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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 September 29, 2004
Commission File No. 0-14311
EACO Corporation
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
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 X_ No____
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 November 4, 2004
EACO Corporation
Consolidated Results of Operations
(Unaudited) For The Quarters Ended For The Nine Months Ended
---------------------------------------------------
September 29, October 1 September 29, October 1,
2004 2003 2004 2003
---------------------------------------------------
Revenues:
Sales $8,710,800 $8,558,900 $28,929,300 $28,854,500
Vending revenue 40,600 53,600 136,800 160,900
---------- ----------- ----------- -----------
Total revenues 8,751,400 8,612,500 29,066,100 29,015,400
---------- ----------- ----------- -----------
Cost and expenses:
Food and beverage 3,296,400 3,271,200 10,988,300 10,989,700
Payroll and benefits 2,811,700 2,707,300 8,905,700 8,697,300
Depreciation and amortization 494,300 488,300 1,476,200 1,511,900
Other operating expenses 1,536,500 1,628,000 4,849,900 5,013,200
General and administrative expenses 526,400 481,900 1,566,100 1,588,100
Franchise fees 245,200 341,800 912,100 1,153,400
Asset valuation charge --- --- 594,200 ---
Loss on store closings and disposition
of equipment 9,900 23,300 135,100 87,900
---------- ----------- ----------- -----------
8,920,400 8,941,800 29,427,600 29,011,500
---------- ----------- ----------- -----------
(Loss) earnings from operation (169,000) (329,300) (361,500) 3,900
Investment gain (loss) 1,600 (78,300) 12,400 (105,800)
Interest and other income 60,800 61,800 169,800 193,500
Interest expense (433,000) (422,700) (1,262,400) (1,309,900)
---------- ----------- ----------- -----------
Loss before income taxes (539,600) (768,500) (1,441,700) (1,218,300)
Provision for income taxes -- -- -- --
---------- ----------- ----------- -----------
Net loss ($539,600) ($768,500) ($1,441,700) ($1,218,300)
Undeclared cumulative preferred
stock dividend (6,300) --- (6,300) ---
---------- ----------- ----------- -----------
Net loss available for basic
and diluted loss per share (545,900) (768,500) (1,448,000) (1,218,300)
========== =========== =========== ===========
Basic loss per share ($0.14) ($0.21) ($0.38) ($0.33)
========== =========== =========== ===========
Basic weighted average common
shares outstanding 3,881,500 3,706,200 3,790,000 3,706,200
========== =========== =========== ===========
Diluted loss per share ($0.14) ($0.21) ($0.38) ($0.33)
========== =========== =========== ===========
Diluted weighted average common
shares outstanding 3,881,500 3,706,200 3,790,000 3,706,200
========== =========== =========== ===========
2
EACO Corporation
Consolidated Balance Sheets
(Unaudited) September 29, December 31,
2004 2003
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $282,500 $2,287,800
Investments 200 32,600
Receivables 147,600 110,600
Inventories 240,100 300,400
Prepaid and other current assets 571,800 500,500
----------- -----------
Total current assets 1,242,200 3,231,900
Certificate of deposit 300,000 10,000
Property and equipment:
Land 7,310,100 7,310,000
Buildings and improvements 25,368,800 22,858,000
Equipment 12,308,600 11,509,200
Construction in progress 162,000 388,300
----------- -----------
45,149,500 42,065,500
Accumulated depreciation (18,667,700) (17,713,500)
----------- -----------
Net property and equipment 26,481,800 24,352,000
Property held for sale --- 2,288,800
Other assets, principally deferred charges,
net of accumulated amortization 775,400 924,000
----------- -----------
$28,799,400 $30,806,700
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,157,400 $1,121,900
Securities sold, not yet purchased -- 1,187,400
Accrued liabilities 1,476,500 1,801,700
Current of workers compensation liability 646,000 646,000
Current portion of long-term debt 993,200 718,400
Current portion of obligation under capital lease 75,200 30,900
----------- -----------
Total current liabilities 4,348,300 5,506,300
Deferred rent 71,300 47,500
Deposit liability 23,300 31,300
Workers compensation benefit liability 467,000 469,800
Long-term debt 15,364,100 17,470,700
Deferred gain 1,187,100 1,240,300
Obligation under capital lease 3,973,200 2,279,800
----------- -----------
Total liabilities 25,434,300 27,045,700
Shareholders' equity:
Preferred stock of $.01 par; authorized
10,000,000 shares; 36,000 shares issued 400 ---
Common stock of $.01 par; authorized
4,000,000 shares;
outstanding 3,881,900 shares 38,800 37,100
Additional paid-in capital 10,928,800 9,869,600
Accumulated deficit (7,602,900) (6,159,100)
Accumulated other comprehensive income --- 13,400
----------- -----------
Total shareholders' equity 3,365,100 3,761,000
----------- -----------
$28,799,400 $30,806,700
=========== ===========
See accompanying notes to consolidated financial statements.
