UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter ended June 29, 2005
Commission File No. 0-14311
EACO Corporation
(Registrant)
Incorporated under the laws of IRS Employer Identification
Florida No. 59-2597349
2113 FLORIDA BOULEVARD
NEPTUNE BEACH, FLORIDA 32266
Registrant's Telephone No. (904) 249-4197
EACO Corporation
(Former Name of Registrant)
Indicate by check mark whether the registrant has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes 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 3,890,101
$.01 par value As of August 12, 2005
EACO Corporation
Consolidated Results of Operations
(Unaudited) For The Quarters Ended For The Six Months Ended
--------------------------------------------------
June 29, June 30, June 29, June 30,
2005 2004 2005 2004
--------------------------------------------------
Revenues:
Rental income $32,800 $32,800 $65,600 $65,600
---------- ----------- ----------- -----------
Total revenues 32,800 32,800 65,600 65,600
---------- ----------- ----------- -----------
Cost and expenses:
Payroll and benefits 6,400 4,600 13,400 11,600
Depreciation and amortization 35,800 48,000 83,100 95,300
Other operating expenses 45,800 50,100 84,300 103,900
General and administrative expenses 190,200 180,400 365,200 354,100
---------- ----------- ----------- -----------
Total costs and expenses 278,200 283,100 546,000 564,900
---------- ----------- ----------- -----------
Loss from continuing operations (245,400) (250,300) (480,400) (499,300)
Investment gain 2,100 10,800 2,100 10,800
Interest and other income 28,600 19,300 49,500 37,800
Interest expense (34,800) (36,600) (69,700) (73,600)
---------- ----------- ----------- -----------
Loss from continuing operations,
before income taxes (249,500) (256,800) (498,500) (524,300)
Income tax benefit 213,200 -- 213,200 --
---------- ----------- ----------- -----------
Loss from continuing operations (36,300) (256,800) (285,300) (524,300)
Income (loss) on discontinued operations,
net of income tax benefit 2,579,200 (314,600) 3,086,400 (377,800)
---------- ----------- ----------- -----------
Net income (loss) attributable
to common shareholders 2,542,900 (571,400) 2,801,100 (902,100)
Cumulative preferred stock dividend (19,100) --- (38,300) ---
---------- ----------- ----------- -----------
Net income (loss) available for
basic and diluted earnings (loss)
per share $2,523,800 ($571,400) $2,762,800 ($902,100)
========== =========== =========== ===========
Basic income (loss) per share
Continuing operations ($0.01) ($0.07) ($0.08) ($0.14)
Discontinued operations 0.66 (0.08) 0.79 (0.10)
---------- ----------- ----------- -----------
Net income (loss) $0.65 ($0.15) $0.71 ($0.24)
========== =========== =========== ===========
Basic weighted average common
shares outstanding 3,881,900 3,771,000 3,881,900 3,744,000
========== =========== =========== ===========
Diluted income (loss) per share
Continuing operations ($0.01) ($0.07) ($0.08) ($0.14)
Discontinued operations 0.63 (0.08) 0.78 (0.10)
---------- ----------- ----------- -----------
Net income (loss) $0.62 ($0.15) $0.70 ($0.24)
========== =========== =========== ===========
Diluted weighted average common
shares outstanding 4,072,900 3,771,000 3,972,800 3,744,000
========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
EACO Corporation
Consolidated Balance Sheets
(Unaudited) June 29, December 29,
2005 2004
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $628,300 $151,100
Receivables 69,500 81,300
Inventories 6,000 235,200
Prepaid and other current assets 211,500 426,800
Deferred income tax benefit 213,200 ---
Assets held for sale 27,448,800 ---
----------- -----------
Total current assets 28,577,300 894,400
Certificate of deposit 369,500 300,000
Property and equipment:
Land 588,300 6,967,200
Buildings and improvements 2,942,800 24,933,100
Equipment 2,567,700 11,880,000
Construction in progress --- 138,800
----------- -----------
6,098,800 43,919,100
Accumulated depreciation (4,330,800) (18,051,600)
----------- -----------
Net property and equipment 1,768,000 25,867,500
Other assets, principally deferred charges,
net of accumulated amortization 73,800 727,100
----------- -----------
$30,788,600 $27,789,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $17,500 $1,079,400
