10-Q 1 eaco10q1st05.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 30, 2005 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to _________. Commission File No. 0-14311 EACO CORPORATION (Exact Name of Registrant as Specified in Its Charter) Florida No. 59-2597349 State of Incorporation Employer Identification No. 2113 FLORIDA BOULEVARD NEPTUNE BEACH, FLORIDA 32266 Address of Principal Executive Offices Registrant's Telephone No. (904) 249-4197 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes___X___ No_____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes_______ No__X__ Title of each class Number of shares outstanding Common Stock 3,881,901 $.01 par value As of May 7, 2005 EACO Corporation Condensed Consolidated Statements of Operations
(Unaudited) For The Quarters Ended ----------------------- March 30, March 31, 2005 2004 ----------------------- Revenues: Sales $10,026,600 $10,259,300 Vending revenue 48,800 49,000 ----------- ----------- Total revenues 10,075,400 10,308,300 ----------- ----------- Cost and expenses: Food and beverage 3,747,400 3,851,300 Payroll and benefits 2,810,100 2,893,500 Depreciation and amortization 500,400 490,600 Other operating expenses 1,560,100 1,470,700 General and administrative expenses 610,800 621,600 Franchise fees 174,200 371,200 Asset valuation charge 0 594,200 Loss on disposition of equipment and closed store costs 19,200 12,200 ----------- ----------- Total costs and expenses 9,422,200 10,305,300 ----------- ----------- Earnings from operations 653,200 3,000 Investment gain 0 23,900 Interest and other income 56,200 53,400 Interest expense (451,200) (411,000) ----------- ----------- Earnings (loss) before income taxes 258,200 (330,700) Provision for income taxes -- -- ----------- ----------- Net earnings (loss) 258,200 (330,700) Undeclared cumulative preferred stock dividend (19,100) -- ----------- ------------ Net earnings (loss) available for basic and diluted earnings (loss) per share $239,100 ($330,700) =========== ============ Basic earnings (loss) per share $0.06 ($0.09) =========== =========== Diluted earnings (loss) per share $0.06 ($0.09) =========== =========== See accompanying notes to condensed consolidated financial statements.
2 EACO Corporation Condensed Consolidated Balance Sheets
(Unaudited) March 30, December 29, 2005 2004 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $1,369,000 $151,100 Receivables 290,400 81,300 Inventories 259,700 235,200 Prepaid and other current assets 516,100 426,800 ---------- ----------- Total current assets 2,435,200 894,400 Certificate of deposit 369,500 300,000 Property and equipment: Land 6,371,600 6,967,200 Buildings and improvements 25,058,000 24,933,100 Equipment 11,987,300 11,880,000 Construction in progress 41,700 138,800 ----------- ----------- 43,458,600 43,919,100 Accumulated depreciation (18,138,900) (18,051,600) ----------- ----------- Net property and equipment 25,319,700 25,867,500 Other assets, principally deferred charges, net of accumulated amortization 675,700 727,100 ----------- ----------- $28,800,100 $27,789,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,546,000 $1,079,400 Accrued liabilities 1,498,800 1,778,000 Current portion of workers compensation benefit liability 600,000 569,500 Current portion of long-term debt 887,500 917,200 Current portion of obligation under capital lease 50,100 77,300 ----------- ----------- Total current liabilities 4,582,400 4,421,400 Deferred rent 87,100 79,200 Deposit liability 24,100 23,300 Workers compensation benefit liability 615,200 628,500 Long-term debt 13,552,300 14,774,000 Deferred gain 1,514,600 1,169,400 Obligation under capital lease 5,433,600 3,941,400 ----------- ----------- Total liabilities 25,809,300 25,037,200 Shareholders' equity: Preferred stock of $.01 par; authorized 10,000,000 shares; outstanding 36,000 shares at March 30, 2005 (liquidation value $900,000) 400 400 Common stock of $.01 par; authorized 8,000,000 shares; outstanding 3,881,899 shares at March 30, 2005 and December 29, 2004 38,800 38,800 Additional paid-in capital 10,884,300 10,903,300 Accumulated deficit (7,932,700) (8,190,700) ----------- ----------- Total shareholders' equity 2,990,800 2,751,800 ----------- ----------- $28,800,100 $27,789,000 =========== =========== See accompanying notes to condensed consolidated financial statements.