3
Consolidated Statements of Cash Flows
(Unaudited) For the Nine Months Ended
------------------------
September 29, October 1,
2004 2003
---------- -----------
Operating activities:
Net loss ($1,441,700) ($1,218,300)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 1,476,200 1,511,900
Asset valuation charge 594,200 --
Directors' fees in the form of stock options 20,000 --
Net realized losses on investments 300 105,800
Amortization of loan fees 59,400 46,200
Amortization of deferred gain (53,200) (53,100)
Gain (loss) on disposition of property and equipment 90,800 (132,700)
Increase (decrease) in:
Receivables (37,000) (7,200)
Inventories 60,300 200
Prepaids and other current assets (71,300) (125,600)
Other assets (5,300) (44,600)
Increase (increase) in:
Accounts payable 35,500 (208,800)
Accrued liabilities (327,200) (39,600)
Deferred rent 23,800 23,800
Deposit liability (8,000) 16,500
Workers compensation benefit liability (2,800) 6,100
---------- -----------
Net cash provided by (used in) operating activities 416,000 (119,400)
---------- -----------
Investing activities:
Purchase of investments (1,699,900) (284,900)
Principal receipts on mortgages receivable --- 342,000
Proceeds from sale of investments 184,600 272,000
Proceeds from securities sold not yet purchased 57,000 727,600
Proceeds from sale of property held for sale 2,260,100 335,000
Proceeds from sale of property and equipment --- 1,796,000
Capital expenditures (2,406,000) (608,500)
---------- -----------
Net cash (used in) provided by investing activities (1,604,200) 2,579,200
---------- -----------
Financing activities:
Payments on long-term debt and obligations under capital leases (1,858,400) (1,963,800)
Proceeds from the issuance of common stock 175,300 --
Proceeds from the issuance of preferred stock 900,000 --
Expenses of the issuance of preferred stock (36,000) --
---------- -----------
Net cash used in financing activities (817,100) (1,963,800)
---------- -----------
Net (decrease) increase in cash and cash equivalents (2,005,300) 496,000
Cash and cash equivalents - beginning of period 2,287,800 1,679,600
---------- -----------
Cash and cash equivalents - end of period $282,500 $2,175,600
========== ===========
Noncash investing and financing activities:
Net change in unrealized gain (2,100) ($15,800)
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the nine months for interest $1,227,100 $1,390,300
========== ===========
Building acquired under capital lease $1,762,300 --
========== ===========
See accompanying notes to consolidated financial statements.
4
EACO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 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 condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
and the interim financial information instructions to Form 10-Q,
and do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation of the results for the interim periods
have been included. Operating results for the quarter and nine
months ended September 29, 2004 are not necessarily indicative
of the results that may be expected for the fiscal year ending
December 29, 2004. The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires the use of certain estimates
by management in determining the amount of assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. There are risks inherent in estimating and therefore,
actual results could differ from those estimates. 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 quarter and nine months ended
September 29, 2004 and October 1, 2003 were computed based on
the weighted average number of common shares outstanding.
Diluted loss per share for those periods have been computed
5
based on the weighted average number of common shares
outstanding, giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive shares
are represented by shares under option. Due to the Company's net
losses for the quarters ended September 29, 2004, and October 1,
2003, and for the nine months ended September 29, 2004 and
October 1, 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
$888,900 and $924,000 as of September 29, 2004 and December 31,
2003, respectively. Accumulated amortization related to
deferred financing costs was $232,700 and $216,200 as of
September 29, 2004 and December 31, 2003, respectively.
Amortization expense was $18,800 and $12,000 for the three-month
periods ended September 29, 2004 and October 1, 2003,
respectively. Amortization expense was $59,400 and $46,200 for
the nine-month periods ended September 29, 2004 and October 1,
2003, respectively. Amortization expense for each of the next
five years is expected to be $45,500.
The gross carrying amount of the initial franchise rights was
$354,700 as of September 29, 2004 and December 31, 2003.
