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EACO CorporationMorningstar® Document Research℠ FORM 10-KEACO CORP - EACOFiled: December 14, 2010 (period: August 31, 2010)Annual report with a comprehensive overview of the companyThe information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The userassumes all risks for any damages or losses arising from any use of this information, except to the extent such damages or losses cannot belimited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsUNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549Form 10-Kþþ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 For the fiscal year ended August 31, 2010oo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934 For the fiscal year ended Commission File No. 000-14311EACO CORPORATION(Exact name of Registrant as specified in its charter)Florida 59-2597349(State of Incorporation) (I.R.S. Employer Identification No.)1500 North Lakeview AvenueAnaheim, California 92807(Address of Principal Executive Offices)Registrant’s telephone number, including area code:(714) 876-2490Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, $.01 Par Value(Title of Class)Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þIndicate 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 Actof 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 tosuch filing requirements for the past 90 days. YES þ NO oIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive DataFile required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). YES o NO oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. oIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þThe aggregate market value of the registrant’s common stock as of the last business day of the registrant’s most recently completed secondfiscal quarter (based upon the average bid and asked price of the common stock on that date) held by non-affiliates of the registrant wasapproximately $44,657.As of December 1, 2010, 4,862,079 shares of the registrant’s common stock were outstanding.DOCUMENTS INCORPORATED BY REFERENCENo documents required to be listed hereunder are incorporated by reference in this report on Form 10-K.Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsForward-Looking InformationThis report may contain forward-looking statements. Forward-looking statements broadly involve our current expectations,estimates and forecasts of future events and results. Such statements can be identified by the use of terminology such as “anticipate,”“believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “possible,” “project,” “should,” “will” and similar words orexpressions. These forward-looking statements include but are not limited to statements regarding our anticipated revenue, expenses,profits, capital needs, and potential transactions with affiliates. Forward-looking statements involve a number of risks and uncertaintiesthat could cause actual results to differ materially including among other things,the following: failure of facts to conform to managementestimates and assumptions; economic conditions, including the recent economic downturn and continuing economic uncertainties; ourability to develop and maintain an effective system of internal controls over financial reporting; potential losses from trading insecurities; our ability to retain key personnel and relationships with suppliers; the willingness of GE Capital, Community Bank or otherlenders to extend financing commitments and the availability of capital resources; repairs or similar expenditures required for existingproperties due to weather or acts of God; the Company’s success in selling properties listed for sale; and other risks identified from timeto time in the Company’s reports and other documents filed with the Securities and Exchange Commission (the “SEC”), and in publicannouncements. It is not possible to foresee or identify all factors that could cause actual results to differ materially from thoseanticipated. As such, investors should not consider any of such factors to be an exhaustive statement of all risks or uncertainties.No forward-looking statements can be guaranteed and actual results may vary materially. The Company undertakes no obligationto update any statement it makes except as required by law, but investors are advised to consult any further disclosures by the Companyin its filings with the SEC, especially on Forms 10-K, 10-Q and 8-K, in which the Company discusses in more detail various importantfactors that could cause actual results to differ from expected or historical results.2Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. PART I ITEM 1 Business 4 ITEM 1A. Risk Factors 8 ITEM 1B. Unresolved Staff Comments 12 ITEM 2. Properties 12 ITEM 3. Legal Proceedings 13 ITEM 4. (Removed and Reserved) 13 PART II ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities 13 ITEM 6. Selected Financial Data 14 ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 24 ITEM 8. Financial Statements and Supplementary Data 24 ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 24 ITEM 9A(T). Controls and Procedures 24 ITEM 9B. Other Information 26 PART III ITEM 10. Directors, Executive Officers and Corporate Governance 26 ITEM 11. Executive Compensation 28 ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters 29 ITEM 13. Certain Relationships and Related Transactions and Director Independence 30 ITEM 14. Principal Accounting Fees and Services 31 PART IV ITEM 15. Exhibits and Financial Statement Schedules 32 EX-21.1 EX-23.1 EX-31.1 EX-32.13Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contents PART IItem 1. BusinessOrganization and Merger with Bisco Industries, Inc.EACO Corporation ( “EACO,” ) was organized under the laws of the State of Florida in September 1985. From the inception of theCompany through June 2005, EACO’s business consisted of operating restaurants in the State of Florida. On June 29, 2005, EACO soldall of its operating restaurants (the “Asset Sale”) including sixteen restaurant businesses, premises, equipment and other assets used inrestaurant operations. The Asset Sale was made pursuant to an asset purchase agreement dated February 22, 2005. The only remainingactivity of the restaurant operations relates to the workers’ compensation claim liability, which is presented as liabilities of discontinuedoperations on the Company’s balance sheets. Prior to the acquisition of Bisco (described below), EACO’s operations principallyconsisted of managing four real estate properties held for leasing in Florida and California.EACO filed an amendment to its articles of incorporation with the Secretary of State of the State of Florida, effective March 23,2010 (the “Effective Time”), to effect a 1-for-25 reverse split of its outstanding common stock (the “Reverse Split”). As of the EffectiveTime, each outstanding share of EACO common stock automatically converted into four one-hundredth (0.04) of a share of commonstock. Unless otherwise noted, the number of common shares and per share calculations in this report reflect the effect of the ReverseSplit. See Note 7, Shareholders’ Equity, for further discussion.During 2009, EACO engaged financial advisors to evaluate alternative strategies to increase shareholder value, including a mergerwith Bisco Industries, Inc. (“Bisco”), an affiliated entity wholly-owned by EACO’s majority stockholder and Chief Executive Officer,Glen F. Ceiley, (“CEO”). Bisco is a distributor of electronic components and fasteners with 37 sales offices and six distribution centerslocated throughout the United States and Canada. Bisco supplies parts used in the manufacture of products in a broad range of industries,including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment and marineindustries.On March 24, 2010, EACO completed the acquisition of Bisco, a company under the common control of EACO’s majorityshareholder (Glen Ceiley). The acquisition of Bisco (the “Acquisition”) was consummated pursuant to an Agreement and Plan of Mergerdated December 22, 2009 by and among EACO, Bisco Acquisition Corp., Bisco and Glen F. Ceiley (the “Agreement”). Pursuant to theAgreement, Bisco Acquisition Corp., a wholly-owned subsidiary of EACO, was merged with and into Bisco. Bisco was the survivingcorporation in the merger and became a wholly-owned subsidiary of EACO. The transaction was accounted for as a combination ofcompanies under common control using the historical balances of Bisco. (See Basis of Presentation in Note 1 to the accompanyingfinancial statements)In connection with the Acquisition, EACO issued an aggregate of 4,705,669 shares of its common stock (the “Merger Shares”) tothe sole shareholder of Bisco in exchange for all of the outstanding capital stock of Bisco. 36,000 shares of the Merger Shares are beingheld in escrow by EACO for twelve months as security for the indemnification obligations of the former Bisco shareholder to EACO asset forth in the Agreement.Bisco’s sole shareholder was Glen F. Ceiley. Immediately after the Acquisition and the issuance to him of the Merger Shares,Mr. Ceiley owned 98.9% of the outstanding common stock of EACO. Mr. Ceiley also owns 36,000 shares of the Series A CumulativeConvertible Preferred Stock of EACO. In addition, under a management agreement with EACO, Bisco handles the day to day operationsof EACO and provides administration and accounting services through a steering committee. The steering committee consists ofMr. Ceiley and certain senior executives of Bisco.EACO, Bisco and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited are hereinafter collectively referred toherein as the “Company”, “we”, “us” and “our”.4Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsChange in Fiscal YearOn September 29, 2009, the Board of Directors approved a change in EACO’s fiscal year end to August 31. Prior to that, the fiscalyear was the fifty-two or fifty-three week period ending on the Wednesday nearest to December 31. EACO reported the decision tochange its fiscal year end to August 31 in a Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on October 5,2009 and filed its transition report on Form 10-K for the eight month transition period ended August 31, 2009.OperationsEACO Corporation (Real Estate Rental Operations)Through June 2005, EACO’s business consisted of operating restaurants in the State of Florida. On June 29, 2005, EACOcompleted the asset sale and sold all of its operating restaurants to Banner Buffets LLC (“Banner”), including sixteen restaurantbusinesses, premises, equipment and other assets used in restaurant operations. The Asset Sale was made pursuant to an asset purchaseagreement dated February 22, 2005. The contingencies related to the restaurant operations are presented as discontinued operations inthe financial statements included elsewhere herein. Banner declared bankruptcy in September 2007 and this resulted in certain leasedproperties reverting back to EACO. Prior to its acquisition of Bisco (described below), EACO’s operations principally consisted ofmanaging real estate properties it owns and leases in Florida and California.At August 31, 2009, EACO owned two restaurant properties, one located in Orange Park, Florida (the “Orange Park Property”) andone in Brooksville, Florida (the “Brooksville Property”). The Orange Park Property was vacant at August 31, 2009, while the BrooksvilleProperty was leased to a tenant under a lease which commenced on January 9, 2008. EACO was obligated under a lease of a restaurantlocated in Deland, Florida (the “Deland Property”). The Deland Property was vacant on August 31, 2009. During the fiscal year endedAugust 31, 2010 (“fiscal 2010”), EACO purchase of the Deland Property from the landlord for $2,123,000, which consisted of thepayment of a $200,000 deposit in July 2009 and a payment of $1,923,000 at the closing of the purchase on September 30, 2009. Inaddition, EACO owns an income producing real estate property held for investment in Sylmar, California (the “Sylmar Property”) withtwo industrial tenants.EACO operates in a single segment: Real Estate Rental Operations. During the year ended August 31, 2010, the Company had threetenants that accounted for 100% of the Company’s rental revenue. The tenants and their related percentage contribution to revenue aresummarized below: Percentage ofTenant RevenueNES Rentals/Hertz 47%Boeing Corporation 26%International Buffet 18%Hibachi Grill 6%Orange Buffet 3%See the section titled “Liquidity and Capital Resources” in Part II, Item 7 of this report for more information about the Company’scurrent condition.Bisco Industries, Inc. (Distribution Operations)OverviewBisco is a premier distributor of electronic components and fasteners. Through its 37 sales offices and six distribution centerslocated throughout the United States and Canada, Bisco supplies parts used in the manufacture of products in a broad range of industries,including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment and marineindustries.5Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsBisco commenced operations in Illinois in 1973 and was incorporated in 1974. Bisco moved its corporate headquarters in 1981 toCalifornia and its principal executive offices are now located at 1500 N. Lakeview Avenue, Anaheim, California 92807. Bisco’s websiteaddress is www.biscoind.com. The inclusion of Bisco’s website address in this annual report does not include or incorporate by referenceinto this annual report any information on or accessible through the website.Products and ServicesBisco currently stocks over 87,000 items from more than 260 manufacturers, and is an authorized distributor for over 120 of thesemanufacturers. Bisco’s products include electronic components such as spacers and standoffs, card guides and ejectors, componentholders and fuses, circuit board connectors, and cable components, as well as a large variety of fasteners and hardware. The breadth ofBisco’s products and extensive inventory provide a one-stop shopping experience for many customers.Bisco also provides customized services and solutions for a wide range of production needs, including special packaging, binstocking, kitting and assembly, bar coding, electronic requisitioning, and integrated supply programs, among others. Bisco works withits customers to design and develop systems to meet their specific needs.DivisionsAs “Bisco Industries,” Bisco sells the full spectrum of products that it offers to all markets that Bisco serves, but primarily sells toOEMs. While historically, the substantial majority of Bisco’s revenues have been derived from the Bisco division, Bisco has alsoestablished three additional divisions that specialize in specific industries and products. Bisco believes that the focus by industry and/orproduct enhances Bisco’s ability to provide superior service and devise tailored solutions for its customers.National-PrecisionThe National-Precision division primarily sells electronic hardware and commercial fasteners to OEMs in the aerospace, fabricationand industrial equipment industries. National-Precision seeks to be the leading global distributor of mil-spec and commercial fasteners,hardware and distribution services used in production. Since January 1, 2008, Bisco has opened five additional National-Precisionoffices and plans to open additional offices in the futureFast-CorThe Fast-Cor division was established to be a distributor’s source for a broad range of components and fasteners. Fast-Cor hasaccess to the entire inventory of products that Bisco offers but primarily focuses on selling to other distributors, not manufacturers.Component PowerThe Component Power division specializes in electronic active and passive components and sells primarily to customers in theinstrumentation, computer, communication, aerospace and industrial equipment industries.Customers and SalesBisco’s customers operate in a wide variety of industries and range from large, global companies to small local businesses. Biscostrives to provide exceptional service to all customers, including smaller businesses, and continues to focus on growing its share of thatmarket. As of August 31, 2010, Bisco had more than 9,500 active customers; however, no single customer accounted for more than 10%of Bisco’s revenues for the year ended August 31, 2010.Bisco generally sells its products through its sales representatives located in Bisco’s 37 sales offices located in the United Statesand Canada. Customers can also place orders through Bisco’s website. Bisco6Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contentscurrently maintains six distribution centers located in Anaheim and San Jose, California, Dallas, Texas, Chicago, Illinois, Boston,Massachusetts and Toronto, Canada. Each of Bisco’s selling facilities and distribution centers are linked to Bisco’s central computersystem, which provides Bisco’s salespersons with online, real-time data with respect to inventory levels throughout Bisco and facilitatescontrol of purchasing, shipping, and billing. Bisco generally ships products to customers from one of its six distribution centers, basedon the geographic proximity and the availability of the ordered products.Bisco sells its products primarily in the United States and Canada. Bisco’s international sales represented 6% of its distributionsales for each of the fiscal year ended August 31, 2010, eight months ended August 31, 2009 and year ended December 31, 2008,respectively. Sales to customers in Canada accounted for approximately 80% of such international sales in each of those years.SuppliersAs of August 31, 2010, Bisco offered the products of over 260 manufacturers and is an authorized distributor for over 120manufacturers. The authorized distributor agreements with most manufacturers are typically cancelable by either party at any time or onshort notice. While Bisco doesn’t manufacture its products, it does provide kitting and packaging services for certain of its customers.Although Bisco sells more products of certain brands, Bisco believes that most of the products it sells are available from other sources atcompetitive prices. No single supplier accounted for more than 10% of Bisco’s revenues in fiscal 2010.EmployeesAs of August 31, 2010, the Company had 329 full-time employees, of which 226 were in sales and marketing and 103 were inmanagement, administration and finance.Working Capital RequirementsThe Company’s Distribution Operations has historically funded its operations from cash generated from its operations and/or bytrading in marketable domestic equity securities. In April 2008, the Company entered into a revolving credit agreement with CommunityBank, which currently provides for borrowings of up to $10.0 million and bears interest at either the 30, 60, or 90 day London Inter-BankOffered Rate (“LIBOR”) (.43% and .27% for the 60 day LIBOR at August 31, 2010 and 2009, respectively) plus 1.75% and/or the bank’sreference rate (3.25% at August 31, 2010 and 2009, respectively). Borrowings are secured by substantially all assets of the Company’sDistribution Operations and are guaranteed by the Company’s Chief Executive Officer and Chairman of the Board, Glen F. Ceiley. Theagreement expired in October 2010, but has been extended to December 31, 2010. The amount outstanding under this line of credit as ofAugust 31, 2010 and 2009 was $8,900,400 and $8,467,400, respectively. Availability under the line of credit was $1,099,600 and$1,532,600 at August 31, 2010 and 2009, respectively.The Company’s Real Estate Rental Operations have historically been funded by rents received from the tenants of its five rentalproperties. Any cash requirements in excess of the rental income required by the Real Estate Rental Operations have historically beenfunded by the Distribution Operations. These borrowings and related interest have been eliminated in the accompanying consolidatedfinancial statements.As discussed above, the Company’s line of credit with the bank was extended to December 2010. Whereas management expects toextend its line of credit agreement and is in negotiations with the lender, there cannot be any assurance that such extension will occur orthat such terms will be favorable. The line of credit provides liquidity and is used to fund operations in the normal course of business.The accompanying consolidated financial statements do not reflect the effects of this uncertainty.Long-Term DebtIn April 2008, the Company financed the Brooksville Property with Zion’s Bank. The Company borrowed $1,216,400. Proceedswere received in cash. The loan agreement with Zion’s Bank requires the Company to comply with certain financial covenants and ratiosmeasured annually beginning with the year ended7Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsDecember 31, 2008. As of August 31, 2009, the Company was not in compliance with one covenant regarding the Company borrowings.Zion’s Bank did not grant the Company a waiver regarding that default. As such, although Zion’s Bank did not accelerate payment ofthe loan, the full amount due under the mortgage is reported as a current liability in the accompanying August 31, 2009 balance sheet.Zion’s Bank has indicated they will not take any action regarding the breach; however, they reserve any and all rights they have underthe mortgage with respect to the breach. As of August 31, 2010, the Company was in compliance with the covenants of the Zion’s Bankloan. The loan amount has been properly classified between current and noncurrent as of August 31, 2010.Violation of the Zion Bank covenant triggered a cross default provision with the GE Capital and Community Bank loans and as aresult because the Company did not obtain waivers from creditors such loans have been classified as current liabilities as of August 31,2009. The Company was in compliance as of August 31, 2010.In October 2002, the Company entered into a loan agreement with GE Capital for one restaurant property still owned by theCompany. As of August 31, 2009, the outstanding balance due under the Company’s loan with GE Capital was $699,100. The Companywas not in compliance as of August 31, 2009, due to the cross default provision described above. The Company was in compliance as ofAugust 31, 2010.Item 1A. Risk FactorsOur business is subject to a number of risks, some of which are discussed below. Other risks are presented elsewhere in this reportand in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. If any of the risks actually occur, ourbusiness, financial condition, or results of operations could be seriously harmed. In that event, the market price for shares of ourcommon stock may decline, and you could lose all or part of your investment.Changes and uncertainties in the economy have harmed and could continue to harm our operating results.As a result of the recent economic downturn and continuing economic uncertainties, our operating results, and the economicstrength of our customers and suppliers, are increasingly difficult to predict. Purchases of our products by our