Securities sold, not yet purchased 64,300 ---
Accrued liabilities 57,400 1,778,000
Current portion of workers compensation
benefit liability 329,400 569,500
Current portion of long-term debt 105,400 917,200
Current portion of obligation under capital lease --- 77,300
Liabilities associated with assets held for sale 22,152,200 ---
----------- -----------
Total current liabilities 22,726,200 4,421,400
Deferred rent --- 79,200
Deposit liability 47,300 23,300
Workers compensation benefit liability 731,500 628,500
Long-term debt 1,769,100 14,774,000
Deferred gain --- 1,169,400
Obligation under capital lease --- 3,941,400
----------- -----------
Total liabilities 25,274,100 25,037,200
Shareholders' equity:
Preferred stock of $.01 par; authorized
10,000,000 shares; outstanding 40,000
shares at June 29, 2005 and December 29, 2004 400 400
Common stock of $.01 par; authorized
4,000,000 shares;
outstanding 3,881,900 shares 38,800 38,800
Additional paid-in capital 10,865,200 10,903,300
Accumulated deficit (5,389,900) (8,190,700)
----------- -----------
Total shareholders' equity 5,514,500 2,751,800
----------- -----------
$30,788,600 $27,789,000
=========== ===========
See accompanying notes to consolidated financial statements.
3
EACO Corporation
Consolidated Statements of Cash Flows
(Unaudited) For the Six Months Ended
------------------------
June 29, June 30,
2005 2004
---------- -----------
Operating activities:
Net income (loss) $2,801,100 ($902,100)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 987,100 981,900
Asset valuation charge --- 594,200
Deferred income tax benefit (3,061,800) ---
Net realized (gains) losses on investments (2,200) (700)
Amortization of loan fees 48,000 40,600
Loss on disposition of property held for sale --- 32,100
Amortization of deferred gain (40,300) (35,500)
Loss on disposition of property and equipment 27,400 32,100
(Decrease) increase in:
Receivables 11,800 (95,900)
Inventories (16,300) 45,800
Prepaids and other current assets 800 (46,100)
Other assets (15,600) (8,400)
Increase (decrease) in:
Accounts payable 84,400 (67,200)
Construction accounts payable --- 154,800
Accrued liabilities (276,900) 9,700
Deferred gain 66,000 ---
Deferred rent 15,900 15,900
Deposit liability 24,000 (8,000)
Workers compensation benefit liability (137,100) (34,400)
---------- -----------
Net cash provided by operating activities 516,300 708,800
---------- -----------
Investing activities:
Purchase of investments (69,500) (1,700,000)
Proceeds from sale of investments --- 184,600
Proceeds from securities sold not yet purchased 66,500 57,000
Net proceeds from sale of property held for sale --- 1,552,900
Store cash within assets held for sale (23,200) ---
Capital expenditures (987,800) (2,102,200)
---------- -----------
Net cash used in investing activities (1,014,000) (2,007,700)
---------- -----------
Financing activities:
Proceeds from sale-leaseback 2,600,000 ---
Payments on long-term debt (1,404,000) (1,104,000)
Payment of sale-leaseback costs (160,000) ---
Preferred stock dividend (38,300) ---
Payments on capital lease (22,800) (15,100)
Proceeds from the issuance of common stock --- 175,300
---------- -----------
Net cash provided by (used in) financing activities 974,900 (943,800)
---------- -----------
Net increase (decrease) in cash and cash equivalents 477,200 (2,242,700)
Cash and cash equivalents - beginning of period 151,100 2,287,800
---------- -----------
Cash and cash equivalents - end of period $628,300 $45,100
========== ===========
Noncash investing and financing activities:
Net change in unrealized gain $0 $12,200
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the six months for interest $868,900 $821,400
========== ===========
Building acquired under capital lease $1,475,000 $1,762,300
========== ===========
See accompanying notes to consolidated financial statements.
4
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
EACO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 29, 2005
(Unaudited)
Note 1. Basis of Presentation
The consolidated financial statements include the accounts of
EACO Corporation (the "Company"), (formerly Family Steak Houses
of Florida, Inc.) and its wholly-owned subsidiary. All
significant intercompany profits, transactions and balances have
been eliminated.
