<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from _______________ to _______________
Commission file number 1-12104
BACK YARD BURGERS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 64-0737163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2768 COLONY PARK DRIVE, MEMPHIS, TENNESSEE 38118
(Address of principal executive offices)
(901) 367-0888
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class - Common stock, par value $.01 per share
Outstanding at November 1, 1996 - 4,230,826
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
<PAGE> 2
BACK YARD BURGERS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements:
Balance Sheet as of September 28, 1996 and December 30, 1995 3
Statement of Income for the Thirteen Weeks Ended and
Thirty-Nine Weeks Ended September 28, 1996 and September 30, 1995 4
Statement of Cash Flows for the Thirty-Nine Weeks Ended
September 28, 1996 and September 30, 1995 5
Notes to Unaudited Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
Part II - Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote
of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 30,
1996 1995
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 856 $ 528
Receivables, net 360 259
Inventories 164 167
Income taxes refundable 22 22
Prepaid expenses and other current assets 54 174
----------- -----------
Total current assets 1,456 1,150
Note receivable - 8
Property and equipment, at depreciated cost 8,008 8,128
Intangible assets 1,587 1,664
Other assets 195 199
----------- -----------
$ 11,246 $ 11,149
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 252 $ 327
Accrued expenses 457 511
Current installments of long-term debt 236 232
----------- -----------
Total current liabilities 945 1,070
Long-term debt, less current installments 1,893 2,066
Other deferred liabilities 104 85
Deferred franchise fees 143 200
----------- -----------
Total liabilities 3,085 3,421
----------- -----------
Commitments and contingencies - -
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized;
316,894 shares issued and outstanding at September 28, 1996
(329,415 at December 30, 1995) 3 3
Common stock, $.01 par value, 12,000,000 shares authorized;
4,230,826 outstanding at September 28, 1996
(4,205,551 at December 30, 1995) 42 42
Paid-in capital 9,951 9,931
Retained deficit (1,835) (2,248)
----------- -----------
Total stockholders' equity 8,161 7,728
----------- -----------
$ 11,246 $ 11,149
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements
3
<PAGE> 4
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
---------------------------- ----------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 5,778 $ 5,521 $ 16,563 $ 15,902
Franchise fees 78 110 154 194
Royalty fees 283 213 736 647
Advertising fees 74 55 191 167
Other 71 71 205 178
---------- ---------- ---------- ----------
Total revenues 6,284 5,970 17,849 17,088
---------- ---------- ---------- ----------
Expenses:
Cost of restaurant sales 1,921 1,927 5,536 5,589
Restaurant operating expenses 2,828 2,684 8,106 7,475
General and administrative 686 685 2,042 2,153
Advertising 275 225 763 590
Depreciation and amortization 282 379 836 1,053
---------- ---------- ---------- ----------
Total expenses 5,992 5,900 17,283 16,860
---------- ---------- ---------- ----------
Operating income 292 70 566 228
Interest income 5 4 12 14
Interest expense (57) (85) (172) (211)
Other, net 2 2 7 10
---------- ---------- ---------- ----------
Income before income taxes 242 (9) 413 41
Income tax provision - 8 - 28
---------- ---------- ---------- ----------
Net Income $ 242 $ (17) $ 413 $ 13
========== ========== ========== ==========
Net Income per share $ .05 $ (.00) $ .09 $ .00
========== ========== ========== ==========
Weighted average number of common shares
and common equivalent shares outstanding 4,546 4,533 4,541 4,533
========== ========== ========== ==========
</TABLE>
See accompanying notes to unaudited financial statements
4
<PAGE> 5
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 413 $ 13
Adjustments to reconcile net income to net cash
from operating activities
Depreciation and amortization of property and equipment 699 703
Deferred income taxes - (13)
Amortization of intangible assets 77 129
Amortization of preopening costs 60 221
Provision for losses on receivables 80 35
Gain on sale of assets (3) -
(Increase) decrease in assets
Receivables (173) (81)
Inventories 3 (3)
Prepaid expenses and other current assets 60 (100)
Other assets 4 (18)
Increase (decrease) in liabilities
Accounts payable and accrued expenses (129) (149)
Income taxes payable - 67
Other deferred liabilities 19 19
Deferred franchise fees (57) (36)
----------- ----------
Net cash provided by operating activities 1,053 787
----------- ----------
Cash flows from investing activities
Additions to property and equipment (621) (2,227)
Investment in joint venture - (100)
Acquisition of business, net of cash acquired - (89)
Proceeds from sale of assets 45 -
----------- ----------
Net cash used in investing activities (576) (2,416)
----------- ----------
Cash flows from financing activities
Issuance of stock 20 -
Principal payments on long-term debt and capital leases (169) (383)
Proceeds from issuance of long-term debt - 2,046
----------- ----------
Net cash provided by (used in) financing activities (149) 1,663
----------- ----------
Net increase in cash and cash equivalents 328 34
Cash and cash equivalents
Beginning of period 528 419
----------- ----------
End of period $ 856 $ 453
=========== ==========
Supplemental disclosure of cash flow information
Income taxes paid (received) $ - $ (23)
=========== ==========
Interest paid $ 172 $ 211
=========== ==========
</TABLE>
See accompanying notes to unaudited financial statements
5
<PAGE> 6
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
BACK YARD BURGERS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Back Yard Burgers, Inc. (the "Company") owns and operates
quick-service restaurants and is engaged in the sale of franchises and the
collection of royalties based upon related franchise sales. The Company grants
franchise rights for the use of "Back Yard Burgers," "BYB" or "BY Burgers"
trade names and other associated trademarks, signs, emblems, logos, slogans and
service marks which have been or may be developed.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and therefore do not include
all information and notes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The statements do reflect all adjustments
(consisting of only normal recurring accruals) which are, in the opinion of
management, necessary to present fairly the financial position and results of
operations and cash flows in conformity with generally accepted accounting
principles. The statements should be read in conjunction with the Notes to
Financial Statements for the year ended December 30, 1995 included in the
Company's 1995 Annual Report.