customers is affected bymany factors, including, among others, general economic conditions, interest rates, inflation, liquidity in the credit markets,unemployment trends, geopolitical events, and other factors. Although we sell our products to customers in a broad range of industries,the significant weakening of economic conditions on a global scale has caused some of our customers to experience a slowdown that hasadversely impacted our sales and operating results. Changes and uncertainties in the economy also increase the risk of uncollectibleaccounts receivable. The pricing we receive from suppliers may also be impacted by general economic conditions. Continued and futurechanges and uncertainties in the economic climate in the United States and elsewhere could have a similar negative impact on the rateand amounts of purchases by our current and potential customers, create price inflation for our products, or otherwise have a negativeimpact on our expenses, gross margins and revenues, and could hinder our growth.If we fail to develop and maintain an effective system of internal controls over financial reporting or are not able to adequatelyaddress certain identified material weaknesses in our system of internal controls or comply with Section 404 of the Sarbanes-OxleyAct of 2002, we may not be able to report our financial results accurately or timely or detect fraud, which could have a materialadverse effect on the market price of our common stock and our business.We have from time to time had material weaknesses in our internal controls over financial reporting due to a lack of process relatedto the preparation of our financial statements and the lack of segregation of duties / a lack of sufficient control in the area of financialreporting oversight and review and the lack of appropriate personnel to ensure the complete and proper application of GAAP as it relatesto certain routine accounting transactions. If we fail to adequately address these material weaknesses or experience additional materialweaknesses in the future, we may not be able to improve our system of internal control over financial reporting to comply with thereporting requirements applicable to public companies in the United States.8Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsFurthermore, because we have not completed the testing of the operation of our internal controls, it is possible that we or our auditorswill identify additional material weaknesses and/or significant deficiencies in the future in our system of internal control over financialreporting. Our failure to address any deficiencies or weaknesses in our internal control over financial reporting or to properly maintain aneffective system of internal control over financial reporting could impact our ability to prevent fraud or to issue our financial statementsin a timely manner that presents fairly (in accordance with accounting principles generally accepted in the United States of America) ourfinancial condition and results of operations. The existence of any such deficiencies and/or weaknesses, even if cured, may also lead tothe loss of investor confidence in the reliability of our financial statements, could harm our business and negatively impact the tradingprice of our common stock. Such deficiencies or material weaknesses may also subject us to lawsuits, investigations and other penalties.We have recently incurred significant losses from trading in securities, and we may continue to incur such losses in the future, whichmay also cause us to be in violation of covenants under our line of credit agreement.Bisco has historically funded its operations from cash generated from its operations and/or by trading in marketable domesticequity securities. Bisco’s investment strategy includes taking both long and short positions, as well as utilizing options to maximizereturn. This strategy can lead to significant losses based on market conditions and trends. During the year ended August 31, 2010, Biscorealized losses of $3,481,000 in its brokerage accounts used for its investments. We may continue to incur losses in future periods fromsuch trading activities, which could materially and adversely affect our liquidity and financial condition.In addition, unanticipated losses from our trading activities may cause Bisco to be in violation of certain covenants under its line ofcredit agreement with Community Bank. As of August 31, 2010, Bisco had outstanding $8,900,400 under its revolving credit agreement,which loan is secured by substantially all of Bisco’s assets and is guaranteed by Mr. Ceiley, our Chairman and CEO. The loan agreementcontains covenants which require that, on a quarterly basis, Bisco’s losses from trading in securities not exceed its pre-tax operatingincome. We cannot assure you that unanticipated losses from our trading activities will not cause us to violate the covenant in the futureor that the bank will grant a waiver for any such default or that it will not exercise its remedies, which could include the acceleration ofthe obligation’s maturity date and foreclosure on Bisco’s assets, with respect to any such noncompliance, which could have a materialadverse effect on our business and operations. As of August 31, 2010, Bisco was in compliance with these covenants.We rely heavily on our internal information systems, which, if not properly functioning, could materially and adversely affect ourbusiness.Our information systems have been in place for many years, and are subject to system failures as well problems caused by humanerror, which could have a material adverse effect on our business. Many of our systems consist of a number of legacy or internallydeveloped applications, which can be more difficult to upgrade to commercially available software. It may be time consuming for us toretrieve data that is necessary for management to evaluate our systems of control and information flow. In the future, management maydecide to convert our information systems to a single enterprise solution. Such a conversion, while it would enhance the accessibilityand reliability of our data, could be costly and would not be without risk of data loss, delay or business interruption. Maintaining andoperating these systems requires continuous investments. Failure of any of these internal information systems or material difficulties inupgrading these information systems could have material adverse effects on our business and our timely compliance with our reportingobligations.We may not be able to attract and retain key personnel.Our future performance will depend to a significant extent upon the efforts and abilities of certain key management and otherpersonnel, including Glen Ceiley, our Chairman of the Board and Chief Executive Officer, as well as other executive officers and seniormanagement. The loss of service of one or more of our key management members could have a material adverse effect on our business.9Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsWe do not have long-term supply agreements or guaranteed price or delivery arrangements with the majority of our suppliers.In most cases, we have no guaranteed price or delivery arrangements with our suppliers. Consequently we may experienceinventory shortages on certain products. Furthermore, our industry occasionally experiences significant product supply shortages andcustomer order backlogs due to the inability of certain manufacturers to supply products as needed. We cannot assure you that supplierswill maintain an adequate supply of products to fulfill our orders on a timely basis, or at all, or that we will be able to obtain particularproducts on favorable terms or at all. Additionally, we cannot assure you that product lines currently offered by suppliers will continueto be available to us. A decline in the supply or continued availability of the products of our suppliers, or a significant increase in theprice of those products, could reduce our sales and negatively affect our operating results.Our supply agreements are generally terminable at the suppliers’ discretion.Substantially all of the agreements we have with our suppliers, including our authorized distributor agreements, are terminable withlittle or no notice and without any penalty. Suppliers that currently sell their products through us could decide to sell, or increase theirsales of, their products directly or through other distributors or channels. Any termination, interruption or adverse modification of ourrelationship with a key supplier or a significant number of other suppliers would likely adversely affect our operating income, cash flowand future prospects.The competitive pressures we face could have a material adverse effect on our business.The market for our products and services is very competitive. we compete for customers with other distributors, as well as withmany of our suppliers. A failure to maintain and enhance our competitive position could adversely affect our business and prospects.Furthermore, our efforts to compete in the marketplace could cause deterioration of gross profit margins and, thus, overall profitability.Some of our competitors may have greater financial, personnel, capacity and other resources or a more extensive customer base than wedo.Our estimate of the potential for opening offices in new geographic areas could be incorrect.One of our primary growth strategies for our Distribution Operations segment is to grow our business through the introduction ofsales offices into new geographic markets. Based on our analysis of demographics in the United States, Canada and Mexico, we currentlyestimate there is potential market opportunity in North America to support additional sales offices. We cannot guarantee that ourestimates are accurate or that we will open enough offices to capitalize on the full market opportunity. In addition, a particular localmarket’s ability to support a sales office may change because of a change due to competition, or local economic conditions.We may be unable to meet our goals regarding new office openings.Our growth, in part, is primarily dependent on our ability to attract new customers. Historically, the most effective way to attractnew customers has been opening new sales offices. Our current business strategy focuses on opening a specified number of new salesoffices each year, and quickly growing each new sales office. Given the current economic slowdown, we may not be able to open or grownew offices at our projected rates. Failure to do so could negatively impact our long-term growth.Opening sales offices in new markets presents increased risks that may prevent us from being profitable in these new locations,and/or may adversely affect our operating results.Our new sales offices do not typically achieve operating results comparable to our existing offices until after several years ofoperation. The added expenses relating to payroll, occupancy, and transportation costs can impact our ability to leverage earnings. Inaddition, offices in new geographic areas face additional challenges to achieving profitability. In new markets, we have less familiaritywith local customer preferences and customers in these markets are less familiar with our name and capabilities. Entry into new marketsmay also bring us into competition with new, unfamiliar competitors. These challenges associated with opening new offices in newmarkets may have an adverse effect on our business and operating results.10Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsWe may not be able to identify new products and products lines, or obtain new product on favorable terms and prices.Our success depends in part on our ability to develop product expertise and identify future products and product lines thatcomplement existing products and product lines and that respond to our customers’ needs. We may not be able to compete effectivelyunless our product selection keeps up with trends in the markets in which we compete.Our ability to successfully attract and retain qualified sales personnel is uncertain.Our success depends in large part on our ability to attract, motivate, and retain a sufficient number of qualified sales employees,who understand and appreciate our strategy and culture and are able to adequately represent us to our customers. Qualified individuals ofthe requisite caliber and number needed to fill these positions may be in short supply in some areas, and the turnover rate in the industryis high. If we are unable to hire and retain personnel capable of consistently providing a high level of customer service, as demonstratedby their enthusiasm for our culture and product knowledge, our sales could be materially adversely affected. Additionally, competitionfor qualified employees could require us to pay higher wages to attract a sufficient number of employees. An inability to recruit andretain a sufficient number of qualified individuals in the future may also delay the planned openings of new offices. Any such delays,material increases in existing employee turnover rates, or increases in labor costs, could have a material adverse effect on our business,financial condition or operating results.We generally do not have long-term sales contracts with our customers.Most of our sales are made on a purchase order basis, rather than through long-term sales contracts. A variety of conditions, bothspecific to each customer and generally affecting each customer’s industry, may cause customers to reduce, cancel or delay orders thatwere either previously made or anticipated, go bankrupt or fail, or default on their payments. Significant or numerous cancellations,reductions, delays in orders by customers, losses of customers, and/or customer defaults on payment could materially adversely affect ourbusiness.Increases in energy costs and the cost of raw materials used in our products could impact our cost of goods and distribution andoccupancy expenses, which would result in lower operating margins.Costs of raw materials used in our products and energy costs have been rising during the last several years, which has resulted inincreased production costs for our suppliers. These suppliers typically look to pass their increased costs along to us through priceincreases. The shipping costs for our distribution operation have risen as well. While we typically try to pass increased supplier pricesand shipping costs through to our customers or to modify our activities to mitigate the impact, we may not be successful. Failure to fullypass these increased prices and costs through to our customers or to modify our activities to mitigate the impact would have an adverseeffect on our operating margins.We may fail to realize some or all of the anticipated benefits of the merger with Bisco, which may adversely affect the value of ourcommon stock.The success of the recent merger transaction with Bisco, pursuant to which Bisco became our wholly-owned subsidiary, willdepend, in part, on our ability to successfully integrate the two companies and realize the anticipated benefits from consolidation.Although Bisco has been handling the day-to-day operation of EACO for the past several years, Bisco and EACO have operatedindependently. It is possible that the actual consolidation of the two companies will be disruptive to the operations of either or bothcompanies, or result in additional and unforeseen expenses and have an adverse effect on our combined business and results ofoperations, which may affect the value of the shares of our common stock. In addition, any unforeseen restriction or delay on our abilityto use, after the merger, the net operating loss carryforwards of EACO would prevent us from fully realizing the anticipated tax benefitsfrom consolidation within the anticipated time frame and harm our financial results.11Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsThe Company’s Chairman and CEO holds almost all of our voting stock and the influence of our other public stockholders over theelection of directors and significant corporate actions will be significantly limited.Glen Ceiley, our Chairman and CEO, owns approximately 99% of our outstanding voting stock. Mr. Ceiley is able to exertsignificant influence over the outcome of almost all corporate matters, including significant corporate transactions requiring astockholder vote, such as a merger or a sale of the Company or our assets. This concentration of ownership and influence in managementand board decision-making could also harm the price of our common stock by, among other things, discouraging a potential acquirerfrom seeking to acquire shares of our common stock (whether by making a tender offer or otherwise) or otherwise attempting to obtaincontrol of the Company.Sales of our common stock by Glen Ceiley could cause the price of our common stock to decline.There is currently no established trading market for our common stock, and the volume of any sales is generally low. As ofDecember 1, 2010, the number of shares held by non-affiliates of Mr. Ceiley or Bisco is less than 48,000 shares. If Mr. Ceiley sells orseeks to sell a substantial number of his shares of our common stock in the future, the market price of our common stock could decline.The perception among investors that these sales may occur could produce the same effect.Inclement weather and other disruptions to the transportation network could impact our distribution system.Our ability to provide efficient shipment of products to our customers is an integral component of our overall business strategy.Disruptions at distribution centers or shipping ports may affect our ability to both maintain core products in inventory and deliverproducts to our customers on a timely basis, which may in turn adversely affect our results of operations. In addition, severe weatherconditions could adversely impact demand for our products in particularly hard hit regions.Our advertising and marketing efforts may be costly and may not achieve desired results.We incur substantial expense in connection with our advertising and marketing efforts. Postage represents a significant advertisingexpense for us because we generally mail fliers to current and potential customers through the U.S. Postal Service. Any future increases inpostal rates will increase our mailing expenses and could have a material adverse effect on our business, financial condition and resultsof operations.We may not have adequate or cost-effective liquidity or capital resources.Our ability to satisfy our cash needs depends on our ability to generate cash from operations and to access to the capital markets,both of which are subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond ourcontrol. We may need to satisfy our cash needs through external financing. However, external financing may not be available onacceptable terms or at all.Item 1B. Unresolved Staff CommentsNot applicable.Item 2. PropertiesWe have 37 sales offices and six distribution centers located throughout the United States and in Canada. Our corporateheadquarters and one of our primary distribution centers are located in Anaheim, California in approximately 40,000 square feet of officeand warehouse space. We lease all of our properties, consisting of office and warehouse space, under leases generally having a term ofthree years. For additional information regarding our obligations under property leases, see Note 11 of the Notes to Consolidated andCombined Financial Statements, included in Part IV, Item 15 of this report.12Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsWe also own and operate the following properties in connection with our Real Estate Rental Operations:Locations DescriptionDeland, FL Restaurant land and building. Leased to third party restaurant operator.(1) Orange Park, FL Restaurant land and building. Leased to third party restaurant operator.(2) Sylmar, CA Two properties leased to industrial tenants.(3) Brooksville, FL Restaurant land and building. Leased to a restaurant operator.(1)Property subject to mortgage securing promissory note issued to GE Capital.(2)Property subject to mortgage securing promissory note issued to Community Bank.