3 EACO Corporation Condensed Consolidated Statements of Cash Flows
(Unaudited) For the Quarters Ended ------------------------------ March 30, March 31, 2005 2004 ------------ ------------ Operating activities: Net income (loss) $258,200 ($330,700) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 500,400 490,600 Asset valuation charge -- 594,200 Director's fees in the form of stock options -- 20,000 Net realized gains on investments -- (23,900) Amortization of loan fees 37,200 12,400 Amortization of deferred gain (22,600) (17,700) Loss on disposition of equipment 15,200 12,200 (Decrease) increase in: Receivables (209,100) 10,200 Inventories (24,500) 53,800 Prepaids and other current assets (89,300) (23,900) Other assets (10,000) (5,600) Increase (decrease) in: Accounts payable 466,600 208,500 Accrued liabilities (298,600) (426,800) Deferred revenue -- 70,900 Deferred rent 7,900 8,000 Deposit liability 800 3,300 Workers compensation benefit liability 17,200 (37,200) ---------- ----------- Net cash provided by operating activities 649,400 618,300 ---------- ----------- Investing activities: Net purchase of investments (69,500) (1,082,400) Proceeds from sale of investments -- 184,600 Proceeds from securities sold, not yet purchased -- 57,000 Capital expenditures (521,500) (1,027,400) ---------- ---------- Net cash used in investing activities (591,000) (1,868,200) ---------- ---------- Financing activities: Proceeds from sale-leaseback 2,600,000 -- Payments on long-term debt (1,251,400) (176,500) Payment of sale-leaseback costs (160,000) -- Preferred stock dividend (19,100) -- Payment on capital lease (10,000) (6,100) Proceeds from issuance of common stock -- 300 ---------- ---------- Net cash provided by (used in) financing activities 1,159,500 (182,300) ---------- ---------- Net increase (decrease) in cash and cash equivalents 1,217,900 (1,432,200) Cash and cash equivalents - beginning of period 151,100 2,287,800 ---------- ---------- Cash and cash equivalents - end of period $1,369,000 $855,600 ========== ========== Noncash investing and financing activities: Net change in unrealized gain -- $11,700 ========== ========== Building acquired under capital lease $1,475,000 -- ========== ========== Supplemental disclosures of cash flow information: Cash paid during the quarter for interest $431,000 $399,800 ========== ========== See accompanying notes to condensed consolidated financial statements.
4 EACO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 30, 2005 (Unaudited) Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the interim financial information instructions to Form 10-Q, and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for the interim periods have been included. Operating results for the quarter ended March 30, 2005 are not necessarily indicative of the results that may be expected for the fiscal year ending December 28, 2005. For further information, refer to the financial statements and footnotes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2004. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany profits, transactions and balances have been eliminated. Note 2. Earnings (Loss) Per Share Basic earnings and loss per share for the quarters ended March 30, 2005 and March 31, 2004 were computed based on the weighted average number of common shares outstanding. Diluted earnings and loss per share for those periods have been computed based on the weighted average number of common shares outstanding, giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive shares are represented by shares under option. For the quarters ended March 30, 2005 and March 31, 2004, stock options totaling 106,800 and 153,300 shares were excluded from the computation of diluted loss per share due to their antidilutive effect. 5 Note 3. Other Assets Other assets consist principally of deferred charges, which are amortized on a straight-line basis. Deferred charges and related amortization periods are as follows: financing costs - term of the related loan, and initial franchise rights - forty years through 2003, eighteen months beginning in 2004. The gross carrying amount of the deferred financing costs was $841,900 and $878,400 as of March 30, 2005 and December 29, 2004, respectively. Accumulated amortization related to deferred financing costs was $241,900 and $241,100 as of March 30, 2005 and December 29, 2004, respectively. Amortization expense was $37,200 and $12,400 for the quarters ended March 30, 2005 and March 31, 2004. Amortization expense for each of the next five years is expected to be $43,000. The gross carrying amount of the initial franchise rights was $294,700 and $299,700 as of March 30, 2005 and December 29, 2004. Accumulated amortization related to initial franchise rights was $271,600 and $252,400 as of March 30, 2005 and December 29, 2004, respectively. Amortization expense was $24,200 and $27,600 for the quarters ended March 30, 2005 and March 31, 2004, respectively. Franchise rights will be fully amortized by June 30, 2005. Note 4. Reclassifications Certain items in the prior interim financial statements have been reclassified to conform to the 2005 presentation. Note 5. Stock Based Compensation The Company accounts for stock-based compensation utilizing the intrinsic value method under Accounting Principles Board No. 25 (APB 25), "Accounting for Stock Issued to Employees". The Company's long-term incentive plan provides for the granting stock options and restricted stock. The exercise price of each option equals the market price of the Company's stock on the date of grant. Options vest in one-quarter increments over a four-year period starting on the date of grant. An option's maximum term is 10 years. See Note 10 "Common Shareholders' Equity" in the Company's Annual Report for the year ended December 29, 2004 for additional information regarding the Company's stock options. 