EX-13 4 eacoar2004.txt Exhibit 13.01 EACO CORPORATION CORPORATE PROFILE About The Company EACO Corporation (the "Company") was incorporated under the laws of the State of Florida in September of 1985. Currently, the Company operates seventeen restaurants in the state of Florida. The restaurants are family-oriented buffet restaurants serving high quality, reasonably priced food in a casual atmosphere with server-assisted service. The restaurants feature self-service scatter bars with a variety of over 100 fruit, vegetable and meat entree items, bakery and dessert bar, drink refills and table service. Several restaurants feature a display cooking area, where guests can have grilled-to-order steaks, chicken, pork chops and other items, all of which is included in the price of the all-you-can-eat buffet. Since the beginning of its operations, the Company has been the sole franchisee for Ryan's Family Steak House restaurants in the state of Florida. In December 2003, the Company entered into an agreement with Ryan's Family Steakhouses, Inc. ("Ryan's" or "Franchisor") to convert all of the restaurants operated by the Company into a different name and concept by June 2005. Prior to June 2005, the Company plans to convert all of its restaurants into one of two new names and concepts, either "Whistle Junction" or "Florida Buffet," based on a variety of relevant factors. The operations of all converted restaurants will maintain the current buffet format, but after the conversion will include enhancements to each restaurant's building, service and menu. Whistle Junction restaurants will also feature several high quality "signature dish" items, and offer beer and wine. Restaurant Locations (As of March 1, 2005): Whistle Junction Florida Buffet Ryan's Jacksonville Melbourne Lakeland Tampa Daytona Beach Winter Haven Orlando Lake City Orlando Deland Ocala Titusville Brooksville Lakeland St. Cloud Tampa Gainesville To Our Shareholders: 2004 was an exciting year of transition for the Company. We began the process of converting our restaurants from Ryan's to our new concepts, Whistle Junction and Florida Buffet. Our first conversion to Whistle Junction in March was a huge success, exceeding our highest expectations. Our first Whistle Junction restaurant exceeded its previous all-time sales record as a Ryan's in its first week open as a Whistle Junction restaurant, more than doubling its same-store sales. Although not all of the Whistle Junctions have performed at this level, in general we have been pleased with the results of these conversions. By the end of 2004, we had completed conversions of three restaurants to Whistle Junction, built a new Whistle Junction in Orlando, and converted eight locations to Florida Buffet. One of our initial concerns going into the conversion process was our future ability to build sales without the name recognition we had enjoyed as Ryan's restaurants. Our initial concerns were quickly relieved, as we achieved a same-store sales increase of 6.7% for the year. Each time we convert a Ryan's restaurant to one of our new concepts, the royalty fee of 4% of sales payable under our franchise agreement to Ryan's for that restaurant is eliminated for that location, improving our profitability. We plan to complete conversion on all of our restaurants by June 2005. This will save us over $1 million per year in royalty fees. We made great progress in disposing of unproductive assets in 2004. We sold four restaurants, three of which had been closed for several years. In addition, we closed another under- performing leased restaurant. This allowed us to pay off debt of $1.8 million, and eliminate losses from those restaurants. The combination of eliminating unproductive assets and remodeling all of our remaining restaurants leaves us with a strong core of restaurants for the future. The success of our transition has generated a lot of interest in the Company. In late February 2005, this led to an offer from a restaurant operating group to purchase sixteen of the Company's restaurants at a price we believe is very favorable to our shareholders. The Board of Directors approved the offer, and we have entered into an asset purchase agreement, subject to the buyer's due diligence. If this transaction is completed, EACO Corporation's book value and cash position will be enhanced, and we will look for new opportunities to move the Company forward. If not, we are still excited about growing the Whistle Junction concept. 2 We look forward to another year of progress in 2005. We completed a financing transaction on December 30, 2004 (the first day of our new fiscal year), which will provide the cash to complete our remodels. As of March 1, 2005, we have already converted another Whistle Junction and a Florida Buffet, with positive initial results on both. Our transition of the Company's business is almost complete, and we are confident in the Company's future. We are working hard to return the Company to profitability and build shareholder value. Thanks for your continuing support. Sincerely, Edward B. Alexander President 3 EACO CORPORATION
Five Year Financial Summary 2004 2003 2002 2001 2000(1) ------------------------------------------------------------------------------- Selected Income Statement Data: (in thousands, except per share data) Revenues: Sales $37,586 $37,384 $42,050 $42,054 $39,960 Vending income 214 208 192 210 232 ------- ------- ------- ------- ------- 37,800 37,592 42,242 42,264 40,192 Cost and expenses: Food and beverage 14,249 14,252 15,696 15,938 15,469 Payroll and benefits 11,751 11,678 12,713 12,582 11,306 Depreciation and amortization 1,976 1,991 2,205 2,148 2,061 Other operating expenses 6,218 6,211 6,826 6,754 6,217 General and administrative expenses 2,205 2,317 2,396 2,540 2,445 Franchise fees 1,112 1,494 1,682 1,260 1,198 Asset valuation charge 594 63 988 -- 190 Loss on store closings and disposition of equipment 91 133 258 214 87 ------ ------- ------- ------- ------- 38,196 38,139 42,764 41,437 38,973 ------ ------- ------- ------- ------- Earnings (loss) from operations (396) (547) (522) 827 1,219 Investment (loss) income 11 (331) 17 (487) 487 Interest and other income 94 213 168 100 157 Interest expense (1,741) (1,736) (1,763) (1,726) (1,910) ------ ------- ------- ------- ------- Loss before income taxes (2,032) (2,401) (2,100) (1,286) (47) Income taxes -- -- -- -- -- ------ ------- ------- ------- ------- Net loss $(2,032) $(2,401) $(2,100) $(1,286) $(47) Undeclared cumulative preferred stock dividend (19) -- -- -- -- ------ ------- ------- ------- -------- Net loss available for basic and diluted loss per share (2,051) (2,401) (2,100) (1,286) (47) ====== ======= ======= ======= ======== Basic loss per share $(0.53) $(0.65) $(0.59) $(0.49) $(0.02) ------ ------- ------- ------- ------- Diluted loss earnings per share $(0.53) $(0.65) $(0.59) $(0.49) $(0.02) ====== ======= ======== ======= ======= Selected Balance Sheet Data: Land and net property and equipment $25,868 $24,352 $28,347 $29,582 $26,356 Total assets 27,789 30,807 33,667 34,261 31,627 Long-term debt 14,774 17,471 19,523 19,903 17,869 Current portion of long-term debt 917 718 725 663 566 Shareholders' equity 2,752 3,761 6,145 7,843 7,770 Selected Operating Data : Current ratio 0.2 0.6 0.7 0.2 0.4 Working capital (deficit) $(3,535) $(2,274) $(1,208) $(4,528) $(2,781) Cash provided by operating activities 786 309 822 1,293 1,937 Property and equipment additions 3,080 937 2,006 5,716 3,648 ------------------------------------------------------------------------------- (1) Fifty-three week period.