(3)Property subject to mortgage securing promissory note issued to Zion’s Bank.Item 3. Legal ProceedingsFrom time to time, the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedingsor claims are pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a materialadverse effect on our business or financial condition.Item 4. (Removed and Reserved) PART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information and HoldersThe Company’s common stock is quoted on the OTC Bulletin Board (“OTCBB”) under the trading symbol “EACO”; however,there is no established public trading market for the Company’s common stock. As of December 1, 2010, there were 133 shareholders ofrecord, not including individuals holding shares in street names. The closing sale price for the Company’s stock on December 1, 2010was $2.38.The quarterly high and low bid information of the Company’s common stock as quoted on the OTCBB are set forth below. Thesequoted prices represent inter-dealer prices, without retail markup, markdown or commission, and may not necessarily represent actualtransactions: High LowYear Ended December 31, 2008 January 1 — March 31, 2008 $0.42 $0.12 April 1 — June 30, 2008 0.26 0.12 July 1 — August 31, 2008 0.22 0.15 September 1 — December 31, 2008 0.15 0.06 Eight Months Ended August 31, 2009 January 1 — March 31, 2009 0.14 0.07 April 1 — June 30, 2009 0.14 0.06 July 1 — August 31, 2009 0.10 0.06 Year Ended August 31, 2010 September 1 — November 30, 2009 0.10 0.06 December 1, 2009 — February 28, 2010 0.28 0.06 March 1 — May 31, 2010* 3.00 0.06 June 1 — August 31, 2010* 3.20 1.95 13Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contents*Reflects 1 for 25 reverse stock split on March 23, 2010.As of August 31, 2010, the Company had no options outstanding under any equity compensation plans. The Company did notgrant or issue any unregistered shares during the year ended August 31, 2010. The Company did not repurchase any of its own commonstock during the year ended August 31, 2010.Dividend PolicyThe 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 operations and expansion of the business.Item 6. Selected Financial DataThe Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide theinformation required under this item.Item 7. Management’s Discussion and Analysis of Financial Condition and Results Of OperationsOverviewEACO was organized under the laws of the State of Florida in September l985. From the inception of the Company through June2005, the Company’s business consisted of operating restaurants in the State of Florida. On June 29, 2005, the Company sold all of itsoperating restaurants and other assets used in the restaurant operations. The restaurant operations are presented as discontinuedoperations in the accompanying financial statements. Since June 2005, our operations have principally consisted of managing four realestate properties held for leasing in Florida and California. As a result of our March 2010 acquisition of Bisco, the Company currentlyoperates in two reportable segments: the Real Estate Rental Operations segment, which consists of managing the four rental properties inFlorida and California, and the Distribution Operations segment, which consists of the business of Bisco and is alternatively referred toin this report as the Bisco segment. Revenues derived from the Bisco segment represented approximately 99% of the total revenues forthe year ended August 31, 2010 and is expected to continue to represent the substantial majority of the Company’s total revenues for theforeseeable future. The Distribution Operations segment includes the operations of Bisco.The accompanying consolidated financial statements include the financial position and results of operations of Bisco for allperiods presented. As a result of Mr. Ceiley having majority voting control over both entities during all periods presented, theconsolidated financial statements were prepared in accordance with Accounting Standards Codification (“ASC”) 805-50, TransactionsBetween Entities Under Common Control, which specifies that in a combination of entities under common control, the entity thatreceives the assets or the equity interests shall initially recognize the assets and liabilities transferred at their historical carrying amountsat the date of transfer (“as-if pooling-of-interests” accounting). The financial statements of the receiving entity shall also report theresults of operations for the period, the financial position and other financial information as though the transfer of net assets or exchangeof equity interests had occurred at the beginning of the period. Financial statements and financial information presented for prior yearshave been retrospectively adjusted to furnish comparative historical information for periods during which the entities were undercommon control.Reverse Stock SplitEACO effected a 1-for-25 reverse split of its outstanding common stock (the “Reverse Split”) on March 23, 2010. On such date,each outstanding share of EACO common stock automatically converted into four one-hundredth (0.04) of a share of common stock.Unless otherwise noted, the number of common shares and per share calculations in this report have been retrospectively adjusted toreflect the Reverse Split.14Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsAcquisition of BiscoOn March 24, 2010, we completed the acquisition of Bisco, a distributor of electronic components and fasteners that are used in themanufacture of products in a broad range of industries, including the aerospace, circuit board, communication, computer, fabrication,instrumentation, industrial equipment and marine industries. Bisco also provides customized services and solutions for a wide range ofproduction needs, including special packaging, bin stocking, kitting and assembly, bar coding, electronic requisitioning, and integratedsupply programs, among others. The acquisition of Bisco (the “Acquisition”) was consummated pursuant to an Agreement and Plan ofMerger dated December 22, 2009, pursuant to which a wholly-owned subsidiary of EACO was merged with and into Bisco with Biscosurviving the merger as a wholly-owned subsidiary of EACO.Bisco has 37 sales offices and six distribution centers located throughout the United States and Canada. As “Bisco” or “BiscoIndustries,” Bisco sells the full spectrum of products that it offers to all markets that it serves, and the substantial majority of Bisco’srevenues have historically been derived from this Bisco division, but Bisco has also established three additional divisions (NationalPrecision, Fast-Cor and Component Power) that specialize in specific industries and products, each of which has its own direct salesforce. While all divisions sell electronics components and fasteners, National Precision and Fast-Cor generally focus on sales todistributors, which typically carry lower margins. The Bisco division and the Component Power division largely sell to originalequipment manufacturers (“OEMs”), while Fast-Cor generally focuses its sales on electronic circuits and parts.In connection with the Acquisition, EACO issued an aggregate of 4,705,669 shares of its common stock (the “Merger Shares”) tothe sole shareholder of Bisco in exchange for all of the outstanding capital stock of Bisco. Bisco’s sole shareholder was Glen F. Ceiley,EACO’s Chairman, CEO and majority stockholder. Mr. Ceiley currently owns 99% of the outstanding common stock of EACO.Mr. Ceiley also owns 36,000 shares of the Series A Cumulative Convertible Preferred Stock of EACO. In addition, under a managementagreement with EACO, Bisco handles the day to day operations of EACO and provides administration and accounting services through asteering committee. The steering committee consists of Mr. Ceiley and certain senior executives of Bisco.Change in Fiscal YearOn September 29, 2009, the Board of Directors approved a change in EACO’s fiscal year end to August 31. Prior to that, the fiscalyear was the fifty-two or fifty-three week period ending on the Wednesday nearest to December 31. The accompanying financialstatements reflect the historical balances and results of operations of Bisco for all periods period because EACO and Bisco were underthe common control of Glen Ceiley, EACO’s majority stockholder.As a result of the change in year end, the Company believes that a comparison between fiscal 2010 and fiscal 2009 (unaudited), acomparison between the transition period and the comparable eight-month period from 2008 (see Note 15 to the financial statements)and a comparison of fiscal 2010 to calendar 2008 enhances a reader’s understanding of the Company’s results of operations and, as such,these are the comparisons which are presented below in the section titled “Results of Operations”.Critical Accounting PoliciesLong-Lived AssetsLong-lived assets (principally real estate, equipment and leasehold improvements) are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of the impairment review,real estate properties are reviewed on an asset-by-asset basis. Recoverability of real estate property assets is measured by a comparison ofthe carrying amount of each operating property and related assets to future net cash flows expected to be generated by such assets. Formeasuring recoverability of distribution operations assets, long-lived assets are grouped with other assets to the lowest level for whichidentifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If assets are considered to beimpaired, the impairment to be recognized is15Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contentsmeasured by the amount by which the carrying amount of the assets exceeds their estimated fair values. The Company recognized animpairment charge of $2,058,000 in December 2008. Since December 2008, EACO has not incurred another triggering event that wouldcause the properties to be impaired further.Revenue RecognitionFor the Company’s distribution operations, the Company’s shipping terms are FOB shipping point thus management generallyrecognizes Company revenue at the time of product shipment. Revenue is considered to be realized or realizable and earned when thereis persuasive evidence of a sales arrangement in the form of an executed contract or purchase order, the product has been shipped (andinstalled when applicable), the sales price is fixed or determinable, and collectability is reasonably assured.The Company leases its real estate properties to tenants under operating leases with terms exceeding one year. Some of these leasescontain scheduled rent increases. We record rent revenue for leases which contain scheduled rent increases on a straight-line basis overthe term of the lease.Liabilities of Discontinued OperationsThe Company’s policy for estimating liabilities of its discontinued operations is considered critical. This item consists of theCompany’s self-insured worker’s compensation program. The Company self-insures workers’ compensation claims losses up to certainlimits. The liability for workers’ compensation represents an estimate of the present value of the ultimate cost of uninsured losses whichare unpaid as of the balance sheet dates. The estimate is continually reviewed and adjustments to the Company’s estimated claimliability, if any, are reflected in discontinued operations. At fiscal year end, the Company obtains an actuarial report which estimates itsoverall exposure based on historical claims and an evaluation of future claims. An actuarial evaluation was obtained by the Company asof August 31, 2010 and 2009. The Company pursues recovery of certain claims from an insurance carrier. Recoveries, if any, arerecognized when realization is reasonably assured.Deferred Tax AssetsThe Company’s policy for recording a valuation allowance against deferred tax assets (see Note 8 to the financial statementsincluded elsewhere herein) is considered critical. A valuation allowance is provided for deferred tax assets if it is more likely than notthese items will either expire before the Company is able to realize their benefit, or when future deductibility is uncertain. In accordancewith ASC 740, “Accounting for Income Taxes” (“ASC 740”), the Company records net deferred tax assets to the extent managementbelieves these assets will more likely than not be realized. In making such determination, the Company considers all available positiveand negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planningstrategies and recent financial performance. ASC 740 further states that forming a conclusion that a valuation allowance is not required isdifficult when there is negative evidence such as cumulative losses and/or significant decreases in operations. As a result of theCompany’s disposal of significant business operations, management concluded that a valuation allowance should be recorded againstcertain federal and state tax credits. The utilization of these credits requires sufficient taxable income after consideration of net operatingloss utilization.16Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsResults of OperationsComparison of the Years Ended August 31, 2010 and August 31, 2009 (Unaudited)Distribution Sales and Gross Margin (in thousands) Years Ended, August 31, August 31, $ % 2010 2009 Change Change (Unaudited) Distribution sales $91,547 $84,251 $7,296 8.6%Cost of sales 67,048 61,203 (5,845) (9.5)%Gross profit $24,499 $23,048 $1,451 Gross margin 26.7% 27.3% (0.6)%Net sales related to the Distribution Operations segment consist primarily of sales of component parts and fasteners, but alsoinclude, to a lesser extent, kitting charges and special order fees, as well as freight charged to its customers. Distribution sales generatedby the Bisco division represented the substantial majority of distribution sales in both periods. The increase in net sales in the yearended August 31, 2010 (“fiscal 2010”) was largely due to increased unit sales, resulting primarily from a turnaround in the generaleconomy during fiscal 2010. The Company maintained the same number of sales offices in the United States and Canada in fiscal 2010,as it did for the year ended August 31, 2009 (“fiscal 2009”). The Company did not increase sales headcount in fiscal 2010, rather it wasmore efficient and generated increased sales per employee.Rental Income (in thousands) Years Ended August 31, August 31, $ % 2010 2009 Change Change (Unaudited) Rental revenue $1,086 $1,019 $67 6.5%Cost of rental operations 1,706 1,903 197 (10.3)Gross profit $(620) $(884) $264 Gross margin (57.0)% (86.7)% 29.7%Rental revenue in the Real Estate Rental Operations increased in fiscal 2010 due to the rental of the Deland Property in the latterhalf of fiscal 2010. The Deland property was vacant during all of fiscal 2009. In the fourth quarter of fiscal 2010, the Company alsoleased the Orange Park Property. All of the Company’s rental properties are currently leased. Gross margin improved in fiscal 2010primarily due to a decrease in the cost of rental operations. This decrease was due mainly to the rents associated with the Deland andFowler Properties in fiscal 2009, that were no longer leased properties in fiscal 2010.Selling, General and Administrative Expense (in thousands) Years Ended August 31, August 31, $ % 2010 2009 Change Change (Unaudited) Selling, general and administrative expense $21,763 $21,168 $(595) 2.8%Percent of distribution sales 23.7% 25.1% 1.4%Selling, general and administrative expense (“SG&A”) consists primarily of payroll and related expenses for its sales andadministrative staff, professional fees including accounting, legal and technology costs and expenses, as well as sales and marketingcosts for the Distribution Operations. SG&A expense in fiscal 2010 increased from fiscal 2009 largely due to increased bonuses andcommissions payable to employees as a result of the increase in net sales and related operating income, which are the basis for many ofthe Company’s sales bonus programs. The Company also incurred increase legal and accounting fees during fiscal 2010 due to the17Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contentsmerger of EACO with Bisco on March 24, 2010. As a percentage of distribution sales, SG&A decreased as the Company increased theefficiency of its current staff, resulting in a smaller percentage of expense as compared to sales.Other Income (Expense), Net (in thousands) Years Ended, $ % Aug 31, 2010 Aug 31, 2009 Change Change (Unaudited) Other income (expense): Realized loss on sales of marketable trading securities $(3,481) $(4,983) $1,502 30.1%Unrealized gain (loss) on marketable trading securities 1,314 (1,251) 2,565 205.0 Contract gain — 828 (828) (100.0)Property impairment — (2,058) 2,058 100.0 Interest and other income 26 231 (205) (88.7)Interest expense (net) (796) (1,137) 341 29.9 Other income (expense), net $(2,937) $(8,370) $5,433 64.9%Other income (expense), net as a percent of sales (3.2)% (9.8)% 6.6%Other income (expense), net primarily consists of income or losses on investments in short-term marketable equity securities ofpublicly-held domestic corporations. The Company’s investment strategy consists of both long and short positions, as well as utilizingoptions to maximize return. During fiscal 2009, the Company recognized $6,234,000 in net realized and unrealized losses, which losseswere primarily due to the sharp decline in the public trading markets and adverse market conditions. The Company experienced declinesof $2,167,000 during fiscal 2010, due mainly to losses associated with short positions the Company was holding.Prior to 2008, the Company leased two properties that were subleased to third party restaurant operators. The monthly subleaseincome was less than the Company’s monthly lease payment on both properties. This resulted in the Company recognizing a loss onthose subleases prior to 2008. During fiscal 2009, both tenants of those properties were evicted due to their failure to abide by the termsof the sublease. As a result, the Company reversed previously recognized losses resulting in a contract gain of $828,000. No suchsituation occurred in fiscal 2010.During fiscal 2009, the Company recognized an impairment on its three Florida properties, the Deland Property, the Orange ParkProperty and the Brooksville Property, primarily due to sharp declines in the Florida commercial real estate market. No such triggeringevent caused an impairment occurred in fiscal 2010.During fiscal 2009, the Company received a rebate on a worker’s compensation claim from the Florida Disability Trust Fund. Inaddition, the Company was receiving lease payments on equipment leased to a third party restaurant operator. Both of these items appearin interest and other income. In fiscal 2010, neither of these items occurred, as the agreement with the third party operator ended in 2009and the Company has no further claims from the Florida Disability Trust Fund.Income Tax Provision (in thousands) Years Ended, $ % Aug 31, 2010 Aug 31, 2009 Change Change (Unaudited) Income tax provision $532 $757 $225 29.7%Percent of net sales 0.5% 0.8% 0.3%18Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsThe provision for income taxes decreased by $0.2 million in fiscal 2010 as compared to fiscal 2009, which primarily resulted froman increase in the valuation allowance for capital losses incurred during fiscal 2009.Comparison of the Eight Month Transition Period Ended August 31, 2009 to Comparable Eight Month Period Ended August 31,2008Distribution Sales and Gross Margin (in thousands) Eight Months EndedAugust 31, $ % 2009 2008 Change Change (Unaudited) Distribution sales $54,365 $63,660 $(9,295) (14.6)%Cost of sales 38,112 43,530 5,418 12.4 Gross profit $16,253 $20,130 $(3,877) Gross margin 29.8% 31.6% (1.8)%The decrease in net sales related to the Distribution Operations in the eight months ended August 31, 2009 (the “2009 period”) waslargely due to decreased unit sales in the 2009 period versus the eight months ended August 31, 2008 (the “2008 period”). In the 2009period, the Company did experienced the negative effects of the economic downturn in the beginning of the calendar year. Prior to that,the Company maintained its item output and was increasing margins on incoming orders. In March 2009, the Company experienced anapproximate 20% decrease in bookings and, subsequently, a marked decrease in shipments.Rental Income (in thousands) Eight Months Ended August 31, $ % 2009 2008 Change Change (Unaudited) Rental revenue $647 $916 $(269) (29.3)%Cost of rental operations 796 1,739 943 54.2 Profit $(149) $(823) $674 Margin (23.0)% (89.8)% 66.8%Rental revenue in the Real Estate Rental Operations decreased in the 2009 period primarily due to the vacancy of the Deland andFowler Properties throughout 2009. Higher expenses in the 2008 period were due mainly to rent expense on the Fowler property,depreciation on that property and bad debt expense related to the two tenants evicted from the Deland and Fowler Properties.Selling, General and Administrative Expense (in thousands) Eight Months EndedAugust 31, $ % 2009 2008 Change Change (Unaudited) Selling, general and administrative expense $15,615 $15,477 $(138) 0.0%Percent of distribution sales 28.7% 24.3% (0.5)%Loss on disposition of equipment 146 — (146) (100)%Selling, general and administrative expense (“SG&A”) consists primarily of payroll and related expenses for its sales andadministrative staff, professional fees including accounting, legal and technology costs and expenses, as well as sales and marketingcosts for the Distribution Operations. SG&A expense in the 2009 period increased from the same period the previous year as a percentageof sales largely due to decreased sales for the eight months. The Company maintained the same number of employees and continued toexpand19Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contentsits sales force during the eight months in anticipation of an economic recovery. SG&A remained consistent with prior year for thatreason.In April 2009, the Company reached a settlement with the landlord of the Fowler Property. For a lump sum payment, the landlordagreed to release the Company from any past of future obligations under the lease. A loss of $146,000 was recognized with the removalof the capital asset’s carrying value.Other Income (Expense), Net (in thousands) Eight Months EndedAugust 31, $ % 2009 2008 Change Change (Unaudited) Other income (expense): Realized gain (loss) on sales of marketable trading securities $(6,386) $1,767 $(8,153) (461.4)%Gain on extinguishment of obligation under capital lease 949 — 949 100.0 Unrealized gain (loss) on marketable trading securities 4,233 (12) 4,245 3,537.5 Interest and other income 8 202 (194) (96.0)Interest expense (net) (1,032) (815) (217) (26.6)Other income (expense), net $(2,228) $1,142 $(3,370) (295.0)%Other income (expense), net as a percent of sales (4.0)% 1.7% (5.7)%Other income (expense), net primarily consists of income or losses on investments in short-term marketable equity securities ofpublicly-held domestic corporations. The Company’s investment strategy consists of both long and short positions, as well as utilizingoptions to maximize return. During the 2009 period, the Company recognized $2,153,000 in net realized and unrealized losses, whichlosses were primarily due to the sharp decline in the public trading markets and adverse market conditions. During the 2008 period theCompany recognized $1,755,000 in net realized and unrealized gains, which gains were primarily due to the public trading marketsincreasing.In April 2009, the Company reached a settlement with the landlord of the Fowler Property, whereas the Company agreed to pay thelandlord a lump sum of $500,000. This amount released the Company from any past and future obligations related to the capital lease.The settlement resulted in a gain on the extinguishment of the capital lease obligation of approximately $949,000.During the 2008 period, the Company received a rebate on a worker’s compensation claim from the Florida Disability Trust Fund.In addition, the Company was receiving lease payments on equipment leased to a third party restaurant operator. Both of these itemsappear in interest and other income. In the 2009 period, neither of these items occurred, as the agreement with the third party operatorended at the beginning of the 2009 period and the Company has no further claims from the Florida Disability Trust Fund.Interest expense increased in the 2009 period due to the refinancing of the Sylmar Property in December 2008, resulting in a largerdebt balance for the 2009 period then for the 2008 period.20Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsComparison of the Years Ended August 31, 2010 and December 31, 2008Distribution Sales and Gross Margin (in thousands) Year Ended, $ % Aug 31, 2010 Dec 31, 2008 Change Change Distribution sales $91,547 $93,379 $(1,832) (1.9)%Cost of sales 67,048 66,947 (101) 0.00 Gross profit $24,499 $26,432 $1,933 Gross margin 26.7% 28.3% (1.6)%Net sales related to the Distribution Operations segment consist primarily of sales of component parts and fasteners, but alsoinclude, to a lesser extent, kitting charges and special order fees, as well as freight charged to its customers. The slight decrease in netsales in the year ended August 31, 2010 was largely due to decreased unit sales, resulting primarily from an decrease in manufacturing inthe markets the Company operates, namely military and aerospace. The Company maintained the same number of sales offices in theUnited States and Canada in fiscal 2010, as it did for the year ended December 31, 2008 (“fiscal 2008”). However, the Company didincrease sales headcount by 11%, mainly through the hiring of temporary employees. This resulted in a decrease of sales per salespersonin fiscal 2010 compared to fiscal 2008. The Company also experienced some pressure on prices due to the slowdown in the economy