The accompanying unaudited consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America and the
interim financial information instructions to Form 10-Q, and do
not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation of the results for the interim periods
have been included. Operating results for the thirteen and
twenty-six week periods ended June 29, 2005 are not 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.
Note 2. Discontinued Operations
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 ("Banner" or
"the Buyer"). The transaction closed on June 30, 2005, the
first day of the Company's third quarter. The total purchase
price for the sixteen restaurant businesses, premises, equipment
and other assets used in restaurant operations was approximately
$29,950,000, consisting of $25,950,000 in cash at closing and a
5
promissory note for $4 million. The note accrues interest at 8%
payable monthly and is secured by restaurant equipment valued at
less than $1 million. At the present time, management does not
have sufficient information to evaluate the true value of the $4
million note. The Buyer also assumed obligations under capital
leases of approximately $4.5 million.
Due to the asset sale, the Company has exited the restaurant
business and the results of the sixteen restaurants sold have
been segregated from continuing operations in the Consolidated
Results of Operations and reported as Income (Loss) from
Discontinued Operations for all periods presented. The assets
and liabilities associated with the restaurants sold have been
classified as "Assets Held for Sale" and "Liabilities Associated
with Assets Held for Sale" on the Consolidated Balance Sheet as
of June 29, 2005. These classifications were not made prior to
the period ended June 29, 2005 due to substantial uncertainty
about the Buyer's ability to obtain the financing necessary to
complete the transaction, which was not resolved until a few
days prior to the June 30, 2005 closing.
Operating results of the discontinued operations are
summarized below:
For the quarters ended For the six months ended
June 29, 2005 June 30, 2004 June 29, 2005 June 30, 2004
-------------------------------------------------------------
Revenues
Sales $9,066,900 $9,959,200 $19,093,500 $20,218,500
Vending revenue 19,000 47,600 67,800 96,600
---------- ---------- ---------- ----------
Total revenues 9,085,900 10,006,800 19,161,300 20,315,100
---------- ---------- ---------- ----------
Costs and expenses
Food and beverage 3,568,300 3,840,600 7,315,700 7,691,900
Payroll and benefits 2,764,900 3,133,900 5,568,000 6,020,400
Depreciation and amortization 450,900 443,300 904,000 886,600
Other operating expenses 1,583,900 1,739,000 3,105,500 3,116,400
General and
administrative expenses 489,000 347,300 924,800 801,200
Franchise fees 117,500 295,600 291,700 666,800
Asset valuation charge --- --- --- 594,200
Loss on store closings and
disposal of assets 23,200 58,600 42,400 93,000
---------- --------- ---------- ----------
Total costs and expenses 8,997,700 9,858,300 18,152,100 19,870,500
---------- ---------- ----------- ----------
Operating income 88,200 148,500 1,009,200 444,600
Interest and other income (expense) 48,800 (49,100) 51,300 (34,400)
Loss on sale of property --- (32,100) --- (32,100)
Interest expense (406,400) (381,900) (822,700) (755,900)
---------- ---------- ---------- ----------
(Loss) income from discontinued
operations before income taxes (269,400) (314,600) 237,800 (377,800)
Income tax benefit 2,848,600 --- 2,848,600 ---
---------- ---------- ----------- -----------
Income (loss) from discontinued
operations, net of income tax benefit $2,579,200 ($314,600) $3,086,400 ($377,800)
========== ========== =========== ===========
6
The consolidated balance sheet as of June 29, 2005 includes
assets and liabilities of discontinued operations as follows:
June 29, 2005
--------------
Assets
Current assets $ 483,300
Property and equipment, net 23,543,300
Deferred income tax benefit 2,848,600
Other assets 573,600
-----------
Total assets held for sale $27,448,800
-----------
Liabilities
Current liabilities $2,590,000
Deferred rent 95,100
Long-term debt 12,412,700
Obligations under capital lease 5,472,200
Deferred gain 1,582,200
----------
Total liabilities associated with
assets held for sale $22,152,200
-----------
Note 3. Income Taxes
Income taxes are calculated using the liability method specified
by SFAS No. 109 "Accounting for Income Taxes". Valuation
allowances are provided against deferred tax assets if it is
considered "more likely than not" that some portion or the
entire deferred tax asset will not be realized. As of December
29, 2004, a valuation allowance was provided for the entire
balance of net deferred tax assets.
