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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
Commission file number 1-12104
BACK YARD BURGERS, INC.
(Name of small business issuer 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) (Zip code)
(901) 367-0888
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE SECURITIES EXCHANGE ACT
OF 1934:
Name of Each Exchange
Title of Each Class on Which Registered
-------------------- ----------------------
Common Stock, $.01 par value Chicago Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE SECURITIES EXCHANGE ACT
OF 1934:
Name of Each Market
Title of Each Class on Which Listed
------------------- ---------------
Common Stock, $.01 par value NASDAQ Small-Cap Market
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
---- ----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge in definitive proxy or in information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Issuer's revenues for its most recent fiscal year were $24,041,000.
The aggregate market value of voting stock held by non-affiliates on
February 28, 1997, was approximately $5,369,000.
The number of shares outstanding of the Registrant's Common Stock, $.01
par value and Preferred Stock, $.01 par value, as of February 28, 1997 was
4,246,158 and 308,115, respectively.
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CERTAIN PORTIONS OF PART II ARE INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 28, 1996
AND CERTAIN PORTIONS OF PART III ARE INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S PROXY STATEMENT RELATING TO THE ANNUAL MEETING OF STOCKHOLDERS TO
BE HELD ON MAY 22, 1997.
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FORM 10-KSB INDEX
<TABLE>
<CAPTION>
Part I
<S> <C> <C>
Item 1 Business .................................................... 1
Business Development ....................................... 1
Concept and Strategy ....................................... 1
Restaurant Operations ...................................... 2
Franchise Operations ....................................... 5
Competition ................................................ 7
Trademarks and Service Marks ............................... 8
Government Regulations ..................................... 8
Executive Officers of the Company .......................... 9
Employees .................................................. 9
Item 2 Properties .................................................. 10
Item 3 Litigation .................................................. 10
Item 4 Submission of Matters to a Vote of Security-Holders.......... 10
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters ........................................ 11
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 11
Item 7 Financial Statements ........................................ 11
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................ 11
Part III
Item 9 Directors and Executive Officers of the Company ............ 12
Item 10 Executive Compensation ..................................... 12
Item 11 Security Ownership of Certain Beneficial Owners
and Management ............................................ 12
Item 12 Certain Relationships and Related Transactions ............. 12
Item 13 Exhibits and Reports on Form 8-K ........................... 12
</TABLE>
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PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
The Company operates and franchises quick-service restaurants under the
name Back Yard Burgers(R) (the "Restaurants"). The Company was incorporated in
December, 1986 as Back Yard Burgers, Inc., a Mississippi corporation, and
opened its first Restaurant in Cleveland, Mississippi in March 1987. The
Company was reorganized under the laws of the State of Delaware in January 1991
and succeeded to the business operated by Back Yard Burgers Mississippi.
Unless the context requires otherwise, references in this Annual Report to the
"Company" and its operations mean Back Yard Burgers, Inc., a Delaware
corporation, the surviving corporation in the merger transaction described
below.
The Company consummated a merger transaction in which it acquired certain
Restaurants and area development rights concurrently with the closing of the
Company's Initial Public Offering on July 2, 1993 (the "Offering"). As of June
1, 1993, giving effect to said merger transaction, the Company operated and
franchised 45 Restaurants (8 Company-operated and 37 franchised) in 13 States.
As of December 28, 1996, the Company had expanded its operations to 34
Restaurants, in addition to having 47 franchised Restaurants in operation in a
total of 16 states.
CONCEPT AND STRATEGY
The Restaurants are designed to project a backyard theme that emphasizes
charbroiled, freshly prepared, great tasting food, including gourmet
hamburgers, chicken sandwiches and other gourmet sandwich items as customers
would prepare in their own backyard. The Company's operating strategy
includes:
- offering a diverse menu of freshly prepared food items that are
competitive with the everyday prices of the four largest hamburger
chains;
- utilizing Restaurant designs featuring a single drive-thru concept
integrated with indoor dining, which projects a uniform image and
creates pleasing curb appeal.
- serving high quality, great tasting food comparable to that of
sit-down casual dining restaurants;
- providing fast and friendly service with emphasis on the customer
experience; and
- actively training, supervising and supporting franchised and
Company-operated Restaurants.
The Company's strategy for the next twelve months is to focus on (i) the
retrofitting of existing double drive-thru Restaurants into single drive-thru
concepts integrated with indoor dining, (ii) the addition of strategically
placed Company-operated Restaurants, (iii) the operational development of
Company-operated Restaurants, (iv) the development of additional franchised
Restaurants expected to be opened pursuant to existing Area Development
Agreements (as defined) and Franchise Agreements (as defined), and (v) the
pursuit of additional franchised Restaurants pursuant to new Area Development
Agreements and Franchise Agreements.