The financial statements include the accounts of Back Yard Burgers,
Inc. and its wholly-owned subsidiaries, Little Rock Back Yard Burgers, Inc. and
Atlanta Burgers BYB Corporation, as well as the Back Yard Burgers National
Advertising Fund. All significant intercompany transactions have been
eliminated.
The results of operations for the thirteen-week and thirty-nine week
periods are not necessarily indicative of the results to be expected for the
full year.
The Company maintains its financial records on a 52-53 week fiscal
year ending on the Saturday closest to December 31.
NOTE 2 - NET INCOME PER SHARE
The Company calculates earnings per share based on the weighted
average number of common shares and common equivalent shares outstanding.
Common equivalent shares represent dilutive stock options and warrants, reduced
by the number of shares which could be repurchased at the average fair market
value during the year with the proceeds of the options and warrants.
6
<PAGE> 7
NOTE 3 - DEFERRED FRANCHISE FEES
Amounts received for certain franchise and area development rights,
net of commissions paid, have been deferred. Revenues on individual franchise
fees are recognized when substantially all of the initial services required of
the Company have been performed, which generally coincides with the opening of
the franchises. Under the terms of the franchise agreements, these fees are
non-refundable, and may be recognized as income should the franchisee fail to
perform as agreed. Area development fees are recognized on a pro-rata basis as
each unit opens. At September 28, 1996, deferred fees include franchise and
area development rights sold during the following years:
<TABLE>
<S> <C>
1995 $ 88
Previous Years 55
-------------
$ 143
=============
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company is party to several pending legal proceedings and claims.
Although the outcome of the proceedings and claims cannot be determined with
certainty, management of the Company is of the opinion that it is unlikely that
these proceedings and claims will have a material adverse effect on the
financial condition or results of operations of the Company.
NOTE 5 - SUBSEQUENT EVENT
Effective October 16, 1996, the Company purchased a franchised
restaurant and converted it to a Company-operated restaurant. The purchase
price was approximately $150,000, which included approximately $93,000 of
indebtedness assumed. This debt had been guaranteed by the Company and is
collateralized by the assets and leasehold interest of a Back Yard Burgers
restaurant in Little Rock, Arkansas. Company management believes that the
purchase price approximates the fair value of this restaurant as of the date of
the acquisition.
Effective October 27, 1996, the Company sold a Company-operated
restaurant and converted it to a franchised restaurant. The sales price
approximated book value.
7
<PAGE> 8
SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain qualifying forward-looking statements. Certain
information included in this Form 10-QSB may contain statements that are
forward-looking, such as statements related to financial items and results,
plans for future expansion and other business development activities, capital
spending or financing sources, capital structure and the effects of regulation
and competition. Such forward-looking information involves important risks and
uncertainties that could significantly impact anticipated results in the future
and, accordingly, such results may differ materially from those expressed in
any forward-looking statements by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" below.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company's revenues are derived primarily from Company-operated
restaurant sales, franchise fees and royalty fees. Certain expenses (cost of
restaurant sales, restaurant operating expenses, depreciation and amortization
and advertising) relate directly to Company-operated restaurants, while general
and administrative expenses relate to both Company-operated restaurants and
franchise operations. The Company's revenues and expenses are affected by the
number and timing of the opening of additional restaurants. Sales for new
restaurants in the period immediately following their opening tend to be high
because of trial by public and promotional activities. As a result, the timing
of openings can affect the average volume and other period-to-period
comparisons.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenue, unless otherwise indicated, of certain items included in the Company's
historical operations and operating data for the periods indicated.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Revenues
Restaurant sales 92.8% 93.1%
Franchise fees .9 1.1
Royalty fees 4.1 3.8
Advertising fees 1.0 1.0
Other operating revenue 1.2 1.0
----- -----
Total revenue 100.0% 100.0%
===== =====
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
------------------------
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
---- ----
<S> <C> <C>
Costs and Expenses
Cost of restaurant sales (1) 33.4% 35.1%
Restaurant operating expenses (1) 48.9 47.0
General and administrative 11.4 12.6
Advertising 4.3 3.5
Depreciation and amortization 4.7 6.2
Operating income 3.2 1.3
Interest income .1 .1
Interest expense 1.0 1.2
Other, net - .1
Income before income taxes 2.3 .2
Income tax provision - .2
Net income 2.3 .1
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
---- ----
($000's)
<S> <C> <C>
Operating data
System-wide restaurant sales
Company-operated $ 16,563 $ 15,902
Franchised 19,896 17,363
------------ -----------
Total $ 36,459 $ 33,265
============ ===========
Average annual sales per restaurant open for a
full year (2)
Company-operated $ 673 $ 653
Franchised $ 608 $ 589
System-wide $ 638 $ 617
Number of restaurants (3)
Company-operated 34 32
Franchised 46 39
------------ -----------
Total 80 71
============ ===========
</TABLE>
(1) As a percentage of restaurant sales.