Management continuously evaluates the deferred tax valuation
allowance to determine what portion of the deferred tax asset,
if any, may be realized in the future. Management's evaluation
includes, among other things, such factors as the history of
operating results, a substantial history of operations upon
which to base a forecast and known transactions that will
generate enough taxable income to realize the deferred tax
assets.
The June 30, 2005 asset sale (see Note 2. Discontinued
Operations) resulted in sufficient income to allow management to
determine that it is now more likely than not that certain of
the deferred tax assets will be realized. As a result, the
deferred tax assets and liabilities as of June 29, 2005 are
reinstated on the balance sheet, the valuation allowance is
reversed related to those deferred tax assets that will be
7
realized in 2005 and the resulting income tax benefit is
recorded in the three months ended June 29, 2005. The net
deferred tax assets and income tax benefit have been allocated
to the assets and liabilities and income tax benefit of
continuing operations and assets held for sale and income tax
benefit of discontinued operations in the accompanying June 29,
2005 consolidated balance sheet and in the consolidated
statement of operations for the three and six months ended June
29, 2005 as follows:
Deferred tax assets, current $213,200
Income tax benefit, continuing operations $213,200
Assets held for sale $2,848,600
Income tax benefit, discontinued operations $2,848,600
The components of deferred taxes at June 29, 2005 and December
29, 2004 are summarized below:
June 29, 2005 December 29, 2004
-------------- -----------------
Deferred tax assets:
Net operating loss $2,700,300 $2,270,200
Federal and state tax credits 589,200 589,200
Accruals not currently deductible 410,500 458,800
Capital loss carryforward 248,800 248,800
Unearned revenue, previously taxed 595,400 466,700
---------- ----------
4,544,200 4,033,700
Valuation allowance (317,600) (3,281,500)
---------- ----------
Total deferred tax assets 4,226,600 752,200
---------- ----------
Deferred tax liabilities:
Excess of tax over book depreciation 1,164,800 752,200
---------- ----------
Total deferred tax assets $3,061,800 $---
========== ==========
8
Note 4. Earnings (loss) Per Share
The following table provides details of the calculation of basic
and diluted income per common share:
Quarter Ended Six Months Ended
June 29, 2005 June 29, 2005
--------------------- ----------------------
2005 2004 2005 2004
---------------------- ----------------------
Loss from continuing operations $(36,300) $(256,800) $(285,300) $(524,300)
Income (loss) from discontinued operations 2,579,200 (314,600) 3,086,400 (377,800)
---------- ----------- ---------- -----------
Net income $2,542,900 $(571,400) $2,801,100 $(902,100)
---------- ----------- ---------- -----------
Shares used for determining basic earning
per common share 3,881,900 3,771,000 3,881,900 3,744,000
Dilutive effect of:
Stock options 1,800 --- --- ---
Convertible Preferred Stock 189,200 --- 90,900 ---
---------- ---------- ----------- -----------
Shares used for determining diluted
earnings per common share 4,072,900 3,771,000 3,972,800 3,744,000
---------- ---------- ----------- -----------
Basic earnings (loss) per common share:
Continuing operations $(0.01) $(0.07) $(0.08) $(0.14)
Discontinued operations 0.66 (0.08) 0.79 (0.10)
---------- ---------- ----------- -----------
Net income $0.65 $(0.15) $0.71 $(0.24)
========== ========== =========== ===========
Diluted earnings (loss) per common share:
Continuing operations $(0.01) $(0.07) $(0.08) $(0.14)
Discontinued operations 0.63 (0.08) 0.78 (0.10)
---------- ---------- ----------- -----------
Net income $0.62 $(0.15) $0.70 $(0.24)
========== ========== =========== ===========
Due to the Company's net losses for the thirteen and twenty-six
weeks ended June 30, 2004, potentially dilutive securities
totaling 177,700 shares for both periods are antidilutive and
have been excluded from the computation of diluted earnings per
share for those periods.