6 In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". Pursuant to the disclosure requirements of SFAS 148, the following table provides an expanded reconciliation for all periods presented: Quarter Ended Quarter Ended March 30, 2005 March 31, 2004 ------------------ ------------------ Net earnings (loss), as reported $258,200 $(330,700) Stock based compensation expense included in net income, net of tax -- 5,000 Deduct: Total stock-based compensation expense determined under fair value, net of tax -- (900) ------------ ------------ Pro forma net earnings (loss) $258,200 $(326,600) Undeclared cumulative preferred stock dividend (19,100) -- ------------ ------------ 239,100 (326,600) Earnings (loss) per share - basic and diluted as reported $ 0.06 $ (0.09) Pro forma $ 0.06 $ (0.09)
Note 6. Preferred Stock The Company has outstanding 36,000 shares of Series A Cumulative Convertible Preferred Stock with a dividend rate of 8.5%. In the quarter ended March 30, 2005, the Board of Directors declared and the Company paid dividends in the amount of $19,100. The balance of undeclared cumulative preferred dividends at March 30, 2005 was $19,100. Note 7. Sale Leaseback Transaction On December 30, 2004, the Company completed a sale leaseback transaction to refinance one of its restaurants. The Company sold the property for $2.6 million and paid off its existing mortgage of approximately $1.1 million on the property. The leaseback of the building is accounted for as a capital lease and the leaseback of the land is accounted for as an operating lease, with a deferred gain of $387,100 being recognized over the twenty-year life of the lease. The lease requires annual payments beginning at $260,000, with various increases over the life of the lease. The Company plans to use the proceeds of this transaction to fund several of its remodels to its new concepts. 7 Note 8. Pending Asset Sale On February 23, 2005, the Company announced that it had entered into an asset purchase agreement under which it would sell sixteen of its restaurants to Banner Buffets, LLC ("Buyer"). The total purchase price for the sixteen restaurant businesses, premises, equipment and other assets used in restaurant operations will be $29,950,000, $25,950,000 in cash at closing and a promissory note for $4 million. The note is secured by restaurant equipment valued at less than $1 million. At the present time, the Company does not have sufficient information to evaluate the true value of the $4 million note. The Buyer would also assume obligations under capital leases of approximately $5.5 million. As of the date of the filing of this Quarterly Report on Form 10-Q, the Buyer is still in the process of obtaining financing to complete the transaction. Once the Company is satisfied with the Buyer's financing commitment, it will circulate an information statement to its shareholders to provide them additional details on the transaction. Due to delays in the Buyer's financing process, and the requirements under the securities laws to circulate the shareholder information statement, the transaction will not close by the original May 31, 2005 deadline contained in the asset purchase agreement. That date has now been extended to June 30, 2005. If the Buyer successfully obtains the financing, it is expected that the sale will be completed by June 30th, although that timing will still be subject to certain other due diligence items between the Buyer and its lender. Due to these uncertainties, the Company has presented its results for the first quarter of 2005 as continuing operations. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policy and Use of Estimates The Company's accounting policy for the recognition of impairment losses on long-lived assets is considered critical. The Company's policy is to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of the impairment review, assets are grouped on a restaurant-by-restaurant basis. The recoverability of the 8 assets is measured by a comparison of the carrying value of each restaurant's assets to future net cash flows expected to be generated by such restaurant's assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds the fair value of the assets. The preparation of EACO Corporation's consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the Company's assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The Company bases these estimates and assumptions on historical data and trends, current fact patterns, expectations and other sources of information it believes are reasonable. Actual results may differ from these estimates under different conditions. For a full description of the Company's critical accounting policy, see Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 2004 Annual Report on Form 10-K. Results of Operations Quarter Ended March 30, 2005 versus March 31, 2004 The Company experienced a decrease of 2.3% in total sales during the thirteen weeks of 2005 compared to the first thirteen weeks of 2004, due to the closure of two restaurants since the prior year, offset by the opening