(2) Includes sales for restaurants open for entire trailing twelve-month
period. Restaurants are included in the calculation after the completion
of six months of operation as sales during the period immediately after
the opening tend to be higher due to promotions and trial by public.
(3) Subsequent to September 28, 1996, one Company-operated restaurant was
converted to a franchised restaurant and one franchised restaurant was
converted to a Company-operated restaurant.
9
<PAGE> 10
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 28,
1996 AND SEPTEMBER 30, 1995.
RESTAURANT SALES increased 4.7% to $5,778,000 during the thirteen
weeks ended September 28, 1996 compared to $5,521,000 for the same 1995 period.
This increase is primarily the result of a price increase of approximately 3.5%
effective at the beginning of the 1996 third quarter and opening three new
Company-operated restaurants subsequent to July 1, 1995. These three
restaurants accounted for approximately $218,000 in sales while the price
increases improved sales by approximately $193,000. These sales increases were
partially offset by a decrease in same-store sales at restaurants open for more
than one year of 3.4%, or approximately $154,000.
ROYALTY FEES increased 32.9% to $283,000 during the thirteen week
period ended September 28, 1996 compared to $213,000 during the same period in
1995. The increase is due to an increase in franchised restaurant sales upon
which the fees are based. The sales increase resulted partially from a net
increase of seven franchised restaurants. Thirteen franchised restaurants were
opened, and six were closed since July 1, 1995. Additionally, comparable same-
store sales at franchised restaurants open for more than one year increased
6.1%, representing an increase in royalty fees of approximately $11,000.
ADVERTISING FEES increased 34.5% to $74,000 for the thirteen weeks
ended September 28, 1996 compared to $55,000 during the comparable period in
1995. The increase is related to the increase in franchised restaurant sales
as noted above.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$1,921,000 for the thirteen weeks ended September 28, 1996 and $1,927,000
during the same period in 1995, decreasing as a percentage of restaurant sales
to 33.2% from 34.9%. This percentage decrease is the result of the price
increase noted above which resulted in a 0.9% decrease in cost of restaurant
sales as well as decreases in the cost of beef and certain other produce prices
from the prior year. These decreases were partially offset by increases in the
costs of bacon, dairy products and most paper items.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, rent and certain other unit level operating expenses, increased to
$2,828,000 for the thirteen weeks ended September 28, 1996 from $2,684,000 in
the same prior year period. This represents an increase as a percentage of
restaurant sales to 48.9% from 48.6% for the same period in 1995. The
increase, as a percentage of sales, relates primarily to a decrease in
same-store sales at existing restaurants of 3.4% which results in expenses of a
fixed and semi-variable nature, such as management payroll, repairs, rent,
utilities, taxes and insurance, representing a greater percentage of sales.
GENERAL AND ADMINISTRATIVE COSTS, which increased to $686,000 from
$685,000, decreased to 10.9% as a percentage of total revenues for the thirteen
weeks ended September 28, 1996 compared to 11.5% for the same period in 1995.
The decrease, as a percentage of total revenues, is primarily the result of
improved sales combined with decreases in legal and investor relations expenses
of approximately 0.3% and 0.5%, respectively. Additionally, certain
efficiencies were realized by the addition of three Company-operated restaurants
and a net increase of seven franchised restaurants, subsequent to July 1, 1995,
without a corresponding increase in corporate administrative expense. These
decreases were offset by an increase of approximately 0.3% in personnel costs
related to restaurant management training programs.
10
<PAGE> 11
INTEREST EXPENSE decreased to $57,000, or 0.9% of total revenues, for
the third quarter of 1996 from $85,000, or 1.4% of total revenues, for the same
period in 1995. This is the result of a net decrease of approximately
$1,192,000 of debt subsequent to July 1, 1995.
