UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter ended September 28, 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
Changing To (904) 241-9798 (Effective November 22, 2005)
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 3,906,801
$.01 par value As of November 3, 2005
EACO Corporation
Consolidated Results of Operations
(Unaudited) For The Quarters Ended For The Nine Months Ended
------------------------------------------------------
September 28, September 29, September 28, September 29,
2005 2004 2005 2004
-------------------------------------------------------
Revenues:
Rental income $46,800 $32,800 $112,300 $98,300
---------- ----------- ----------- -----------
Total revenues 46,800 32,800 112,300 98,300
---------- ----------- ----------- -----------
Cost and expenses:
Depreciation and amortization 61,900 102,900 145,100 198,200
General and administrative expenses 310,000 369,500 769,000 840,400
---------- ----------- ----------- -----------
Total costs and expenses 371,900 472,400 914,100 1,038,600
---------- ----------- ----------- -----------
Loss from operations (325,100) (439,600) (801,800) (940,300)
Investment gain 56,000 1,600 58,100 12,400
Interest and other income 225,900 24,300 275,500 62,100
Interest expense (34,900) (36,700) (104,500) (110,300)
---------- ----------- ----------- -----------
Loss from continuing operations
before income taxes (78,100) (450,400) (572,700) (976,100)
Income tax benefit 29,400 --- 215,700 ---
---------- ----------- ----------- -----------
Loss from continuing operations (48,700) (450,400) (357,000) (976,100)
---------- ----------- ----------- -----------
Discontinued operations:
Income (loss) on discontinued operations,
net of income tax (151,500) (89,200) 132,300 (465,600)
Gain on sale of discontinued operations,
net of income tax 7,567,700 --- 10,393,300 ---
---------- ----------- ----------- -----------
Income (loss)from discontinued operations 7,416,200 (89,200) 10,525,600 (465,600)
---------- ----------- ----------- -----------
Net income (loss) 7,367,500 (539,600) 10,168,600 (1,441,700)
Cumulative preferred stock dividend (19,100) (6,300) (57,400) (6,300)
---------- ----------- ----------- -----------
Net income (loss) available
(attributable) to common shareholders $7,348,400 ($545,900) $10,111,200 ($1,448,000)
========== =========== =========== ==========
Basic income (loss) per share:
Continuing operations ($0.01) ($0.12) ($0.09) ($0.26)
Discontinued operations 1.90 (0.02) 2.71 (0.12)
---------- ----------- ----------- -----------
Net income (loss) $1.89 ($0.14) $2.62 ($0.38)
========== =========== =========== ===========
Basic weighted average common
shares outstanding 3,889,000 3,881,500 3,884,300 3,790,000
========== =========== =========== ===========
Diluted income (loss) per share:
Continuing operations ($0.01) ($0.12) ($0.08) ($0.26)
Discontinued operations 1.69 (0.02) 2.52 (0.12)
---------- ----------- ----------- -----------
Net income (loss) $1.68 ($0.14) $2.44 ($0.38)
========== =========== =========== ===========
Diluted weighted average common
shares outstanding 4,379,900 3,881,500 4,172,800 3,790,000
========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
2
EACO Corporation
Consolidated Balance Sheets
September 28, December 29,
2005 2004
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $13,304,000 $151,100
Receivables 155,900 81,300
Inventories 3,000 235,200
Prepaid and other current assets 32,600 426,800
----------- -----------
Total current assets 13,495,500 894,400
Restricted cash 400,000 ---
Certificate of deposit 369,500 300,000
Note receivable, net 3,719,600 ---
Property and equipment:
Land 586,500 6,967,200
Buildings and improvements 2,943,100 24,933,100
Equipment 3,056,800 11,880,000
Construction in progress 17,200 138,800
----------- -----------
6,603,600 43,919,100
Accumulated depreciation (4,743,700) (18,051,600)
----------- -----------
Net property and equipment 1,859,900 25,867,500
Assets held for sale 1,146,200 ---
Other assets, principally deferred charges,
net of accumulated amortization 120,200 727,100
----------- -----------
Total assets $21,110,900 $27,789,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $52,700 $1,079,400
Securities sold, not yet purchased 2,695,100 ---
Accrued liabilities 422,300 1,778,000
Current portion of workers compensation
benefit liability 329,400 569,500
Current portion of long-term debt 106,800 917,200
Current portion of obligations under capital lease --- 77,300
----------- -----------
Total current liabilities 3,606,300 4,421,400
Deferred rent --- 79,200
Deposit liability 47,300 23,300
Workers compensation benefit liability 578,500 628,500
Long-term debt 1,724,600 14,774,000
Deferred income tax liability 1,199,200 ---
