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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 30, 2005 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period
from ________ to _________.
Commission File No. 0-14311
EACO CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Florida No. 59-2597349
State of Incorporation Employer Identification No.
2113 FLORIDA BOULEVARD
NEPTUNE BEACH, FLORIDA 32266
Address of Principal Executive Offices
Registrant's Telephone No. (904) 249-4197
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes___X___ No_____
Indicate by check mark whether the registrant is 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 May 7, 2005
EACO Corporation
Condensed Consolidated Statements of Operations
(Unaudited) For The Quarters Ended
-----------------------
March 30, March 31,
2005 2004
-----------------------
Revenues:
Sales $10,026,600 $10,259,300
Vending revenue 48,800 49,000
----------- -----------
Total revenues 10,075,400 10,308,300
----------- -----------
Cost and expenses:
Food and beverage 3,747,400 3,851,300
Payroll and benefits 2,810,100 2,893,500
Depreciation and amortization 500,400 490,600
Other operating expenses 1,560,100 1,470,700
General and administrative expenses 610,800 621,600
Franchise fees 174,200 371,200
Asset valuation charge 0 594,200
Loss on disposition of equipment
and closed store costs 19,200 12,200
----------- -----------
Total costs and expenses 9,422,200 10,305,300
----------- -----------
Earnings from operations 653,200 3,000
Investment gain 0 23,900
Interest and other income 56,200 53,400
Interest expense (451,200) (411,000)
----------- -----------
Earnings (loss) before
income taxes 258,200 (330,700)
Provision for income taxes -- --
----------- -----------
Net earnings (loss) 258,200 (330,700)
Undeclared cumulative preferred
stock dividend (19,100) --
----------- ------------
Net earnings (loss) available for
basic and diluted earnings (loss)
per share $239,100 ($330,700)
=========== ============
Basic earnings (loss) per share $0.06 ($0.09)
=========== ===========
Diluted earnings (loss) per share $0.06 ($0.09)
=========== ===========
See accompanying notes to condensed consolidated financial statements.
2
EACO Corporation
Condensed Consolidated Balance Sheets
(Unaudited) March 30, December 29,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $1,369,000 $151,100
Receivables 290,400 81,300
Inventories 259,700 235,200
Prepaid and other current assets 516,100 426,800
---------- -----------
Total current assets 2,435,200 894,400
Certificate of deposit 369,500 300,000
Property and equipment:
Land 6,371,600 6,967,200
Buildings and improvements 25,058,000 24,933,100
Equipment 11,987,300 11,880,000
Construction in progress 41,700 138,800
----------- -----------
43,458,600 43,919,100
Accumulated depreciation (18,138,900) (18,051,600)
----------- -----------
Net property and equipment 25,319,700 25,867,500
Other assets, principally deferred charges,
net of accumulated amortization 675,700 727,100
----------- -----------
$28,800,100 $27,789,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,546,000 $1,079,400
Accrued liabilities 1,498,800 1,778,000
Current portion of workers compensation benefit liability 600,000 569,500
Current portion of long-term debt 887,500 917,200
Current portion of obligation under capital lease 50,100 77,300
----------- -----------
Total current liabilities 4,582,400 4,421,400
Deferred rent 87,100 79,200
Deposit liability 24,100 23,300
Workers compensation benefit liability 615,200 628,500
Long-term debt 13,552,300 14,774,000
Deferred gain 1,514,600 1,169,400
Obligation under capital lease 5,433,600 3,941,400
----------- -----------
Total liabilities 25,809,300 25,037,200
Shareholders' equity:
Preferred stock of $.01 par; authorized
10,000,000 shares; outstanding 36,000
shares at March 30, 2005 (liquidation
value $900,000) 400 400
Common stock of $.01 par; authorized
8,000,000 shares;
outstanding 3,881,899 shares at
March 30, 2005 and December 29, 2004 38,800 38,800
Additional paid-in capital 10,884,300 10,903,300
Accumulated deficit (7,932,700) (8,190,700)
----------- -----------
Total shareholders' equity 2,990,800 2,751,800
----------- -----------
$28,800,100 $27,789,000
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
EACO Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the Quarters Ended
------------------------------
March 30, March 31,
2005 2004
------------ ------------
Operating activities:
Net income (loss) $258,200 ($330,700)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 500,400 490,600
Asset valuation charge -- 594,200
Director's fees in the form of stock options -- 20,000
Net realized gains on investments -- (23,900)