DEPRECIATION AND AMORTIZATION EXPENSE decreased to $282,000, or 4.5%
of total revenues, for the thirteen weeks ended September 28, 1996 from
$379,000, or 6.3% of total revenues, for the same period in 1995. This
decrease is primarily the result of the Company's 1995 adoption of a new
accounting standard, partially offset by depreciation from the addition of six
Company-operated restaurants noted above. See "Impairment of Long-Lived
Assets" below.
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER
28, 1996 AND SEPTEMBER 30, 1995.
RESTAURANT SALES increased 4.2% to $16,563,000 during the thirty-nine
weeks ended September 28, 1996 compared to $15,902,000 for the same 1995
period. This increase is primarily the result of opening five new
Company-operated restaurants subsequent to January 1, 1995, the acquisition of
two franchised restaurants on June 30, 1995 and a price increase of
approximately 3.5% effective at the beginning of the 1996 third quarter. These
restaurants and the price increase accounted for approximately $1,699,000 in
sales. These sales were partially offset by a decrease in same-store sales at
restaurants open for more than one year of 5.1%, or approximately $536,000.
ROYALTY FEES increased 13.8% to $736,000 during the thirty-nine week
period ended September 28, 1996 compared to $647,000 during the same period in
1995. The increase is due to an increase in franchised restaurant sales upon
which the fees are based. The sales increase resulted partially from a net
increase of seven franchised restaurants. Seventeen franchised restaurants
were opened, eight were closed and two franchised restaurants were converted to
Company-operated since January 1, 1995. Comparable same-store sales at
franchised restaurants open for more than one year increased 3.5%, representing
an increase in royalty fees of approximately $3,800.
ADVERTISING FEES increased 14.4% to $191,000 for the thirty-nine weeks
ended September 28, 1996 compared to $167,000 during the comparable period in
1995. The increase is related to the increase in franchised restaurant sales
as noted above.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$5,536,000 for the thirty-nine weeks ended September 28, 1996 and $5,589,000
during the same period in 1995, decreasing as a percentage of restaurant sales
to 33.4% from 35.1%. This decrease is due primarily to decreases in the cost
of beef and certain other produce prices from the prior year. Additionally, a
price increase at the beginning of the 1996 third quarter resulted in a
decreased percentage cost of restaurant sales of approximately 0.3%. These
decreases were partially offset by increases in the costs of bacon, certain
produce, dairy products and most paper items.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, rent and certain other unit level operating expenses, increased to
$8,106,000 for the thirty-nine weeks ended September 28, 1996 from $7,475,000
in the same prior year period. This represents an increase as a percentage of
restaurant sales to 48.9% from 47.0% for the same period in 1995. The
increase, as a percentage of sales, relates primarily to a decrease in
same-store sales at existing restaurants of 5.1% which results in expenses of a
fixed and semi-variable nature, such as management payroll, repairs, rent,
utilities, taxes and insurance, representing a greater percentage of sales.
11
<PAGE> 12
GENERAL AND ADMINISTRATIVE COSTS, which decreased to $2,042,000 from
$2,153,000, decreased to 11.4% as a percentage of total revenues for the
thirty-nine weeks ended September 28, 1996 compared to 12.6% of total revenues,
for the same period in 1995. The decrease, as a percentage of total revenues,
is primarily the result of improved sales combined with decreases in legal and
investor relations expenses of approximately 0.2% and 0.4%, respectively.
Additionally, efficiencies were realized by the addition of six
Company-operated restaurants and a net increase of seven franchised restaurants
without a corresponding increase in corporate administrative expense.
INTEREST EXPENSE decreased to $172,000, or 1.0% of total revenues, for
the thirty-nine weeks ended September 28, 1996 from $211,000, or 1.2% of total
revenues, for the same period in 1995. This is the result of a decrease of
approximately $788,000 of debt subsequent to April 1, 1995.
DEPRECIATION AND AMORTIZATION EXPENSE decreased to $836,000, or 4.7%
of total revenues, for the thirty-nine weeks ended September 28, 1996 from
$1,053,000, or 6.2% of total revenues, for the same period in 1995. This
decrease is primarily the result of the Company's 1995 adoption of a new
accounting standard in which certain long-lived assets were written down. This
decrease was partially offset by depreciation from the addition of six new
Company-operated restaurants noted above. See "Impairment of Long-Lived
Assets" below.
IMPAIRMENT OF LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("SFAS 121") in
March 1995. The Company adopted the provisions of SFAS 121 during 1995. SFAS
121 establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The Company reviews the carrying values of its long-lived and
intangible assets for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. SFAS 121 requires that a new cost basis be established for
impaired assets based on the fair value of these assets as of the date the
assets are determined to be impaired, and that previously recorded accumulated
depreciation or amortization related to the impaired assets be eliminated.
During 1995, the Company determined that the carrying amount of
certain long-lived assets of the Company's restaurants in the central Arkansas
area might not be recoverable. The resultant calculated impairment of
long-lived assets necessitated a write-down in 1995 of $2,564,000.