Deferred gain --- 1,169,400
Obligations under capital lease --- 3,941,400
Liabilities associated with assets held for sale 1,062,700 ---
----------- -----------
Total liabilities 8,218,600 25,037,200
Shareholders' equity:
Preferred stock of $.01 par; authorized
10,000,000 shares; outstanding 36,000
shares at September 28, 2005 and
December 29, 2004 (liquidation value $900,000) 400 400
Common stock of $.01 par; authorized
4,000,000 shares;
outstanding 3,906,801 shares at September 28, 2005
and 3,881,899 at December 29, 2004 39,100 38,800
Additional paid-in capital 10,875,200 10,903,300
Retained earnings (accumulated deficit) 1,977,600 (8,190,700)
----------- -----------
Total shareholders' equity 12,892,300 2,751,800
----------- -----------
Total liabilities and equity $21,110,900 $27,789,000
=========== ===========
See accompanying notes to consolidated financial statements.
3
EACO Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the Nine Months Ended
------------------------
September 28, September 29,
2005 2004
---------- -----------
Operating activities:
Net income (loss) $10,168,600 ($1,441,700)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,053,700 1,476,200
Asset valuation charge --- 594,200
Directors' fees in the form of stock options --- 20,000
Net realized (gains) losses on investments (58,100) 300
Amortization of loan fees 48,600 59,400
Amortization of deferred gain (40,300) (53,200)
Loss on disposition of equipment (3,800) 90,800
Note receivable discount 299,100 ---
Amortization of note receivable discount (18,700) ---
(Increase) decrease in:
Receivables (74,600) (37,000)
Inventories 232,200 60,300
Prepaids and other current assets 394,200 (71,300)
Restricted cash (400,000) ---
Note receivable (4,000,000) ---
Other assets (2,500) (5,300)
Increase (decrease) in:
Accounts payable (1,026,700) (327,200)
Accrued liabilities (1,335,400) 9,700
Deferred gain 66,000 ---
Deferred rent (79,200) 23,800
Deposit liability 24,000 (8,000)
Workers compensation benefit liability (290,100) (2,800)
Deferred income tax liability 1,199,200 ---
---------- -----------
Net cash provided by operating activities 6,156,200 414,000
---------- -----------
Investing activities:
Purchase of investments (129,500) (1,699,900)
Proceeds from sale of investments --- 184,600
Proceeds from securities sold not yet purchased 2,753,200 57,000
Net proceeds from sale of property held for sale 16,876,300 2,260,100
Proceeds from sale of property and equipment 1,326,200 ---
Capital expenditures (2,352,400) (2,406,000)
---------- -----------
Net cash provided by (used in) investing activities 18,473,800 (1,604,200)
---------- -----------
Financing activities:
Proceeds from sale-leaseback 2,600,000 ---
Payments on long-term debt (13,859,800) (1,841,300)
Payment of sale-leaseback costs (160,000) ---
Preferred stock dividend (57,400) ---
Payments on capital lease obligations (29,200) (15,100)
Stock options exercised 29,300 ---
Expenses of the issuance of preferred stock --- (34,000)
Proceeds from the issuance of preferred stock --- 900,000
Proceeds from the issuance of common stock --- 175,300
---------- -----------
Net cash used in financing activities (11,477,100) (815,100)
---------- -----------
Net increase (decrease) in cash and cash equivalents 13,152,900 (2,005,300)
Cash and cash equivalents - beginning of period 151,100 2,287,800
---------- -----------
Cash and cash equivalents - end of period $13,304,000 $282,500
========== ===========
Noncash investing and financing activities:
Net change in unrealized gain $0 ($2,100)
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the nine months for interest $1,022,200 $1,227,100
========== ===========
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
September 28, 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
thirty-nine week periods ended September 28, 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
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the Company accounts for the results of
operations of a component of an entity that has been disposed or
that meets all of the "held for sale" criteria, as discontinued
operations, if the component's operations and cash flows have
been (or will be) eliminated from the ongoing operations of the
entity as a result of the disposal transaction and the Company
5
will not have any significant continuing involvement in the
operations of the component after the disposal transaction. The
"held for sale" classification requires having the appropriate
approvals by our management, Board of Directors and
shareholders, as applicable, and meeting other criteria. When
of all these criteria are met, the component is then classified
as "held for sale" and its operations are reported as
discontinued operations.