Note 5. 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
$841,900 and $878,400 as of June 29, 2005 and December 29, 2004,
respectively. Accumulated amortization related to deferred
financing costs was $252,600 and $241,100 as of June 29, 2005
and December 29, 2004, respectively. Amortization expense was
$10,800 and $28,600 for the three-month periods ended June 29,
9
2005 and June 30, 2004, respectively. Amortization expense was
$48,000 and $40,600 for the six-month periods ended June 29,
2005 and June 30, 2004, respectively. Amortization expense for
each of the next five years is expected to be $3,000. The
reduction in amortization compared to prior periods is due to
the sale of restaurants described in Note 2 above.
The gross carrying amount and accumulated amortization of the
initial franchise rights was $299,700 and $252,400,
respectively, as of December 29, 2004. Amortization expense was
$23,100 and $38,800 for the three-month periods ended June 29,
2005 and June 30, 2004, respectively. Amortization expense was
$47,300 and $66,500 for the six-month periods ended June 29,
2005 and June 30, 2004, respectively. All franchise rights were
fully amortized as of June 30, 2005, in connection with the
expiration of the franchise agreement. All franchise rights
amortization expense has been presented as part of income(loss)
on discontinued operations for the three and six month periods
ended June 29, 2005 and June 30, 2004, respectively.
Note 6. 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. This property was included in the asset sale
described in Note 2 above, and has been classified under
"Assets Held for Sale" for the period ended June 29, 2005.
Note 7. Reclassifications
Certain items in the prior period financial statements have been
reclassified to conform to the 2005 presentation.
Note 8. Stock Based Compensation
The Company accounts for stock-based compensation utilizing the
intrinsic value method under Accounting Principles Board No. 25
(APB 25), "Accounting for Stock Issued to Employees". The
Company's long-term incentive plan provides for the grant of
10
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 29, 2004 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:
Quarters Ended Six Months Ended
June 29, 2005 June 30, 2004 June 29, 2005 June 30, 2004
------------------ ----------------
Net income (loss), as reported $2,542,900 $(571,400) $2,801,100 $(902,100)
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) --- (1,600)
---------- ---------- ----------- ---------
Pro forma net earnings (loss) $2,542,900 $(572,200) $2,801,100 $(903,700)
Undeclared cumulative preferred
Stock dividend (19,100) --- (38,300) ---
========= ========= ========== ==========
Income (loss) per share $0.62 $(0.15) $0.70 $(0.24)
Basic, as reported $0.65 $(0.15) $0.71 $(0.24)
Basic, pro forma $0.65 $(0.15) $0.71 $(0.24)
Diluted, as reported $0.62 $(0.15) $0.70 $(0.24)
Diluted, pro forma $0.62 $(0.15) $0.70 $(0.24)
Note 9. Preferred Stock
The Company has outstanding 36,000 shares of Series A Cumulative
Convertible Preferred Stock with a dividend rate of 8.5%. The
preferred shares have a liquidation preference of $25 per share
of preferred stock into shares of the Company's common stock at
a conversion price of $0.90 per share. Accordingly, the holder
of the preferred shares could purchase up to one million shares
of the Company's common stock at $0.90 per share, which could
potentially dilute basic earnings per share in the future. For
the three and six months ended June 29, 2005, the Board of
Directors declared and the Company paid dividends in the amount
of $19,100 and $38,300 respectively. In the quarter ended June
29, 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 June 29, 2005 was $19,100.
11
Note 10. Legal Proceedings
In connection with the asset sale described in Note 2 to the
financial statements, a broker has demanded a commission payment
of $3.5 million. The Company has filed suit against the broker
in an effort to expedite a resolution of the claim. The Company
agreed to place $400,000 in escrow in connection with the
lawsuit. In addition, in August 2005, the Company was sued by
another broker who claims that a commission of $749,000 is
payable to him as a result of the asset sale. The Company plans
to vigorously defend both of these claims.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies 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.
The Company sometimes invests a portion of its available cash in
marketable securities via an online investment account. The
investment account is a margin account which allows the Company
to purchase 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. When securities are purchased on margin, the resulting
liability is included on the Consolidated Balance Sheet as
12
"Margin Debt". Management does not expect to effect any
transactions using margin debt in 2005.