atthe beginning of fiscal 2010.Rental Income (in thousands) Years Ended, $ % Aug 31, 2010 Dec 31, 2008 Change Change Rental revenue $1,086 $1,203 $(117) 9.7%Cost of rental operations 1,706 1,954 248 12.6 Gross profit $(620) $(751) $131 Gross margin (57.0)% (62.4)% 5.4%Rental revenue in the Real Estate Rental Operations decreased in fiscal 2010 due to the vacancies in the Deland Property in the firsthalf of fiscal 2010. The Deland property was not vacant during fiscal 2008. In the fourth quarter of fiscal 2010, the Company also leasedthe Orange Park Property. The Company now has all of its rental properties leased. Gross margin improved in fiscal 2010 primarily due toa decrease in the cost of rental operations. This decrease was due mainly to the disposition of the Fowler Property in 2009. This resultedin a removal of expenses in fiscal 2010 that were present in fiscal 2008.Selling, General and Administrative Expense (in thousands) Years Ended, $ % Aug 31, 2010 Dec 31, 2008 Change ChangeSelling, general and administrative expense $21,763 $22,852 $1,089 4.7%Percent of distribution sales 23.7% 24.4% 0.7%Selling, general and administrative expense (“SG&A”) consists primarily of payroll and related expenses for its sales andadministrative staff, professional fees including accounting, legal and technology costs and expenses, as well as sales and marketingcosts for the Distribution Operations. SG&A expense in fiscal 2010 decreased from fiscal 2008 largely due to decreased bonuses andcommissions payable to employees as a result of the decrease in net sales and related operating income, which is the basis for many ofthe Company’s sales bonus programs. As a percentage of distribution sales, SG&A decreased as the Company increased the efficiency ofits current staff, resulting in a smaller percentage of expense as compared to sales.21Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsOther Income (Expense), Net (in thousands) Years Ended, $ % Aug 31, 2010 Dec 31, 2008 Change Change Other income (expense): Realized gain (loss) on sales of marketable trading securities $(3,481) $3,169 $(6,650) (209.8)%Unrealized gain (loss) on marketable trading securities 1,314 (5,681) 6,995 123.1 Contract gain — 722 (722) (100.0)Property impairment — (2,058) 2,058 100.0 Interest and other income 26 169 (143) 84.6 Interest expense (net) (796) (816) 20 2.4 Other income (expense), net $(2,937) $(4,495) $1,558 (34.6)%Other income (expense), net as a percent of sales (3.2)% (4.8)% 1.6%Other income (expense), net primarily consists of income or losses on investments in short-term marketable equity securities ofpublicly-held domestic corporations. The Company’s investment strategy consists of both long and short positions, as well as utilizingoptions to maximize return. During fiscal 2008, the Company recognized $2,512,000 in net realized and unrealized losses, which losseswere primarily due to the sharp decline in the public trading markets and adverse market conditions. The Company experienced declinesof $2,167,000 during fiscal 2010, due mainly to losses associated with short positions the Company was holding.Prior to 2008, the Company leased two properties that were subleased to third party restaurant operators. The monthly subleaseincome was less than the Company’s monthly lease payment on both properties. This resulted in the Company recognizing a loss onthose subleases prior to 2008. During fiscal 2008, both tenants of those properties were evicted due to their failure to abide by the termsof the sublease. As a result, the Company reversed previously recognized losses resulting in a contract gain of $722,000. No suchsituation occurred in fiscal 2010.During fiscal 2008, the Company recognized an impairment on its three Florida properties, the Deland Property, the Orange ParkProperty and the Brooksville Property, due to sharp declines in the Florida commercial real estate market. No such triggering eventcausing an impairment occurred in fiscal 2010.During fiscal 2008, the Company received a rebate on a worker’s compensation claim from the Florida Disability Trust Fund. Inaddition, the Company was receiving lease payments on equipment leased to a third party restaurant operator. Both of these items appearin interest and other income. In fiscal 2010, neither of these items occurred, as the agreement with the third party operator ended in 2009and the Company has no further claims from the Florida Disability Trust Fund.Income Tax Provision (in thousands) Years Ended, $ % Aug 31, 2010 Dec 31, 2008 Change ChangeIncome tax provision (benefit) $532 $420 $(112) (26.6)%Percent of net sales 0.5% 0.4% (0.1)%The provision for income taxes increased by $0.1 million in fiscal 2010 as compared to fiscal 2008, which resulted from an increasein the valuation allowance for capital losses incurred during the period.Liquidity and Capital ResourcesOn March 24, 2010, EACO completed the acquisition of Bisco, a company under the common control of EACO’s majoritystockholder (Glen Ceiley). The acquisition of Bisco (the “Acquisition”) was approved by the22Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsCompany’s shareholders and consummated pursuant to an Agreement and Plan of Merger dated December 22, 2009 by and amongEACO, Bisco Acquisition Corp., Bisco and Glen F. Ceiley (the “Agreement”). Pursuant to the Agreement, Bisco Acquisition Corp., awholly-owned subsidiary of EACO, was merged with and into Bisco; Bisco was the surviving corporation in the merger and became awholly-owned subsidiary of EACO. The transaction was accounted for as a combination of companies under common control using thehistorical balances of Bisco.The accompanying financial statements include the financial position and results of operations of Bisco for all periods presented.As a result of Mr. Ceiley having majority voting control over both entities during all periods presented, the consolidated financialstatements were prepared in accordance with Accounting Standards Codification (“ASC”) 805-50, Transactions Between Entities UnderCommon Control, which specifies that in a combination of entities under common control, the entity that receives the assets or theequity interests shall initially recognize the assets and liabilities transferred at their historical carrying amounts at the date of transfer(“as-if pooling-of-interests” accounting). The financial statements of the receiving entity shall also report the results of operations for theperiod, the financial position and other financial information as though the transfer of net assets or exchange of equity interests hadoccurred at the beginning of the period. Financial statements and financial information presented for prior years have beenretrospectively adjusted to furnish comparative historical information for periods during which the entities were under common control.The Distribution Operations segment includes the operations of Bisco.The Company’s Distribution Operations have historically generated positive cash flow from its operations and/or by trading inmarketable domestic equity securities. In April 2008, Bisco entered into a revolving credit agreement with Community Bank, whichcurrently provides for borrowings of up to $10.0 million and bears interest at either the 30, 60, or 90 day London Inter-Bank Offered Rate(“LIBOR”) (.43% and .27% for the 60 day LIBOR at August 31, 2010 and August 31, 2009, respectively) plus 1.75% and/or the bank’sreference rate (3.25% at August 31, 2010 and August 31, 2009, respectively). Borrowings are secured by substantially all assets of theCompany’s Distribution Operations and are guaranteed by the Company’s Chief Executive Officer and Chairman of the Board, Glen F.Ceiley. The agreement expired in October 2010, but was extended to December 31, 2010. The amount outstanding under this line ofcredit as of August 31, 2010 and August 31, 2009 was $8,900,400 and $8,467,400, respectively. Availability under the line of credit was$1,099,600 and $1,532,600 at August 31, 2010 and August 31, 2009, respectively.The Company’s Real Estate Rental Operations are funded by rents received from the tenants of its five rental properties. Any cashrequirements in excess of the rental income required by the Real Estate Rental Operations have historically been funded by theDistribution Operations. These borrowings and related interest have been eliminated in the accompanying consolidated financialstatements.Cash Flows from Operating ActivitiesThe Company’s principal uses of cash during fiscal 2010 included (i) losses realized on trading securities; and (ii) the payment ofthe Company’s operating expenses.During the year ended August 31, 2010, the Company was provided with $879,000 in cash from its operations. This was duemainly to an increase in accounts payable resulting from extending credit terms and checks held at the end of the period.During the eight months ended August 31, 2009, the Company was provided $1,417,000 of cash in operations. This was duemainly to the decrease of accounts receivable and inventory balances from the prior year, offset by a smaller increase in accruedexpenses.During the year ended December 31, 2008, the Company used $1,211,000 in cash from its operations. This was due mainly to andecrease in accrued expenses as a result of the a settlement payment of $2.3 million in 2008 in a lawsuit brought against the Companyby a broker regarding the Asset Sale.23Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsCash Flows from Investing ActivitiesCash flow used by investing activities was $1,032,000 for the year ended August 31, 2010. This was due to required repurchases ofsecurities sold, not yet purchased and losses due to investment trading. This was offset by the release of restricted cash related to a) theliabilities for short sales and b) a reduction in the collateral requirement regarding the Company’s self insured worker’s compensationprogram by Florida SIGA.During the eight months ended August 31, 2009, the Company was provided $504,000 in investing activities, primarily due to theproceeds from the sale of equipment.During the year ended December 31, 2008, the Company used $2,114,000 in investing activities due to losses on investmentsresulting from the general decline in the stock market.Cash Flows from Financing ActivitiesCash used in financing activities for the year ended August 31, 2010 was $432,000 as compared with cash used from financingactivities of $2,374,000 for the eight months ended August 31, 2009. The decrease in the cash used was due mainly to the change in theCompany’s bank overdraft position during the year.For the year ending December 31, 2008, financing activities provided $2,943,000. This was due to the Company’s increasedborrowing on its revolving line of credit and proceeds received from the financing of the Brooksville Property in the latter half of 2008.Off-Balance Sheet ArrangementsThe Company has no off-balance sheet arrangements that are reasonably likely to have a current or future effect on the financialposition, revenues, results of operations, liquidity or capital expenditures.Contractual Financial ObligationsIn addition to using cash flow from operations, the Company finances its operations through the issuance of debt, and previouslyby entering into leases. These financial obligations are recorded in accordance with accounting rules applicable to the underlyingtransactions, with the result that some are recorded as liabilities in the balance sheet while others are required to be disclosed in the Notesto the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the AnnualReport on Form 10-K for the year ended August 31, 2010 and eight months ended August 31, 2009.Item 7A. Quantitative and Qualitative Disclosures About Market RiskThe Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide theinformation required under this item.Item 8. Financial Statements And Supplementary DataFinancial StatementsThe financial statements required by Regulation S-X are included in Part IV, Item 15 of this report.Item 9. Changes In and Disagreements With Accountants on Accounting and Financial DisclosureNone.Item 9A(T). Controls and Procedures(a) Evaluation of disclosure controls and procedures. As required by Rule 13a-15(e) and 15d-15(e) under the Exchange Act, as ofthe end of the period covered by this report the Company carried out an evaluation of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of theCompany’s Chief Executive Officer, who also serves as the Company’s principal financial officer. Based upon that24Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contentsevaluation, the Company’s Chief Executive Officer has concluded that the Company’s disclosure controls and procedures were noteffective as of August 31, 2010 in alerting management to material information regarding the Company’s financial statements anddisclosure obligations in order to allow the Company to meet its reporting requirements under the Exchange Act in a timely manner.In management’s opinion, the remedial actions described below relating to the material weaknesses in the Company’s internalcontrol over financial reporting will also address the ineffectiveness of the Company’s disclosure controls and procedures.(b) Management’s annual report on internal control over financial reporting. Management is responsible for establishing andmaintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. TheCompany’s internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is areasonable possibility that a material misstatement of the registrant’s annual and/or interim financial statements will not be prevented ordetected on a timely basis.The Company’s management, with the participation of its Chief Executive Officer, assessed the effectiveness of the Company’sinternal control over financial reporting as of August 31, 2010. In making this assessment, management used the criteria set forth by theCommittee of Sponsoring Organizations of The Treadway Commission (COSO) in its report entitled “Internal Control-IntegratedFramework.” Based on that assessment under such criteria, management concluded that the Company’s internal control over financialreporting was not effective as of August 31, 2010 due to control deficiencies that constituted material weaknesses.In assessing the Company’s internal control over financial reporting as of August 31, 2010, management identified a lack ofsufficient control in the area of financial reporting oversight and review. This internal control weakness could cause material errors in ourpublic financial reports to go undetected. Please refer to the discussion below for details regarding this material weakness andmanagement’s remediation plans.Management has also identified a lack of the appropriate personnel to ensure the complete and proper application of accountingprinciples generally accepted in the United States of America (“GAAP”) as it relates to certain routine accounting transactions.Specifically, this material weakness resulted in a number of errors in the original version of the Company’s August 31, 2010 and 2008financial statements and related disclosures regarding the accounting for lease revenue under SFAS No. 13, “Accounting for Leases,” andcomputing depreciation expense.These material weaknesses, if not remediated, have the potential to cause material misstatements of the Company’s annual and/orinterim financial statements in the future, with regard to both routine and complex accounting transactions.The Company is in the process of developing and implementing remediation plans to address its material weaknesses. Managementhas identified specific remedial actions to address the material weaknesses described above: • Improve the effectiveness of the accounting group by continuing to augment existing Company resources with new personneland/or consultants who have the technical accounting capabilities to assist in the analysis, recording and reporting of routineand complex accounting transactions. • Improve period-end closing procedures by establishing a monthly hard close process that ensures the timely review andapproval of routine and complex accounting estimates.Due to its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections ofany evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes inconditions, and/or that the degree of compliance with25Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contentsthe policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations.Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statementpreparation and presentation.(c) Attestation report of the registered public accounting firm. This Transition Report on Form 10-K does not include anattestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Pursuant torules of the SEC.(d) Changes in internal control over financial reporting. There have been no changes in internal control over financial reportingin the quarter ended August 31, 2010 that have materially affected or are reasonably likely to materially affect the Company’s internalcontrol over financial reporting.Item 9B. Other InformationNone. PART IIIItem 10. Directors, Executive Officers and Corporate GovernanceSet forth below is certain information, as of December 1, 2010, regarding our directors and executive officers, including informationregarding the experience, qualifications, attributes or skills of each director that led to the Board of Directors conclusion that the personshould serve on the Board.Directors and Executive OfficersGlen F. Ceiley currently serves as the Chairman of the Board and Chief Executive Officer of the Company. Stephen Catanzaro, JayConzen and William L. Means also currently serve as directors of the Company. Each director serves a one-year term, or until suchdirector’s successor has been elected and qualified. Each officer holds office at the discretion of the Company’s Board, or until theofficer’s successor has been elected and qualified.Glen F. Ceiley, 64, has served as EACO’s Chief Executive Officer and Chairman of the Board since 1999. Mr. Ceiley is also theChief Executive Officer and Chairman of the Board (sole director) of Bisco, and has held those positions since he founded Bisco in 1973.He also served as the President of Bisco from 1973 until June 2010. Mr. Ceiley has served as a director of the Company since 1998. Inaddition, Mr. Ceiley served as a director of Data I/O Corporation, a publicly-held company that provides programming systems forelectronic device manufacturers, from February 1999 until December 2005. As the founder of Bisco with over 35 years of experience inthat industry, Mr. Ceiley is uniquely qualified to provide insights into and guidance on the industry and growth and development of theCompany.Stephen Catanzaro, 57, has served as the Controller of Allied Business Schools, Inc., a company that provides home study coursesand distance education, since April 2004. Prior to that, Mr. Catanzaro was the Chief Financial Officer of V&M Restoration, Inc., abuilding restoration company, from September 2002 to February 2004, and the Chief Financial Officer of Bisco. Mr. Catanzaro hasserved as a director of the Company since 1999. Mr. Catanzaro offers to the Board valuable business and strategic insights obtainedthrough his work in a variety of industries, as well as experience as a certified public accountant which is invaluable to his service in theAudit Committee.Jay Conzen, 64, has served as the President of Old Fashioned Kitchen, Inc., a national food distributor, since April 2003. Prior tothat, from October 1992 to April 2003, Mr. Conzen was the principal of Jay Conzen Investments, an investment advisor. Mr. Conzen alsoserved as a consultant to EACO from August 1999 until January 2001 and from October 2001 to April 2003. Mr. Conzen has served as adirector of the Company since 1998. Having served as an executive officer of several companies, Mr. Conzen offers to the Board a wealthof management and leadership experience as well as an understanding of issues faced by businesses. He also served as a certified publicaccountant for a number of years.26Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsWilliam L. Means, 67, served as the Vice President of Information Technology of Bisco from 2001 until his retirement in June2010. Prior to that, from 1997 to 2001, Mr. Means was Vice President of Corporate Development of Bisco. Mr. Means has served as adirector of the Company since July 1999. He holds an M.B.A. degree from San Jose State University. Mr. Means provides extensiveindustry expertise to the Board, as well as a deep and broad understanding of the Company and its operations resulting from his years ofservice as an officer of Bisco.Donald S. Wagner, 48, has served as the President of Bisco since June 2010 and as its Chief Operating Officer since November2007. Prior to his promotion to President, Mr. Wagner also held the title of Executive Vice President of Bisco from November 2007.Mr. Wagner has worked at Bisco since 1994 in a number of other capacities, including as Vice President of Product Management. Prior tojoining Bisco, Mr. Wagner worked in the Defense division at Rockwell International. He holds a B.A. degree in Communications fromCalifornia State University, Fullerton.Michael Bains, 41, has served as the Controller of EACO since March 2010 and as the Controller of Bisco since December 2004.Prior to joining Bisco, Mr. Bains worked as the controller of several service companies and as an accountant in a number of publicaccounting firms. He is a certified public accountant and holds a B.S. degree in Accounting from Loyola Marymount University.Robert Rist, 42, has served as the Vice President of Sales and Marketing of Bisco since September 2010. Since he joined Bisco in1995, Mr. Rist has served the company in a number of capacities, most recently as Northern Regional Manager from March 2001 toAugust 2010. He holds a B.A. degree in Communications from California State University, Fullerton.There are no family relationships among any of our directors or executive officers.Section 16(a) Beneficial Ownership Reporting ComplianceSection 16(a) of the Exchange Act requires certain officers of the Company and its directors, and persons who beneficially ownmore than ten percent of any registered class of the Company’s equity securities, to file reports of ownership in such securities andchanges in ownership in such securities with the SEC and the Company.Based solely on a review of the reports and written representations provided to the Company by the above referenced persons, theCompany believes that during the year ended August 31, 2010, all filing requirements applicable to its reporting officers, directors andgreater than ten percent beneficial owners were timely satisfied.Code of Ethical ConductThe Company has adopted a financial code of ethics applicable to the Company’s senior executive and financial officers. You mayreceive, without charge, a copy of the Financial Code of Ethical Conduct by contacting our Corporate Secretary