4 EACO CORPORATION
Management's Discussion and Analysis of Financial Condition and Results Shown for the years indicated are (i) items in the statements of operations as a percent of total sales, (ii) operating expense items in the statements of operations as a percent of sales and (iii) the number of restaurants open at the end of each year. Percentage Change Versus Prior Year ------------------------ 2004 2003 vs vs 2004 2003 2002 2003 2002 ----------- ----------- ----------- ------------------------- Sales $37,585,600 $37,384,000 $42,050,300 .5% (11.1%) =========== =========== =========== ========== ========= Net Change In Percentage ------------------------- 2004 2003 Percent of Sales vs vs 2004 2003 2002 2003 2002 ----------------------------------- ------------------------- Vending Revenue 0.6% 0.6% 0.5% 0.0% 0.1% -------- ------- ------- --------- -------- Costs and expenses: Operating expenses 91.0% 91.3% 89.0% (0.3) 2.3 General and administrative expenses 5.9 6.2 5.7 (0.3) 0.5 Franchise fees 3.0 4.0 4.0 (1.0) 0.0 Asset valuation charge 1.6 0.2 2.4 1.4 (2.2) Loss on store closings and disposition of equipment 0.2 0.5 0.6 (0.3) (0.1) -------- ------- ------- --------- -------- 101.7 102.2 101.7 (0.5) 0.5 -------- ------- ------- --------- -------- Loss from operations (1.1) (1.6) (1.2) 0.5 (0.5) Investment (loss) income --- (0.9) --- 0.9 (0.9) Interest and other income 0.3 0.7 0.4 (0.4) 0.3 Interest expense (4.6) (4.6) (4.2) 0.0 (0.4) -------- ------- ------- --------- -------- Loss before income taxes (5.4) (6.4) (5.0) 1.0 (1.4) Income tax benefit --- --- --- --- --- -------- ------- ------- --------- -------- Net Loss (5.4) (6.4) (5.0) 1.0 (1.4) ======== ======= ======= ========= ======== Operating expenses: Food and beverage 37.9% 38.1% 37.4% (0.2)% 0.7% Payroll and benefits 31.3 31.2 30.2 0.1 1.0 Depreciation and amortization 5.3 5.3 5.2 0.0 0.1 Other operating expenses 16.5 16.7 16.2 (0.2) 0.5 -------- ------- ------- --------- -------- 91.0% 91.3% 89.0% (0.3)% 2.3% ======== ======= ======= ========= ======== Restaurants open at end of year 17 18 22 ======== ======= =======
5 RESULTS OF OPERATIONS 2004 Compared to 2003 Total sales increased 0.5% to $37,585,600 in 2004 from $37,384,000 in 2003. The increase was due to incremental sales from a new restaurant opened in 2004 and an increase in same- store sales of 6.7% discussed below, offset by the closure and sale of one restaurant in October 2004, and the temporary closure for remodel of several restaurants during 2004. Same-store sales (average unit sales in restaurants that have been open for at least 18 months and operating during comparable weeks during the current and prior year) for 2004 increased 6.7% from the same period in 2003, compared to a decrease of 5.3% from 2003 as compared to 2002. The increase in same-store sales was primarily due to increases at two restaurants remodeled to the Company's new Whistle Junction concept. The operating expenses of the Company's restaurants include food and beverage, payroll and benefits, depreciation and amortization, and other operating expenses, which include repairs, maintenance, utilities, supplies, advertising, insurance, property taxes, rents and licenses. In total, food and beverage, payroll and benefits, depreciation and amortization and other operating expenses as a percentage of sales decreased to 91.0% in 2004 from 91.3% in 2003. Food and beverage costs as a percentage of sales decreased to 37.9% in 2004 from 38.1% in 2003, primarily due to menu price increases implemented by the Company. Payroll and benefits as a percentage of sales increased to 31.3% in 2004 from 31.2% in 2003. Other operating expenses as a percentage of sales decreased to 16.5% in 2004 from 16.7% in 2003, primarily due to improved operational efficiencies, created by the increase in same-store sales since a portion of these costs are fixed. Depreciation and amortization as a percentage of sales was 5.3% in 2004 and 2003. General and administrative expenses decreased to 5.9% of sales in 2004 from 6.2% in 2003 due to a reduction in personnel. The Company recognized an asset impairment charge of $594,200 in 2004 in accordance with Statement of Financial Accounting Standards No. 144, ("SFAS 144") "Accounting for the Impairment of or Disposal of Long-Lived Assets". The charges were based upon a financial review of all Company-owned restaurants and applied to one closed restaurant. The Company recognized an asset impairment charge of $63,100 in 2003. 6 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 2004 included net realized gains of $10,500 from the sale of marketable securities, compared to net realized losses of $330,600 in 2003. As of the end of 2004, all of the Company's cash has been invested in the Company's operations. Interest expense increased to $1,741,300 in 2004 from $1,735,800 during 2003, due primarily to interest from a new capital lease begun in 2004. The effective income tax rate for the years ended December 29, 2004 and December 31, 2003 was 0.0%. An increase in the valuation allowance in deferred tax assets for 2004 and 2003 resulted in the lower than statutory effective rates for those years. Net loss for 2004 was $2,031,600, compared to $2,401,000 in 2003. Loss per share was $.53 for 2004, compared to $.65 in 2003. 2003 Compared to 2002 Total sales decreased by 11.1%, to $37,384,000 in 2003 from $42,050,300 in 2002. The decrease was due to the closure of three under-performing restaurants in 2003, and to a decrease in same store sales of 5.3% discussed below. Same store sales for 2003 decreased 5.3% from the same period in 2002, compared to a decrease of 6.1% from 2002 as compared to 2001. The decrease in same store sales was primarily due to declines at certain restaurants which faced new competition in their markets in 2003. 7 In total, food and beverage, payroll and benefits, depreciation and amortization and other operating expenses as a percentage of sales increased to 91.3% in 2003 from 89.0% in 2002. Food and beverage costs as a percentage of sales increased to 38.1% in 2003 from 37.4% in 2002, primarily due to menu enhancements implemented and higher beef prices in 2003. Payroll and benefits as a percentage of sales increased to 31.2% in 2003 from 30.2% in 2002, primarily due to increases in workers' compensation expense, based on the results of an actuarial review of the Company's claim liability. Other operating expenses as a percentage of sales increased to 16.7% in 2003 from 16.2% in 2002, primarily due to increased property insurance and utility costs. Depreciation and amortization increased as a percentage of sales to 5.3% in 2003 from 5.2% in 2002. General and administrative expenses as a percentage of sales increased to 6.2% in 2003 from 5.7% in 2002, primarily due to the decline in same-store sales and the addition of a district supervisor position in 2003. The Company recognized an asset impairment charge of $63,100 in 2003 in accordance with SFAS 144. The charge was based upon a financial review of all Company-owned restaurants and applied to one closed restaurant, for which the Company entered into a sales contract in February 2004. The Company recognized asset impairment charges of $987,700 in 2002. As described above, the Company sometimes invests a portion of its available cash in marketable securities. A primary investment strategy used by the Company in 2003 consisted of short-selling of securities, which results in obligations to purchase securities at a later date. As of December 31, 2003, the Company's total obligation for these securities sold not yet purchased was $1,187,400, compared to $19,200 at January 1, 2003. The results for the year 2003 include realized losses from the sale of marketable securities of $330,600, compared to realized gains of $17,300 in 2002. Interest expense decreased to $1,735,800 in 2003 from $1,763,400 during 2002, due to lower outstanding debt balances. The Company capitalized interest costs of $0 in 2003 and $3,900 in 2002. The effective income tax rate for the years ended December 31, 2003 and January 2, 2002 was 0.0%. An increase in the valuation allowance in deferred tax assets for 2003 and 2002 resulted in the lower than statutory effective rates for those years. 