Amortization of loan fees 37,200 12,400
Amortization of deferred gain (22,600) (17,700)
Loss on disposition of equipment 15,200 12,200
(Decrease) increase in:
Receivables (209,100) 10,200
Inventories (24,500) 53,800
Prepaids and other current assets (89,300) (23,900)
Other assets (10,000) (5,600)
Increase (decrease) in:
Accounts payable 466,600 208,500
Accrued liabilities (298,600) (426,800)
Deferred revenue -- 70,900
Deferred rent 7,900 8,000
Deposit liability 800 3,300
Workers compensation benefit liability 17,200 (37,200)
---------- -----------
Net cash provided by operating activities 649,400 618,300
---------- -----------
Investing activities:
Net purchase of investments (69,500) (1,082,400)
Proceeds from sale of investments -- 184,600
Proceeds from securities sold, not yet purchased -- 57,000
Capital expenditures (521,500) (1,027,400)
---------- ----------
Net cash used in investing activities (591,000) (1,868,200)
---------- ----------
Financing activities:
Proceeds from sale-leaseback 2,600,000 --
Payments on long-term debt (1,251,400) (176,500)
Payment of sale-leaseback costs (160,000) --
Preferred stock dividend (19,100) --
Payment on capital lease (10,000) (6,100)
Proceeds from issuance of common stock -- 300
---------- ----------
Net cash provided by (used in) financing activities 1,159,500 (182,300)
---------- ----------
Net increase (decrease) in cash and cash equivalents 1,217,900 (1,432,200)
Cash and cash equivalents - beginning of period 151,100 2,287,800
---------- ----------
Cash and cash equivalents - end of period $1,369,000 $855,600
========== ==========
Noncash investing and financing activities:
Net change in unrealized gain -- $11,700
========== ==========
Building acquired under capital lease $1,475,000 --
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the quarter for interest $431,000 $399,800
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
EACO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 30, 2005
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
and the interim financial information instructions to Form 10-Q,
and do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation of the results for the interim periods
have been included. Operating results for the quarter ended
March 30, 2005 are not necessarily indicative of the results
that may be expected for the fiscal year ending December 28,
2005. 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 29, 2004.
The condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany profits, transactions and balances have
been eliminated.
Note 2. Earnings (Loss) Per Share
Basic earnings and loss per share for the quarters ended March
30, 2005 and March 31, 2004 were computed based on the weighted
average number of common shares outstanding. Diluted earnings
and 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
outstanding during the period. Dilutive shares are represented
by shares under option. For the quarters ended March 30, 2005
and March 31, 2004, stock options totaling 106,800 and 153,300
shares were excluded from the computation of diluted loss per
share due to their antidilutive effect.
5
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 - forty years through 2003, eighteen months
beginning in 2004.
The gross carrying amount of the deferred financing costs
was $841,900 and $878,400 as of March 30, 2005 and December
29, 2004, respectively. Accumulated amortization related
to deferred financing costs was $241,900 and $241,100 as of
March 30, 2005 and December 29, 2004, respectively.
Amortization expense was $37,200 and $12,400 for the
quarters ended March 30, 2005 and March 31, 2004.
Amortization expense for each of the next five years is
expected to be $43,000.
The gross carrying amount of the initial franchise rights
was $294,700 and $299,700 as of March 30, 2005 and December
29, 2004. Accumulated amortization related to initial
franchise rights was $271,600 and $252,400 as of March 30,
2005 and December 29, 2004, respectively. Amortization
expense was $24,200 and $27,600 for the quarters ended
March 30, 2005 and March 31, 2004, 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 2005 presentation.
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 granting
stock options and restricted stock. The exercise price of each
option equals the market price of the Company's stock on the
date of grant. Options vest in one-quarter increments over a
four-year period starting on the date of grant. An option's
maximum term is 10 years. See Note 10 "Common Shareholders'
Equity" in the Company's Annual Report for the year ended
December 29, 2004 for additional information regarding the
Company's stock options.