at 1500 N. LakeviewAvenue, Anaheim, California 92807.Corporate GovernanceAudit CommitteeThe Audit Committee’s basic functions are to assist the Board in discharging its fiduciary responsibilities to the shareholders andthe investment community in the preservation of the integrity of the financial information published by the Company, to maintain freeand open means of communication between the Company’s directors, independent auditors and financial management, and to ensure theindependence of the independent auditors. The Board has adopted a written charter for the Audit Committee which is attached asAnnex E to the Company’s Proxy Statement for the 2010 Annual Meeting of the Shareholders, as filed with the SEC on January 8, 2010.The Audit Committee charter is not available on the Company’s website. Currently, the members of the Audit Committee areMessrs. Catanzaro, Conzen (Chairman) and Means. As indicated in Item 13 below, the Board has determined that each of Messrs.Catanzaro and Conzen is27Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contents‘independent‘ as defined by the NASDAQ Stock Market’s Marketplace Rules. The Board has identified Mr. Conzen as the member of theAudit Committee who qualifies as an “audit committee financial expert” under applicable SEC rules and regulations governing thecomposition of the Audit Committee.Item 11. Executive CompensationThe Executive Compensation Committee (the “Committee”) is responsible for establishing the salary and annual bonuses paid toexecutive officers of EACO and administering EACO’s equity incentive plans, including granting stock options to officers andemployees of EACO. The Committee has not adopted a formal charter. The current members of the Committee are Messrs. Glen Ceileyand William Means.Prior to the acquisition of Bisco in March 2010, EACO had only one officer — Mr. Ceiley, the Chief Executive Officer of EACO.Due to the nature of EACO’s operations and related financial results in recent years, the Committee and Mr. Ceiley agreed that no salaryor other compensation for his services as the Chief Executive Officer was justified and no such compensation was provided to Mr. Ceileyfor fiscal 2010, the eight months ended August 31, 2009 and fiscal 2008. This structure is reviewed periodically by the Committee, andwill be reviewed again, should EACO’s operations or results change. In March 2010, Michael Bains, who was serving as the Controller ofBisco, was also appointed as the Controller and principal accounting officer of EACO. The Committee did not determine to pay anyadditional compensation to him in connection with his role as the Controller of EACO.All compensation for the named executive officers for fiscal 2010, other than the amounts payable to Messrs. Ceiley and Means inconnection with their service as a director of EACO, were paid by Bisco. Bisco currently does not pay bonuses or other incentivecompensation to the named executive officers.Summary CompensationThe following table sets forth information regarding compensation earned from the Company (including from Bisco, our wholly-owned subsidiary) during fiscal 2010, the eight months ended August 31, 2009 and fiscal 2008 by (i) our Chief Executive Officer,(ii) two other most highly compensated executive officers who were employed by us or Bisco as of August 31, 2010 and whose totalcompensation exceeded $100,000 during that year and (iii) a former executive officer of Bisco who would have been included in thegroup described in clause (ii) except that he was not serving as an officer as of August 31, 2010. The officers listed below are collectivelyreferred to as the “named executive officers” in this report. We consummated the acquisition of Bisco in March 2010; therefore, theinformation for the eight months ended August 31, 2009 and fiscal 2008 contains only compensation information for our ChiefExecutive Officer, who was the only officer of the Company during such periods.Name and Principal All Other Position Year(1) Salary Compensation TotalGlen F. Ceiley, 2010 $340,521 $12,000(2) $352,521 Chief Executive Officer and 2009 — 11,500(2) 11,500 Chairman of the Board 2008 — 12,000(2) 12,000 Donald Wagner, 2010 190,321 — 190,321 President of Bisco William Means, Former Vice 2010 103,274 12,000(2) 115,274 President of Information Technology of Bisco(3) Michael Bains, Controller 2010 131,721 — 131,721 (1)“2010” refers to compensation paid by EACO and/or Bisco for the year ended August 31, 2010; “2009” refers to compensation paidby EACO for the eight months ended August 31, 2009; “2008” refers to compensation paid by EACO for the year endedDecember 31, 2008.(2)Consists of fees paid to such person in his capacity as a director of EACO.(3)Mr. Means served as our Vice President of Information Technology until his retirement in June 2010.28Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsOutstanding Equity Awards at Fiscal Year-EndThe Company did not grant any equity awards during fiscal 2010 to any named executive officers and no outstanding equityawards were held by the named executive officers at August 31, 2010.Director CompensationThe Company pays $10,000 in cash to each director per year as compensation for his services. In addition, directors who are notemployees of EACO or do not receive a salary from EACO receive a fee of $500 for each Board meeting attended. No fees are awarded todirectors for attendance at meetings of the Audit Committee or the Executive Compensation Committee of the Board.The following table sets forth the compensation of certain Company directors for the year ended August 31, 2010. (See the above“Summary Compensation Table” for information regarding Messrs. Ceiley and Means). Fees Earned or Director Paid in Cash TotalStephen Catanzaro $12,000 $12,000 Jay Conzen 12,000 12,000 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersSecurity Ownership of Certain Beneficial Owners and ManagementThe table below presents certain information regarding beneficial ownership of the Company’s common stock (the Company’s onlyvoting security) as of December 1, 2010 (i) by each shareholder known to the Company to own, or have the right to acquire within sixtydays of December 1, 2010, more than five percent (5%) of the outstanding common stock, (ii) by each named executive officer anddirector of the Company, and (iii) by all directors and executive officers of the Company as a group. Shares of Name and Address(1) of Common Stock Percent of Beneficial Owner Beneficially Owned Class(2) Stephen Catanzaro 765 * Glen F. Ceiley(3) 4,853,697 99.0%William L. Means 644 * Donald Wagner — — Michael Bains — — All Executive Officers and Directors as a group (6 persons)(3)(4) 4,855,106 99.0%* Less than 1%(1)The address for each person named in the table is c/o Bisco Industries, Inc., 1500 North Lakeview Avenue, Anaheim, CA 92807.(2)Under the rules of the SEC, the determinations of “beneficial ownership” of the Company’s common stock are based uponRule 13d-3 under the Exchange Act. Under Rule 13d-3, shares will be deemed to be “beneficially owned” where a person has, eithersolely or with others, the power to vote or to direct the voting of shares and/or the power to dispose, or to direct the disposition ofshares, or where a person has the right to acquire any such power within 60 days after the date such beneficial ownership isdetermined. Shares of the Company’s common stock that a beneficial owner has the right to acquire within 60 days are deemed to beoutstanding for the purpose of computing the percentage ownership of such owner but are not deemed outstanding for the purpose ofcomputing the percentage ownership of any other person. The percentages represent the total of the shares listed in the adjacentcolumn divided by 4,862,079, the number of issued and outstanding shares of common stock as of December 1, 2010.29Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contents(3)Includes (i) 4,775,895 shares held directly by Mr. Ceiley; (ii) 6,000 shares held by Mr. Ceiley’s wife; (iii) 29,535 shares held by theBisco Industries Profit Sharing and Savings Plan (the “Bisco Plan”) of which Mr. Ceiley is the trustee, (iv) 2,267 shares held in hisIRA; and (v) 40,000 shares issuable upon conversion of the 36,000 shares of Series A Cumulative Convertible Preferred Stock (notincluding any dividends accrued but not yet paid) held by Mr. Ceiley. Mr. Ceiley has the sole power to vote and dispose of theshares of common stock he owns individually and the shares owned by the Bisco Plan. Mr. Ceiley is the Chief Executive Officer andthe sole director of Bisco. Mr. Ceiley disclaims beneficial ownership of the shares held by the Bisco Plan except to the extent of hispecuniary interest therein.(4)Includes Robert Rist, the Vice President of Sales and Marketing of Bisco. Mr. Rist does not own any shares of EACO common stock.Equity Compensation PlansThe following table provides information as of August 31, 2010 with respect to shares of our common stock that may be issuedunder existing equity compensation plans. Number of Securities Remaining Available Number of for Future Issuance Securities to be Under Equity Issued Upon Weighted Average Compensation Plans Exercise of Exercise Price of (Excluding Outstanding Outstanding Securities Options, Warrants Options, Warrants Reflected in First Plan Category and Rights and Rights Column)(A) Equity Compensation Plans Approved by Security Holders 2002 Long-Term Incentive Plan — N/A 200,000 Equity Compensation Plans Not Approved by Security Holders None Total — N/A 200,000 (A)The above table excludes 40,000 shares of common stock that are issuable (at a conversion price of $22.50 per share) uponconversion of the Company’s outstanding Series A Cumulative Convertible Preferred Stock.Item 13. Certain Relationships and Related Transactions and Director IndependenceCertain Relationships and Related TransactionsSince January 1, 2008, except as described below, there has not been, nor is there any proposed transaction, where we (or any of oursubsidiaries) were or will be a party in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of theaverage of the Company’s total assets at year end for the last two fiscal years and in which any director, director nominee, executiveofficer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoingpersons had or will have a direct or indirect material interest.The Company leases three buildings under operating lease agreements from its majority shareholder, Glen Ceiley. During the yearended August 31, 2010, the eight months ended August 31, 2009 and the year ended December 31, 2008, the Company incurredapproximately $514,000, $342,000 and $514,000, respectively, of expense related to these leases.Director IndependenceThe Company’s Board consists of the following directors: Stephen Catanzaro, Glen Ceiley, Jay Conzen and William L. Means. TheBoard has determined that two of its four directors, Stephen Catanzaro and30Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsJay Conzen, are independent as defined by the NASDAQ Stock Market’s Marketplace Rules. In addition to such rules, the Boardconsidered transactions and relationships between each director (and his immediate family) and the Company to determine whether anysuch relationships or transactions were inconsistent with a determination that the director is independent. As a result, the Boarddetermined that Messrs. Ceiley and Means are not independent, as they are (or recently served as) employees of Bisco and members ofBisco’s steering committee. Bisco’s steering committee handles the day to day operations of the Company, and Messrs. Ceiley andMeans have been intimately involved with decision-making that directly affects the financial statements of the Company for the reasonsdescribed above.Currently, the members of the Audit Committee are Messrs. Catanzaro, Conzen (Chairman) and Means.Item 14. Principal Accounting Fees and ServicesAudit Committee Pre-Approval Policies and ProceduresThe Audit Committee is required to pre-approve all auditing services and permissible non-audit services, including related fees andterms, to be performed for the Company by its independent auditor, subject to the de minimus exceptions for non-audit servicesdescribed under the Exchange Act, which are approved by the Audit Committee prior to the completion of the audit. The AuditCommittee also considers whether the provision by its independent accounting firm of any non-audit related services is compatible withmaintaining the independence of such firm. For fiscal 2010. the eight months ended August 31, 2009 and fiscal 2008, the AuditCommittee pre-approved all services performed for the Company by the auditor.Audit FeesThe aggregate fees billed by Squar, Milner, Peterson, Miranda & Williamson, LLP (“Squar Milner”) for the year ended August 31,2010, the eight months ended August 31, 2009 and the year ended December 31, 2008 for professional services rendered for the audit ofsuch financial statements and for the reviews of the unaudited financial statements included in the Company’s quarterly reports onForm 10-Q for the quarters ended during the year ended August 31, 2010, the eight months ended August 31, 2009 and the year endedDecember 31, 2008 were $175,000, $109,500, and $155,000, respectively.Audit-Related FeesThe Company was billed no audit-related fees by Squar Milner for the year ended August 31, 2010, the eight months endedAugust 31, 2009 or the year ended December 31, 2008.Tax FeesThe Company was billed no fees by Squar Milner for the year ended August 31, 2010, the eight months ended August 31, 2009 andthe year ended December 31, 2008 for professional services rendered for preparation of federal and state tax returns and tax consultingservices.All Other FeesThere were no other fees billed by Squar Milner for the year ended August 31, 2010, the eight months ended August 31, 2009 andthe year ended December 31, 2008 for services rendered to the Company, other than the services described above.31Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contents PART IVItem 15. Exhibits, Financial Statement Schedules(a) The financial statements listed below and commencing on the pages indicated are filed as part of this report on Form 10-K.Report of Independent Registered Public Accounting Firm F-1 Consolidated and Combined Balance sheets as of August 31, 2010 and August 31, 2009 F-2 Consolidated and Combined Statements of Operations for the year ended August 31, 2010, the eight months ended August 31,2009 and the year ended December 31, 2008 F-3 Consolidated and Combined Statements of Shareholders’ Equity for the year ended August 31, 2010, the eight months endedAugust 31, 2009, and the year ended December 31, 2008 F-4 Consolidated and Combined Statements of Cash Flows for the year ended August 31, 2010, the eight months ended August 31,2009 and the year ended December 31, 2008 F-5 Notes to the Consolidated and Combined Financial Statements F-6 (b) The following exhibits are filed as part of this report on Form 10-K as required by Item 601 of Regulation S-K.Exhibit No. Description 2.1 Agreement and Plan of Merger dated December 22, 2009 by and between EACO Corporation, Bisco Acquisition Corp.,Bisco Industries, Inc. and Glen Ceiley (Exhibit 2.1 of the Company’s Transition Report on Form 10-K filed with theSEC on December 23, 2009) 3.1 Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.01 to the Company’s Registration Statementon Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.2 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.03 to theCompany’s Registration Statement on Form S-1, , Registration No. 33-1887, is incorporated herein by reference.) 3.3 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.04 to theCompany’s Registration Statement on Form S-1, Registration No. 33-17620, is incorporated herein by reference.) 3.4 Amended and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 4 to the Company’s registrationstatement on Form 8-A, filed with the SEC on March 19, 1997, is incorporated herein by reference.) 3.5 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.08 to theCompany’s Annual Report on Form 10-K filed with the SEC on March 31, 1998, is incorporated herein by reference.) 3.6 Amendment to Amended and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.08 to the Company’sAnnual Report on Form 10-K filed with the SEC on March 15, 2000, is incorporated herein by reference.) 3.7 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.09 to theCompany’s Annual Report on Form 10-K filed with the SEC on March 29, 2004 is incorporated herein by reference.) 3.8 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc., changing the name ofthe corporation to EACO Corporation. (Exhibit 3.10 to the Company’s Quarterly Report on Form 10-Q filed with theSEC on September 3, 2004, is incorporated herein by reference.) 3.9 Articles of Amendment Designating the Preferences of Series A Cumulative Convertible Preferred Stock $0.10 Par Valueof EACO Corporation (Exhibit 3.1 to the Company’s current report on Form 8-K filed with the SEC on September 8,2004, is incorporated herein by reference.) 3.10 Certificate of Amendment to Amended and Restated Bylaws effective December 21, 2009 (Exhibit 3.10 to theCompany’s transition report on Form 10-K filed with the SEC on December 23, 2009 is incorporated herein byreference.)32Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsExhibit No. Description 3.11 Articles of Amendment to Articles of Amendment Designating the Preferences of Series A Cumulative ConvertiblePreferred Stock, as filed with the Secretary of State of the State of Florida on December 22, 2009 (Exhibit 3.11 to theCompany’s transition report on Form 10-K filed with the SEC on December 23, 2009 is incorporated herein byreference.) 10.1 Form of Amended and Restated Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filingbetween the Company and GE Capital Franchise Corporation dated October 21, 2002. (Exhibit 10.01 to the Company’sQuarterly Report on Form 10-Q, filed with the SEC on November 14, 2002, is incorporated herein by reference.) 10.2 Form of Amended and Restated Promissory Note between the Company and GE Capital Franchise Finance Corporationdated October 21, 2012. (Exhibit 10.02 to the Company’s Quarterly Report on Form 10-Q filed with the SEC onNovember 14, 2002, Registration No. 33-1887, is incorporated herein by reference.) 10.3 Form of Loan Agreement between the Company and GE Capital Franchise Finance Corporation dated October 21,2002. (Exhibit 10.03 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 14, 2002, isincorporated herein by reference.) 10.4 Settlement Agreement dated as of May 9, 2008 by and among EACO Corporation, Horn Capital Realty, Inc. andJonathan S. Horn. (Exhibit 10.1 to the Company’s current report on Form 8-K, filed with the SEC on May 9, 2008 ishereby incorporated by reference.) 10.5 Settlement Agreement dated as of January 22, 2008 by and between EACO Corporation, Glen Ceiley, Florida GrowthRealty, Inc. and Robert Lurie. (Exhibit 10.1 to the Company’s current report on Form 8-K/A filed with the SEC onJanuary 23, 2008 is incorporated by reference.) 10.6+ 2002 Long-Term Incentive Plan (Appendix A to the Company’s Proxy Statement on Schedule 14A, filed with the SECon May 1, 2002, is hereby incorporated by reference) 10.7 Form of Note Agreement by and between Bisco Industries, Inc. and EACO Corporation (Exhibit 10.7 to the Company’stransition report on Form 10-K filed with the SEC on December 23, 2009 is incorporated herein by reference.) 10.8 Purchase and Sale Agreement dated July 31, 2009 by and between Gottula Properties, LLC and EACO Corporation(Exhibit 10.8 to the Company’s transition report on Form 10-K filed with the SEC on December 23, 2009 isincorporated herein by reference.) 10.9 Management Agreement dated March 3, 2006 by and between EACO Corporation and Bisco Industries, Inc.(Exhibit 10.9 to the Company’s transition report on Form 10-K filed with the SEC on December 23, 2009 isincorporated herein by reference.) 21.1 Subsidiaries of the Company. 23.1 Consent of Squar, Milner, Peterson, Miranda & Williamson LLP. 31.1 Certification of Chief Executive Officer (principal executive officer and principal financial officer) pursuant toSecurities and Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002. 32.1 Certification of Chief Executive Officer (principal executive officer and principal financial officer) pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.