of one new restaurant. Same- store sales (average weekly sales in restaurants that have been operating for at least 18 months) in the first quarter of 2005 increased 0.4% from the same period in 2004, compared to an increase of 7.3% from 2004 as compared to 2003. The costs and expenses of the Company's restaurants include food and beverage, payroll, payroll taxes and employee benefits, depreciation and amortization, repairs, maintenance, utilities, supplies, advertising, insurance, property taxes, rents and licenses. The Company's food, beverage, payroll, and employee benefit costs as a percentage of sales are believed to be higher than the industry average, due to the Company's philosophy of providing customers with high value of food and service for every dollar a customer spends. In total, food and beverage, payroll and benefits, depreciation and amortization and other operating expenses as a percentage of sales increased to 86.0% in the first quarter of 2005 from 84.5% in the same quarter of 2004. 9 Food and beverage costs as a percentage of sales decreased to 37.4% in 2005 from 37.5% in 2004, due primarily to price increases implemented by the Company. Payroll and benefit costs as a percentage of sales decreased to 28.0% in 2005 from 28.2% in 2004, primarily due to lower health insurance costs. Other operating expenses increased to 15.6% in 2005 from 14.0% in 2004, due primarily to increased advertising costs and increased rent costs from two new leases. Depreciation and amortization expenses were 5.0% and 4.8% in 2005 and 2004, respectively. General and administrative expenses as a percentage of sales were 6.1% in the first quarters of 2005 and 2004. Franchise fees as a percentage of sales decreased to 1.7% in 2005 from 3.6% in 2004. The decrease results from the amendment to the franchise agreement, which requires the Company to convert all Ryan's restaurants to its new concepts by June 2005. Interest expense increased to $451,200 in the first quarter of 2005 from $411,000 in the same quarter of 2004, due to interest from two new capital lease obligations and the write- off of loan fees associated with a sale leaseback refinancing, offset by reductions from lower debt balances. The effective income tax rate for the first three months of 2005 and 2004 was 0.0%. The Company sometimes invests a portion of its available cash in marketable securities. The Company maintains an investment account to effect these transactions. Investments are made based on a combination of fundamental and technical analysis primarily using a value-based investment approach. The holding period for investments usually ranges from 60 days to 24 months. Management occasionally purchases marketable securities using margin debt. In determining whether to engage in transactions on margin, management evaluates the risk of the proposed transaction and the relative returns offered thereby. If the market value of securities purchased on margin were to decline below certain levels, the Company would be required to use additional cash from its operating account to fund a margin call in its investment account. Management reviews the status of the investment account on a regular basis and analyzes such margin positions and adjusts purchase and sale transactions as necessary to ensure such margin calls are not likely. The results for the first quarter of 2004 included realized gains from the sale of marketable securities of $23,900. The Company did not have any investment in marketable securities in 2005. 10 The Company recognized a non-cash asset valuation charge of $594,200 in 2004 in accordance with SFAS No. 144, "Accounting for the Impairment of or Disposal of Long-Lived Assets." The charge was based on the write-off of the net book value of the leasehold improvements from the closure of a leased restaurant. The restaurant was an under-performing restaurant, and the Company was able to assign the lease to another company. Net earnings were $258,200 in the first quarter of 2005 , compared to net loss of $330,700 in the first quarter of 2004. Earnings per share for the quarter was 7 cents in 2005 compared to loss per share of 9 cents in 2004. The Company's operations are subject to seasonal fluctuations. Revenues per restaurant generally increase from January through April and decline September through December. Operating results for the quarter ended March 30, 2005 are not indicative of the results that may be expected for the fiscal year ending December 28, 2005. Liquidity and Capital Resources Substantially all of the Company's revenues are derived from cash sales. Inventories are purchased on credit and are rapidly converted to cash. Therefore, the Company does not carry significant receivables or inventories and, other than repayment of debt, working capital requirements for continuing operations are not significant. At March 30, 2005, the Company had a working capital deficit of $2,147,200 compared to $3,527,000 at December 29, 2004. The decrease was due to approximately $1.3 million in cash received from the sale leaseback transaction as described below. Cash provided by operating activities increased to $649,400 in the first quarter of 2005 from $618,300 in the first quarter of 2004, primarily due to timing differences in the payments of accounts payable. The Company spent $521,500 in the first quarter of 2005 for property and equipment. Capital expenditures for 2005, based on present costs and plans for capital improvements, are