One of the Company's investment strategies involves short-sales
of marketable securities. The risk and expected return on these
investments are evaluated through the Company's expertise in
certain industries, and decisions on timing to cover short
positions are made based on an ongoing detailed review and
evaluation of each short position. Short-sale transactions are
accounted for as a liability entitled "Securities Sold, Not Yet
Purchased." They are adjusted to current market value at the
end of each quarter, and the associated gain or loss is
recognized in the statement of operations.
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 June 29, 2005 versus June 30, 2004
Continuing Operations
As described in Note 2 above, the Company exited the restaurant
business through the sale of its operating restaurants to Banner
on June 30, 2005. The Company still owns two restaurant
locations which it leases to other operators and has two leased
restaurant locations sub-leased to other operators. In
addition, the Company maintained its corporate office, although
with a substantial reduction in number of people and total
overhead. These items presently comprise the Company's
continuing operations.
The Company had a loss from continuing operations before income
taxes of $249,500 for the second quarter of 2005 compared to a
loss of $256,800 for the second quarter of 2004. The Company
recognized an income tax benefit of $213,200 for the second
13
quarter of 2005, due to the asset sale described in Note 2
above. The income tax benefit resulted from the partial
reversal of a valuation allowance which had previously offset
the Company's deferred tax assets - See Note 3 above. Net loss
from continuing operations net of the income tax benefit for the
was quarter ended June 29, 2005 $36,300. The effective income
tax rate for the quarter ended June 30, 2004 was 0.0%.
Discontinued Operations
During the first quarter of 2005, the Company entered into an
agreement to sell all of its operating restaurants to Banner.
The results of discontinued operations reflect the activities of
these sold restaurants. The following discusses the comparative
results of the sold restaurants.
Total sales decreased during the second quarter of 2005 to
$9,066,900 from $9,959,200 or 9.0%, due to store closures and a
decline in same-store sales. Same-store sales (average unit
sales in restaurants that have been open for at least 18 months
and operating during comparable weeks during the current and
prior year) in the second quarter of 2005 decreased 3.4% from
the same period in 2004, compared to an increase of 9.9% in the
second quarter of 2004 as compared to 2003. The decrease in
same-store sales resulted primarily from unusually high sales
comparisons from the prior year, when the Company converted two
restaurants to its Whistle Junction concept and experienced
large sales increases.
In total, food and beverage, payroll and benefits, depreciation
and amortization and other operating expenses as a percentage of
sales increased to 92.4% or $8,368,000 in the second quarter of
2005 from 92.1% or $9,156,800 in the same quarter of 2004.
Food and beverage costs as a percentage of sales increased to
39.4% in the second quarter of 2005 from 38.6% in the same
period of 2004 primarily as a result of higher beef costs in
2005 and enhanced menus initiated by the Company in connection
with the conversions to Whistle Junction. Payroll and benefits
as a percentage of sales decreased to 30.5% in the second
quarter of 2005 from 31.5% in the same quarter of 2004 due to
higher initial payroll costs at converted and newly opened
Whistle Junction restaurants in 2004.
Other operating expenses as a percentage of sales was 17.5% in
the second quarter of 2005 and in 2004. Depreciation and
14
amortization as a percentage of sales increased to 5.0% in 2005
from 4.5% in 2004.
General and administrative expenses as a percentage of sales
increased to 5.4% in the second quarter of 2005, from 3.5% in
the second quarter of 2004, primarily due to legal costs
associated with the asset sale.
For the quarter ended June 29, 2005, the Company recognized an
income tax benefit from discontinued operations of $2,848,600,
due to the asset sale described in Note 2 above. The effective
income tax rate for the quarter ended June 30, 2004 was 0.0%
Net income from discontinued operations for the second quarter
of 2005 was $2,579,200, compared to a net loss of $314,600 in
the second quarter of 2004. Net income per share from
discontinued operations was $0.63 for the second quarter of
2005, compared to net loss per share of $0.08 for the second
quarter of 2004.