Accumulated amortization related to initial franchise rights was
$279,900 and $179,800 as of September 29, 2004 and December 31,
2003, respectively. Amortization expense was $27,600 and $2,500
for the three-month periods ended September 29, 2004 and October
1, 2003, respectively. Amortization expense was $94,100 and
$7,900 for the nine-month periods ended September 29, 2004 and
October 1, 2003, respectively. Franchise rights will be fully
amortized by June 30, 2005.
Note 4. Reclassifications
Certain items in the prior interim 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 per 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 Nine Months Ended
Sept. 29, 2004 Oct. 1, 2003 Sept. 29, 2004 Oct. 1, 2003
---------------------------- ---------------------------
Net loss, as reported $(539,600) $(768,500) $(1,441,700) $(1,218,300)
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) (1,400) (2,400) (4,500)
--------- ---------- ---------- --------
Pro forma net loss $(540,400) $(769,900) $(1,444,100) $(1,222,800)
Undeclared cumulative preferred
stock dividend (6,300) --- (6,300) ---
--------- --------- ---------- ---------
$(546,700) $(769,900) $(1,459,400) $(1,222,800)
Loss per share - basic
and diluted as reported $(0.14) (0.21) $(0.38) $(0.33)
Pro forma $(0.14) $(0.21) $(0.38) $(0.33)
Note 6. Shareholders' Equity
The following summarizes shareholders' equity transactions from
January 1, 2003 through September 29, 2004.
7
Additional Accumulated Other
Preferred Stock Common Stock Paid-in Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (loss) Total
Balance,
January 1, 2003 3,706,218 37,100 9,869,600 (3,758,100) (4,100) 6,144,500
Comprehensive loss:
Net loss (2,401,000) (2,401,000)
Other comprehensive
income:
Unrealized losses
on securities:
Net unrealized
holding losses
arising during
the period 17,500 17,500
Less: reclassification
adjustment for
net losses
included in net loss --
----------
Total comprehensive
loss (2,383,500)
-----------------------------------------------------------------------------------
Balance,
December 31, 2003 3,706,218 $37,100 $9,869,600 ($6,159,100) $13,400 $3,761,000
Director fees in the
form of stock options 300 19,700 20,000
Proceeds from
common stock 175,682 1,400 173,600 175,000
Proceeds from
Preferred Stock 36,000 $400 899,600 900,000
Expense of Preferred
Stock sale (33,700) (33,700)
Net unrealized gains (2,100) (13,400) (15,500)
Net loss (1,441,700) (1,441,700)
------- ---- ---------- ------- ---------- ------------ -------- -----------
Balance,
September 29, 2004 36,000 $400 3,881,900 $38,800 $10,928,800 ($7,602,900) $0 ($3,365,100)
======= ==== ========= ======= =========== ============ ======== ===========
Note 7. 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 1,000 hours
of service within the year. 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-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 accrued matching contribution was $9,000 and $10,500
for the quarters ended June 30, 2004 and 2003 respectively and
8
$27,000 and $31,500 for the nine months ended September 29, 2004
and 2003 respectively.
Note 8. Preferred Stock
The Company has sold and issued 36,000 shares of Series A
Cumulative Convertible Preferred Stock to the Company's
Chairman. The Preferred Stock bears a stated dividend of
8-1/2% of the liquidation preference payable quarterly in
arrears in cash when and as declared by the Board of
Directors.
The liquidation preference of the Preferred Stock is $25 per
share and the Preferred Stock issued was sold at that price for
a total purchase price of $900,000. The stock is convertible
into Common Stock of the Company at the option of the holder
initially at the rate of 27.778 shares of Common Stock for each
share of Preferred Stock. The conversion ratio is subject to
anti-dilution provisions.
Note 9. Subsequent Event
On October 27, 2004, the Company sold its operating location in
Tallahassee, Florida. The sale resulted in cash proceeds to the
Company of approximately $310,000, after payment of debt of
approximately $500,000 and closing costs associated with the
sale.
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.
9
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 September 29, 2004 versus October 1, 2003
The Company experienced an increase in total sales during
the third quarter of 2004 compared to the third quarter of 2003.
Total sales increased 1.8%, due primarily to a new restaurant
opened in 2004 and increases in same-store sales, offset by
losses in sales from three hurricanes estimated at $660,000 and
the closure of one restaurant. 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 third quarter of 2004 increased 3.8% from the
same period in 2003, compared to a decrease of 4.8% in the third
quarter of 2003 as compared to 2002. The increase in same-store
sales resulted primarily from increases at two stores remodeled
to the Company's new Whistle Junction concept.
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 decreased
to 93.4% in the third quarter of 2004 from 93.8% in the same
quarter of 2003, primarily as a result of lower food costs and
other operating expenses, offset by higher payroll and benefits
costs.