estimated to be $1.7 million. This amount is based on budgeted expenditures for building improvements and equipment for remodeling of seven restaurants to the Company's new concepts and normal recurring equipment purchases and minor building improvements ("Capital Maintenance Items"). The Company believes 11 it has sufficient funds for the four remodels to the new concepts. Should the Company's net cash generated by operations decline significantly below expectations, it would have to raise the necessary capital for remodeling these restaurants. If the Company could not raise sufficient capital quickly enough, it would still be required to change the name and signs of these restaurants, in accordance with the amended Franchise Agreement, but capital requirements for such changes would be minimal. Management estimates the cost of opening any future new restaurants to be approximately $3 million. To the extent the Company decides to open new restaurants or remodel its existing restaurants to its new concept in 2005 and beyond, management plans to fund any new restaurant construction or remodels either by GE Capital funding, sales leaseback financing, developer- funded leases, refinancing existing restaurants, or attempting to get additional financing from other lenders. The Company's ability to open new restaurants is also dependent upon its ability to identify suitable locations at acceptable prices, and upon certain other factors beyond its control, such as obtaining building permits from various government agencies. The sufficiency of the Company's cash to fund operations and necessary Capital Maintenance Items will depend primarily on cash provided by operating activities. Current plans call for the Company to convert all of its remaining stores to either the Whistle Junction concept or the Florida Buffet concept by June 30, 2005. As of March 30, 2005, four stores remain to be converted. However, due to delays caused by the pending asset sale by the Company (see "Recent Developments" below), the Company may not be able to comply with the June 30, 2005 deadline. In this event, the Company would be required to pay an additional fee of 2% of sales on any Ryan's restaurant not converted by June 30. The Company expects to be able to complete all of the conversions no later than the end of July 2005, so these additional fees should not have a material impact on the Company. Company management estimates that total funds required to accomplish the conversion of the four remaining restaurants to be approximately $600,000. On December 30, 2004, the Company completed a sale leaseback financing for $2.6 million, which netted the Company approximately $1.3 million in cash after payment of debt and closing expenses. This should provide sufficient cash to complete the remodels, barring any significant declines in cash generated by operations. 12 In June 2004, the Company sold 145,833 shares of its Common Stock directly to Bisco Industries, Inc. Profit Sharing and Savings Plan for a total purchase price of $175,000 cash. In September 2004, the Company sold 36,000 shares of the Company's newly authorized Series A Cumulative Convertible Preferred Stock at a price of $25 per share, for a total purchase price of $900,000 cash. The Preferred Stock was sold to the Company's Chairman. Dividends are paid quarterly when declared by the Company's Board of Directors. The Company paid a declared dividend of $19,100 during the first quarter of 2005. Undeclared dividends as of March 30, 2005 were $19,100. On December 30, 2004, the Company completed a sale leaseback transaction to refinance one of its restaurants. The Company sold the property for $2.6 million and paid off its existing mortgage of approximately $1.1 million on the property. The leaseback of the building is accounted for as a capital lease and the leaseback of the land is accounted for as an operating lease, with the deferred gain being recognized over the twenty-year life of the lease. The lease requires annual payments beginning at $260,000, with various increases over the life of the lease. The Company plans to use the proceeds of this transaction to fund several of its remodels to its new concepts. In July 2002, the Company completed a sale leaseback transaction to refinance one of its restaurants in Tampa, Florida. The Company sold the property for $3.0 million and paid off its existing mortgage of approximately $1.1 million on the property. The leaseback of the building was accounted for as a capital lease and the leaseback of the land is accounted for as an operating lease, with the deferred gain on the sale being recognized over the twenty-year life of the lease. The lease agreement requires annual payments of $330,000, with increases of 10% every five years. Management used the proceeds of the transaction to fund a portion of the construction of a new restaurant in 2004. In April 2002, the Company completed a private placement with Bisco for 435,000 shares at $0.92 per share, which was based on the average closing price of the Company's common stock on the ten trading days prior to the sale. The Company used the $400,200 proceeds from this sale to fund remodels of several restaurants in 2002. The Company is required to pledge collateral for its workers' compensation self insurance liability with the Florida 13 Self Insurers Guaranty Association ("FSIGA"). The Company increased this collateral by $69,500 during the first quarter of 2005, and now has a total