Six Months Ended June 29, 2005 versus June 30, 2004
Continuing Operations
The Company had losses from continuing operations before income
taxes of $498,500 for the six months ended June 29, 2005
compared to the $524,300 for the same period in 2004. The
Company recognized an income tax benefit of $213,200 for the six
months ended June 29, 2005, due to the asset sale. Net loss
from continuing operations net of the income tax benefit was
$285,300, compared to $524,300 in 2004.
Discontinued Operations
For the six months ended June 29, 2005, total sales were
$19,093,500 compared to $20,218,500 for the same period in 2004.
Same-store sales decreased 1.4% for the six months ended June
29, 2005 from the same period in 2004.
Food and beverage costs as a percentage of sales for the six
month periods ended June 29, 2005 and June 30, 2004 were 38.3%
and 38.0% respectively. Higher beef prices in 2005 were offset
by sales price increases implemented by the Company since 2004.
Payroll and benefits as a percentage of sales decreased to 29.2%
in 2005 from 29.8% in 2004, due to higher costs in 2004
associated with the opening of Whistle Junction restaurants.
15
For the six months ended June 29, 2005, other operating expenses
as a percentage of sales increased to 16.3% from 15.4% in 2004,
primarily due to higher advertising costs. Depreciation and
amortization as a percentage of sales increased to 4.7% for the
six-month period ended June 29, 2005, compared to 4.4% in 2004.
General and administrative expenses for the six-month period
ended June 29, 2005 increased to 4.8% from 4.0% for the period
ended June 30, 2004, due to legal costs from the asset sale.
Interest expense increased for the first six months to $822,700
from $755,900 for the same period in 2004 due to interest
associated with two new capital leases.
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.
The Company recognized an income tax benefit of $2,848,600 for
the six months ended June 29, 2005, due to the asset sale. The
effective income tax rate for the six months ended June 30, 2004
was 0.0%.
Net income from discontinued operations, net of income tax
benefit, for the six months ended June 29, 2005 was $3,086,400
or $0.78 per share, compared to a net loss of $377,800, or $0.10
per share for the same period in 2004.
Due to the sale of the Company's operating stores described in
Note 2, operating results for the three and six months ended
June 29, 2005 are not indicative of the results that may be
expected for the fiscal year ending December 28, 2005.
Liquidity and Capital Resources
Historically, substantially all of the Company's revenues were
derived from cash sales. Inventories were purchased on credit
and were rapidly converted to cash. Therefore, the Company has
not carried significant receivables or inventories and, other
than repayment of debt, working capital requirements for
continuing operations have not been significant.
On June 30, 2005, the Company completed the sale of all of its
operating restaurants. The total purchase price was
16
approximately $29,950,000, consisting of $25,950,000 in cash and
a promissory note for $4 million. The note requires monthly
interest payments at a rate of 8.0% through June 30, 2007, when
the first principal payment of $1.5 million is due. The Company
paid off $12,412,700 in loans due to GE Capital with proceeds
from the asset sale. In addition to the cash proceeds, the
Buyer assumed $4,509,100 in capital lease obligations.
At June 29, 2005, the Company had a working capital surplus of
$5,851,100 compared to a working capital deficit of $3,527,000
at December 29, 2004. The working capital increase was due
primarily to the net effect of reclassifying assets held for
sale and the liabilities associated with assets held for sale as
both current assets and current liabilities, respectively. Cash
provided by operating activities decreased to $516,300 in the
second quarter of 2005 from $708,800 in the second quarter of
2004, primarily due to timing differences in the payments of
accrued liabilities.
The Company spent $987,800 in the first six months of 2005 for
property and equipment.
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. This property was included in the asset sale
completed June 30, 2005 (see Note 2 above).
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 second quarter of 2005.
Undeclared dividends as of June 29, 2005 were $19,100.
17
The Company is required to pledge collateral for its workers'
compensation self insurance liability with the Florida 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. Despite the sale of the Company's restaurants, the
workers' compensation will remain an ongoing liability for the
Company until all claims are paid, which will likely take
several years. However, the amount of the liability will
decline as these claims are paid and no new claims will be
incurred.
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 second quarter of 2005 were $117,500. The franchise
agreement with Ryan's expired June 30, 2005, which eliminated
any obligation to pay franchise fees after that date.