8 Net loss for 2003 was $2,401,000, compared to $2,100,300 in 2002. Loss per share was $.65 for 2003, compared to $.59 in 2002. CRITICAL ACCOUNTING POLICY 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. LIQUIDITY AND CAPITAL RESOURCES Substantially all of the Company's revenues are derived from cash sales. Inventories are purchased on credit and are converted rapidly to cash. Therefore, the Company does not carry significant receivables or inventories and, other than the repayment of debt, working capital requirements for continuing operations are not significant. At December 29, 2004, the Company had a working capital deficit of $3,527,000 compared to a working capital deficit of $2,274,400 at December 31, 2003. The increase in the working capital deficit in 2004 was primarily due to operating losses incurred in 2004. Cash provided by operating activities increased to $786,300 in 2004 from $308,600 in 2003, primarily due to a decrease in the net loss. Cash provided by operating activities decreased to $308,600 in 2003 from $822,300 in 2002, due to timing differences in the payments of accounts payable, workers' compensation and accrued liabilities. On December 30, 2004 (the day after the Company's fiscal year end), the Company completed a sale leaseback financing for $2.6 million, which netted the Company approximately $1.3 million cash. The Company projects this will provide sufficient cash to complete all of its remaining required remodels. 9 The Company has incurred operating losses each year since 1997. In preparing the Company's business plan for 2005, management considered a number of factors to determine that adequate cash resources will be available to meet all liquidity needs for the year 2005. Those factors included planned improvement in cash provided from operating activities, which was $786,300 in 2004, from the projected reduction in franchise fees in 2005 of approximately $900,000 and the elimination of losses from closed restaurants estimated at approximately $400,000. The plan also includes continued focus on improving sales at existing stores and managing controllable costs at both the store and corporate levels. Management believes the cash to be provided from operating activities combined with the completed sale leaseback financing transaction discussed below will provide sufficient cash for the Company to meet its operational needs, debt service requirements and capital improvement needs for 2005. The Company spent $3,080,200 in 2004, $938,000 in 2003 and $2,006,000 in 2002 for new restaurant construction, restaurant remodeling and equipment. Capital expenditures for 2005, based on present costs and plans for capital improvements, are estimated to be $1.5 million. This amount is based on budgeted expenditures 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 it has sufficient funds for these expenditures as described below. Management estimates the cost of opening any future new restaurants to be approximately $2,900,000. 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 either by GE Capital funding, sale 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 December 29, 2004, seven stores remain to be converted. Company management estimates that total funds required to accomplish the conversion 10 of all seven restaurants to be approximately $1,350,000. 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 will provide sufficient cash to complete the remodels, barring any significant declines in cash generated by operations. 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. 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 has entered into a series of loan agreements with GE Capital. As of December 29, 2004, the outstanding balance due under the Company's various loans with GE Capital was $15,691,200. The weighted average interest rate for the GE Capital loans is 7.47%. In 2004, the Company paid franchise fees of 4% of gross sales for Ryan's restaurants only. Total franchise fees paid in 2004 were $1,112,000. 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 11 flow. All franchise fees will be eliminated by the end of June 2005. 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, 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. Contractual Financial Obligations In addition to using cash flow from operations, the Company finances its operations through the issuance of debt and by entering into leases. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transactions, with the result that some are recorded as liabilities in the Balance Sheet while others are required to be disclosed in the Notes to the Consolidated Financial Statements and Management's Discussion and Analysis. 12
The following schedule summarizes contractual obligations and other contractual commitments as of December 29, 2004: Payments due by Period Contractual Obligations Total 2005 2006-2007 2008-2009 Thereafter ------------------------ ----------- ---------- ---------- ---------- ----------- Long-term debt $15,691,200 $917,200 $2,052,100 $2,339,300 $10,382,600 Capital leases (1) 8,119,800 480,000 982,900 1,032,200 5,624,700 Operating leases 6,594,400 514,100 975,400 753,400 4,351,500 ----------- ---------- ---------- ---------- ----------- Total contractual cash obligations $30,405,400 $1,911,300 $4,010,400 $4,124,900 $20,358,800 =========== ========== ========== ========== =========== (1) Includes interest expense payable under capital leases.
Recent Developments 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 will provide sufficient cash to complete the remaining remodels to the Company's new concepts. On February 23, 2005, the Company announced that it had entered into an asset purchase agreement under which it would sell sixteen of its seventeen 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 $6 million. The Buyer had a 30-day due diligence period which ended March 24, 2005, during which it 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. It did not notify the Company that its review revealed any such information. As of the date of this filing, the Buyer had not provided evidence that it had obtained financing to complete the transaction. The transaction is subject to shareholder approval. It is expected that the transaction would close in late April, assuming all contingencies are satisfied. 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. 13 IMPACT OF INFLATION Costs of food, beverage, and labor are the expenses most affected by inflation in the Company's business. Although inflation in recent years has been low and accordingly has not had a significant impact on the Company, there can be no assurance that inflation will not increase and impact the Company in the future. A significant portion of the Company's employees are paid by the federally established statutory minimum wage. In November 2004, an increased minimum wage from $5.15 to $6.15 was approved for the State of Florida, effective May 2, 2005. The Company estimates that this will result in a significant increase in payroll expense once this new law is effective. The Company has typically been able to increase its menu prices to cover most of the payroll rate increases; however, management is not certain whether the Company will be successful in increasing menu prices sufficiently to offset the labor cost increase resulting from the minimum wage increase. Annual sales price increases have consistently ranged from 1.0% to 3.0%. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates. For its cash and cash equivalents, investments and mortgages receivables, a change in interest rates affects the amount of interest income that can be earned. For its debt instruments, a change in interest rates affects the amount of interest expense incurred.
The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. 2005 2006 2007 2008 2009 Thereafter Total ------------------------------------------------------------------------------- Assets Certificates of deposit at fixed interest rates $300,000 $300,000 Weighted average interest rate 1.75% Liabilities Notes payable at variable interest rate $917,200 $987,900 $1,064,200 $1,143,800 $1,195,500 $10,382,600 $15,691,200 Weighted average interest rate 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% Long-term capital leases at fixed interest rate $77,300 $89,300 $117,700 $138,700 $169,700 $3,430,600 $4,018,700 Weighted average interest rate 10.3% 10.3% 10.3% 10.3% 10.3% 10.3%
14 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in and disagreements with accountants on accounting and financial disclosure. 15
EACO CORPORATION Consolidated Statements of Operations For the Years Ended ------------------------------------ December 29, December 31, January 1, 2004 2003 2003 ------------------------------------------------------------------------------- Revenues: Sales $37,585,600 $37,384,000 $42,050,300 Vending revenue 213,900 208,100 192,200 ----------- ----------- ----------- Total revenues 37,799,500 37,592,100 42,242,500 ----------- ----------- ----------- Costs and expenses: Food and beverage 14,249,100 14,251,900 15,696,500 Payroll and benefits 11,750,500 11,678,100 12,712,800 Depreciation and amortization 1,975,700 1,990,500 2,205,300 Other operating expenses 6,218,400 6,252,100 6,826,600 General and administrative expenses 2,205,000 2,317,300 2,396,000 Franchise fees 1,112,000 1,494,400 1,681,600 Asset valuation charge 594,200 63,100 987,700 Loss on store closings and disposition of equipment 90,800 133,000 257,600 ----------- ----------- ----------- Total costs and expenses 38,195,700 38,180,400 42,764,100 ----------- ----------- ----------- Loss from operations (396,200) (588,300) (521,600) Investment (loss) income 10,500 (330,600) 17,300 Interest and other income 95,400 253,700 167,400 Interest expense (1,741,300) (1,735,800) (1,763,400) ----------- ----------- ----------- Loss before income taxes (2,031,600) (2,401,000) (2,100,300) Income tax benefit -- -- -- ----------- ----------- ----------- Net loss ($2,031,600) ($2,401,000) ($2,100,300) Undeclared cumulative preferred Stock dividend (19,100) -- -- ----------- ----------- ----------- Net loss available for basic and diluted loss per share ($2,050,700) ($2,401,000) ($2,100,300) =========== =========== =========== Basic loss per share ($.53) ($0.65) ($0.59) =========== =========== =========== Diluted loss per share ($.53) ($0.65) ($0.59) =========== =========== ===========