+Indicates a management contract or compensatory plan or arrangement.33Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contents SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized.EACO Corporation By: /s/ Glen CeileyGlen CeileyIts: Chairman of the Board and Chief Executive Officer(principal executive officer andprincipal financial officer)December 14, 2010Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalfof the Registrant in the capacities and on the date indicated.Signature Title Date /s/ Glen F. CeileyGlen F. Ceiley Chairman of the Board and Chief Executive Officer(principal executive officer and principal financialofficer) 12/14/10 /s/ Michael BainsMichael Bains Controller (principal accounting officer) 12/14/10 /s/ Steve CatanzaroSteve Catanzaro Director 12/14/10 /s/ Jay ConzenJay Conzen Director 12/14/10 /s/ William MeansWilliam Means Director 12/14/1034Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. INDEX TO FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets as of August 31, 2010 and August 31, 2009 F-2 Consolidated Statements of Operations for the year ended August 31, 2010, the eight months ended August 31, 2009 and theyear ended December 31, 2008 F-3 Consolidated Statements of Shareholders’ Equity for the year ended August 31, 2010, the eight months ended August 31, 2009,and the year ended December 31, 2008 F-4 Consolidated Statements of Cash Flows for the year ended August 31, 2010, the eight months ended August 31, 2009 and theyear ended December 31, 2008 F-5 Notes to the Consolidated Financial Statements F-6 35Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and ShareholdersEACO CorporationAnaheim, CaliforniaWe have audited the accompanying consolidated balance sheets of EACO Corporation (the “Company”) as of August 31, 2010 and2009 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended August 31, 2010, theeight months ended August 31, 2009 and the year ended December 31, 2008. These financial statements are the responsibility of theCompany’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 audits to obtain reasonable assurance about whether the financial statements arefree of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal controlover financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing auditprocedures that were appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes, assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial positionof EACO Corporation as of August 31, 2010 and, 2009 and the consolidated results of their operations and their cash flows for the yearended August 31, 2010, the eight months ended August 31, 2009 and the year ended December 31, 2008 in conformity with accountingprinciples generally accepted in the United States of America.As more fully discussed in Note 1, on March 24, 2010, the Company completed the acquisition of Bisco Industries, Inc., anaffiliated entity wholly owned by the Company’s Chief Executive Officer and majority stockholder. The transaction was accounted as acombination of entities under common control using the historical balances of Bisco at the date of the transfer (as-if “pooling ofinterests” accounting). Financial statements and financial information for prior years have been retrospectively adjusted to furnishcomparative historical information as of the earliest period presented during which the Company and Bisco were under common control.As discussed in Note 5, the Company’s line of credit agreement with a bank expired in October 2010 and was extended toDecember 2010. Whereas management expects to extend its line of credit agreement and is in negotiations with the lender, there cannotbe any assurance that such extension will occur or that such terms will be favorable. The Company’s line of credit provides liquidity andis used to fund operations in the normal course of business. The accompanying consolidated financial statements do not reflect theeffects of this uncertainty./s/ Squar, Milner, Peterson, Miranda and Williamson, LLPNewport Beach, CaliforniaDecember 14, 2010F-1Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO Corporation and SubsidiariesConsolidated Balance Sheets(In thousands except share amounts) August 31, 2010 2009# ASSETSCurrent Assets: Cash and cash equivalents $1,260 $1,683 Trade accounts receivable, net 11,114 9,090 Inventory, net 10,009 10,293 Marketable securities, trading 817 2,032 Prepaid expenses and other current assets 260 437 Deferred tax assets, current 1,896 216 Total current assets 25,356 23,751 Non-current assets: Restricted cash 866 2,411 Real estate properties held for leasing, net 10,316 10,299 Equipment and leasehold improvements, net 1,079 1,355 Deferred tax assets 2,561 4,355 Other assets, principally deferred charges, net of accumulated amortization 1,147 1,002 Total assets $41,325 $43,173 LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities: Trade accounts payable $9,226 $6,752 Accrued expenses and other current liabilities 1,823 2,334 Line of credit 8,900 8,467 Liabilities of discontinued operations — short-term 147 147 Liabilities for short sale of marketable trading securities — 1,101 Current portion of long-term debt and obligation under capital lease 300 7,559 Total current liabilities 20,396 26,360 Liabilities of discontinued operations — long-term 2,928 3,174 Deposit liability 147 107 Long-term debt 7,074 — Obligation under capital lease — 1,562 Total liabilities 30,545 31,203 Commitments and contingencies Shareholders’ equity: Convertible preferred stock of $0.01 par value; authorized 10,000,000 shares; 36,000* shares outstanding at August 31, 2010and 2009 (liquidation value $900) 1 1 Common stock of $0.01 par value; authorized 8,000,000 shares; 4,862,079** shares outstanding at August 31, 2010 and 2009 49 49 Additional paid-in capital 12,378 12,378 Accumulated other comprehensive income 639 476 Accumulated deficit (2,287) (934)Total shareholders’ equity 10,780 11,970 Total liabilities and shareholders’ equity $41,325 $43,173 *Reflects 1 for 25 reverse stock split effected on March 23, 2010.**Reflects 1 for 25 reverse stock split effected on March 23, 2010 and issuance of 4,705,669 shares effective March 24, 2010 inconnection with the acquisition of Bisco Industries, Inc., an affiliated company under the common control of EACO’s majoritystockholder. (See Note 1)#Retrospectively adjusted to include comparative historical information of Bisco Industries, Inc. an affiliated company undercommon control by EACO’s majority stockholder acquired by EACO on March 24, 2010.See accompanying notes to consolidated financial statements.F-2Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO Corporation and SubsidiariesConsolidated Statements of Operations(In thousands except per share amounts) Eight Months Year Ended Year Ended Ended August 31, December 31, August 31, 2010 2009(#) 2008(#) Distribution sales $91,547 $54,365 $93,379 Cost of goods sold 67,048 38,112 66,947 Gross margin 24,499 16,253 26,432 Rental revenue 1,086 647 1,203 Cost of rental operations 1,706 796 1,954 Gross loss from rental operations (620) (149) (751)Operating expenses: Selling, general and administrative expenses 21,763 15,615 22,852 Loss on disposition of equipment — 146 — Total operating expenses 21,763 15,761 22,852 Income from operations 2,116 343 2,829 Other non-operating income (expense): Income (loss) on sale of trading securities (3,481) (6,386) 3,169 Unrealized gain (loss) on trading securities 1,314 4,233 (5,681)Contract gain — — 722 Property impairment — — (2,058)Gain on extinguishment of obligation under capital lease — 949 — Interest and other income 26 8 169 Interest expense (796) (1,032) (816)Loss from continuing operations before income taxes (821) (1,885) (1,666)Provision (benefit) for income taxes 532 741 (420)Loss from continuing operations (1,353) (2,626) (1,246)Discontinued operations: Gain from discontinued operations, net of tax — 138 — Net loss (1,353) (2,488) (1,246)Undeclared cumulative preferred stock dividends (95) (57) (76)Net loss attributable to common shareholders $(1,448) $(2,545) $(1,322)Basic and diluted net loss per share: Continuing operations $(0.30) $(0.55) $(0.27)Discontinued operations — 0.03 — Basic and diluted net loss $(0.30) $(0.52) $(0.27)Basic and diluted weighted average common shares outstanding** 4,862,079 4,862,079 4,862,079 **Reflects 1 for 25 reverse stock split effected on March 23, 2010 and issuance of 4,705,669 shares effective March 24, 2010 inconnection with the acquisition of Bisco Industries, Inc., an affiliated company under the common control of EACO’s majoritystockholder. (See Note 1)#Retrospectively adjusted to include comparative historical information of Bisco Industries, Inc. an affiliated company undercommon control by EACO’s majority stockholder acquired by EACO on March 24, 2010.See accompanying notes to consolidated financial statements.F-3Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO Corporation and SubsidiariesConsolidated Statements of Shareholders’ Equity (Deficit)For the Year Ended August 31, 2010, Eight Months Ended August 31, 2009,and the Year Ended December 31, 2008(In thousands except per share amounts) Convertible Additional Accumulated Accumulated Preferred Stock Common Stock Paid-in Other Comprehensive Earnings Shares Amount Shares Amount Capital Income (Deficit) Total Balance, January 2, 2008 36,000 $1 4,862,079 $49 $12,378 $581 $2,838 $15,847 Preferred dividends — — — — — — (38) (38)Comprehensive income — foreign currencytranslation adjustments: — — — — — (166) — (166)Net loss — — — — — — (1,246) (1,246)Balance, December 31, 2008 36,000 1 4,862,079 49 12,378 415 1,554 14,397 Comprehensive income — foreign currencytranslation adjustments: — — — — — 61 — 61 Net loss — — — — — — (2,488) (2,488)Balance, August 31, 2009 36,000 1 4,862,079 49 12,378 476 (934) 11,970 Comprehensive income — foreign currencytranslation adjustments: — — — — — 163 — 163 Net loss — — — — — — (1,353) (1,353)Balance, August 31, 2010 36,000 $1 4,862,079 $49 $12,378 $639 $(2,287) $10,780 See accompanying notes to consolidated financial statements.F-4Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO Corporation and SubsidiariesConsolidated Statements of Cash Flows Eight Months Year Ended Ended Year Ended August 31, August 31, December 31, 2010 2009 (#) 2008 (#) Operating activities: Net loss $(1,353) $(2,488) $(1,246)Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 783 615 948 Gain on sub-lease contract — — (721)Gain on extinguishment of capital lease obligations — (949) — Property impairment charge — — 2,058 Inventory reserve (48) 6 (17)Loss on investments 2,167 2,153 2,512 Bad debt expense 49 60 42 (Increase) decrease in: Trade accounts receivable (2,072) 904 977 Inventory 332 660 135 Prepaid expenses and other assets 32 857 456 Increase (decrease) in: Trade accounts payable 1,592 214 (242)Receipt (repayment) of deposit liability 40 (8) (42)Accrued expenses and other current liabilities (511) (596) (1,589)Deferred taxes 114 271 (4,283)Liabilities of discontinued operations (246) (282) (199)Net cash (used in) provided by operating activities 879 1,417 (1,211)Investing activities: Purchase of property and equipment (524) (605) (514)Change in restricted cash 1,545 (1,051) 2,889 Investments (952) 664 (2,603)Securities sold, not yet purchased (1,101) 863 (1,922)Proceeds from sale of property and equipment — 633 36 Net cash (used in) provided by investing activities (1,032) 504 (2,114)Financing activities: Net borrowings on revolving credit facility 433 150 1,400 Payment on capital lease obligation settlement (1,562) (500) — Issuance (payments) on long-term debt (185) (159) 1,046 Payments on capital lease obligations — — (1)Bank overdraft 882 (1,865) 498 Preferred stock dividends paid — (38)Net cash (used in) provided by financing activities (432) (2,374) 2,905 Effect of exchange rate changes to cash 162 61 (166)Net decrease in cash and cash equivalents (423) (392) (586)Cash and cash equivalents — beginning of period 1,683 2,075 2,661 Cash and cash equivalents — end of period $1,260 $1,683 $2,075 Supplemental disclosures of cash flow information: Cash paid during the period for interest $297 $1,061 $765 Cash paid during the period for taxes $1,268 $6 $2,115 #Retrospectively adjusted to include comparative historical information of Bisco Industries, Inc. an affiliated company under commoncontrol by EACO’s majority stockholder acquired by EACO on March 24, 2010.See accompanying notes to consolidated financial statements.F-5Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSAugust 31, 2010 and August 31, 2009NOTE 1. ORGANIZATION AND BASIS OF PRESENTATIONOrganization and Merger with Bisco Industries, Inc.EACO Corporation (hereinafter alternatively referred to as “EACO,” the “Company,” “we,” “us,” and “our”) was organized underthe laws of the State of Florida in September 1985. From the inception of the Company through June 2005, EACO’s business consistedof operating restaurants in the State of Florida. On June 29, 2005, the Company sold all of its operating restaurants (the “Asset Sale”)including sixteen restaurant businesses, premises, equipment and other assets used in restaurant operations. The Asset Sale was madepursuant to an asset purchase agreement dated February 22, 2005. The only remaining activity of the restaurant operations relates to theworkers’ compensation claim liability, which is presented as liabilities of discontinued operations on the Company’s balance sheets.Prior to the acquisition of Bisco (described below), the Company also owns four real estate properties held for leasing located in Floridaand California.On March 24, 2010, EACO completed the acquisition of Bisco, a company under the common control of EACO’s majoritystockholder (Glen F. Ceiley). Bisco is a distributor of electronic components and fasteners with 37 sales offices and six distributioncenters located throughout the United States and Canada. Bisco supplies parts used in the manufacture of products in a broad range ofindustries, including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment andmarine industries. The acquisition of Bisco (the “Acquisition”) was approved by the Company’s shareholders and consummatedpursuant to an Agreement and Plan of Merger dated December 22, 2009 by and among EACO, Bisco Acquisition Corp., Bisco and GlenF. Ceiley (the “Agreement”). Pursuant to the Agreement, Bisco Acquisition Corp., a wholly-owned subsidiary of EACO, was merged withand into Bisco; Bisco was the surviving corporation in the merger and became a wholly-owned subsidiary of EACO. The transaction wasaccounted for as a combination of companies under common control using the historical balances of Bisco. (See Basis of Presentationbelow)In connection with the Acquisition, EACO issued an aggregate of 4,705,669 shares of its common stock (the “Merger Shares”) tothe sole shareholder of Bisco in exchange for all of the outstanding capital stock of Bisco. 36,000 shares of the Merger Shares will beheld in escrow by EACO for twelve months as security for the indemnification obligations of the former Bisco shareholder to EACO asset forth in the Agreement.Bisco’s sole shareholder was Glen F. Ceiley. After the Acquisition and the issuance of the Merger Shares, Mr. Ceiley owns 98.9% ofthe outstanding common stock of EACO. Mr. Ceiley also owns 36,000 shares of the Series A Cumulative Convertible Preferred Stock ofEACO.Change in Fiscal YearOn September 29, 2009, the Board of Directors approved a change in EACO’s fiscal year end to August 31. Prior to that, the fiscalyear was the fifty-two or fifty-three week period ending on the Wednesday nearest to December 31. EACO reported the decision tochange its fiscal year end to August 31 in a Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on October 5,2009 and filed its transition report on Form 10-K for the eight month transition period ended August 31, 2009. See also Note 15 foradditional information.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States ofAmerica (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expensesduring the reporting periods. These estimates include allowance for doubtful trade accounts receivable, slow moving and obsoleteinventoryF-6Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)reserves, recoverability of the carrying value and estimated useful lives of long-lived assets, workers’ compensation liability and thevaluation allowance against deferred tax assets. Actual results could differ from those estimates.Principles of ConsolidationThe consolidated financial statements include the accounts of EACO, its wholly-owned subsidiary Bisco Industries, Inc. andBisco’s wholly-owned Canadian subsidiary, Bisco Industries Limited (which are hereinafter collectively referred to as the “Company”).All significant intercompany transactions and balances have been eliminated in consolidation.Basis of PresentationThe accompanying financial statements include the financial position and results of operations of Bisco and EACO for all periodspresented. As a result of Mr. Ceiley having majority voting control over both entities during all periods presented, the consolidatedfinancial statements were prepared in accordance with Accounting Standards Codification (“ASC”) 805-50, Transactions BetweenEntities Under Common Control, which specifies that in a combination of entities under common control, the entity that receives theassets or the equity interests shall initially recognize the assets and liabilities transferred at their historical carrying amounts at the dateof transfer (“as-if pooling-of-interests” accounting). The financial statements of the receiving entity shall also report the results ofoperations for the period, the financial position and other financial information as though the transfer of net assets or exchange of equityinterests had occurred at the beginning of the period. Financial statements and financial information presented for prior years have beenretrospectively adjusted to furnish comparative historical information for periods during which the entities were under common control.NOTE 2. SIGNIFICANT ACCOUNTING POLICIESCash and Cash EquivalentsThe Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cashequivalents.Restricted CashThe State of Florida Division of Workers’ Compensation (the “Division”) requires self-insured companies to pledge collateral infavor of the Division in an amount sufficient to cover the projected outstanding liability. In compliance with this requirement, theCompany pledged three irrevocable letters of credit totaling $2,769,500, as of May 31, 2009. In May 2010, the Division lowered therequired collateral required by the Company to $2,322,000. These letters are secured by certificates of deposits totaling $866,000 atAugust 31, 2010 and $1,313,500 at August 31, 2009 and the Company’s Sylmar Property.The Company also has restricted cash of $0 and $1,101,200 at August 31, 2010 and August 31, 2009, respectively, on deposit witha securities brokerage firm, which relates to the liability for short sale of marketable trading securities.Trade Accounts ReceivableTrade accounts receivable are carried at original invoice amount, less an estimate for an allowance for doubtful accounts.Management determines the allowance for doubtful accounts by identifying probable credit losses in the Company’s accountsreceivable and reviewing historical data to estimate the collectability on items not yet specifically identified as problem accounts. Tradeaccounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off arerecorded whenF-7Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)received. A trade account receivable is considered past due if any portion of the receivable balance is outstanding for more than 30 days.The Company does not charge interest on past due balances. The allowance for doubtful accounts was $189,800 and $307,200 atAugust 31, 2010 and August 31, 2009, respectively.InventoriesInventories consist of electronic fasteners and components stated at the lower of cost or estimated market value. Cost is determinedusing the average cost method. Inventories are net of a reserve for slow moving or obsolete items of $732,000 and $684,000 atAugust 31, 2010 and August 31, 2009, respectively. The reserve is based upon management’s review of inventories on-hand over theirexpected future utilization and length of time held by the Company.Real Estate PropertiesReal estate properties held for leasing are stated at cost, net of accumulated depreciation. Maintenance, repairs and bettermentswhich do not enhance the value or increase the life of the assets are expensed as incurred. Depreciation is provided for financial reportingpurposes principally on the straight-line method over the following estimated useful lives: buildings and improvements — 25 years,land improvements — 25 years and equipment — 3 to 8 years. Leasehold improvements are amortized over the estimated useful life ofthe asset or remaining lease term, whichever is less.Equipment and Leasehold ImprovementsEquipment and leasehold improvements not used in conjunction with real estate properties are stated at cost net of accumulatedamortization. Depreciation on equipment is calculated on the straight-line method over the estimated useful lives of the assets, rangingfrom five to seven years. Leasehold improvements are amortized over the estimated useful life of the asset or the remaining lease term,whichever is less.Maintenance and repairs are charged to expense as incurred. Renewals and improvements of a major nature are capitalized. At thetime of retirement or disposition of property and equipment, the cost and accumulated depreciation or amortization are removed from theaccounts and any gains or losses are reflected in earnings.Long-Lived AssetsLong-lived assets (principally real estate, equipment and leasehold improvements) are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of the impairment review,real estate properties are reviewed on an asset-by-asset basis. Recoverability of real estate property assets is measured by a comparison ofthe carrying amount of each operating property and related assets to future net cash flows expected to be generated by such assets. TheCompany recognized an impairment charge of $2,058,000 during the year ended December 31, 2008. For measuring recoverability ofdistribution operations assets, long-lived assets are grouped with other assets to the lowest level for which identifiable cash flows arelargely independent of the cash flows of other groups of assets and liabilities. If assets are considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount of the assets exceeds their estimated fair values.InvestmentsInvestments consist of marketable trading securities and securities sold, not yet purchased consisting of the short-selling ofsecurities, which results in obligations to purchase securities at a later date.These securities are stated at fair value. Market value is determined using the quoted closing or latest bid prices. Realized gains andlosses on investment transactions are determined by the average cost method andF-8Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)are recognized as incurred in the statements of operations. Net unrealized gains and losses are reported in the statements of operationsand represent the change in the market value of investment holdings during the period. At August 31, 2010 and August 31, 2009,marketable securities consisted of equity securities (including stock options) of publicly held domestic companies.As of August 31, 2010 and August 31, 2009, the Company’s total obligation for securities sold and not yet purchased was $0 and$1,101,200, respectively. The Company recognized unrealized gains on securities sold, not yet purchased (“short sales”) of $1,101,200,gains of $510,300 and losses of $2,007,000 for the year ended August 31, 2010, eight months ended August 31, 2009 and year endedDecember 31, 2008, respectively. The Company recognized realized losses on short sales of $179,000, $2,718,600 and gains of$4,307,600 for the year ended August 31, 2010, eight months ended August 31, 2009 and year ended December 31, 2008, respectively.Restricted cash to collateralize the Company’s obligation for short sales totaled $0 and $1,101,200 at August 31, 2010 and August 31,2009, respectively.The Company recognized unrealized gains on trading securities not related to short sales of $212,800, losses of $4,743,300 andlosses of $3,673,900 for the year ended August 31, 2010, the eight months ended August 31, 2009 and the year ended December 31,2008, respectively. The Company recognized realized losses on trading securities not related to short sales of $3,302,000, $3,667,400and $1,138,600 for the year ended August 31, 2010, the eight months ended August 31, 2009 and the year ended December 31, 2008,respectively.Revenue RecognitionFor the Company’s distribution operations, the Company’s shipping terms are FOB shipping point thus management generallyrecognizes Company revenue at the time of product shipment. Revenue is considered to be realized or realizable and earned when thereis persuasive evidence of a sales arrangement in the form of an executed contract or purchase order, the product has been shipped (andinstalled when applicable), the sales price is fixed or determinable, and collectability is reasonably assured.The Company leases its real estate properties to tenants under operating leases with terms exceeding one year. Some of these leasescontain scheduled rent increases. We record rent revenue for leases which contain scheduled rent increases on a straight-line basis overthe term of the lease.Income TaxesDeferred taxes on income result from temporary differences between the reporting of income for financial statement and taxreporting purposes. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or all of thedeferred tax asset will not be realized.We provide tax contingencies, if any, for federal, state, local and international exposures relating to audit results, tax planninginitiatives and compliance responsibilities. The development of these reserves requires judgments about tax issues, potential outcomesand timing. Although the outcome of these tax audits is uncertain, in management’s opinion adequate provisions for income taxes havebeen made for potential liabilities emanating from these reviews. If actual outcomes differ materially from these estimates, they couldhave a material impact on our results of operations.Freight and Shipping/HandlingShipping and handling expenses are included in cost of goods sold, and were approximately $2,012,900, $1,234,300 and$2,275,500 during the year ended August 31, 2010, eight months ended August 31, 2009 and year ended December 31, 2008,respectively.F-9Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)LeasesCertain of the Company’s operating leases provide for minimum annual payments that adjust over the life of the lease. Theaggregate minimum annual payments are expensed on the straight-line basis over the minimum lease term. The Company recognizes adeferred rent liability for rent escalations when the amount of straight-line rent exceeds the lease payments, and reduces the deferred rentliability when the lease payments exceed the straight-line rent expense.Earnings/Loss Per Common ShareBasic earnings (loss) per common share for the year ended August 31, 2010, the eight months ended August 31, 2009 and the yearended December 31, 2008 were computed based on the weighted average number of common shares outstanding. Diluted earnings pershare for those periods have been computed based on the weighted average number of common shares outstanding, giving effect to allpotentially dilutive common shares that were outstanding during the respective periods. Potentially dilutive shares represent thoseissuable upon conversion of convertible preferred stock, which were 40,000 at August 31, 2010 and 2009, and December 31, 2008. Suchsecurities are excluded from diluted earnings per share as their effect would be anti-dilutive.Foreign Currency Translation and TransactionsAssets and liabilities recorded in functional currencies other than the U.S. dollar (Canadian dollars for the Company’s Canadiansubsidiary) are translated into U.S. dollars at the period-end rate of exchange. Revenue and expenses are translated at the weighted-average exchange rates for the year ended August 31, 2010, eight months ended August 31, 2009 and the year ended December 31,2008. The resulting translation adjustments are charged or credited directly to accumulated other comprehensive income or loss. Theaverage exchange rates for the year ended August 31, 2010, the eight months ended August 31, 2009 and the year ended December 31,2008 were $0.95, $0.85 and $0.94 Canadian dollars per one U.S. dollar, respectively.ConcentrationsFinancial instruments that subject the Company to credit risk include cash balances maintained in the United States in excess offederal depository insurance limits and accounts receivable. Cash accounts maintained by the Company at domestic financialinstitutions are insured by the Federal Deposit Insurance Corporation up to $250,000 at August 31, 2010 and 2009. The uninsuredbalance was $1,604,000 and $1,167,200 at August 31, 2010 and 2009, respectively. The Company has not experienced any losses insuch accounts and believes it is not exposed to any significant credit risks on cash.Net sales to customers outside the United States and related trade accounts receivable were approximately 6% and 6% of total salesand trade accounts receivable, respectively, at August 31, 2010, 6% and 9%, respectively, at August 31, 2009 and 5% and 7%,respectively, at December 31, 2008.No single customer accounted for more than 10% of revenues for the year ended August 31, 2010, the eight months endedAugust 31, 2009 or the year ended December 31, 2008.Estimated Fair Value of Financial Instruments and Certain Nonfinancial Assets and LiabilitiesThe Company’s financial instruments include cash and cash equivalents, trade accounts receivable, prepaid expenses, securitydeposits, trade accounts payable, line of credit, accrued expenses and long-term debt. Management believes that the fair value of thesefinancial instruments approximate their carrying amounts based on current market indicators, such as prevailing interest rates and theshort-term maturities of such financial instruments.F-10Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)During the year ended August 31, 2010, the eight months ended August 31, 2009 and during the year ended December 31, 2008,the Company did not have any nonfinancial assets or liabilities that were measured at estimated fair value on a nonrecurring basis.Segment ReportingOperating segments are defined as components of an enterprise about which separate financial information is available that isevaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and inassessing performance. Our chief operating decision maker is our Chief Executive Officer. Management has evaluated its approach formaking operating decisions and assessing the performance of our business and determined that the Company has two reportablesegments: Distribution Operations and Real Estate Rental Operations. The Distribution Operations are those results of Bisco Industries,while the Real Estate Rental Operations reflect the results of EACO Corporation.Recent Accounting PronouncementsIn June 2009, the FASB issued guidance as codified in ASC 810-10, “Consolidation of Variable Interest Entities” (previouslySFAS No. 167, “Amendments to FASB Interpretation No. 46(R)).” This guidance is intended to improve financial reporting by providingadditional guidance to companies involved with variable interest entities (“VIE’s”) and by requiring additional disclosures about acompany’s involvement in variable interest entities. This guidance is generally effective for annual periods beginning afterNovember 15, 2009 and for interim periods within that first annual reporting period. The adoption of this pronouncement will not resultin a material impact to the Company’s financial position or results of operations.NOTE 3. REAL ESTATE PROPERTIES HELD FOR LEASINGReal estate properties held for leasing consist of four properties and are as follows at August 31, 2010 and August 31, 2009: August 31, August 31, 2010 2009 Land $5,841,200 5,682,800 Buildings & improvements 5,842,500 6,242,300 Equipment 1,485,100 1,188,400 Total 13,168,800 13,113,500 Accumulated depreciation and amortization (2,853,000) (2,814,900) $10,315,800 10,298,600 One of the properties is located in Sylmar, California and the other three properties are located in Orange Park, Deland andBrooksville, Florida. The Sylmar Property consists of two industrial buildings with 65,000 total square feet. The other three propertiesare suited for restaurant use and approximately 30,000 combined square feet.In the latter half of fiscal 2008, the real estate market in Florida declined considerably. In addition, the general economic climate inthe United States has caused consumers to decrease discretionary spending, adversely affecting the restaurant industries. This situationcombined with vacancies at three of the Company’s Florida properties triggered an analysis by management of the Company’s propertyholdings in the state of Florida as required by ASC 360-10, “Impairment or Disposal of Long-Lived Assets”. The Company contractedwith an outside firm to value the properties in Florida. Management reviewed the appraisals on the properties and determined totalimpairment charges of $2,058,000 were required. The impairment charges referenced inF-11Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)the preceding sentence was recorded in December 2008. The properties are leased in fiscal 2010; accordingly, no impairment indicatorsexisted as of August 31, 2010.The following table shows the future minimum rentals due under non-cancelable operating leases (where the Company is the lessoror sublessor) in effect at August 31, 2010: Industrial Restaurant Properties Properties Total 2011 $782,200 $483,600 $1,265,800 2012 797,100 526,000 1,323,100 2013 812,600 326,800 1,139,400 2014 781,100 336,300 1,117,400 2015 561,000 346,400 907,400 Thereafter 626,200 1,064,700 1,690,900 $4,360,200 $3,083,800 $7,444,000 Rental income from leases was $1,086,000, $647,000 and $1,203,000 for the year ended August 31, 2010, eight months endedAugust 31, 2009 and year ended December 31, 2008, respectively.For the year ended August 31, 2010, eight months ended August 31, 2009 and year ended December 31, 2008, depreciationexpense was $335,300, $299,000 and $504,000, respectively.Rental expense for operating leases for the eight months ended August 31, 2009 was $226,800. In September 2009, the Companypurchased the Deland Property from the landlord terminating its only remaining lease.NOTE 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTSEquipment and leasehold improvements are summarized as follows at August 31, 2010 and 2009: August 31, August 31, 2010 2009 Machinery and equipment $3,482,800 $3,406,300 Furniture and equipment 632,500 622,400 Vehicles 173,300 187,000 Leasehold improvements 1,097,400 1,083,700 5,386,000 5,299,400 Less accumulated depreciation and amortization (4,307,000) (3,944,400) $1,079,000 $1,355,000 For the year ended August 31, 2010, eight months ended August 31, 2009 and year ended December 31, 2008, depreciationexpense was $447,500, $316,000 and $444,200, respectively.NOTE 5. LINE OF CREDITThe Company has a $10,000,000 line-of-credit agreement with a bank. Borrowings under this agreement bear interest at either the30, 60, or 90 day London Inter-Bank Offered Rate (“LIBOR”) (.43% and .27% for the 60 day LIBOR at August 31, 2010 and August 31,2009, respectively) plus 1.75% and/or the bank’s reference rate (3.25% at August 31, 2010 and August 31, 2009, respectively).Borrowings are secured by substantially all assets of Bisco and are guaranteed by the Company’s Chief Executive Officer and Chairmanof the Board, Glen F. Ceiley. The agreement expired in October 2010 and was extended to December 31,F-12Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2010. The amount outstanding under this line of credit as of August 31, 2010 and August 31, 2009 was $8,900,400 and $8,467,400,respectively. Availability under the line of credit was $1,099,600 and $1,532,600 at August 31, 2010 and 2009, respectively.As discussed above, the Company’s line of credit with the bank was extended to December 2010. Whereas management expects toextend its line of credit agreement and is in negotiations with the lender, there cannot be any assurance that such extension will occur orthat such terms will be favorable. The line of credit provides liquidity and is used to fund operations in the normal course of business.The accompanying consolidated financial statements do not reflect the effects of this uncertainty.The credit agreement contains nonfinancial and financial covenants requiring the maintenance of certain financial ratios. As ofAugust 31, 2009, the Company was not in compliance with one covenant of the loan agreement relating to a $1,000,000 limit on shortsale trading securities. The bank granted the Company a waiver regarding the default. In addition, beginning in fiscal 2010, the line ofcredit agreement established a quarterly debt covenant requiring trading losses in a quarter not to exceed pre-tax operating income forthe quarter. As of August 31, 2010, the Company was in compliance with this quarterly debt covenant and all other covenants under theline of credit agreement.NOTE 6. LONG-TERM DEBTLong-term debt is summarized as follows: August 31, August 31, 2010 2009 Note payable to GE Capital Franchise Finance Corporation (“GE Capital”), secured by real estate,monthly principal and interest payments totaling $10,400, interest at thirty-day LIBOR rate(0.2755% at August 31, 2010) +3.75% (minimum interest rates of 7.3%), due December 2016 $626,000 $699,100 Note payable to Zion’s Bank, secured by real estate, monthly principal and interest payment totaling$8,402, interest at 6.7%, due April 2033 1,165,000 1,187,800 Note payable to Community Bank, secured by real estate, monthly principal and interest paymenttotaling $39,700, interest at 6.0%, due December 2017 5,541,000 5,671,900 Note payable to BMW Bank of North America, secured by automobile, monthly principal andinterest payments totaling $1,800, interest at 0.9%, due July 2012 42,000 — 7,374,000 7,558,800 Less current portion (300,000) (7,558,800) $7,074,000 $— The scheduled payments for the above loans are as follows at August 31 2010:2011 $300,000 2012 291,000 2013 287,000 2014 307,000 2015 328,000 Thereafter 5,861,000 $7,374,000 F-13Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The GE Capital loan is secured by the Company’s Orange Park Property. The Community Bank loan is secured by the Company’sSylmar Property. The Zion’s Bank loan is secured by the Company’s Brooksville Property.The loan from Zion’s Bank requires the Company to comply with certain financial covenants and ratios measured annuallybeginning with the 12-month period ended December 31, 2008, as defined in the loan agreement. As of August 31, 2009, the Companywas not in compliance with one covenant of the loan agreement. Zion’s Bank did not grant the Company a waiver regarding that default.Violation of the Zion Bank covenant triggered a cross default provision with the GE Capital and Community Bank loans and, as a result,because the Company did not obtain waivers from creditors, such loans were classified as current liabilities as of August 31, 2009.During fiscal 2010, the Company cured the breach with Zion’s Bank. Accordingly, as of August 31, 2010, the Company is in compliancewith the bank’s covenants. As a result of the cure with Zion’s Bank, the Company believes it is also in compliance with the covenants onthe GE Capital and Community Bank loans as of August 31, 2010.NOTE 7. SHAREHOLDERS’ EQUITYLoss per Common ShareThe following is a reconciliation of the numerators and denominators of the basic and diluted computations for income (loss) fromcontinuing operations and net income (loss) from continuing operations attributable to common shareholders: For the For the Eight Months For the Year Ended Ended Year Ended August 31, 2010 August 31, 2009 December 31, 2008 (In thousands, except per share information) EPS from continuing operations — basic and diluted: Net loss from continuing operations $(1,353) $(2,626) $(1,246)Less: undeclared cumulative preferred stock dividends (95) (57) (76)Net loss from continuing operations for basic and diluted EPScomputation $(1,448) $(2,683) $(1,322)Weighted average common shares outstanding for basic and dilutedEPS computation* 4,862,079 4,862,079 4,862,079 Loss per common share from continuing operations — basic anddiluted $(0.30) $(0.55) $(0.27)*Reflects 1 for 25 reverse stock split effected on March 23, 2010 and issuance of 4,705,669 shares effective March 24, 2010 inconnection with the merger with Bisco. The reverse split has been reflected retrospectively to the earliest period presented herein.Stock OptionsThe Company has no stock options outstanding and has 200,000 common shares reserved for future grants at August 31, 2010.During the year ended August 31, 2010, eight months ended August 31, 2009 and the year ended December 31, 2008, the Companyawarded no stock options, nor did any option awards vest during the periods noted, and thus, the Company recorded no compensationexpense related to stock options during these periods. During the year ended August 31, 2010, eight months ended August 31, 2009 andyear ended December 31, 2008, no stock options were exercised, and therefore, no cash was received from stock option exercises.F-14Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Preferred StockThe Company’s Board of Directors is authorized to establish 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. InSeptember 2004, the Company sold 36,000 shares (900,000 shares prior to the March 23, 2010 reverse stock split) of its Series ACumulative Convertible Non-Voting Preferred Stock (the “Preferred Stock”) to the Company’s CEO, with an 8.5% dividend rate at aprice of $25 per share for a total cash purchase price of $900,000. Holders of the Preferred Stock have the right at any time to convert thePreferred Stock and accrued but unpaid dividends into shares of the Company’s common stock at the conversion price of $22.50 pershare. In the event of a liquidation or dissolution of the Company, holders of the Preferred Stock are entitled to be paid out of the assetsof the Company available for distribution to shareholders $25 per share plus all unpaid dividends before any payments are made to theholders of common stock. Unpaid cumulative preferred stock dividends totaled $209,000 at August 31, 2010.Reverse Split of EACO Common StockEACO filed an amendment to its articles of incorporation with the Secretary of State of the State of Florida, effective March 23,2010 (the “Effective Time”), to effect a 1-for-25 reverse split of its outstanding common stock (the “Reverse Split”). As of the EffectiveTime, each outstanding share of EACO common stock automatically converted into four one-hundredth (0.04) of a share of commonstock. No fractional shares shall be issued upon such automatic conversion of the common stock. If any fractional share of common stockwould be delivered upon such conversion to any shareholder, such shareholder shall be entitled to be paid an amount in cash equal tothe fair market value of such fractional share as of the Effective Time, as determined in good faith by the Board of Directors of EACO.Immediately prior to the Effective Time, 3,910,264 shares (pre-reverse split) of common stock were outstanding; upon the EffectiveTime, such shares converted into approximately 156,410 shares (post-reverse split) of common stock.The Reverse Split did not affect the number or par value of the authorized shares of common stock, which remain at8,000,000 shares of common stock, $0.01 par value per share. As a result, the Reverse Split effectively increased the proportion ofauthorized shares which are unissued relative to those which are issued. In addition, the Reverse Split did not affect the number or parvalue of the authorized shares of preferred stock of EACO, which remain at 10,000,000 shares of preferred stock, $0.01 par value pershare, of which 40,000 shares are designated Series A Cumulative Convertible Preferred Stock. However, the Reverse Split increased theconversion price of the outstanding Series A Cumulative Convertible Preferred Stock from $0.90 to $22.50, and reduced the number ofshares of common stock into which the outstanding shares of preferred stock may be converted, from 1,000,000 shares to 40,000 shares(not including any accrued dividends on such shares which may be converted).NOTE 8. PROFIT SHARING PLANThe Company has a defined contribution 401(k) profit sharing plan for all eligible employees. Employees are eligible to contributeto the 401(k) plan after six months of employment. Under the plan, employees may contribute up to 15% of their compensation. TheCompany matched 50% of the employee contributions up to 4% of employees’ compensation in the 2009 fiscal year. The Companytemporarily suspended the matching contribution for the fiscal year ended August 31, 2010. The Company’s contributions are subject toa five-year vesting period beginning the second year of service. The Company’s contribution expense was approximately $0, $121,200and $147,500 for the year ended August 31, 2010, eight months ended August 31, 2009 and year ended December 31, 2008,respectively.F-15Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)NOTE 9. DISCONTINUED OPERATIONSWhen the Company was active in the restaurant business, the Company self-insured losses for workers’ compensation claims up tocertain limits. The Company exited the restaurant business in 2005. The liability for workers’ compensation represents an estimate of thepresent value of the ultimate cost of uninsured losses which are unpaid as of the balance sheet dates. This liability is presented asliabilities of discontinued operations in the accompanying balance sheets. The estimate is continually reviewed and adjustments to theCompany’s estimated claim liability, if any, are reflected in discontinued operations. On a periodic basis, the Company obtains anactuarial report which estimates its overall exposure based on historical claims and an evaluation of future claims. An actuarialevaluation was last obtained by the Company as of August 31, 2010. As of August 31, 2010 and August 31, 2009, the estimated claimliability was $3,075,000 and $3,322,000, respectively.On May 28, 2009, the Company reached a settlement with one of its self insured worker’s compensation third party administrators(“TPA”) regarding an outstanding worker’s compensation claim against the Company. In the settlement, the TPA agreed to indemnifythe Company for a portion of the claim the Company paid with regard to one claimant. The settlement of $200,000 ($138,000 net of tax)is included in gain on discontinued operations in the Company’s consolidated statement of operations for the eight months endedAugust 31, 2009.NOTE 10. INCOME TAXESThe following summarizes the Company’s provision (benefit) for income taxes on loss from continuing operations: For the For the Eight Months For the Year Ended Ended Year Ended August 31, 2010 August 31, 2009 December 31, 2008 Current: Federal $245,800 $272,700 $957,400 State 171,800 142,600 276,200 Foreign — 55,800 123,100 417,600 471,100 1,356,700 Deferred: Federal 225,900 250,400 (1,747,700)State (38,200) 28,700 (19,800)Foreign (73,300) (9,200) (9,300) 114,400 269,900 (1,776,800) $532,000 $741,000 $(420,800)Income taxes for the year ended August 31, 2010, eight months ended August 31, 2009 and the year ended December 31, 2008differ from the amounts computed by applying the federal statutory corporate rate of 34% to the pre-tax loss from continuing operations.F-16Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The differences are reconciled as follows: For the For the Eight Months For the Year Ended Ended Year Ended August 31, 2010 August 31, 2009 December 31, 2008 Current: Expected income tax benefit at statutory rate $(279,300) $(640,900) $(566,300)Increase (decrease) in taxes due to: State tax, net of federal benefit (28,100) (111,100) (106,600)Permanent differences 20,000 37,500 88,900 Change in deferred