On June 30, 2005 (the first day of the Company's third quarter),
the Company completed the sale of substantially all of its store
assets to Banner Buffets, LLC ("Banner" or "the Buyer"). The
sale of sixteen restaurant businesses, premises, equipment and
other assets used in restaurant operations was made pursuant to
an asset purchase agreement dated February 22, 2005. Prior to
this transaction, no material relationship existed between the
Company and Banner. The total purchase price was approximately
$29,950,000, consisting of $25,950,000 in cash at closing and a
promissory note for $4,000,000. The note accrues interest at
8.0% payable monthly and is secured by restaurant equipment
valued at less than $1 million. The Buyer also assumed
obligations under capital leases of approximately $4.5 million.
The sale transaction between the Company and Banner is
summarized as follows:
Proceeds from sale $29,950,000
Transaction expenses
Legal fees 294,400
Investment banker fees 21,200
Other divestment related costs 141,600
-----------
Total transaction expenses 457,200
-----------
Net proceeds 29,492,800
Net assets sold (17,465,400)
Unamortized discount on note receivable (See Note 5) (299,100)
-----------
Gain on sale before income tax 11,728,300
Estimated income tax (*) (1,335,000)
-----------
Gain on sale after income tax $10,393,300
===========
(*) Represents the effect of $4,304,400 in estimated taxes from
the transaction, net of the change in the Company's deferred tax
asset valuation allowance of $2,969,400, principally the
utilization of net operating losses ("NOLs"), in connection with
the sale. The change in the deferred tax asset valuation
allowance was recognized in the second quarter.
6
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 Company
has restricted cash of $400,000 in escrow set aside for the
potential payment of broker commissions which are currently
subject to litigation. See Note 11 - Legal Proceedings. The
ultimate amount of gain to be recognized on the asset sale may
be reduced based on the outcome of such litigation.
Operating results of the discontinued operations are
summarized below:
For the three months ended For the nine months ended
September 28, September 29, September 28, September 29,
2005 2004 2005 2004
-------------------------------------------------------------
Revenues $ 400 $8,750,900 $19,161,800 $29,066,100
Costs and expenses 252,100 8,519,800 18,186,600 28,389,000
Interest and other income 48,000 75,900 99,200 9,400
Interest expense (39,400) (396,200) (862,200) (1,152,100)
---------- ---------- ---------- ----------
Income (loss) before income taxes (243,100) (89,200) 212,200 (465,600)
Income tax benefit (expense) 91,600 --- (79,900) ---
---------- ---------- ----------- -----------
Income (loss) from discontinued
operations, net of income taxes (151,500) (89,200) 132,300 (465,600)
Gain on sale of discontinued
operations, net of income taxes
Gain before income taxes 11,949,700 --- 11,728,300 ---
Income taxes (*):
Transaction taxes (4,387,500) --- (4,304,400) ---
Change in deferred tax
valuation allowance 5,500 --- 2,969,400 ---
---------- ---------- ----------- ----------
Income (loss) from
discontinued operations $7,416,200 ($89,200) $10,525,600 ($465,600)
========== ========== =========== ===========
(*) For the nine months ended September 28, 2005, income from
discontinued operations includes the effect of $4,304,400 in
estimated taxes from the transaction, net of the change in the
Company's deferred tax asset valuation allowance of $2,969,400,
principally the utilization of NOLs, in connection with the
sale. The change in the deferred tax asset valuation allowance
was recognized in the second quarter.