6
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". Pursuant
to the disclosure requirements of SFAS 148, the following table
provides an expanded reconciliation for all periods presented:
Quarter Ended Quarter Ended
March 30, 2005 March 31, 2004
------------------ ------------------
Net earnings (loss), as reported $258,200 $(330,700)
Stock based compensation expense
included in net income,
net of tax -- 5,000
Deduct: Total stock-based
compensation expense
determined under fair value,
net of tax -- (900)
------------ ------------
Pro forma net earnings (loss) $258,200 $(326,600)
Undeclared cumulative preferred
stock dividend (19,100) --
------------ ------------
239,100 (326,600)
Earnings (loss) per share - basic
and diluted as reported $ 0.06 $ (0.09)
Pro forma $ 0.06 $ (0.09)
Note 6. Preferred Stock
The Company has outstanding 36,000 shares of Series A Cumulative
Convertible Preferred Stock with a dividend rate of 8.5%. In the
quarter ended March 30, 2005, the Board of Directors declared and
the Company paid dividends in the amount of $19,100. The balance
of undeclared cumulative preferred dividends at March 30, 2005 was
$19,100.
Note 7. Sale Leaseback Transaction
On December 30, 2004, the Company completed a sale leaseback
transaction to refinance one of its restaurants. The Company sold
the property for $2.6 million and paid off its existing mortgage
of approximately $1.1 million on the property. The leaseback of
the building is accounted for as a capital lease and the leaseback
of the land is accounted for as an operating lease, with a
deferred gain of $387,100 being recognized over the twenty-year
life of the lease. The lease requires annual payments beginning
at $260,000, with various increases over the life of the lease.
The Company plans to use the proceeds of this transaction to fund
several of its remodels to its new concepts.
7
Note 8. Pending Asset Sale
On February 23, 2005, the Company announced that it had
entered into an asset purchase agreement under which it
would sell sixteen of its restaurants to Banner Buffets,
LLC ("Buyer"). The total purchase price for the sixteen
restaurant businesses, premises, equipment and other assets
used in restaurant operations will be $29,950,000,
$25,950,000 in cash at closing and a promissory note for $4
million. The note is secured by restaurant equipment
valued at less than $1 million. At the present time, the
Company does not have sufficient information to evaluate
the true value of the $4 million note. The Buyer would
also assume obligations under capital leases of
approximately $5.5 million.
As of the date of the filing of this Quarterly Report on
Form 10-Q, the Buyer is still in the process of obtaining
financing to complete the transaction. Once the Company is
satisfied with the Buyer's financing commitment, it will
circulate an information statement to its shareholders to
provide them additional details on the transaction. Due to
delays in the Buyer's financing process, and the
requirements under the securities laws to circulate the
shareholder information statement, the transaction will not
close by the original May 31, 2005 deadline contained in
the asset purchase agreement. That date has now been
extended to June 30, 2005. If the Buyer successfully
obtains the financing, it is expected that the sale will be
completed by June 30th, although that timing will still be
subject to certain other due diligence items between the
Buyer and its lender. Due to these uncertainties, the
Company has presented its results for the first quarter of
2005 as continuing operations.
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
8
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.
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 2004 Annual Report on Form 10-K.
Results of Operations
Quarter Ended March 30, 2005 versus March 31, 2004
The Company experienced a decrease of 2.3% in total sales
during the thirteen weeks of 2005 compared to the first thirteen
weeks of 2004, due to the closure of two restaurants since the
prior year, offset by the opening of one new restaurant. Same-
store sales (average weekly sales in restaurants that have been
operating for at least 18 months) in the first quarter of 2005
increased 0.4% from the same period in 2004, compared to an
increase of 7.3% from 2004 as compared to 2003.
The costs and expenses of the Company's restaurants include
food and beverage, payroll, payroll taxes and employee benefits,
depreciation and amortization, repairs, maintenance, utilities,
supplies, advertising, insurance, property taxes, rents and
licenses. The Company's food, beverage, payroll, and employee
benefit costs as a percentage of sales are believed to be higher
than the industry average, due to the Company's philosophy of
providing customers with high value of food and service for
every dollar a customer spends. In total, food and beverage,
payroll and benefits, depreciation and amortization and other
operating expenses as a percentage of sales increased to 86.0%
in the first quarter of 2005 from 84.5% in the same quarter of
2004.