See accompanying notes to consolidated financial statements. 16 EACO CORPORATION
Consolidated Balance Sheets December 29, December 31, 2004 2003 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 151,100 $2,287,800 Investments-available for sale -- 32,600 Receivables 81,300 110,600 Inventories 235,200 300,400 Prepaid and other current assets 426,800 500,500 ----------- ------------ Total current assets 894,400 3,231,900 Certificate of deposit-held to maturity 300,000 10,000 Property and equipment: Land 6,967,200 7,310,000 Buildings and improvements 24,933,100 22,858,000 Equipment 11,880,000 11,509,200 Construction in progress 138,800 388,300 ----------- ------------ 43,919,100 42,065,500 Accumulated depreciation (18,051,600) (17,713,500) ----------- ------------ Net property and equipment 25,867,500 24,352,000 Property held for sale -- 2,288,800 Other assets, principally deferred financing costs, net of accumulated amortization 727,100 924,000 ----------- ------------ $27,789,000 $30,806,700 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,079,400 $1,121,900 Securities sold, not yet purchased -- 1,187,400 Accrued liabilities 1,778,000 1,801,700 Current portion of workers compensation liability 569,500 646,000 Current portion of long-term debt 917,200 718,400 Current portion of obligation under capital lease 77,300 30,900 ---------- ---------- Total current liabilities 4,421,400 5,506,300 Deferred rent 79,200 47,500 Deposit liability 23,300 31,300 Workers compensation liability 628,500 469,800 Long-term debt 14,774,000 17,470,700 Deferred gain 1,169,400 1,240,300 Obligations under capital lease 3,941,400 2,279,800 ---------- ---------- Total liabilities 25,037,200 27,045,700 Commitments and contingencies (Notes 4, 11) Shareholders' equity: Preferred stock of $.01 par; authorized 10,000,000 shares; outstanding 36,000 shares at December 29, 2004 (liquidation value $900,000) 400 -- Common stock of $.01 par; authorized 8,000,000 shares; outstanding 3,881,899 and 3,706,218 shares at December 29, 2004 and December 31, 2003 38,800 37,100 Additional paid-in capital 10,903,300 9,869,600 Accumulated deficit (8,190,700) (6,159,100) Accumulated other comprehensive income -- 13,400 ----------- ------------ Total shareholders' equity 2,751,800 3,761,000 ----------- ----------- $27,789,000 $30,806,700 =========== ===========
See accompanying notes to consolidated financial statements. 17 EACO CORPORATION
Consolidated Statements of Shareholders' Equity For the Years Ended December 29, 2004, December 31,2003 and January 1, 2003 Preferred Common Additional Accumulated Other Stock Stock Paid-in Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Income (loss) Total Balance, January 2, 2002 0 $0 3,251,014 $32,500 $9,466,600 $(1,657,800) $1,300 $7,842,600 Exercise of stock options 20,204 200 200 Directors' fees in the form of stock options 20,000 20,000 Proceeds from private placement 435,000 4,400 383,000 387,400 Comprehensive loss: Net loss (2,100,300) (2,100,300) Other comprehensive income: Unrealized losses on securities: Net unrealized holding gains arising during the period 11,900 11,900 Less: reclassification adjustment for net losses included in net loss (17,300) (17,300) ---------- Total comprehensive loss (2,105,700) ------ ------- --------- ------ --------- ----------- -------- ---------- Balance, January 1, 2003 0 0 3,706,218 37,100 9,869,600 (3,758,100) (4,100) 6,144,500 Comprehensive loss: Net loss (2,401,000) (2,401,000) Other comprehensive income: Unrealized losses on securities: Net unrealized holding losses arising during the period 17,500 17,500 ---------- Total comprehensive loss (2,383,500) ----- ------- --------- ------ --------- ----------- -------- ----------- Balance, December 31, 2003 0 0 3,706,218 37,100 9,869,600 (6,159,100) 13,400 3,761,000 Exercise of stock options 29,848 300 300 Directors' fees in the form of stock options 20,000 20,000 Proceeds from private placement 145,833 1,400 173,600 175,000 Sale of preferred stock 36,000 400 899,600 900,000 Expenses of preferred stock issuance (53,000) (53,000) Preferred stock dividend (6,500) (6,500) Comprehensive loss: Net loss (2,031,600) (2,031,600) Other comprehensive income: Unrealized losses on securities: Less: reclassification adjustment for net losses included in net loss (13,400) (13,400) Total comprehensive loss (2,045,000) ----- ------- --------- ------ --------- ----------- -------- ----------- Balance, December 29, 2004 36,000 $400 3,881,899 $38,800 $10,903,300 $(8,190,700) $0 $2,751,800 ====== ======= ========= ====== ========= =========== ======== =========== See accompanying notes to consolidated financial statements.
18 EACO CORPORATION
Consolidated Statements of Cash Flows For the Years Ended December 29, December 31, January 1, 2004 2003 2003 Operating activities: Net loss ($2,031,600) ($2,401,000) ($2,100,300) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,975,400 1,990,500 2,205,400 Asset impairment charge 594,200 63,100 987,700 Directors' fees in the form of stock options 20,000 -- 20,000 Investment loss (gain) (7,000) 330,600 (17,300) Amortization of loan fees 84,400 58,300 82,500 Amortization of deferred gain (70,900) (70,800) (106,400) Loss on disposition of assets held for sale and other property 29,000 26,700 67,300 Decrease (increase) in: Receivables 29,300 (5,200) 54,400 Inventories 65,200 (64,000) 83,400 Prepaids and other current assets 81,400 (127,600) (88,500) Other assets (22,800) (3,800) (38,200) Decrease (increase) in: Accounts payable (42,500) (224,300) (225,100) Accrued liabilities (23,700) 418,300 (264,700) Deferred rent 31,700 31,700 15,800 Deposit liability (8,000) 16,500 14,800 Workers compensation liability 82,200 269,600 131,500 ---------- ---------- ---------- Net cash provided by operating activities 786,300 308,600 822,300 ---------- ---------- ---------- Investing activities: Principal receipts on mortgages receivable -- 342,000 13,400 Purchases of investments (1,704,600) (378,900) (343,300) Proceeds from sales of investments 196,700 272,000 134,600 Proceeds from securities sold not yet purchased 57,000 988,600 24,300 Proceeds from sale of property 900,000 1,796,000 -- Expenses from sale of property held for sale (183,000) -- -- Proceeds from sale of property held for sale 2,427,500 304,300 32,600 Capital expenditures (3,080,200) (938,000) (2,006,000) ---------- ---------- ---------- Net cash (used in) provided by investing activities (1,386,600) 2,386,000 (2,144,400) ---------- ---------- ---------- Financing activities: Payments on long-term debt and obligation under capital lease (2,552,200) (2,086,400) (3,533,200) Proceeds from issuance of long-term debt -- -- 3,190,000 Payment of debt issuance costs -- -- (74,500) Proceeds from sale - leaseback -- -- 3,000,000 Payment of sale-leaseback cost -- -- (151,300) Proceeds from the issuance of preferred stock 900,000 -- -- Expenses of preferred stock issuance (53,000) -- -- Preferred stock dividend paid (6,500) -- -- Proceeds from the issuance of common stock 175,300 -- 387,600 --------- ---------- ---------- Net cash (used in ) provided by financing activities (1,536,400) (2,086,400) 2,818,600 ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents (2,136,700) 608,200 1,496,500 Cash and cash equivalents - beginning of year 2,287,800 1,679,600 183,100 ---------- ---------- ---------- Cash and cash equivalents - end of year $151,100 $2,287,800 $1,679,600 ========== ========== ========== Noncash investing and financing activities: Net change in unrealized (loss) gain ($2,100) $17,500 ($18,200) ========== ========== ========== Transfer from assets held for sale to property $0 $0 $361,600 ========== ========== ========== Transfer to assets held for sale from property $0 $1,136,700 0 ========== ========== ========== Building acquired under capital lease $1,762,300 $0 $1,320,000 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for interest $1,671,000 $1,682,200 $1,564,300 ========== ========== ========== Cash paid during the year for income taxes $0 $0 $0 ========== ========== ========== See accompanying notes to consolidated financial statements.