The Company continues to review for underperforming restaurants at
each period end and evaluate for possible impairment pursuant to the accounting
standard described above. Certain of the Company's restaurants have initiated
action plans to improve their underperforming status. Should these plans prove
unsuccessful, some or all of these stores' assets may become impaired.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $621,000 for the thirty-nine weeks ended
September 28, 1996 and $2,227,000 for the same period of 1995. Generally, the
Company purchases its restaurant buildings and leases the properties for its
Company-operated restaurants. The average monthly lease cost for the 23
Company-operated restaurants on leased sites at September 28,
12
<PAGE> 13
1996 is approximately $2,800 per month. For the nine restaurants where the
Company leases the building as well as the site, the average monthly lease cost
is approximately $3,900.
Cash from operations for the Company is primarily affected by net
earnings adjusted for deferred franchise fees and non-cash expenses which
consist primarily of depreciation and amortization. Depreciation and
amortization totaled $836,000 for the thirty-nine weeks ended September 28,
1996 and $1,053,000 for the same 1995 period. The decrease relates primarily
to the Company's 1995 adoption of SFAS 121 discussed previously. Receivables,
net, increased $81,000 during the thirty-nine weeks ended September 28, 1996,
primarily due to the timing of collections from franchisees.
Cash provided by operations for the thirty-nine week period ended
September 28, 1996 and September 30, 1995 totaled $1,053,000 and $787,000,
respectively. Since January 1, 1995, the addition of restaurants and equipment
has been financed primarily through cash from operations and debt.
Subsequent to September 28, 1996, the Company converted one
Company-operated restaurant to a franchised restaurant and also converted one
franchised restaurant to a Company-operated restaurant.
The Company believes that it currently has sufficient resources to
fund anticipated capital expenditures of approximately $200,000 during the
remainder of 1996. Additional future growth in 1997 may require the Company to
obtain additional debt or equity financing.
SEASONALITY AND INFLATION
While the Company does not believe that seasonality affects its
operations in a materially adverse manner, first quarter results will generally
be lower than other quarters due to seasonal climate conditions in the
locations of many of its restaurants. Management does not believe that
inflation has had a material affect on income during the thirteen or
thirty-nine weeks ended September 28, 1996. Increases in food, labor or other
operating costs could adversely affect the Company's operations. In the past,
the Company generally has been able to increase menu prices or modify its
operating procedures to substantially offset increases in operating costs.
Because of the intense competition in the quick-service restaurant industry,
there can be no certainty that the Company will be able to successfully
continue this practice as it has in the past.
KNOWN TRENDS AND UNCERTAINTIES
Labor will continue to be a critical factor for the remainder of 1996
and into 1997. In most areas where the Company operates restaurants, there is
a shortage of labor. This, in itself, could result in higher wages as the
competition for employees intensifies, not only in the quick-service restaurant
industry, but in practically all retail and service industries. It will be
crucial for the Company to develop programs to attract and retain quality
employees. Effective October 1, 1996, the minimum wage was increased from
$4.25 per hour to $4.75 per hour. The estimated impact of this increase in the
minimum wage is to increase personnel costs approximately $20,000 per year.
The second phase of the minimum wage law will go into effect in 1997 and will
increase the minimum wage to $5.15 per hour. This increase could have a
negative impact on operating margins.
During 1995, and continuing through the first three quarters of 1996,
the cost of beef, the largest single component of the cost of restaurant sales,
was below prices of recent years. Company management expects beef prices to
rise at some time in the future. Additionally, the
13
<PAGE> 14
Company believes that the prices of chicken and dairy products will increase
during the remainder of 1996. It will be difficult to raise menu prices to
fully cover these anticipated increases due to the competitive state of the
quick-service restaurant industry. Additional margin improvements would have
to be made through operational improvements, equipment advances and increased
volumes to help offset these increases.
Due to the competitive nature of the restaurant industry, site
selection will become more difficult as an increasing number of businesses will
be vying for locations with similar characteristics. This could result in
higher occupancy costs for prime locations.
Same-store sales declined 3.4% during the third quarter of 1996
compared to the same period in 1995. However, the decline was not as great as
in the first and second quarters of 1996 which were 7.8% and 4.5%,
respectively. The Company implemented a new marketing strategy which is
focused on increasing customer awareness and improving store-level margins.
The future success of the Company will be determined, to a great
extent, by its ability to positively address these issues.
CONVERSION OF PREFERRED STOCK
In accordance with the provisions of the Company's Certificate of
Incorporation regarding preferred stock, as a result of the Company's having
attained after tax net income in excess of $600,000 during 1994, each share of
preferred stock is convertible into one share of common stock, at the option of
the holder. The Company notified preferred stockholders of their right to
convert preferred stock to common stock, and anticipates that all shares of
preferred stock will be converted. Such conversion began on April 5, 1995, at
which time there were 1,199,979 shares of preferred stock outstanding. As of
September 28, 1996, 883,085 shares had been converted.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") which is effective for fiscal years
beginning after December 15, 1995. This statement defines a fair-value based
method of accounting for employee stock options or similar equity instruments
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation for those plans using the intrinsic-value
based method currently prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), provided certain pro forma disclosures are made that disclose what
the impact on net earnings would have been had the Company adopted the
accounting provisions of SFAS 123. The Company plans to continue to use the
intrinsic-value method currently prescribed by APB 25 therefore, there will be
no impact on the Company's financial position or results of operations from
adopting this standard.
LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings. See "Legal
Proceedings" below.
14
<PAGE> 15
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Reference is made to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 30, 1995 and to the Company's Forms 10-QSB for
the quarterly periods ended March 30, 1996 and June 29, 1996. There were no
material changes during the quarterly period ended September 28, 1996 with
respect to the litigation so referenced, except as noted below.
On August 8, 1996, the United States Court of Appeals for the Eighth
Circuit released its opinion in the case of Morrison v. Back Yard Burgers, Inc.
The Court of Appeals upheld the U.S. District Court's decision that the Company
was entitled to summary judgement in its favor as to all claims asserted
against the Company by former franchisees Jerry and Helen Morrison. Following
the release of the opinion in the Morrison case, legal counsel for the
remaining franchisee litigants, Pezzecca Enterprises, Inc., Chris Powell and
Scott Townsend dismissed their appeals pending before the Sixth Circuit Court
of Appeals.
The Company is involved in other litigation incidental to its
business, including, but not necessarily limited to, claims alleging violations
of the Civil Rights Act of 1964 and/or discrimination. Aside from the cost of
defense, such litigation is not presently considered by management to be
material to the financial condition or results of operations of the Company.
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
Exhibits
10.28 - Management and Stock Ownership Agreement with
Gifford D. Powell and/or James Timothy Collins
dated September 13, 1996.
11 - Calculation of Income Per Share
27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
Reports on Form 8-K
None
15
<PAGE> 16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereto duly
authorized.
BACK YARD BURGERS, INC.
Date: November 11, 1996 By: /s/ Lattimore M. Michael
- ----------------------- -----------------------------
Lattimore M. Michael
Chairman and Chief Executive
Officer
Date: November 11, 1996 By: /s/ Stephen J. King
- ----------------------- ------------------------------
Stephen J. King
Chief Financial Officer
16
<PAGE> 1
EXHIBIT 10.28
MANAGEMENT AND STOCK OWNERSHIP AGREEMENT WITH
GIFFORD D. POWELL AND/OR JAMES TIMOTHY COLLINS
THIS AGREEMENT made and entered into this the 13th day of September,
1996, by and between Little Rock Back Yard Burgers, Inc., a Delaware
corporation with its principal office located in Memphis, Tennessee
(the"Company"), and Gifford D. Powell, an adult resident citizen of the state
of Arkansas, and/or James Timothy Collins, an adult resident of the state of
Arkansas ("Individuals"),
The Company and Individuals desire to enter into a Management and
Stock Ownership Agreement (the "Agreement") for the operation of the Company's
restaurants in central Arkansas (the area within a 100 mile radius of the city
limits of Little Rock, Arkansas, excluding Jefferson County, Arkansas and the
cities of Hot Springs, Malvern, Arkadelphia and Bryant, Arkansas); and agree as
follows:
1. DUTIES. Individuals agree to work with the Company in the
management of the Company's restaurants located in central Arkansas.
Individuals will have significant control over the operation of Company's
restaurants, within certain guidelines. Individuals shall report to the Chief
Operating Officer, or his designee, of the Company's parent, Back Yard Burgers,
Inc. (BYB).
Individuals shall work full-time (a minimum of 40 hours per
week per individual, except for normal vacation and sick days, or any other
time allowed by the Company) for the Company with regard to their duties and
responsibilities. During the term of this Agreement, Individuals will not
engage, directly or indirectly, as an employee, contractor, consultant,
officer, director, manager, owner, or otherwise in any business or activity
which competes with the business of the Company, except as a franchisee of Back
Yard Burgers, Inc.
2. TERM. This Agreement shall be effective as of September 15,
1996, and shall expire, unless earlier terminated, on December 31, 2003. The
parties may mutually agree to extend this Agreement, under the same terms and
conditions, in one year increments by providing written notice on or before
September 15, 2003.
3. SALARY AND BENEFITS. Effective September 15, 1996, or as soon
thereafter as possible but no later than September 25, 1996 Individuals will
become salaried employees of the Company and will each be compensated at the
rate of Nine Hundred and Seventy Dollars ($970) per week. In addition to the
base salary, Individuals will also be provided with health insurance, subject
to their acceptance by the Company's health insurance provider. Ninety percent
(90%) of the cost of this insurance will be paid by Company and ten percent
(10%) by Individuals. Spouse and/or dependent care coverage is available with
the cost for such coverage to be paid solely by Individuals. Further,
Individuals will each receive a monthly automobile allowance of Four Hundred
Dollars ($400). In return for this automobile allowance, Individuals will bear
the total cost related to the use of their respective vehicles which includes,
but is not limited to, fuel, insurance, repairs, etc.