9
Food and beverage costs as a percentage of sales decreased
to 37.4% in 2005 from 37.5% in 2004, due primarily to price
increases implemented by the Company. Payroll and benefit costs
as a percentage of sales decreased to 28.0% in 2005 from 28.2%
in 2004, primarily due to lower health insurance costs. Other
operating expenses increased to 15.6% in 2005 from 14.0% in
2004, due primarily to increased advertising costs and increased
rent costs from two new leases.
Depreciation and amortization expenses were 5.0% and 4.8%
in 2005 and 2004, respectively. General and administrative
expenses as a percentage of sales were 6.1% in the first
quarters of 2005 and 2004. Franchise fees as a percentage of
sales decreased to 1.7% in 2005 from 3.6% in 2004. The decrease
results from the amendment to the franchise agreement, which
requires the Company to convert all Ryan's restaurants to its new
concepts by June 2005.
Interest expense increased to $451,200 in the first quarter
of 2005 from $411,000 in the same quarter of 2004, due to
interest from two new capital lease obligations and the write-
off of loan fees associated with a sale leaseback refinancing,
offset by reductions from lower debt balances.
The effective income tax rate for the first three months of
2005 and 2004 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 first quarter of 2004 included realized gains
from the sale of marketable securities of $23,900. The Company
did not have any investment in marketable securities in 2005.
10
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 write-off of the net book value of the
leasehold improvements from the closure of a leased restaurant.
The restaurant was an under-performing restaurant, and the
Company was able to assign the lease to another company.
Net earnings were $258,200 in the first quarter of 2005 ,
compared to net loss of $330,700 in the first quarter of 2004.
Earnings per share for the quarter was 7 cents in 2005 compared
to loss per share of 9 cents in 2004.
The Company's operations are subject to seasonal
fluctuations. Revenues per restaurant generally increase from
January through April and decline September through December.
Operating results for the quarter ended March 30, 2005 are not
indicative of the results that may be expected for the fiscal
year ending December 28, 2005.
Liquidity and Capital Resources
Substantially all of the Company's revenues are derived
from cash sales. Inventories are purchased on credit and are
rapidly converted 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 March 30, 2005, the Company had a working capital
deficit of $2,147,200 compared to $3,527,000 at December 29,
2004. The decrease was due to approximately $1.3 million in
cash received from the sale leaseback transaction as described
below. Cash provided by operating activities increased to
$649,400 in the first quarter of 2005 from $618,300 in the first
quarter of 2004, primarily due to timing differences in the
payments of accounts payable.
The Company spent $521,500 in the first quarter of 2005 for
property and equipment. Capital expenditures for 2005, based on
present costs and plans for capital improvements, are estimated
to be $1.7 million. This amount is based on budgeted
expenditures for building improvements and equipment for
remodeling of seven restaurants to the Company's new concepts
and normal recurring equipment purchases and minor building
improvements ("Capital Maintenance Items"). The Company believes
11
it has sufficient funds for the four remodels to the new
concepts. Should the Company's net cash generated by operations
decline significantly below expectations, it would have to raise
the necessary capital for remodeling these restaurants. If the
Company could not raise sufficient capital quickly enough, it
would still be required to change the name and signs of these
restaurants, in accordance with the amended Franchise Agreement,
but capital requirements for such changes would be minimal.
Management estimates the cost of opening any future new
restaurants to be approximately $3 million. To the extent the
Company decides to open new restaurants or remodel its existing
restaurants to its new concept in 2005 and beyond, management
plans to fund any new restaurant construction or remodels 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 identify 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.
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 March 30, 2005,
four stores remain to be converted. However, due to delays
caused by the pending asset sale by the Company (see "Recent
Developments" below), the Company may not be able to comply with
the June 30, 2005 deadline. In this event, the Company would be
required to pay an additional fee of 2% of sales on any Ryan's
restaurant not converted by June 30. The Company expects to be
able to complete all of the conversions no later than the end of
July 2005, so these additional fees should not have a material
impact on the Company. Company management estimates that total
funds required to accomplish the conversion of the four
remaining restaurants to be approximately $600,000. On December
30, 2004, the Company completed a sale leaseback financing for
$2.6 million, which netted the Company approximately $1.3
million in cash after payment of debt and closing expenses.