19 EACO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Organization The Company was organized under the laws of the State of Florida in September l985. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Steak House Construction. All significant intercompany transactions and balances have been eliminated. Fiscal Year The fiscal year consists of a fifty-two or fifty-three week period ending on the Wednesday nearest to December 31. Fiscal years 2004, 2003 and 2002 consisted of fifty-two weeks. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company has a cash management program that provides for the investment of excess cash balances in short-term investments. These investments are stated at cost which approximates market value and consist of money market instruments and have maturities of three months or less. Investments Available for Sale The Company classifies its existing marketable equity securities as available for sale in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity 20 Securities." These securities are carried at fair market value, with unrealized gains and losses reported in shareholders' equity as a component of other comprehensive income (loss). Gains or losses on securities sold are based on the specific identification method. Proceeds from sales of these investments were $196,700, $272,000, and $134,600 in 2004, 2003 and 2002, respectively. Gross gains of $25,000, $33,400 and $17,100 and gross losses of $0, $7,300 and $27,500 were realized on these sales in 2004, 2003 and 2002 respectively. Securities Sold, Not Yet Purchased A primary investment strategy used by the Company in 2003 and 2004 consisted of short-selling of securities, which results in obligations to purchase securities at a later date. As of December 29, 2004, the Company's total obligation for these securities sold not yet purchased was $0, compared to $1,187,400 at December 31, 2003. Certificate of Deposit Certificates of deposit are stated at cost. Inventories Inventories are stated at the lower of cost (first-in, first- out) or market and consist of food items, ingredients and supplies. Property and Equipment Property and equipment are stated at cost. Maintenance, repairs and betterments which do not enhance the value of or increase the life of the assets are expensed as incurred. Depreciation is provided for financial reporting purposes principally on the straight-line method over the following estimated lives: buildings and improvements - 25 years, land improvements - 25 years and equipment - 3 to 8 years. Leasehold improvements are amortized over the life of the related lease, or the life of the asset, whichever is less. Interest expense from the GE Capital loans is capitalized to the extent that such proceeds are used for the construction of new restaurants. Interest costs of approximately $0, $0, and $3,900 were capitalized in 2004, 2003 and 2002 respectively. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", long-lived assets are reviewed for impairment whenever events or changes in 21 circumstances indicate that the carrying amount of an asset may not be recoverable. For purpose of the impairment review, assets are grouped on a restaurant-by-restaurant basis. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of each restaurant's assets to future net cash flows expected to be generated by such restaurant's assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Property Held for Sale Property held for sale at December 31, 2003 consisted of three restaurant properties and an outparcel stated at the lower of cost or estimated net realizable value. There was no remaining property held for sale at December 29, 2004. 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 - 40 years for 2003 and 2002, 18 months beginning in 2004. The gross carrying amount of the deferred financing costs was $878,400 and $924,000 as of December 29, 2004 and December 31, 2003, respectively. Accumulated amortization related to financing costs was $241,100 and $216,500 as of December 29, 2004 and December 31, 2003, respectively. Amortization expense was $84,300 and $58,300 for 2004 and 2003, respectively. The increase in 2004 was due to the write-off of financing costs related to repayment of debt on stores sold in 2004. Amortization expense for each of the next five years is expected to be $45,000. The gross carrying amount of the initial franchise rights was $299,700 and $354,700 as of December 29, 2004 and December 31, 2003, respectively. Accumulated amortization related to initial franchise rights was $252,400 and $179,800 as of December 29, 2004 and December 31, 2003, respectively. Amortization expense was $127,600 and $23,500 for 2004 and 2003, respectively. The Company is amortizing the remaining franchise rights asset over the eighteen month conversion period allowed by the Amended Franchise Agreement (see Note 4 to the Financial Statements). 22 Income Taxes Deferred income taxes are provided for temporary differences between financial reporting basis and tax basis of the Company's assets and liabilities using presently enacted income tax rates. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefit, or that future deductibility is uncertain. Earnings Per Share Basic earnings per share for fiscal years 2004, 2003 and 2002 were computed based on the weighted average number of common shares outstanding. Diluted earnings per share for those years 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 respective year. Dilutive shares are represented by shares under option and stock warrants. Due to the Company's net losses in fiscal years 2004, 2003 and 2002, all potentially dilutive securities are antidilutive and have been excluded from the computation of diluted earnings per share. Stock-Based Compensation The Company accounts for stock-based compensation utilizing the intrinsic value method per Accounting Principles Board No. 25 (APB 25), "Accounting for Stock Issued to Employees". The Company's long-term incentive plan provides for the grant of stock options and restricted stock. The exercise price of each option equals the market price of the Company's stock on the date of 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 9 - Common Shareholders' Equity for additional information regarding the Company's stock options. 23 In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". Pursuance to the disclosure requirements of SFAS 148, the following table provides an expanded reconciliation for all periods presented: 2004 2003 2002 ------------ ----------- ------------ Net loss, as reported $(2,031,600) $(2,401,000) $(2,100,300) Add: Stock based compensation expense included in net income, net of tax 20,000 -- 20,000 Deduct: Total stock-based compensation expense determined under fair value, net of tax (23,500) (12,400) (32,400) ------------ ------------ --------- Pro forma net loss $(2,035,100) $(2,413,400) $(2,112,700) ============ ============ ========= Earnings per share - basic and diluted As reported $ (0.53) $ (0.65) $ (0.59) Pro forma $ (0.53) $ (0.65) $ (0.59)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. No employee stock options were granted in 2004, 2003 or 2002. Reclassifications Certain items in the prior year financial statements have been reclassified to conform to the 2004 presentation. New Accounting Standards In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Disposal Activities". Under SFAS 146, liabilities for costs associated with a plan to dispose of an asset or to exit a business activity must be recognized in the period in which the costs are incurred. SFAS 146 was effective for disposal activities initiated after December 31, 2002. The adoption of SFAS 146 did not have a significant impact on the Company's financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation costs will be measured based on the grant-date fair value of the equity or liability instruments issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. 24 SFAS No. 123(R) replaces FASB SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The effective date of SFAS No. 123(R) is for interim periods beginning after June 15, 2005. NOTE 2. COMPANY LIQUIDITY The Company has incurred operating losses each year since 1997. In preparing the Company's business plan for 2005, management considered a number of factors to determine that adequate cash resources will be available to meet all liquidity needs for the year 2005. Those factors included planned improvement in cash provided from operating activities, which was $786,300 in 2004, from the projected reduction in franchise fees in 2005 of approximately $900,000 and the elimination of losses from closed restaurants estimated at approximately $400,000. The plan also includes continued focus on improving sales at existing stores and managing controllable costs at both the store and corporate levels. Management believes the cash to be provided from operating activities combined with the completed sale leaseback financing transaction discussed below will provide sufficient cash for the Company to meet its operational needs, debt service requirements and capital improvement needs for 2005. NOTE 3. CLOSED RESTAURANT COSTS The Company sold all of its closed restaurants in 2004. Costs incurred to close restaurants and construction incurred to maintain the closed restaurants in 2004, 2003 and 2002 were $63,300, $105,600 and $190,300, respectively. NOTE 4. ASSET IMPAIRMENT CHARGES In accordance with SFAS 144, the Company recognized asset impairment charges of $594,200, $63,100 and $987,700 in 2004, 2003 and 2002, respectively. The charges in 2004 resulted from closure of one leased restaurant. The charges in 2003 related to one closed restaurant. The charges in 2002 related to two closed restaurants and a third restaurant where the Company sub- leased the restaurant to another restaurant operator. NOTE 5. FRANCHISE AGREEMENT The Company operates its Ryan's