of $1.37 million pledged collateral. Of this amount, Bisco Industries, Inc. ("Bisco") provides $1 million of this collateral. EACO Corporation's Chairman of the Board of Directors, Glen Ceiley, is the President of Bisco. The Company may be required to increase this collateral pledge from time to time in the future, based on its workers' compensation claim experience and various FSIGA requirements for self-insured companies. The Company has entered into a series of loan agreements with GE Capital. As of March 30, 2005, the outstanding balance due under the Company's various loans with GE Capital was $14,439,800. The weighted average interest rate for the GE Capital loans is 7.5%. In 2004 and 2005, the Company paid franchise fees of 4% of gross sales for Ryan's restaurants only. Total franchise fees paid in the first quarter of 2005 were $174,200. As the Company converts each restaurant from Ryan's to its new concepts, no franchise fees are paid on those converted restaurants, which will improve the Company's cash flow. The Company sold four restaurants in 2004, resulting in total net proceeds of $3,144,500. The Company used these proceeds to pay off mortgages on the four restaurants totaling approximately $1,816,000. Total net gains on sales of property in 2004 were $62,700. The preceding discussion of liquidity and capital resources contains certain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed herein, among the other factors that could cause actual results to differ materially are the following: failure of facts to conform to necessary management estimates and assumptions; the willingness of GE Capital or other lenders to extend financing commitments; repairs or similar expenditures required for existing restaurants due to weather or acts of God; the Company's ability to identify and secure suitable locations on acceptable terms and open new restaurants in a timely manner; the Company's success in selling restaurants listed for sale; the economic conditions in the new markets into which the Company expands; changes in customer dining patterns; competitive pressure from other national and regional restaurant chains and other food vendors; business conditions, such as inflation or a recession, 14 and growth in the restaurant industry and general economy; and other risks identified from time to time in the Company's SEC reports, registration statements and public announcements. Recent Developments On February 23, 2005, the Company announced that it had entered into an asset purchase agreement under which it would sell all sixteen of its operating restaurants to Banner Buffets, LLC ("Buyer"). The total purchase price for the restaurant businesses, premises, equipment and other assets used in restaurant operations will be $29,950,000, $25,950,000 in cash at closing and a promissory note for $4 million. The note is secured by restaurant equipment valued at less than $1 million. At the present time, the Company does not have sufficient information to evaluate the true value of the $4 million note. The Buyer would also assume obligations under capital leases of approximately $5.5 million. The transaction is subject to shareholder approval. The Buyer had a 30-day due diligence period which ended March 24, 2005, during which time the Buyer could have terminated the transaction if its review revealed any information that could have a material adverse effect on its ability to consummate the transaction that could not be cured prior to the closing. The Buyer did not terminate the transaction, and has posted a $500,000 non-refundable deposit, which is held in escrow by an independent third party. As of the date of the filing of this Quarterly Report on Form 10-Q, the Buyer had not provided evidence to the Company indicating that it had obtained financing to complete the transaction. Because of this, the Company has the right to terminate this transaction at any time and retain at least $250,000 of the Buyer's deposit. Due to delays in the Buyer's financing process, and the requirements under the securities laws to circulate the shareholder information statement, the transaction will not close by the original May 31, 2005 deadline contained in the asset purchase agreement. That date has now been extended to June 30, 2005. If the Buyer successfully obtains the financing, it is expected that the sale would be completed by June 30th, although that timing would still be subject to certain other due diligence items between the Buyer and its lender. Due to these uncertainties, the Company has presented its results for the first quarter of 2005 as continuing operations. 15 If the transaction does close, EACO Corporation would continue to exist with limited business operations, and the Company plans to seek out other business opportunities. Item 3. Qualitative and Quantitative Disclosure about Market Risk There has been no significant changes in the Company's exposure to market risk during the first fiscal quarter of 2005. For discussion of the Company's exposure to market risk, refer to Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2004. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the President and Chief Operating Officer and the Director of Finance. Based upon that evaluation, the Company's President and Chief Operating Officer and the Director of Finance have concluded that the Company's disclosure controls and procedures are effective in alerting them to material information regarding the Company's financial statement and disclosure obligation in order to allow the Company to meet its reporting requirements under the Exchange Act in a timely manner. (b) Changes in internal control. There have been no changes in internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect internal controls over financial reporting subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than proceedings arising in the normal course of business, to which the Company, or any of its 16 subsidiaries, is a party or to which any of their properties known to be contemplated by any governmental authority; nor are there material proceedings known to the Company, pending or contemplated, in which any director, officer, affiliate or any principal security holder of the Company or any associate of the foregoing is a party or has an interest adverse to the Company. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of the report on Form 10-Q. No. Exhibit 3.01 Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.01 to the Company's Registration Statement on Form S-1, Registration No. 33- 1887, is incorporated herein by reference.) 3.02 Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.02 to the Company's Registration Statement on Form 2- 1, Registration No. 33-1887, is incorporated herein by reference.) 3.03 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.03 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 17 3.04 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.04 to the Company's Registration Statement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.05 Amended and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 4 to the Company's Form 8-A, filed with the Commission on March 19, 1997, is incorporated herein by reference.) 3.06 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3 to the Company's Form 8-A filed with the Commission on March 19, 1997, is incorporated herein by reference.) 3.07 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.08 to the Company's Annual Report on Form 10-K filed with the Commission on March 31, 1998, is incorporated herein by reference.) 3.08 Amendment to Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.08 to the Company's Annual Report on Form 10-K filed with the Commission on March 15, 2000 is incorporated herein by reference.) 3.09 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.09 to the Company's Annual Report on Form 10-K filed with the Commission on March 29, 2004 is incorporated herein by reference.) 3.10 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc., changing the name of the corporation to EACO Corporation. (Exhibit 3.10 to the Company's Quarterly Report on Form 10-Q filed with the Commission on September 3, 2004, is incorporated herein by reference.) 31.01 Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.02 Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.01 Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.02 Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 18 (b) Reports on Form 8-K. On January 19, 2005, the Company filed a report on Form 8-K regarding the press release announcing the completion of a sale leaseback financing designed to provide funding for remodels of several of its Ryan's restaurants to its new concepts. On February 23, 2005, the Company filed a report on Form 8-K regarding the press release on the Company's announcement it had entered into an asset purchase agreement with Banner Buffets LLC, under which it will sell all of its operating restaurants. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EACO CORPORATION (Registrant) /s/ Edward B. Alexander Date: May 27, 2005 Edward B. Alexander President/Chief Operating Officer /s/ Stephen C. Travis Date: May 27, 2005 Stephen C. Travis Director of Finance 19 Exhibit 31.01 Certification I, Edward Alexander, certify that: 1. I have reviewed this quarterly report on Form 10-Q of EACO Corporation. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 20 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 27, 2005 /s/ Edward B. Alexander Edward B. Alexander President/Chief Operating Officer 21 Exhibit 31.02 Certification I, Stephen C. Travis, certify that: 1. I have reviewed this quarterly report on Form 10-Q of EACO Corporation. 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 22 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 27, 2005 /s/ Stephen C. Travis Stephen C. Travis Director of Finance 23 Exhibit 32.01 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the EACO Corporation's (the "Company") Quarterly Report on Form 10-Q for the period ending March 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward B. Alexander, Chief Operating Officer/President of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,: (1). The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2). The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 27, 2005 /s/ Edward B. Alexander Edward B. Alexander President / Chief Operating Officer 24 Exhibit 32.02 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with EACO Corporation's (the "Company") Quarterly Report on Form 10-Q for the period ending March 30, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen C. Travis, Director of Finance for the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,: (1). The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2). The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 27, 2005 By: /s/ Stephen C. Travis Stephen C. Travis Director of Finance 24