This should provide sufficient cash to complete the remodels,
barring any significant declines in cash generated by
operations.
12
In June 2004, the Company sold 145,833 shares of its Common
Stock directly to Bisco Industries, Inc. Profit Sharing and
Savings Plan for a total purchase price of $175,000 cash. In
September 2004, the Company sold 36,000 shares of the Company's
newly authorized Series A Cumulative Convertible Preferred Stock
at a price of $25 per share, for a total purchase price of
$900,000 cash. The Preferred Stock was sold to the Company's
Chairman. Dividends are paid quarterly when declared by the
Company's Board of Directors. The Company paid a declared
dividend of $19,100 during the first quarter of 2005.
Undeclared dividends as of March 30, 2005 were $19,100.
On December 30, 2004, the Company completed a sale
leaseback transaction to refinance one of its restaurants.
The Company sold the property for $2.6 million and paid off
its existing mortgage of approximately $1.1 million on the
property. The leaseback of the building is accounted for as
a capital lease and the leaseback of the land is accounted
for as an operating lease, with the deferred gain being
recognized over the twenty-year life of the lease. The lease
requires annual payments beginning at $260,000, with various
increases over the life of the lease. The Company plans to
use the proceeds of this transaction to fund several of its
remodels to its new concepts.
In July 2002, the Company completed a sale leaseback
transaction to refinance one of its restaurants in Tampa,
Florida. The Company sold the property for $3.0 million and
paid off its existing mortgage of approximately $1.1 million on
the property. The leaseback of the building was accounted for as
a capital lease and the leaseback of the land is accounted for
as an operating lease, with the deferred gain on the sale being
recognized over the twenty-year life of the lease. The lease
agreement requires annual payments of $330,000, with increases
of 10% every five years. Management used the proceeds of the
transaction to fund a portion of the construction of a new
restaurant in 2004.
In April 2002, the Company completed a private placement
with Bisco for 435,000 shares at $0.92 per share, which was
based on the average closing price of the Company's common stock
on the ten trading days prior to the sale. The Company used the
$400,200 proceeds from this sale to fund remodels of several
restaurants in 2002.
The Company is required to pledge collateral for its
workers' compensation self insurance liability with the Florida
13
Self Insurers Guaranty Association ("FSIGA"). The Company
increased this collateral by $69,500 during the first quarter of
2005, and now has a total of $1.37 million pledged collateral.
Of this amount, Bisco Industries, Inc. ("Bisco") provides $1
million of this collateral. EACO Corporation's Chairman of the
Board of Directors, Glen Ceiley, is the President of Bisco. The
Company may be required to increase this collateral pledge from
time to time in the future, based on its workers' compensation
claim experience and various FSIGA requirements for self-insured
companies.
The Company has entered into a series of loan agreements
with GE Capital. As of March 30, 2005, the outstanding balance
due under the Company's various loans with GE Capital was
$14,439,800. The weighted average interest rate for the GE
Capital loans is 7.5%.
In 2004 and 2005, the Company paid franchise fees of 4% of
gross sales for Ryan's restaurants only. Total franchise fees
paid in the first quarter of 2005 were $174,200. As the Company
converts each restaurant from Ryan's to its new concepts, no
franchise fees are paid on those converted restaurants, which
will improve the Company's cash flow.
The Company sold four restaurants in 2004, resulting in
total net proceeds of $3,144,500. The Company used these
proceeds to pay off mortgages on the four restaurants totaling
approximately $1,816,000. Total net gains on sales of property
in 2004 were $62,700.
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,
14
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 February 23, 2005, the Company announced that it had
entered into an asset purchase agreement under which it would
sell all sixteen of its operating restaurants to Banner Buffets,
LLC ("Buyer"). The total purchase price for the restaurant
businesses, premises, equipment and other assets used in
restaurant operations will be $29,950,000, $25,950,000 in cash
at closing and a promissory note for $4 million. The note is
secured by restaurant equipment valued at less than $1 million.
At the present time, the Company does not have sufficient
information to evaluate the true value of the $4 million note.