Food and beverage costs as a percentage of sales decreased
to 37.8% in the third quarter of 2004 from 38.2% in the same
period of 2003 primarily as a result of price increases
implemented by the Company since the same period in 2003.
10
Payroll and benefits as a percentage of sales increased to 32.3%
in the third quarter of 2004 from 31.6% in the same quarter of
2003 due to an increase in initial payroll costs at converted
and newly opened Whistle Junction restaurants.
Other operating expenses as a percentage of sales decreased
to 17.6% in the third quarter of 2004 from 18.3% in 2003
primarily due to reduced materials and supplies costs and
efficiencies from the increased same-store sales. Depreciation
and amortization were 5.7% in 2004 and 2003.
General and administrative expenses as a percentage of
sales decreased to 6.0% in the third quarter of 2004, as
compared to 6.4% in the third quarter of 2003, primarily due to
lower legal fee expenses.
The effective income tax rate for the quarters ended
September 29, 2004 and October 1, 2003 was 0.0%.
Net loss for the third quarter of 2004 was $539,600,
compared to net loss of $768,500 in the third quarter of 2003.
Net loss per share was $.14 for 2004, compared to net loss per
share of $.21 in 2003.
Nine Months Ended September 29, 2004 versus October 1, 2003
For the nine months ended September 29, 2004, total sales
increased 0.3% compared to the same period of 2003. Increases
in same-store sales and sales from a new Whistle Junction
restaurant opened in May 2004 were offset by the closure of two
restaurants. Same-store sales increased 7.1% for the nine
months ended September 29, 2004 from the same period in 2003,
primarily due to sales increases from the converted Whistle
Junction restaurants.
Food and beverage costs as a percentage of sales for the
nine month period ended September 29, 2004 decreased to 38.0%
from 38.1% for the same period in 2003. Payroll and benefits as
a percentage of sales increased to 30.8% in 2004 from 30.1% in
2003, due primarily to higher initial payroll costs at converted
and newly opened Whistle Junction restaurants.
For the nine months ended September 29, 2004, other
operating expenses as a percentage of sales increased to 16.8%
from 16.6% in 2003, primarily due to store opening expenses of
approximately $262,000 from the Whistle Junction restaurants,
offset by efficiencies gained from the increased same-store
11
sales. Depreciation and amortization decreased to 5.1% for the
nine-month period ended September 29, 2004, compared to 5.2% in
2003.
General and administrative expenses were 5.4% for the nine-
month periods ended September 29, 2004 and October 1, 2003.
Interest expense decreased for the first nine months to
$1,262,400 from $1,309,900 for the same period in 2003 due to
reductions in total debt.
The effective income tax rate for the nine-month periods
ended September 29, 2004 and October 1, 2003 was 0.0%.
The Company sometimes 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 nine months of 2004 include realized gains from
the sale of marketable securities of $12,400, compared to
realized losses of $105,800 in 2003. The Company has no marketable
securities or margin debt as of September 29, 2004.
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.
Net loss for the nine months ended September 29, 2004 was
$1,441,700 or $.38 per share, compared to net loss of
$1,218,300, or $.33 per share for the same period in 2003.
12
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 nine months
ended September 29, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ending December
29, 2004.
Liquidity and Capital Resources
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 meet 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 September 29, 2004, the Company had a working capital
deficit of $3,106,100 compared to $2,274,400 at December 31,
2003. The increase was primarily due to lower cash balances
resulting from capital expenditures for restaurant conversions.
Cash provided by operating activities was $414,000 in the first
nine months of 2004, compared to cash provided by operations of
$369,200 in the first nine months of 2003.
In June 2004, the Company sold 145,833 shares of its Common
Stock directly to Bisco Industries, Inc. Profit Sharing and
Savings Plan for a total purchase price of $175,000 cash. In
September 2004, the Company sold 36,000 shares of the Company's
newly authorized Series A Cumulative Convertible Preferred Stock
at a price of $25 per share for a total purchase price of
$900,000 cash. The Preferred Stock was sold to the Company's
Chairman.
During the nine month period ended September 29, 2004, the
Company sold three of its previously closed locations for gross
sale prices totaling $2,427,500. The three stores had an
aggregate net book value of $2,288,800. Related debt of
$1,327,400 was paid off. Net of expenses of the sales of
$167,400, the Company recognized a loss of $28,700 on the sales.