4. % MANAGEMENT FEE. Individuals will jointly receive a
management fee equal to forty percent (40%) of the net pretax income,
determined in accordance with generally accepted accounting principles, of the
Company-owned stores in central Arkansas. BYB will continue to charge the
Company a fee of 5% of taxable sales. This charge is included in the
determination of net pretax income. The % management fee will be paid as long
as Individuals are actively involved in the Company's management. A minimum of
one-half of the management fee paid to Individuals (determined after
Individuals federal, state and local income taxes) shall be used to buy stock
as contemplated by Section 5 below. Additionally, management fee percentage
under this section will decrease as stock is purchased under Section 5 below,
in an amount equal to the percentage of stock purchased. For example, when 5%
of the Company's stock is purchased, the management fee will decrease to 35%;
when 10% of the Company's stock is purchased, the management fee will decrease
to 30%, and so on.
17
<PAGE> 2
This management fee will be paid on an annual basis within 30 days
after the receipt of the BYB audited financial statements (which include the
accounts of the Company). However, Individuals can request interim payments
toward the annual management fee on a quarterly basis, so long as the total
interim payments do not exceed fifty percent (50%) of the management fee
calculated for the year-to-date period.
5. STOCK PURCHASE PROVISION. Individuals shall have the option
to purchase an aggregate of twenty percent (20%) of the Company's outstanding
stock. No fractional shares of stock will be available for purchase.
Individuals agree to purchase by June 30 (or 15 days after receipt of
management fee, whichever is later) of each year (beginning in 1998) stock with
a value of at least 50% of the management fee (determined after Individuals
federal, state and local income taxes) paid under Section 4. The stock
purchase provision shall expire once Individuals have purchased the above
referenced aggregate of twenty percent (20%) of the Company's outstanding
stock.
6. STOCK PURCHASE PRICE. The purchase price for the stock
referenced above has been determined to be the fair market value ("FMV") as
determined using the net present value of anticipated future cash flows. Such
value has been determined to be $5,750 per share based on the current number of
outstanding shares (100). This results in a FMV of $115,000 for twenty percent
(20%) of the Company's outstanding stock.
7. STOCK BUY BACK IN EVENT OF TERMINATION. In the event of
termination of this Agreement by its terms, the Company agrees to buy back any
fully-paid stock purchased by Individuals at FMV as determined by multiplying
the net income of the preceding fiscal year by three and one-half (3.5) and
then dividing by the number of shares outstanding, or the price paid, whichever
is greater.
8. TERMINATION. The Company may terminate this Agreement for
cause without notice as follows: a) Individuals violate the terms of this
agreement, knowingly misappropriate funds or property of the Company for
personal benefit or, b) overall same-store sales in the restaurants managed by
Individuals decreases for two (2) consecutive years.
9. BOARD OF DIRECTORS. Individuals will be appointed to the
Board of Directors of Little Rock Back Yard Burgers, Inc. Individuals agree to
serve as directors of the Company without additional compensation, as long as
this Agreement is in effect.
10. FRANCHISE RIGHTS. Back Yard Burgers, Inc. will grant
Individuals the exclusive option to purchase the franchise rights for the
cities of Hot Springs, Malvern, Arkadelphia and Bryant, Arkansas. The purchase
price will be the price in effect under the then current Back Yard Burgers,
Inc. Uniform Franchise Offering Circular. This option, if not exercised, will
expire if this Agreement is terminated, or December 31, 2003, whichever is
sooner.
11. INDEMNIFICATION. The Company shall indemnify and hold
Individuals harmless to the maximum extent permitted by Delaware law against
judgements, fines, amounts paid in settlement and reasonable expenses
(including attorney's fees) incurred by them in connection with the defense of,
or as a result of any action or proceeding (or appeal therefrom) in which they
are made (or threatened to be made) a party by reason of the fact that they are
or were officers or directors of the Company, regardless of whether such action
or proceeding is one brought by or in the name of the Company, or to procure a
judgement in its favor. The Company further agrees that the Individuals are,
or shall continue to be covered and insured up to the maximum limits provided
by all insurance maintained by the Company to indemnify its officers and
directors (and the Company in connection therewith). The Company hereby
warrants and represents that the undertakings of this Section is not in
conflict with its articles of incorporation or by-laws, or any other validly
existing agreement of the Company.
18
<PAGE> 3
12. CONFIDENTIALITY. During the term of their employment
hereunder or at any time thereafter, Individuals shall not disclose or use
(except in the course of their employment) any confidential or proprietary
information or data of Company regardless of whether such information or data
is embodied in writing or other form.
13. NOTICES. All notices, requests, demands and/or other
communications provided for by this Agreement shall be in writing and shall be
mailed to the parties as follows:
(a)To the Company: Little Rock Back Yard Burgers, Inc., 2768
Colony Park Drive, Memphis, Tennessee 38118;
(b) To Individuals: James Timothy Collins, 2259 Old Bear Road,
Royal, Arkansas 71968; Gifford D. Powell, 510 Valley Vista Road, Benton,
Arkansas 72015.