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; the
economic conditions in the new markets into which the Company
expands; business conditions, such as inflation or a recession,
and growth in the general economy; and other risks identified
from time to time in the Company's SEC reports, registration
statements and public announcements.
18
Subsequent Events
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"). This transaction closed during the Company's third
quarter, on June 30, 2005. The total purchase price for the
restaurant businesses, premises, equipment and other assets used
in restaurant operations was approximately $29,950,000,
consisting of $25,950,000 in cash at closing and a promissory
note for $4 million. The note accrues interest at 8%, payable
monthly and 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 also assumed obligations under capital
leases of approximately $4.5 million.
EACO Corporation continues to exist with limited business
operations, and the Company plans to seek out other business
opportunities. The Company assigned approximately $6.6 million
of the cash proceeds from the sale to a third party intermediary
bank for the purpose of exploring a like-kind exchange (LKE)
transaction under Section 1031 of the Internal Revenue Code,
which if accomplished, would result in the deferral of an
estimated $1 million in income taxes resulting from the asset
sale in the third quarter of 2005. The Company identified three
properties on August 12, 2005 for possible acquisition in
connection with the LKE strategy. There can be no assurance
that any of these transactions will be successfully completed.
However, if the Company does purchase one of these three
properties, the Company would then consider borrowing against
these properties and using the cash proceeds to acquire an
operating business or for other investment strategies.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT
MARKET RISK
The only significant change in the Company's exposure to market
risk during the first six months of 2005 was the reduction in
debt discussed in Liquidity and Capital Resources above, which
reduced the Company's market risk exposure. 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.
19
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), and another member
of the Board of Directors. Based upon that evaluation, the
Company's Chairman and President 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, except for a significant reduction in
accounting staff, including the Company's Director of Finance,
subsequent to the asset sale completed on June 30, 2005, the
first day of the Company's third quarter. The Company is in the
process of evaluating these controls in light of the reduction
in business operations and staff, and plans to make any
necessary changes to ensure that internal controls continue to
be effective.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In connection with the asset sale described in Note 2
to the Financial Statements, a broker has demanded a
commission payment of $3.5 million. The Company has
filed suit against the broker in an effort to expedite
a resolution of the claim. The Company agreed to
place $400,000 in escrow in connection with the
lawsuit. In addition, in August 2005, the Company
was sued by another broker who claims that a
commission of $749,000 is payable to him as a result
of the asset sale. The Company plans to vigorously
defend both of these claims.
20
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 23, 2005, the Company held its annual
meeting of shareholders to elect directors to
serve for the upcoming year.
(b) The following table sets forth the number of
votes for and against each of the nominees for
director.
Nominee For Withheld
Glen F. Ceiley 3,658,927 21,538
Jay Conzen 3,658,383 22,488
Stephen Catanzaro 3,659,333 21,538
William Means 3,659,133 21,738
The Company is unable to determine the number of
broker non-votes.
Glen F. Ceiley, Jay Conzen, Stephen Catanzaro and
William Means were elected as directors by the
affirmative vote of a majority of the 3,881,901 shares
of the Company's common stock represented in person or
by proxy at the annual meeting of shareholders.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of the
report on Form 10-Q.
No. Exhibit
3.01 Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibits 3.01 to the Company's
Registration Statement on Form S-1, Registration No.
33-1887, is incorporated herein by reference.)
21
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.)
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 corporation to EACO Corporation.
22
31.1 Chief Executive 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.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EACO CORPORATION
(Registrant)
/s/ Edward B. Alexander
Date: August 18, 2005 Edward B. Alexander
President / Chief Operating Officer
23
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. I am 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
24
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. 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: August 18, 2005 /s/ Edward B. Alexander
Edward B. Alexander
President / Chief Operating Officer
Date: August 18, 2005 /s/ Edward B. Alexander
Edward B. Alexander
Principal Financial Officer
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 June 29,
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 and Principal
Financial Officer, 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: August 18, 2005 By:/s/ Edward B. Alexander
Edward B. Alexander
Chief Operating Officer/
President
Date: August 18, 2005 By:/s/ Edward B. Alexander
Edward B. Alexander
Principal Financial Officer
26