restaurants under a franchise agreement between the Company and the Franchisor dated September 16, 1987, which amended and consolidated all previous franchise agreements (as amended, the "Franchise Agreement"). In December 2003, the Company entered into an amendment (the "Amendment") to 25 the Franchise Agreement to terminate the Franchise Agreement by June 2005. The Amendment requires the Company to convert a specific number of its Ryan's restaurants each quarter to a new name and logo, beginning the first quarter of 2004, and requires all of the Ryan's restaurants to be converted by June 2005. As soon as each Ryan's restaurant is converted, franchise fees are no longer payable to the Franchisor for that converted restaurant. The Amendment requires the Company to pay a monthly franchise fee of 4.0% of the gross receipts of each restaurant operating under the name of Ryan's. Total franchise fee expenses were $1,112,000, $1,494,400 and $1,681,600 for fiscal years 2004, 2003 and 2002, respectively. The following schedule outlines the number of Ryan's restaurants required to be converted to another name by the Company at each quarter-end under the Amendment. Failure to convert the cumulative required number of restaurants at any quarter-end date results in a higher franchise fee on the restaurants still using the Ryan's name. Failure to convert all of the restaurants by June 30, 2005 is a default under the Franchise Agreement in the event of which the franchisor has the right to require the Company to cease using the Ryan's name immediately. Cumulated Number of Restaurants Required to End of Quarter be Converted December 31, 2004 11 March 31, 2005 14 June 30, 2005 18 The Company has complied with this schedule for 2004, having converted eleven restaurants by December 2004. However, the Company's ability to convert the remaining restaurants depends on factors that may be beyond management's control, such as its ability to obtain building permits, the operating results of the converted restaurants and the resulting impact on the Company's cash flow and other variable factors. 26 Note 6. ACCRUED LIABILITIES Accrued liabilities are summarized as follows: December 29, December 31, 2004 2003 ---------- ---------- Property taxes $415,100 $479,300 Payroll and payroll taxes 633,600 577,900 Other 729,300 744,500 ---------- ---------- $1,778,000 $1,801,700 ========== ========== Note 7. WORKERS' COMPENSATION LIABILITY The Company self-insures workers' compensation losses up to certain limits. The liability for workers' compensation claims represents an estimate of the ultimate cost of uninsured losses which are unpaid as of the balance sheet date. The estimate is continually reviewed and adjustments to the Company's estimated claim liability, if any, are reflected in current operations. The State of Florida Division of Workers' Compensation ("the Division") requires self-insured companies to pledge collateral in favor of the Division in an amount sufficient to cover the Company's projected outstanding liability. In compliance with this requirement, in July 2004 the Company provided a $1 million letter of credit to the Division with an expiration date of July 1, 2005. Based upon the Bank's evaluation of the Company's credit and to avoid collateratization requirements, the letter of credit is guaranteed on behalf of the Company by Bisco Industries, Inc. ("Bisco"). The Chairman of the Company's Board of Directors, Glen F. Ceiley, is the President of Bisco. In addition, the Company pledged a Certificate of Deposit worth $300,000 to the Division, to meet the Division's collateral requirement of $1.3 million. 27 Note 8. LONG-TERM DEBT Long-term debt is summarized as follows: December 29, December 31, 2004 2003 ----------- ------------- Collateralized notes payable to GE Capital Franchise Finance Corporation, monthly principal and interest payments totaling $154,000, interest at thirty-day LIBOR rate +3.75% (with various minimum interest rates ranging from 5.9% - 8.5%) $15,691,200 $18,189,100 Less current portion (917,200) (718,400) ------------ ------------ $14,774,000 $17,470,700 ============ ============ Total maturities of long-term debt are as follows: 2005 $ 917,200 2006 987,900 2007 1,064,200 2008 1,143,800 2009 1,195,500 Thereafter 10,382,600 ----------- $15,691,200 =========== Beginning in December 1996, the Company entered into a series of loan agreements with FFCA Mortgage Corporation, (now known as GE Capital). The GE Capital loans are secured by mortgages on fourteen of the Company's restaurant properties. The Company used the proceeds of the GE Capital loans primarily to refinance its debt and to fund construction of restaurants. As of December 29, 2004, the outstanding balance due under the Company's various loans with GE Capital was $15,691,200. The weighted average interest rate for the GE Capital loans is 7.47% at December 29, 2004. The GE Capital loan agreements contain various restrictions on fixed charge coverage ratios, determined both on aggregate and individual restaurant levels. As of December 29, 2004, the Company was in compliance with the debt covenants. NOTE 9. INCOME TAXES Income taxes for the years ended December 29, 2004, December 31, 2003 and January 1, 2003 differ from the amount computed by 28 applying the federal statutory corporate rate to earnings before income taxes. The differences are reconciled as follows: 2004 2003 2002 ---------- ---------- ----------- Income tax benefit at statutory rate $(690,700) $(816,300) $(714,100) Increase (decrease) in taxes due to: State tax net of Federal benefit (73,700) (87,200) (76,200) Change in deferred tax asset valuation allowance 355,200 903,500 790,300 Adjusted book to tax accrual 409,200 --- --- ---------- ---------- ----------- Income tax benefit $ --- $ --- $ --- ========== ========== =========== The components of deferred taxes at December 29, 2004 and December 31, 2003 are summarized below: December 29, 2004 December 31, 2003 ---------------- --------------- Deferred tax assets: Net operating loss $ 2,270,200 $ 2,097,200 Federal and state tax credits 589,200 589,100 Accruals not currently deductible 458,800 440,800 Excess tax over book basis: Asset valuation reserve 0 366,500 Capital loss carryforward 248,800 146,400 Unearned revenue, previously taxed 466,700 493,400 --------------- --------------- 4,033,700 4,133,400 Valuation allowance (3,281,500) (3,116,700) --------------- --------------- Total deferred tax assets 752,200 1,016,700 --------------- --------------- Deferred tax liabilities: Excess of tax over book depreciation and amortization 752,200 548,600 Property held for sale --- 463,000 Unrealized gain on investment --- 5,100 -------------- -------------- Total deferred tax liabilities 752,200 1,016,700 --------------- --------------- Net deferred taxes $ --- $ --- =============== ===============
At December 29, 2004, the Company's federal and state tax credit was comprised of $49,000 in general business credits which expire in 2013 and alternative minimum tax credits of $540,200 which have no expiration date. Additionally, at December 29, 2004, the Company has Federal net operating losses of $5,887,000, which begin expiring in 2018 and State net operating losses of $7,398,700, which begin expiring in 2012. 29 NOTE 10. COMMON SHAREHOLDERS' EQUITY Earnings per Share The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations for net loss and net loss attributable to common shareholders: 2004 2003 2002 ---- ---- ---- Net Loss Shares Per Net Loss Shares Per Net Loss Shares Per (Numerator) (Denominator) Share (Numerator) (Denominator) Share (Numerator) (Denominator) Share ----------- ------------- ----- ------------ ------------- ----- ---------- ------------- ----- Basic EPS: Net loss available to common shareholders ($2,031,600) 3,813,000 $(0.53) $(2,401,000) 3,706,200 $(0.65) $(2,100,300) 3,567,800 $(0.59) ======= ======= ======= Effect of Dilutive Securities Stock Options Warrants Diluted EPS: Net loss available to common shareholders plus assumed conversions ($2,031,600) 3,813,000 $(0.53) $(2,401,000) 3,706,200 $(0.65) $(2,100,300) 3,567,800 $(0.59) ======= ======= =======
For the years ended December 29, 2004, December 31, 2003 and January 1, 2003, no potential common shares from outstanding stock options have been included in the computation of diluted earnings per share due to their antidilutive effect. For the year ended December 29, 2004, common shares issuable upon conversion of preferred stock is also excluded from the computation of diluted earnings per share due to their antidilutive effect. Stock Options The Company also had an employee incentive stock option plan pursuant to which up to an aggregate of 108,000 shares of the common stock were authorized to be granted. All options expire ten years after the date of grant or 90 days after termination of employment. This plan expired as of November 30, 1995. Certain options outstanding under this plan as of November 30, 1995 remain exercisable pursuant to terms of the plan. In 1995, the Company's shareholders approved a new employee long-term incentive plan pursuant to which an additional 200,000 shares of common stock are authorized to be granted in the form of stock options or restricted stock. In 2002, the Company's shareholders approved a new employee long-term incentive plan pursuant to which an additional 200,000 shares of common stock are authorized to be granted in the form of stock options or 30 restricted stock. All options granted under these plans expire no later than ten years after the date of grant or in most cases three months after termination of employment. The Company applies the intrinsic value method of APB 25 to account for its employee stock plans. The Company adopted the disclosure requirements of SFAS 148, effective for the fiscal year beginning January 1, 2003, which requires presentation of pro forma net income and earnings per share