7
The Unaudited Consolidated Balance Sheet as of September 28,
2005 includes assets and liabilities of discontinued operations
as follows:
June 29, Assets and September 28,
2005 Liabilities Sold 2005
------------- --------------- --------------
Assets
Current assets $ 3,331,900 ($3,312,900) $ 19,000
Property and equipment, net 23,543,300 (22,416,100) 1,127,200
Other assets 573,600 (573,600) ---
----------- ----------- -----------
Total assets held for sale $27,448,800 ($26,302,600) $ 1,146,200
----------- ----------- -----------
Liabilities
Current liabilities $ 2,590,000 ($2,569,700) $ 20,300
Deferred rent 95,100 (9,400) 85,700
Long-term debt 12,412,700 (12,412,700) ---
Obligations under capital lease 5,472,200 (4,515,500) 956,700
Deferred gain 1,582,200 (1,582,200) ---
----------- ----------- -----------
Total liabilities associated
with assets held for sale $22,152,200 ($21,089,500) $ 1,062,700
----------- ----------- -----------
The remaining assets held for sale and associated
liabilities relate to one restaurant that was included in
the sale to Banner, but the Company's landlord did not
consent to the assignment of the Company's lease.
Accordingly, the Company still maintains the assets and
liabilities of the restaurant, and Banner operates the
restaurant under a management agreement. The Company and
Banner agreed to continue to pursue assignment of the
lease, and Banner is obligated to buy the assets subject to
the lease pursuant to a purchase option under the terms of
the lease, between September to November 2006.
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
8
generate enough taxable income to realize the deferred tax
assets.
The components of deferred taxes at September 28, 2005 and
December 29, 2004 are summarized below:
September 28, 2005 December 29, 2004
-------------- -----------------
Deferred tax assets:
Net operating loss $489,500 $2,270,200
Federal and state tax credits 624,200 589,200
Accruals not currently deductible 377,700 458,800
Capital loss carryforward --- 248,800
Unearned revenue, previously taxed --- 466,700
Excess of book over tax depreciation 198,400 ---
---------- ----------
1,689,800 4,033,700
Valuation allowance (312,100) (3,281,500)
---------- ----------
Total deferred tax assets 1,377,700 752,200
---------- ----------
Deferred tax liabilities:
Deferred gains 2,576,900 ---
Excess of tax over book depreciation --- 752,200
---------- ----------
Net deferred tax liability $1,199,200 $---
========== ==========
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 were
reinstated on the balance sheet, the valuation allowance was
reversed related to those deferred tax assets that will be
realized in 2005 and the resulting income tax benefit was
recorded in the three months ended June 29, 2005.
The net deferred tax liability of $1,199,200 at September
28, 2005 consists of a deferred gain of $1,175,700
resulting from a Section 1031 property purchase the Company
expects to complete in November 2005, and a deferred gain
of $1,401,200 from the note receivable from the asset sale,
offset by the $1,377,700 deferred tax assets detailed
above.
9
Note 4. Earnings (Loss) Per Share
The following table provides details of the calculation of basic
and diluted income (loss) per common share:
Quarter Ended Nine Months Ended
September 28, 2005 September 28, 2005
--------------------- ----------------------
2005 2004 2005 2004
---------------------- ----------------------
Loss from continuing operations $ (48,700) $ (450,400) $ (357,000) $ (976,100)
Income (loss) from discontinued operations 7,416,200 (89,200) 10,525,600 (465,600)
---------- ----------- ---------- -----------
Net income (loss) $7,367,500 $(539,600) $10,168,600 $(1,441,700)
---------- ----------- ---------- -----------
Shares used for determining basic earning
per common share 3,889,000 3,881,500 3,884,300 3,790,000
Dilutive effect of:
Stock options 24,000 --- 23,400 ---
Convertible Preferred Stock 466,900 --- 265,100 ---
---------- ---------- ----------- -----------
Shares used for determining diluted
earnings per common share 4,379,900 3,881,500 4,172,800 3,790,000
---------- ---------- ----------- -----------
Basic earnings (loss) per common share:
Continuing operations $(0.01) $(0.12) $(0.09) $(0.26)
Discontinued operations 1.90 (0.02) 2.71 (0.12)
---------- ---------- ----------- -----------
Net income (loss) $1.89 $(0.14) $2.62 $(0.38)
========== ========== =========== ===========
Diluted earnings (loss) per common share:
Continuing operations $(0.01) $(0.12) $(0.08) $(0.26)
Discontinued operations 1.69 (0.02) 2.52 (0.12)
---------- ---------- ----------- -----------
Net income (loss) $1.68 $(0.14) $2.44 $(0.38)
========== ========== =========== ===========
Due to the Company's net losses for the thirteen and thirty-nine
weeks ended September 29, 2004, potentially dilutive securities
totaling 6,100 shares for the nine months ended September 28,
2004 were antidilutive and have been excluded from the
computation of diluted earnings per share for those periods.
