephen C. Travis
Director of Finance
25