information. See Stock-Based Compensation in NOTE 1 - Significant Accounting Policies. The Company sometimes compensates its directors for their service to the Company by issuance of stock options at an exercise price below the current market price. In 2004, the Company issued a total of 29,848 shares to the directors at an exercise price of $0.01, considering the lower market price of the stock as of the date of issuance. The following table summarizes the changes in the total number of stock option shares outstanding during the three years ended December 29, 2004. -------------------------------------------------------------------------------------------------------------- 2004 2003 2002 ---------------------------------------------------------------------------------- Options Weighted Average Options Weighted Average Options Weighted Average Exercise Price Exercise Price Exercise Price -------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of year 133,490 $2.02 157,490 $2.07 183,840 $2.11 Options granted 29,848 .01 0 20,204 .01 Options exercised (29,848) .01 0 (20,204) .01 Options forfeited (26,690) 1.74 (24,000) 2.36 (26,350) 2.35 -------- -------- ------- Options outstanding at end of year 106,800 2.09 133,490 2.02 157,490 2.07 ======== ======== ======= Options exercisable at end of year 106,800 2.09 129,915 2.04 143,340 2.15 ======== ======== ======= Weighted average fair value of options granted during the year $ .01 $ --- $ .01 Common shares reserved for future grants at end of year 200,000 200,000 268,900 ==============================================================================================================
31
The following table summarizes information about fixed stock options outstanding at December 29, 2004: Weighted Average Year Exercise Options Options Remaining Life Granted Price Outstanding Exercisable (In years) 1995 $3.75 12,300 12,300 0.7 1995 2.00 7,500 7,500 0.7 1996 2.81 8,400 8,400 2.0 1997 3.28 10,600 10,600 3.0 1998 1.00 13,200 13,200 3.9 1999 2.00 25,000 25,000 4.8 1999 1.50 19,500 19,500 4.9 2000 1.06 10,300 10,300 6.0 _______ _______ 106,800 106,800 ======= =======
Preferred Stock The Company's Board of Directors is authorized to set the various rights and preferences for the Company's Preferred Stock, including voting, conversion, dividend and liquidation rights and preferences, at the time shares of Preferred Stock are issued. In September 2004, the Company sold 36,000 shares of the Company's newly authorized Series A Cumulative Convertible Preferred Stock, with an 8.5% dividend rate 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. Holders of the Preferred Stock have the right at any time to convert the liquidity preference of $25 for each share of Preferred Stock into shares of the Company's Common Stock at the conversion price of $.90 per share. In the event of a liquidation or dissolution of the Company, holders of Series A Preferred Stock are entitled to be paid out of the assets of the Company available for distribution to shareholders $25 per share plus all accrued dividends before any payments are made to the holders of Common Stock. Common Stock 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 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 $387,400 proceeds, net of issuance costs, from this sale to fund remodels of several restaurants in 2002. 32 NOTE 11. PROFIT SHARING AND RETIREMENT PLAN Employees of the Company participate in a profit sharing and retirement plan covering substantially all full-time employees at least twenty-one years of age and with more than one year of service. The plan was established in August 1991. Contributions are made to the plan at the discretion of the Company's Board of Directors. No profit-sharing contributions have been made since the inception of the plan. The profit sharing plan includes a 40l(k) feature by which employees can contribute, by payroll deduction only, a portion of their annual compensation not to exceed $13,000 in 2004. The plan provides for a Company matching contribution of $.25 per dollar of the first 6% of employee contributions. The Company's matching contribution was $28,100 in 2004, $35,000 in 2003 and $48,900 in 2002. In 2004, employees vested in Company contributions based on the following schedule: Years of Vesting Service Percentage -------- ---------- Less than 2 20% 3 40% 4 60% 5 80% 6 100% NOTE 12. COMMITMENTS AND CONTINGENCIES Lease Obligations At December 29, 2004, the Company is committed under the terms and conditions of real and personal property operating leases for minimum rentals aggregating $6,594,400 plus insurance, common area expenses and taxes. The Company has various renewal options on these leases covering periods of five to twenty years. In August 2002, the Company entered into a fifteen-year lease agreement with two ten-year renewal options for a restaurant building. The total net book value of the assets covered by the lease amounted to $1,696,800 at December 29, 2004. Interest is computed at an annual rate of 9.46%. In July 2002, the Company entered into a twenty-year lease agreement with two five-year renewal options for a restaurant building. The total net book value of the assets covered by the 33 lease amounted to $1,155,000 at December 29, 2004. Interest is computed at an annual rate of 10.74%. In September 1996, the Company entered into a twenty-year lease agreement with two five-year renewal options for a restaurant building. The total net book value of the assets covered by the lease amounted to $694,400 at December 29, 2004. Interest is computed at an annual rate of 10.65%. Future minimum lease obligations under non-cancelable capital leases and operating leases consist of the following as of December 29, 2004: ---------------------------------------------------------------------------------------- Capital Operating Leases Leases ---------------------------------------------------------------------------------------- 2005 $480,000 $514,100 2006 480,100 499,300 2007 502,800 476,100 2008 510,100 380,900 2009 522,100 372,500 Future years 5,624,700 4,351,500 ---------- ---------- Total minimum lease payments 8,119,800 $6,594,400 ========== Amount representing interest (4,101,100) ---------- Present value of net minimum payments 4,018,700 Current portion (77,300) ---------- Long-term capital lease obligations $3,941,400 ==========
Rental expense for operating leases for the years ended December 29, 2004, December 31, 2003 and January 1, 2003 was $590,300, $519,900 and $488,400, respectively. The Company has entered into two lease agreements in which it is leasing or sub-leasing two of its restaurant locations to a third party. The following table shows the future minimum rentals receivable under non-cancelable operating leases in effect at year-end 2004: 2005 $ 131,100 2006 131,100 2007 135,800 2008 140,400 2009 140,400 Future years 344,600 ---------- $1,023,400 ========== Rental income from leases was $131,110, $146,100 and $46,500 for 2004, 2003 and 2002, respectively. 34 Legal Matters The Company, in the normal course of business, is subject to occasional legal proceedings. However, there are no material pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which any of their properties are subject; nor are there material proceedings 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. NOTE 13. QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
Following is a summary of the quarterly results of operations for the years ended December 29, 2004 and December 31, 2003: Fiscal Quarter $ In thousands, First Second Third Fourth Total except per share amounts: 2004: Sales $ 10,260 $ 9,959 $ 8,711 $ 8,656 $ 37,586 Earnings (loss) from operations 36 (135) (262) (35) (396) Net earnings (loss) (332) (572) (540) (588) (2,032) Undeclared cumulative preferred stock dividend (19) (19) Basic earnings (loss) per share (.09) (.15) (.14) (.15) (.53) Diluted earnings (loss) per share (.09) (.15) (.14) (.15) (.53) 2003: Sales $ 10,728 $ 9,567 $ 8,559 $ 8,529 $ 37,384 Earnings (loss) from operations 319 (3) (276) (592) (626) Net earnings (loss) (55) (394) (768) (1,183) (2,401) Basic earnings (loss) per share (.02) (.11) (.21) (.32) (.65) Diluted earnings (loss) per share (.02) (.11) (.21) (.32) (.65)
(1) During the quarter ended December 31, 2003, the Company recorded an asset impairment charge of $63,100 related to a closed restaurant. (2) During the quarter ended December 31, 2003, the Company increased it's workers' compensation liability by approximately $274,000. (3) During the quarter ended December 29, 2004, the Company increased its workers' compensation liability by approximately $199,000. (4) During the quarter ended March 31, 2004, the Company recorded an asset impairment charge of $594,200 related to a closed restaurant. 35 NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents - For those short-term instruments, the carrying amount is a reasonable estimate of fair value. Investments Available for Sale - The Company's investments available for sale consist of marketable securities which are valued at the quoted market price. Certificates of Deposit - The Company believes that the carrying amount is a reasonable estimate of the fair value of the certificates of deposit. Debt - Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities are used to estimate fair value for debt instruments. The Company believes the carrying amount is a reasonable estimate of such fair value. NOTE 15. SUBSEQUENT EVENTS On December 30, 2004 (the day after the Company's fiscal year end), the Company completed a sale leaseback financing for $2.6 million, which netted the Company approximately $1.3 million cash. The Company projects this will provide sufficient cash to complete all of its remaining required remodels. 