Note 5. Note Receivable
On June 30, 2005, the first day of the third quarter, the
Company sold substantially all of its store assets for a gain
after income taxes of $10,393,300. The sales price of
$29,950,000 consisted of $25,950,000 in cash and a term note of
$4,000,000. The term note bears interest at 8.0%. Interest-
only payments on the note are due until June 30, 2007, when
principal payments begin as detailed below. The note matures on
June 30, 2009, and is collateralized by restaurant equipment
valued at less than $1 million.
In consideration of the note not being fully collateralized,
management has estimated that the note receivable was issued at
a below market interest rate, and estimated that market
10
conditions in effect at the date of the sale would have resulted
in an estimated market interest rate of 12% for the unsecured
portion of the note. Accordingly, all future payments due under
the note have been discounted to the date of the note, resulting
in the recognition of an unamortized discount of $299,100, which
will be recognized as interest income over the life of the note.
For the three months ended September 28, 2005, $18,700 of the
unamortized discount was recognized as interest income.
Principal contractual maturities on the note receivable are
as follows:
Year Maturities
2007 $1,500,000
2008 1,500,000
2009 1,000,000
----------
$4,000,000
==========
Note 6. 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
$60,300 and $878,400 as of September 28, 2005 and December 29,
2004, respectively. Accumulated amortization related to
deferred financing costs was $25,900 and $241,100 as of
September 28, 2005 and December 29, 2004, respectively.
Amortization expense was $600 and $18,800 for the three-month
periods ended September 28, 2005 and September 29, 2004,
respectively. Amortization expense was $48,600 and $59,400 for
the nine-month periods ended September 28, 2005 and September
29, 2004, respectively. Amortization expense for each of the
next five years is expected to be $2,300. The reduction in
amortization expense 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
$0 and $27,600 for the three-month periods ended September 28,
11
2005 and September 29, 2004, respectively. Amortization expense
was $47,300 and $94,100 for the nine-month periods ended
September 28, 2005 and September 29, 2004, respectively. All
franchise rights were fully amortized as of June 29, 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
nine month periods ended September 28, 2005 and September 29,
2004, respectively.
Note 7. Securities Sold, Not Yet Purchased
As described below in "Critical Accounting Policies", the
Company had investments in short-sales of marketable securities
(common stock) with a market value of $2,695,100 as of September
28, 2005. The Company's results for the quarter and year to
date ended September 28, 2005 include gains from these
securities of $56,000 and $58,100, respectively.
Note 8. Reclassifications
Certain items in the prior period financial statements have been
reclassified to conform to the 2005 presentation.
Note 9. Stock-Based Compensation
The Company accounts for stock-based compensation utilizing the
intrinsic value method under Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees". The Company's long-
term incentive plan provides for the grant of stock options and
restricted stock. The exercise price of each option equals the
market price of the Company's stock on the date of the grant.
Options vest in one-quarter increments over a four-year period
starting on the date of the grant. An option's maximum term is
ten years. See Note 9 "Common Shareholders' Equity" in the
Company's Annual Report for the year ended December 29, 2004 for
additional information regarding the Company's stock options.