Total capital expenditures for 2004, based on present costs
and plans for capital improvements, are estimated to be
approximately $2.8 million. This amount is based on expenditures
for building, leasehold improvements and equipment for one new
restaurant opened in May 2004, the remodeling of three stores to
the Whistle Junction concept, several remodels to the Company's
13
Florida Buffet concept and normal recurring equipment purchases
and minor building improvements ("Capital Maintenance Items").
The Company spent approximately $2,406,000 in the first nine
months of 2004 for property and equipment. The Company
anticipates funding remaining 2004 capital expenditures from
cash on hand and 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 September 29,
2004, ten stores remain to be converted. Company management
estimates that total funds required to accomplish the conversion
of all ten restaurants to be approximately $2,050,000. As of
September 29, 2004, management is pursuing various sources of
capital to accomplish the conversions including traditional
financing, sales leaseback transactions and refinancing existing
restaurants. The Company currently has a contract for a sale
leaseback financing for $3 million, which would net the Company
approximately $1.7 million in cash after payment of debt and
closing expenses. The transaction is subject to the buyer's due
diligence review, which must be completed by November 30, 2004.
In the event that the necessary conversion capital is not
obtained, eight of the unconverted restaurants would likely be
converted to the Florida Buffet concept for approximately
$25,000 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 in
2005 and beyond, 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 entered into a series of loan agreements
with GE Capital Franchise Finance Corporation ("GE Capital").
As of September 29, 2004, the outstanding balance due under the
Company's various loans with GE Capital was $16,357,300. The
weighted average interest rate for the GE Capital loans is 7.4%.
The Company used the proceeds of the GE Capital loans primarily
14
to refinance its debt and to fund construction of new
restaurants.
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
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. Effective June 21, 2004, the Company
was 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
"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 the quarter ended
September 29, 2004.
15
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.
A newly built Whistle Junction opened in May 2004 and two
Whistle Junction remodels have opened as of September 2004, with
a third scheduled to open in November 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 September 2004,
six restaurants have been converted to the Florida Buffet. Two
additional restaurants will be converted to the Florida Buffet
in the fourth 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 nine 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.
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
16
(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. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS.
On September 1, 2004, the Company sold 36,000 shares
of newly issued Series A Cumulative Convertible
Preferred Stock to Glen F. Ceiley, the Company's
Chairman. The Preferred Stock bears a stated dividend
of 8-1/2% of the liquidation preference payable
quarterly in arrears in cash when and as declared by
the Board of Directors.
The liquidation preference of the Preferred Stock is
$25 per share and the Preferred Stock was sold at that
price for a total purchase price of $900,000. The
stock is convertible into Common Stock of the Company
17
at the option of the holder initially at the rate of
27.778 shares of Common Stock for each share of
Preferred Stock. The conversion ratio is subject to
anti-dilution provisions.
The Preferred Stock was issued under the exemption
from registration requirements provided by
Section 4(2) of the Securities Act of 1933 as a
transaction by an issuer not involving any public
offering. The Preferred Stock was offered solely to
Mr. Ceiley.
The Company used the proceeds from the sale of the
Preferred Stock to improve its cash position and for
working capital.
The Company received an opinion from an investment
banking firm that the price received by the Company
for the Preferred Stock was fair to the Company and
its stockholders from a financial standpoint.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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.)
18
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. (Exhibit
3.10 to the Company's Quarterly Report on Form 10-Q
filed with the Commission on September 3, 2004, is
incorporated herein by reference.)
19
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
On July 22, 2004, the Company filed a report on Form
8-K regarding the press release on the Company's name
change to EACO Corporation.
On August 9, 2004, the Company filed a report on Form
8-K regarding the press release on the Company's
financial results as of and for the quarter ended
June 30, 2004.
On September 1, 2004, the Company filed a report on
Form 8-K announcing an amendment to its Articles of
Incorporation, for the purpose of an issuance of
preferred stock by the Company to Glen Ceiley, its
Chairman and CEO.
20
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: November 12, 2004 Edward B.Alexander
President / COO
/s/ Stephen C. Travis
Date: November 12, 2004 Stephen C. Travis
Director of Finance
21
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
22
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: November 12, 2004
/s/ Edward B. Alexander
Edward B. Alexander
President / COO
23
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
24
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: November 12, 2004
/s/ Stephen C. Travis
Stephen C. Travis
Director of Finance
25
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 September
29, 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: November 12, 2004 By:/s/ Edward B. Alexander
Edward B. Alexander
Chief Operating Officer/
President
26
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 September
29, 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: November 12, 2004 By:/s/ Stephen C. Travis
Stephen C. Travis
Director of Finance
27