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 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 $6 million, which includes approximately $2 million for the lease entered into on December 30, 2004, after the Company's fiscal year end. The following unaudited pro forma condensed consolidated financial statements give effect to the asset sale as pro forma adjustments to the historical financial statements of the assets 36 sold. The pro forma statements assume for balance sheet purposes, that the sale had taken place on December 29, 2004, and for purposes of the statement of operations that the sale had taken place at the beginning of the fiscal year presented using the same terms for the proposed sale. The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and are not necessarily indicative of the results of operations or financial position that would have been achieved had the transaction reflected therein been consummated as of the dates indicated, or of the results of operations or financial position for any future periods. 37 EACO Corporation Unaudited Pro Forma Consolidated Balance Sheets As of December 29, 2004 Pro Forma EACO Adjustments EACO Corporation Corporation for the Proposed (Pro Forma for Historical Transaction the Transaction) ----------- ------------ ---------------- ASSETS Current assets: Cash and cash equivalents $ 151,100 $25,522,600 (A) (13,792,900) (B) $11,880,800 Receivables 81,300 81,300 Inventories 235,200 (235,200) (A) -- Prepaid and other current assets 426,800 (265,100) (A) 161,700 ----------- ------------ -------------- Total current assets 894,400 11,229,400 12,123,800 Certificate of deposit-held to maturity 300,000 300,000 Note Receivable 4,000,000 (A)(1) 4,000,000 Property and equipment: Land 6,967,200 (6,378,900) (A) 588,300 Buildings and improvements 24,933,100 (21,990,900) (A) 2,942,200 Equipment 11,880,000 (8,834,300) (A) 3,045,700 Construction in progress 138,800 (138,800) (A) -- ----------- ------------ -------------- 43,919,100 (37,342,900) 6,576,200 Accumulated depreciation (18,051,600) 13,521,400 (A) (4,530,200) ----------- ------------ -------------- Net property and equipment 25,867,500 (23,821,500) 2,046,000 Other assets, principally deferred financing costs, net Of accumulated amortization 727,100 (607,100) (B) 120,000 ----------- ------------ -------------- $27,789,000 ($9,199,200) $18,589,800 =========== ============ ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $1,079,400 $1,079,400 Accrued liabilities 1,778,000 $(70,900) (A) 1,707,100 Current portion of workers compensation liability 569,500 569,500 Current portion of long-term debt 917,200 (806,200) (B) 111,000 Current portion of obligation under capital lease 77,300 (77,300) (A) -- Income taxes payable -- 1,163,000 (C) 1,163,000 ---------- ---------- -------------- Total current liabilities 4,421,400 208,600 4,630,000 Deferred rent 79,200 (79,200) (A) -- Deposit liability 23,300 23,300 Workers compensation liability 628,500 628,500 Long-term debt 14,774,000 (12,986,700) (B) 1,787,300 Deferred gain 1,169,400 (1,169,400) (A) -- Obligations under capital lease 3,941,400 (3,941,400) (A) -- ---------- ---------- -------------- Total liabilities 25,037,200 (17,968,100) 7,069,100 Commitments and contingencies Shareholders' equity: Preferred stock of $.01 par; authorized 10,000,000 shares; outstanding 36,000 shares (liquidation value $900,000) 400 400 Common stock of $.01 par; authorized 8,000,000 shares; outstanding 3,881,899 shares 38,800 38,800 Additional paid-in capital 10,903,300 10,903,300 Accumulated deficit (8,190,700) 10,539,000 (A) (607,100) (B) (1,163,000) (C) 578,200 Accumulated other comprehensive income -- ----------- ------------ -------------- Total shareholders' equity 2,751,800 8,768,900 11,520,700 ----------- ----------- -------------- $27,789,000 ($9,199,200) $18,589,800 =========== =========== ============== (A) Represents the sale of 16 restaurants to Banner Buffets, LLC for $25,950,000 cash plus $4 million note. Assumes $600,000 closing costs, $24,400 store cash kept by buyer, and purchase price adjustments of $64,400 construction in process and $132,500 for prepaid expenses, per the sale agreement. Purchase also includes assumption of leases, so obligations under capital lease are paid off. Deferred gains also recognized as a result of sale of the related properties. (B) Payment of GE Capital mortgage for 12 stores upon closing of sale. Loan fee assets and franchise fee assets associated with the transaction are written off. (C) Estimated income tax liability from the transaction, after use of NOL and capital loss carryforwards. (1) The $4 million note is secured by property valued at less than $1 million.
38
Unaudited Pro Forma Consolidated Financial Statements of EACO Corporation Unaudited Consolidated Statement of Operations Twelve Months Ended December 29, 2004 Adjustments EACO Corporation EACO Corporation for the Proposed (Pro Forma for (Historical) Transaction the Transaction) ---------------------------------------------------------------------------------------- Revenues: Sales $37,585,600 ($34,809,100) (D) $2,776,500 Vending income 213,900 (204,100) (D) 9,800 ----------- ------------- ---------- Total revenues 37,799,500 (35,013,200) 2,786,300 ----------- ------------- ---------- Cost and expenses: Food and beverage 14,249,100 (13,162,900) (D) 1,086,200 Payroll and benefits 11,750,500 (10,705,300) (D) 1,045,200 Depreciation and amortization 1,975,700 (1,596,600) (D) 379,100 Other operating expenses 6,218,400 (5,478,500) (D) 739,900 General and administrative expenses 2,205,000 (695,200) (D) 1,509,800 Franchise fees 1,112,000 (1,082,100) (D) 29,900 Asset valuation charge 594,200 -- 594,200 Loss on store closings and disposition of equipment 90,800 -- 90,800 ----------- ------------- ---------- 38,195,700 (32,720,600) 5,475,100 ----------- ------------- ---------- Loss from operations (396,200) (2,292,600) (2,688,800) Investment income 10,500 -- 10,500 Interest and other income 95,400 -- 95,400 Interest expense (1,741,300) 1,566,000 (E) (175,300) ----------- ------------- ---------- Loss before income taxes (2,031,600) (726,600) (2,758,200) Income tax benefit -- -- -- ----------- ------------- ---------- Net loss (2,031,600) (726,600) (2,758,200) =========== ============= ========== Basic loss per share $(.53) $(.19) $(.72) =========== ============= ========== Diluted loss per share $(.53) $(.19) $(.72) =========== ============= ========== D) Represents the elimination of operations of sixteen restaurants sold to Banner Buffets, LLC. E) Represents the reduction in interest expense attributable to the sixteen stores sold.
39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of EACO Corporation Neptune Beach, Florida We have audited the accompanying consolidated balance sheets of EACO Corporation and subsidiaries (the "Company") as of December 29, 2004 and December 31, 2003 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 29, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of EACO Corporation and subsidiary as of December 29, 2004 and December 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 29, 2004 in conformity with accounting principles generally accepted in the United States of America. Deloitte & Touche LLP Certified Public Accountants Jacksonville, Florida March 29, 2005 40 COMPANY'S REPORT ON FINANCIAL STATEMENTS EACO Corporation management has prepared and is responsible for the accompanying consolidated financial statements and related consolidated financial information included in this report. These consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America and are appropriate under the circumstances. These consolidated financial statements necessarily include amounts determined using management's best judgments and estimates. EACO Corporation maintains accounting and other control systems which the Company believes provides reasonable assurance that assets are safeguarded and that the books and records reflect the authorized transactions of the Company, although there are inherent limitations in all internal control structure elements, as well as cost/benefit considerations. 41 EACO Corporation Corporate Listing Corporate Officers and Directors Independent Registered Public Edward B. Alexander Accounting Firm President, COO Deloitte & Touche LLP Suite 2801, Independent Square One Independent Drive Jacksonville, FL 32202-5034 Steve Catanzaro Director General Counsel McGuire Woods Glen F. Ceiley 50 North Laura Street, Suite 3300 Chairman of the Board P.O. Box 4099 President & CEO, Jacksonville, FL 32201 Bisco Industries, Inc. Jay Conzen Transfer Agent / Rights Agent Director Mellon Shareholder Services President, 200 Galleria Parkway Old Fashioned Kitchen, Inc. Suite 1900 Atlanta, GA 30339 William Means Director Executive Office Vice President of EACO Corporation Information Services, 2113 Florida Boulevard Bisco Industries, Inc. Neptune Beach, FL 32266 Patrick Fekula Form 10-K Vice President A copy of the Company's Annual Report on Form 10-K for fiscal 2004, as filed with the Securities and Exchange Commission, may be obtained without charge by writing to: Corporate Secretary EACO Corporation 2113 Florida Boulevard Neptune Beach, FL 32266 42 Common Stock Data The Company's common stock is traded on the Over the Counter Bulletin Board ("OTCBB") under the trading symbol "EACO". As of March 3, 2005, there were 1,300 shareholders of record, not including individuals holding shares in street names. The closing sale price for the Company's stock on March 3, 2005 was $1.10. The Company has never paid cash dividends on its common stock and does not expect to pay any dividends in the next few years. Management of the Company presently intends to retain all available funds for expansion of the business. The quarterly high and low closing prices of the Company's common stock as quoted on the OTCBB are as shown below: Market Price of Common Stock 2004 2003 Quarter High Low High Low First $1.05 $.67 $.60 $.33 Second 1.50 .80 .51 .30 Third 1.25 .62 .69 .37 Fourth 0.95 .55 .80 .56 43