14. ARBITRATION. All disputes or claims concerning the
interpretation of the terms and conditions of this agreement shall be resolved
pursuant to arbitration proceeding to be conducted in Shelby County, Tennessee,
before a panel of three independent arbitrators, which arbitration shall be
conducted in accordance with the commercial arbitration rules of the American
Arbitration Association; and the decision of such arbitration process shall be
final, binding and not appealable. The three independent arbitrators shall be
selected by the parties from a list of arbitrators selected by the American
Arbitration Association, with each party selecting one arbitrator and the third
arbitrator to be selected by the American Arbitration Association. Company and
Individuals agree to a pro-rata sharing of the expenses associated with the
arbitration.
15. GOVERNING LAW. The validity, interpretation, construction and
performance of this agreement shall be governed by the laws of the state of
Tennessee.
16. VALIDITY. The invalidity or unenforceability of any provision
of this agreement shall not affect the validity or enforceability of any other
provision of this agreement, which other valid provisions shall remain in full
force and effect.
17. NON-ASSIGNABILITY. No right, benefit or interest hereunder
shall be subject to anticipation, alienation, sales, assignment, encumbrance,
charge, pledge or set off in respect of any claim, debt or obligation or to the
execution, attachment, levy or similar process or assignment by operation of
law. Any attempt, voluntary or involuntary to effect any acts as specified in
the immediately preceding sentence shall, to the full extent prevented by law,
be null, void and of no effect. Any of the foregoing to the contrary
notwithstanding, this provision shall not preclude Individual from designating
one or more beneficiaries to receive any amount that may be payable after his
death, and shall not preclude the legal representative of the Individual's
estate from assigning any right hereunder to the person or persons entitled
thereto under this will or in a case of intestacy laws applicable to his
estate.
18. TRANSFER OF RIGHTS. Individuals shall have the right to
transfer this Agreement to a management company formed, owned and operated
wholly by Individuals, along with the right to receive any payments due under
the terms of this Agreement, upon written notification to the Company.
19
<PAGE> 4
Individuals and the Company (by action of its duly authorized officer) have
executed this Agreement on the date first written above.
Little Rock Back Yard Burgers, Inc.
- ----------------------------------------------------------
Lattimore M. Michael, Chairman and Chief Executive Officer
STATE OF TENNESSEE
COUNTY OF SHELBY
WITNESS my hand and notarial seal at my office in said state and
county this ______ day of September, 1996.
----------------------------------
NOTARY PUBLIC
My Commission Expires: May 14, 2000
Gifford D. Powell
- ----------------------------------------------------------
Individual
James Timothy Collins
- ----------------------------------------------------------
Individual
STATE OF ARKANSAS
COUNTY OF ______________
WITNESS my hand and notarial seal at my office in said state and
county this _____ day of September, 1996.
----------------------------------
NOTARY PUBLIC
My Commission Expires: ______________
20
<PAGE> 1
EXHIBIT 11
BACK YARD BURGERS, INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
----- -----
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $ 242 $ (17) $ 413 $ 13
========== ======== ========= =========
Weighted average number
of common shares outstanding
during the period 4,229 4,151 4,217 3,721
Preferred shares convertible
to common shares 317 382 324 812
---------- -------- --------- ---------
4,546 4,533 4,541 4,533
========== ======== ========= =========
Primary income (loss) per share $ .05 $ (.00) $ .09 $ .00
========== ======== ========= =========
Primary weighted average number
of common shares outstanding
during the period 4,229 4,151 4,217 3,721
Preferred shares convertible
to common shares 317 382 324 812
---------- -------- --------- ---------
4,546 4,533 4,541 4,533
========== ======== ========= =========
Fully diluted income (loss) per share $ .05 $ (.00) $ .09 $ .00
========== ======== ========= =========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 28, 1996 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-28-1996
<CASH> 856
<SECURITIES> 0
<RECEIVABLES> 360<F1>
<ALLOWANCES> 0
<INVENTORY> 164
<CURRENT-ASSETS> 1,456
<PP&E> 8,008<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,246
<CURRENT-LIABILITIES> 945
<BONDS> 0
0
3
<COMMON> 42
<OTHER-SE> 8,116
<TOTAL-LIABILITY-AND-EQUITY> 11,246
<SALES> 16,563
<TOTAL-REVENUES> 17,849
<CGS> 5,536
<TOTAL-COSTS> 13,642
<OTHER-EXPENSES> 3,542
<LOSS-PROVISION> 80
<INTEREST-EXPENSE> 172
<INCOME-PRETAX> 413
<INCOME-TAX> 0
<INCOME-CONTINUING> 413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 413
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
<FN>
<F1>Asset Value Represents Net Amount
</FN>
</TABLE>