Pursuant to the disclosure requirements of SFAS 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure", the
following table provides an expanded reconciliation for all
periods presented:
12
Quarters Ended Nine Months Ended
September 28, September 29, September 28, September 29,
2005 2004 2005 2004
--------------------------- ---------------------------
Net income (loss), as reported $7,367,500 $(539,600) $10,168,600 $(1,441,700)
Add: Stock based compensation
expense included in net
income, net of tax --- --- --- ---
Deduct: Total stock-based
compensation expense
determined under fair value,
net of tax --- (800) --- (2,400)
---------- ---------- ----------- ---------
Pro forma net earnings (loss) $7,367,500 $(540,400) $10,168,600 $(1,444,100)
Cumulative preferred stock
dividend (19,100) (6,300) (57,400) (6,300)
--------- --------- ---------- ----------
Net income (loss) available
(attributable) to common
shareholders $7,348,400 $(546,700) $10,111,200 $1,450,400
========== ========= =========== ==========
Income (loss) per share
Basic, as reported $1.89 $(0.14) $2.62 $(0.38)
Basic, pro forma $1.89 $(0.14) $2.62 $(0.38)
Diluted, as reported $1.68 $(0.14) $2.44 $(0.38)
Diluted, pro forma $1.68 $(0.14) $2.44 $(0.38)
Note 10. 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 and are convertible 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 nine months ended
September 28, 2005, the Board of Directors declared and the
Company paid dividends in the amount of $19,100 and $57,400
respectively. The balance of undeclared cumulative
preferred dividends at September 28, 2005 was $19,100.
Note 11. Legal Proceedings
In connection with the asset sale described in Note 2, the
Company is involved in a lawsuit against a broker who has
demanded a commission payment of $3.5 million. The Company
agreed to place $400,000 in escrow in connection with the
lawsuit, which is included in the Company's balance sheet as
"Restricted cash". The Company intends to vigorously litigate
this suit, and has argued in the suit that it does not owe any
13
commission to the broker. At this point, management cannot
determine the probable outcome of this lawsuit or estimate what
the potential damages would be, if any.
In addition, in August 2005, the Company was sued by another
broker who claims that he is entitled to a commission of
$749,000 on the asset sale. The Company believes the claim is
without merit and intends to vigorously defend its position.
The ultimate outcome of this litigation cannot be presently
determined. However, in management's opinion, the likelihood of
a material adverse outcome is remote.
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
14
"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 September 28, 2005 versus September 29, 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. The Company
also owns equipment at one restaurant, which is leased to
another operator. 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 $78,100 for the third quarter of 2005 compared to a
loss of $450,400 for the third quarter of 2004. The Company
15
recognized an income tax benefit of $29,400 for the third
quarter of 2005. Net loss from continuing operations net of the
income tax benefit for the quarter ended September 28, 2005 was
$48,700. The effective income tax rate for the quarter ended
September 28, 2004 was 0.0%.
Discontinued Operations
During the third quarter of 2005, the Company sold all of its
operating restaurants to Banner. The results of discontinued
operations reflect the activities of these sold restaurants.
The Company maintains one restaurant held for sale. The
restaurant is managed by Banner under a management agreement,
which expires in 2006, at which time Banner must exercise a
purchase option under the lease. The rental income and
associated expenses for this restaurant are included in the
third quarter as discontinued operations.
The Company recognized a gain net of income taxes of
$7,567,700 from the sale of the restaurants in the third
quarter of 2005, as described in Note 2 above.
Net loss from discontinued operations for the third quarter of
2005 was $151,500, compared to a net loss of $89,200 in the
third quarter of 2004. Net income from discontinued operations
was $7,416,200 in the third quarter of 2005, compared to a net
loss of $89,200 in 2004. Net income per share from discontinued
operations was $1.90 for the third quarter of 2005, compared to
net loss per share of $0.02 for the third quarter of 2004.
Nine Months Ended September 28, 2005 versus September 29, 2004
Continuing Operations
The Company had losses from continuing operations before income
taxes of $572,700 for the nine months ended September 28, 2005
compared to the $976,100 for the same period in 2004. The
Company recognized an income tax benefit of $215,700 for the
nine months ended September 28, 2005. Net loss from continuing
operations net of the income tax benefit was $357,000, compared
to a net loss of $976,100 in 2004.
Discontinued Operations
Due to the sale of all the Company's operating restaurants on
June 30, 2005, results of these restaurants are presented as
discontinued operations. Results of these restaurants for the
16
six months of operations during 2005, compared to nine months of
operations in 2004 are presented in Note 2 to the financial
statements above. The Company recognized a gain on sale of
discontinued operations net of income taxes of $10,393,300 for
the nine months ended September 28, 2005.
The Company recognized a non-cash asset valuation charge of
$594,200 in 2004 in accordance with SFAS No. 144. 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 income from discontinued operations, net of income tax
expense, for the nine months ended September 28, 2005 was
$10,525,600 or $2.52 per share, compared to a net loss of
$465,600, or $0.12 per share for the same period in 2004.