tax asset valuation allowance 844,600 1,473,400 149,000 Other, net (25,200) (17,900) 14,200 Income tax expense (benefit) $532,000 $741,000 $(420,800)The components of deferred taxes at August 31, 2010 and 2009 are summarized below: August 31, August 31, 2010 2009 Deferred tax assets: Net operating loss $3,662,100 $3,988,900 Capital losses 3,620,200 2,263,000 Allowance for doubtful accounts 74,000 112,000 Accrued expenses 282,600 254,000 Accrued worker’s compensation 1,199,900 1,296,100 Related party interest accrual 144,400 — Inventory reserve 456,100 447,100 Unrealized losses on investment 8,700 521,300 Excess of tax over book depreciation 134,800 89,700 Other 208,800 89,300 Total deferred tax assets 9,791,600 9,061,400 Valuation allowance (4,183,600) (3,339,000) 5,608,000 5,722,400 Deferred tax liabilities: Deferred gains (1,151,500) (1,151,500)Total deferred tax liabilities (1,151,500) (1,151,500)Net deferred tax asset $4,456,500 $4,570,900 At August 31, 2010, the Company has Federal net operating loss carryforwards (“NOL’s”) of approximately $9.1 million, whichwill begin to expire in 2024 and state NOL’s of approximately $11.7 million, which will begin to expire in 2017. The Company also hadcapital loss carryforwards of approximately $9.28 million and $5.80 million respectively, which are deductible only to the extent theCompany, has future capital gains.In accordance with Sections 382 and 383 of the Internal Revenue Code, the utilization of Federal NOL’s and other tax attributesmay be subject to substantial limitations if certain ownership changes occur during aF-17Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)three-year testing period (as defined). Management has determined that the merger with Bisco would not limit the Company’s utilizationof its NOL or credit carryovers.The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized.In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals ofdeferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.Immediately prior to the merger, Eaco reported its financial statements on a separate entity basis, and recorded a valuationallowance of approximately $4.5M on its entire net deferred tax assets. The full valuation allowance was predicated on significantcumulative pre-tax losses as well as significant federal return losses that Eaco incurred over the previous three years. Under the ASC 740standards, the aforementioned cumulative losses are strong negative evidence that would normally override other positive evidence andtherefore a full valuation allowance was recorded on all the net deferred tax assets of Eaco.As a result of the merger with Bisco, management concluded that certain deferred tax assets would be realized, primarily the pre-merger net operating loss carryforwards (“NOLs”) of the Company. Management reviewed the positive and negative evidence availableat August 31, 2009 and 2010 and determined that the capital losses, unrealized losses and Eaco’s state net operating losses did not meetthe more likely than not threshold required to be recognized. As such a valuation allowance was retained on these deferred tax assets.Management forecasted taxable income for Bisco of $4.6 million and $5.2 million for the years ended August 31, 2010 and 2011,respectively. Management considered the forecast of pre-tax income and strong history of pre-tax earnings and taxable income, anddetermined that a valuation allowance was not necessary for Eaco’s deferred tax assets.The guidance in the Transactions Between Entities Under Common Control, subsections of ASC 805-50, does not specificallyaddress the accounting for the deferred tax consequences that may result from a transfer of net assets or the exchange of equity interestbetween enterprises under common control. Although such a transaction is not a pooling of interests, it appears as if the guidance ofFAS 109, paragraphs 270-272, which addresses the income tax accounting effects of a pooling-of-interests transaction should be appliedby analogy.When a transaction combines two or more commonly controlled entities that historically have not been presented together, theresulting financial statements are, in effect considered those of a different reporting entity. This resulted in a change in reporting entity,which requires retrospectively combining the entities for all periods presented as if the combination had been in effect since inception ofcommon control.In the periods prior to the transaction date, a combining entity’s deferred tax assets cannot offset the other entity’s taxable incomeunless allowed under certain jurisdictional tax laws. However, taxable income of the combined operations subsequent to thecombination date should be considered in assessing the need for a valuation allowance in the retrospectively adjusted historicalfinancial statements. Accordingly, in the retrospectively adjusted historical financial statements, the valuation allowance retained on thedeferred tax assets was different than the valuation allowances in the entity’s separate financial statement before the transfer of exchange.The change in the combined entities’ valuation allowance was recognized as an adjustment to retained earnings and resulted in arestatement to the entities’ prior-period financial statements on a combined basis.Prior to the merger, the Company, on a separate entity basis, was in a cumulative loss position and generated taxable lossesannually for the previous three years. Based upon this negative evidence, a valuation allowance was retained on its entire deferred taxassets. The merger changed the basis of presentation and the Company evaluated the need for a valuation allowance based upon thecombined operations of the new reporting entity. The Company evaluated the positive and negative evidence and determined that partof the valuation allowance should be released as an adjustment to beginning retained earning. The release of theF-18Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)valuation was based upon the new reporting entities strong history of earnings and forecast of taxable income that were available onJanuary 1, 2008.On January 1, 2007, we adopted ASC 740 “Income Taxes” formerly the Financial Accounting Standards Board (“FASB”)Interpretation No. 48 an interpretation of FASB Statement No. 109 (ASC 740). ASC 740 clarifies the accounting for uncertainty inincome taxes recognized in a company’s financial statements. ASC 740 prescribes a recognition threshold and measurement attribute forfinancial statement recognition and measurement of a tax position taken or expected to be taken in the tax return. The Company did notrecognize any additional liability for unrecognized tax benefit as a result of the implementation. The Company decreased liability forunrecognized tax benefit related to tax positions in prior periods by $15,000 due to the close of a state audit. A reconciliation of thebeginning and ending amount of unrecognized tax benefits is as follows: 2010 2009 Balance at September 1, $15,000 $15,000 Additions based on tax positions related to the current year — — Reductions based on tax positions related to prior years and settlements (15,000) — Reductions based on the lapse of the statutes of limitations — — Balance at August 31, $0 $15,000 The Company will recognize interest and penalty related to unrecognized tax benefits and penalties as income tax expense. As ofAugust 31, 2010, the Company has not recognized liabilities for penalty and interest as the Company does not have any liability forunrecognized tax benefits.The Company is subject to taxation in the US, Canada and various states. The Company’s tax years for 2006, 2007, 2008 and 2009are subject to examination by the taxing authorities. With few exceptions, the Company is no longer subject to U.S. federal, state, localor foreign examinations by taxing authorities for years before 2006.NOTE 11. COMMITMENTS AND CONTINGENCIESLegal MattersFrom time to time, we may be subject to legal proceedings and claims which a rising in the normal course of our business. Any suchmatters and disputes could be costly and time consuming, subject us to damages or equitable remedies, and divert our management andkey personnel from our business operations. We currently are not a party to any legal proceedings, the adverse outcome of which, inmanagement’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations,financial position or cash flowsLease ObligationsThe Company leases its facilities under operating lease agreements (three of which are with its stockholder) which expire onvarious dates through September 2018 and require minimum annual rentals ranging from $1,000 to $26,000 per month. Certain of theleases contain options for renewal under varying terms.F-19Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Minimum future rental payments under operating leases are as follows:Years ending August 31: 2011 $1,195,700 2012 573,800 2013 347,800 2014 264,900 2015 291,800 Thereafter 742,100 $3,416,100 Rental expense for all operating leases for the year ended August 31, 2010 and eight months ended August 31, 2009 wasapproximately $1,647,200 and $1,134,000, respectively.NOTE 12. RELATED PARTY TRANSACTIONSThe Company leases three buildings under operating lease agreements from its majority stockholder. During the year endedAugust 31, 2010 and eight months ended August 31, 2009, the Company incurred approximately $529,200 and $352,800, respectively,of expense related to these leases. Such amounts (and the future minimum obligations under these lease agreements relating to fiscal2010-2014 and thereafter) are included in the related disclosures set forth in Note 10.NOTE 13. SEGMENT REPORTINGThe Company operates in two reportable business segments; Distribution Operations and Real Estate Rental Operations. Executivemanagement evaluates performance based on gross margins, selling general and administrative expenses and net profits. Managementalso reviews the returns on the rental real estate properties, inventory, accounts receivable and marketable securities (segment assets). For the Year Ended For the Eight Months Ended For the Year Ended August 31, 2010 August 31, 2009 December 31, 2008 Real Estate Real Estate Real Estate Rental Distribution Total Rental Distribution Total Rental Distribution Total (In thousands) Revenues $1,086 $91,547 $92,633 $647 $54,365 $55,012 $1,203 $93,379 94,582 Cost of revenues 1,706 67,048 68,754 796 38,112 38,908 1,954 66,947 68,901 Gross margin (loss) (620) 24,499 23,879 (149) 16,253 16,104 (751) 26,432 25,681 Interest expense 515 281 796 607 425 1,032 641 175 816 Selling, general & administrative expense 375 21,388 21,763 299 15,316 15,615 504 22,348 22,852 Losses on securities trading — (2,167) (2,167) — (2,153) (2,153) (2,512) (2,512)Non-operating income/(expense) 26 — 26 957 — 957 (1,167) — (1,167)Segment profit (loss) (1,641) 288 (1,353) (686) (1,940) (2,626) (4,032) 2,786 (1,246)Segment assets 11,280 30,045 41,325 11,611 31,562 43,173 N/A N/A N/A F-20Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) For the Year Ended For the Eight Months Ended For the Year Ended August 31, 2010 August 31, 2009 December 31, 2008 United United United States Canada Total States Canada Total States Canada Total (In thousands)Revenues 88,417 4,216 92,633 $53,189 1,823 55,012 89,674 4,908 94,582 Identifiable assets 39,062 2,263 41,325 40,860 2,313 43,173 N/A N/A N/A NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTSManagement uses to estimate the fair value of an asset or a liability. The three levels of the fair-value hierarchy are described asfollows:Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. For the Company, Level 1 inputsinclude price and marketable securities that are actively traded.Level 2: Inputs other than Level 1 that are observable, either directly or indirectly. At this time, the Company holds noLevel 2 financial instruments.Level 3: Unobservable inputs.The following table sets forth by level, within the fair value hierarchy, certain assets and a financial liability at estimated fair valueas of August 31, 2010 and August 31, 2009: Quoted Prices in Significant Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs (Level 1) (Level 2) (Level 3) TotalAugust 31, 2010 Marketable securities $817,000 — — $817,000 August 31, 2009 Marketable securities $2,031,800 — — $2,031,800 Liability for short sales of tradingsecurities (1,101,200) — — (1,101,200)NOTE 15. COMPARATIVE EIGHT -MONTH FINANCIAL INFORMATIONEffective as of September 29, 2009, the Board of Directors of EACO approved a change to its fiscal year end to August 31. Prior tothat, the fiscal year was the fifty-two or fifty-three week period ending on the Wednesday nearest to December 31. ConsolidatedStatements of Operations for the eight months ended August 31, 2009 and 2008 are summarized below. All data for the eight monthsended August 31, 2008 are derived from the Company’s unaudited Condensed Consolidated Financial Statements for 2008:F-21Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsEACO CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) August 31 2009* 2008* (Unaudited) Distribution sales $54,365 $63,660 Cost of goods sold 38,112 43,530 Gross margin 16,253 20,130 Rental revenue 647 916 Cost of rental operations 796 1,739 Gross loss from rental operations (149) (823)Operating expenses: Selling, general and administrative expenses 15,615 15,477 Loss on disposition of equipment 146 — Income from operations 343 3,830 Other non-operating income (expense): Gain (loss) on sale of trading securities (6,386) 1,767 Unrealized gain (loss) on trading securities 4,233 (12)Gain on extinguishment of obligation under capital lease 949 — Interest and other income 8 163 Interest expense (1,032) (606)Income (loss) from continuing operations before income taxes (1,885) 5,142 Provision for income taxes 741 682 Income (loss) from continuing operations (2,626) 4,460 Discontinued operations: Gain from discontinued operations, net of tax 138 — Net income (loss) (2,488) 4,460 Undeclared cumulative preferred stock dividends (57) (57)Net income (loss) attributable to common shareholders $(2,545) $4,403 *Reflects the merger with Bisco Industries, Inc as of the earliest period presented.F-22Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of Contents EXHIBIT INDEXExhibit No. Description 2.1 Agreement and Plan of Merger dated December 22, 2009 by and between EACO Corporation, Bisco Acquisition Corp.,Bisco Industries, Inc. and Glen Ceiley (Exhibit 2.1 of the Company’s Transition Report on Form 10-K filed with theSEC on December 23, 2009) 3.1 Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.01 to the Company’s RegistrationStatement on Form S-1, Registration No. 33-1887, is incorporated herein by reference.) 3.2 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.03 to theCompany’s Registration Statement on Form S-1, , Registration No. 33-1887, is incorporated herein by reference.) 3.3 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.04 to theCompany’s Registration Statement on Form S-1, Registration No. 33-17620, is incorporated herein by reference.) 3.4 Amended and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 4 to the Company’s registrationstatement on Form 8-A, filed with the SEC on March 19, 1997, is incorporated herein by reference.) 3.5 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.08 to theCompany’s Annual Report on Form 10-K filed with the SEC on March 31, 1998, is incorporated herein by reference.) 3.6 Amendment to Amended and Restated Bylaws of Family Steak Houses of Florida, Inc. (Exhibit 3.08 to the Company’sAnnual Report on Form 10-K filed with the SEC on March 15, 2000, is incorporated herein by reference.) 3.7 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc. (Exhibit 3.09 to theCompany’s Annual Report on Form 10-K filed with the SEC on March 29, 2004 is incorporated herein by reference.) 3.8 Articles of Amendment to the Articles of Incorporation of Family Steak Houses of Florida, Inc., changing the name ofthe corporation to EACO Corporation. (Exhibit 3.10 to the Company’s Quarterly Report on Form 10-Q filed with theSEC on September 3, 2004, is incorporated herein by reference.) 3.9 Articles of Amendment Designating the Preferences of Series A Cumulative Convertible Preferred Stock $0.10 ParValue of EACO Corporation (Exhibit 3.1 to the Company’s current report on Form 8-K filed with the SEC onSeptember 8, 2004, is incorporated herein by reference.) 3.10 Certificate of Amendment to Amended and Restated Bylaws effective December 21, 2009 (Exhibit 3.10 to theCompany’s transition report on Form 10-K filed with the SEC on December 23, 2009 is incorporated herein byreference.) 3.11 Articles of Amendment to Articles of Amendment Designating the Preferences of Series A Cumulative ConvertiblePreferred Stock, as filed with the Secretary of State of the State of Florida on December 22, 2009 (Exhibit 3.11 to theCompany’s transition report on Form 10-K filed with the SEC on December 23, 2009 is incorporated herein byreference.) 10.1 Form of Amended and Restated Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filingbetween the Company and GE Capital Franchise Corporation dated October 21, 2002. (Exhibit 10.01 to the Company’sQuarterly Report on Form 10-Q, filed with the SEC on November 14, 2002, is incorporated herein by reference.) 10.2 Form of Amended and Restated Promissory Note between the Company and GE Capital Franchise Finance Corporationdated October 21, 2012. (Exhibit 10.02 to the Company’s Quarterly Report on Form 10-Q filed with the SEC onNovember 14, 2002, Registration No. 33-1887, is incorporated herein by reference.) 10.3 Form of Loan Agreement between the Company and GE Capital Franchise Finance Corporation dated October 21,2002. (Exhibit 10.03 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 14, 2002, isincorporated herein by reference.) 10.4 Settlement Agreement dated as of May 9, 2008 by and among EACO Corporation, Horn Capital Realty, Inc. andJonathan S. Horn. (Exhibit 10.1 to the Company’s current report on Form 8-K, filed with the SEC on May 9, 2008 ishereby incorporated by reference.)Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Table of ContentsExhibit No. Description 10.5 Settlement Agreement dated as of January 22, 2008 by and between EACO Corporation, Glen Ceiley, Florida GrowthRealty, Inc. and Robert Lurie. (Exhibit 10.1 to the Company’s current report on Form 8-K/A filed with the SEC onJanuary 23, 2008 is incorporated by reference.) 10.6+ 2002 Long-Term Incentive Plan (Appendix A to the Company’s Proxy Statement on Schedule 14A, filed with the SECon May 1, 2002, is hereby incorporated by reference) 10.7 Form of Note Agreement by and between Bisco Industries, Inc. and EACO Corporation (Exhibit 10.7 to the Company’stransition report on Form 10-K filed with the SEC on December 23, 2009 is incorporated herein by reference.) 10.8 Purchase and Sale Agreement dated July 31, 2009 by and between Gottula Properties, LLC and EACO Corporation(Exhibit 10.8 to the Company’s transition report on Form 10-K filed with the SEC on December 23, 2009 isincorporated herein by reference.) 10.9 Management Agreement dated March 3, 2006 by and between EACO Corporation and Bisco Industries, Inc.(Exhibit 10.9 to the Company’s transition report on Form 10-K filed with the SEC on December 23, 2009 isincorporated herein by reference.) 21.1 Subsidiaries of the Company. 23.1 Consent of Squar, Milner, Peterson, Miranda & Williamson LLP. 31.1 Certification of Chief Executive Officer (principal executive officer and principal financial officer) pursuant toSecurities and Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002. 32.1 Certification of Chief Executive Officer (principal executive officer and principal financial officer) pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.+Indicates a management contract or compensatory plan or arrangement.Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 21.1LIST OF SUBSIDIARIES Subsidiary Jurisdiction of Incorporation Bisco Industries, Inc. IllinoisBisco Industries, Ltd. Canada Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. Exhibit 23.1Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in Registration Statements (File Nos. 333-62101 and 333-9832) on Forms S-8 of EACO Corporation of ourreport dated December 14, 2010, relating to our audit of the consolidated financial statements, which appear in this Annual Report on Form 10-K of EACOCorporation for the year ended August 31, 2010. Our report dated December 14, 2010, relating to the consolidated financial statements includes emphasisparagraphs relating to the combination of entities under common control and uncertainty as to the extension of the Company’s line of credit agreement./s/ Squar, Milner, Peterson, Miranda & Williamson, LLPNewport Beach, CaliforniaDecember 14, 2010Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 31.1CERTIFICATION PURSUANT TO EXCHANGE ACTRULE 13a-14(a)/15d-14(a), AS ADOPTED PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Glen Ceiley, certify that: 1. I have reviewed this annual report on Form 10-K of EACO Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) andinternal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensurethat material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularlyduring the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under mysupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectivenessof the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscalquarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, theregistrant’s internal control over financial reporting; and 5. I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee ofthe registrant’s Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting.Date: December 14, 2010 /S/ GLEN CEILEYGlen Ceiley, Chief Executive Officer (principal executive officer and principal financial officer) Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results. EXHIBIT 32.1CERTIFICATION PURSUANT TO 18 U.S.C. §1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of EACO Corporation (the “Company”) on Form 10-K for the fiscal year ended August 31, 2010, as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Glen Ceiley, Chief Executive Officer of the Company, certify, pursuant to 18U.S.C. §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: December 14, 2010 /S/ GLEN CEILEYGlen Ceiley, Chief Executive Officer (principal executive officer and principal financial officer) Source: EACO CORP, 10-K, December 14, 2010Powered by Morningstar® Document Research℠The information contained herein may not be copied, adapted or distributed and is not warranted to be accurate, complete or timely. The user assumes all risks for any damages or losses arising from any use of this information,except to the extent such damages or losses cannot be limited or excluded by applicable law. Past financial performance is no guarantee of future results.
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