The Buyer would also assume obligations under capital leases of
approximately $5.5 million. The transaction is subject to
shareholder approval.
The Buyer had a 30-day due diligence period which ended
March 24, 2005, during which time the Buyer could have
terminated the transaction if its review revealed any
information that could have a material adverse effect on its
ability to consummate the transaction that could not be cured
prior to the closing. The Buyer did not terminate the
transaction, and has posted a $500,000 non-refundable deposit,
which is held in escrow by an independent third party. As of
the date of the filing of this Quarterly Report on Form 10-Q,
the Buyer had not provided evidence to the Company indicating
that it had obtained financing to complete the transaction.
Because of this, the Company has the right to terminate this
transaction at any time and retain at least $250,000 of the
Buyer's deposit.
Due to delays in the Buyer's financing process, and the
requirements under the securities laws to circulate the
shareholder information statement, the transaction will not
close by the original May 31, 2005 deadline contained in the
asset purchase agreement. That date has now been extended to
June 30, 2005. If the Buyer successfully obtains the financing,
it is expected that the sale would be completed by June 30th,
although that timing would still be subject to certain other due
diligence items between the Buyer and its lender. Due to these
uncertainties, the Company has presented its results for the
first quarter of 2005 as continuing operations.
15
If the transaction does close, EACO Corporation would
continue to exist with limited business operations, and the
Company plans to seek out other business opportunities.
Item 3. Qualitative and Quantitative Disclosure about
Market Risk
There has been no significant changes in the Company's
exposure to market risk during the first fiscal quarter of 2005.
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 29, 2004.
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 President and Chief
Operating Officer and the Director of Finance. Based upon that
evaluation, the Company's President and Chief Operating Officer
and the 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 over financial reporting that has
materially affected, or is reasonably likely to materially
affect internal controls over financial reporting subsequent to
the date of their evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other
than proceedings arising in the normal course of
business, to which the Company, or any of its
16
subsidiaries, is a party or to which any of their
properties known to be contemplated by any
governmental authority; nor are there material
proceedings known to the Company, pending or
contemplated, in which any director, officer,
affiliate or any principal security holder of the
Company or any associate of the foregoing is a party
or has an interest adverse to the Company.
ITEM 2. CHANGES IN SECURITIES
None
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. (Exhibit 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 2-
1, Registration No. 33-1887, is incorporated herein by
reference.)
3.03 Articles of Amendment to the Articles of Incorporation
of Family Steak Houses of Florida, Inc. (Exhibit 3.03 to
the Company's Registration Statement on Form S-1,
Registration No. 33-1887, is incorporated herein by
reference.)
17
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.)
31.01 Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.02 Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.01 Chief Executive Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.02 Chief Financial Officer Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
18
(b) Reports on Form 8-K.
On January 19, 2005, the Company filed a report on Form
8-K regarding the press release announcing the
completion of a sale leaseback financing designed to
provide funding for remodels of several of its Ryan's
restaurants to its new concepts.
On February 23, 2005, the Company filed a report on Form
8-K regarding the press release on the Company's
announcement it had entered into an asset purchase
agreement with Banner Buffets LLC, under which it will
sell all of its operating restaurants.
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: May 27, 2005 Edward B. Alexander
President/Chief Operating Officer
/s/ Stephen C. Travis
Date: May 27, 2005 Stephen C. Travis
Director of Finance
19
Exhibit 31.01
Certification
I, Edward Alexander, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
EACO Corporation.
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
20
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, 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 in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; 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; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 27, 2005
/s/ Edward B. Alexander
Edward B. Alexander
President/Chief Operating Officer
21
Exhibit 31.02
Certification
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 quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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
quarterly 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-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the
Evaluation Date;
22
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, 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 in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; 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; and
6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there
were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 27, 2005
/s/ Stephen C. Travis
Stephen C. Travis
Director of Finance
23
Exhibit 32.01
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 March 30,
2005, 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: May 27, 2005 /s/ Edward B. Alexander
Edward B. Alexander
President / Chief Operating Officer
24
Exhibit 32.02
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 EACO Corporation's (the "Company") Quarterly
Report on Form 10-Q for the period ending March 30, 2005, 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: May 27, 2005 By: /s/ Stephen C. Travis
Stephen C. Travis
Director of Finance
24