Due to the sale of the Company's operating restaurants described
in Note 2, operating results for the three and nine months ended
September 28, 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
approximately $29,950,000, consisting of $25,950,000 in cash and
a promissory note for $4,000,000. 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.
As of September 28, 2005, the Company had total cash and cash
equivalents of $13,304,000. Of this total, $5,293,000 was
invested in brokerage money market accounts. However, $2,695,100
of the brokerage accounts cash resulted from the sale of
securities sold, not yet purchased ("short sales"), which is
17
included as a liability on the Company's balance sheet at
September 28, 2005. Accordingly, the Company will require this
cash to cover the short sales liability, and therefore the
$2,695,100 is not available for the Company's use. The balance of
the cash in the brokerage accounts is available for use by the
Company. After retirement of the short sales and certain other
liabilities, the Company will have approximately $10 million in
cash available for investment. Approximately $6.6 million of this
was assigned 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. The Company expects
to complete the purchase of a qualifying property for this
purpose in November 2005 for $8.3 million. The Company plans to
fund the purchase using the $6.6 million in cash, plus the
assumption of a loan on the property for $1.8 million with a
variable interest rate equal to prime. The identified property
includes two industrial tenants with rental income of
approximately $540,000 per year, with scheduled increases during
the respective lease terms. If completed, this purchase would
result in the deferral of an estimated $1 million in income
taxes payable resulting from the asset sale. The Company plans
to borrow against or refinance this property and use the cash
proceeds to acquire an operating business or for other
investment strategies.
The Company engaged an investment banking firm in October 2005
to investigate potential acquisition or investment
opportunities. The Company plans to evaluate opportunities for
acquisition or investment using the proceeds of the asset sale
that will increase shareholder value. However, there are
currently no pending acquisitions, and there is no defined
timeline as to when an acquisition or investment might take
place.
At September 28, 2005, the Company had a working capital surplus
of $9,889,200 compared to a working capital deficit of
$3,527,000 at December 29, 2004. The working capital increase
was due primarily to the cash proceeds from the asset sale to
Banner. Cash provided by operating activities increased to
$6,156,200 in the third quarter of 2005 from $414,000 in the
third quarter of 2004, primarily due to proceeds from the asset
sale to Banner.
The Company spent $2,352,400 in the first nine months of 2005
for property and equipment.
18
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, and the Company has no continuing
obligation on this lease (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 in 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 third quarter of 2005.
Undeclared dividends as of September 28, 2005 were $19,100.
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. 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
for the twenty-six weeks ended June 29, 2005 were $291,700. The
19
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; 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.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT
MARKET RISK
The only significant change in the Company's exposure to market
risk during the first nine 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.
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 financial and operating officer), legal
counsel 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
20
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.
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.
21
No. Exhibit
3.01 Articles of Incorporation of Family Steak Houses of
Florida, Inc. (Exhibits 3.01 to the Company's
Registration Statement on Form S-1, Registration No.
33-1887, is incorporated herein by reference.)
3.02. Bylaws of Family Steak Houses of Florida, Inc. (Exhibit
3.02 to the Company's Registration Statement on Form S-1
Registration No. 33-1887, is incorporated herein by
reference.)
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
22
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.
10.1. Management agreement between the Company and Banner for
the management of a restaurant in Brooksville, Florida.
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
Form 8-K filed on July 6, 2005 announcing the
completion of the sale of all of its operating
restaurants to Banner Buffets LLC.
Form 8-K filed on August 23, 2005 announcing operating
results for the second quarter 2005.
Form 8-K filed on September 1, 2005 announcing the
resignation by Deloitte & Touche LLP as the Company's
independent registered public accounting firm.
Amended Form 8-KA filed on September 9, 2005. The
amended Form 8-K included the addition of the letter
from Deloitte confirming their agreement with the
Company's filing of September 1, 2005.
Form 8-K filed on October 25, 2005 announcing the
engagement of Squar Milner Reehl Williamson LLP as the
Company's independent registered public accounting
firm.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EACO CORPORATION
(Registrant)
/s/ Edward B. Alexander
Date: November 18, 2005 Edward B. Alexander
President
Chief Operating Officer
24