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RESTAURANT OPERATIONS
Restaurant Locations. The following table sets forth the number of
Restaurants located in each market of the Company's system at December 28,
1996.
Company-operated
(34 Restaurants)
<TABLE>
<S> <C> <C>
TENNESSEE: MISSISSIPPI: ARKANSAS:
Bartlett (1) Horn Lake (1) Benton (1)
Brentwood (1) Conway (1)
Collierville(1) TEXAS: Fort Smith (1)
Cordova (1) Austin (1) Jacksonville (1)
Franklin (2) Little Rock (5)
Germantown (1) North Little Rock (2)
Memphis (10)
Millington (1)
Nashville (3)
Franchised
(47 Restaurants)
ALABAMA:
Anniston (1) ARKANSAS: TEXAS:
Birmingham (1) Bentonville (1) Texarkana (1)
Jonesboro (1)
KANSAS: Rogers (1) TENNESSEE:
Olathe (1) Fayetteville (1) Chattanooga (1)
Overland Park(2) West Memphis (1) Cleveland (1)
Jackson (1)
FLORIDA: KENTUCKY: Hixson (1)
Deerfield Beach (1) Paducah (1) Knoxville (3)
Fort Lauderdale (1)
Sarasota (1) LOUISIANA: MISSOURI:
Orlando (1) Bossier City (1) Springfield (2)
OKLAHOMA:
Tulsa (1) OHIO: NEBRASKA
Columbus (3) South Sioux City (1)
GEORGIA: Wooster (1)
Marietta (2) NORTH CAROLINA:
MISSISSIPPI: Asheville (1)
SOUTH CAROLINA Jackson (1) Boone (1)
Greenville (1) Meridian (1) Charlotte (2)
Clarksdale (1) Fayetteville (2)
Cleveland (1) Lenoir (1)
Tupelo (1)
</TABLE>
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The following table sets forth information as to the sales of both
Company-operated and franchised Restaurants in operation for the periods
indicated.
52-Week Period Ended
<TABLE>
<CAPTION>
December 28, 1996 December 30, 1995
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<S> <C> <C>
Company-operated $22,281,000 $21,196,000
Franchised 27,234,000 22,469,000
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System-wide $49,515,000 $43,665,000
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</TABLE>
Restaurant Openings and Closings. The following table presents an
activity summary of the Company-operated and franchised Restaurants during the
periods presented.
<TABLE>
<CAPTION>
52 Weeks Ended
---------------------------------------------------- Year Ended December 31,
December 28, December 30, December 31, January 1, -----------------------
1996 1995 1994 1994 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<C> <C> <C> <C> <C> <C> <C>
Restaurants
Company-operated
Open beginning of period 32 26 15 3 2 3 2
Opened during period 2 5 10 1 1 -- 1
Converted from Franchised 1 2 1 11 -- -- --
Converted to Franchised (1) -- -- -- -- -- --
Closed during period -- (1) -- -- -- (1) --
--- --- --- --- --- --- ---
Open at end of period 34 32 26 15 3 2 3
--- --- --- --- --- --- ---
Franchised (a)
Open beginning of period 36 39 36 39 27 19 9
Opened during period 11 7 16 11 13 10 12
Converted to Company-operated (1) (2) (1) (11) -- -- --
Converted from Company-
operated 1 -- -- -- -- -- --
Closed during period -- (8) (12) (3) (1) (2) (2)
--- --- --- --- --- --- ---
Open at end of period 47 36 39 36 39 27 19
--- --- --- --- --- --- ---
Total Restaurants 81 68 65 51 42 29 22
=== === === === === === ===
</TABLE>
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(a) Subsequent to December 28, 1996, one franchised Restaurant closed in
Springfield, Missouri, one Company-operated Restaurant was converted to a
franchised Restaurant in Fort Smith, Arkansas and one Company-operated
Restaurant was closed in Nashville, Tennessee.
Site Selection. The Company believes that the location of a Restaurant is
critical to its success. Management inspects each potential Restaurant site
prior to final selection of the site. In evaluating particular sites, the
Company considers various criteria including traffic count, speed of traffic,
convenient access, size and configuration, demographics and density of
population, visibility and cost. The Company also reviews potential
competition and the sales and traffic counts of national and regional chain
restaurants operating in the area. A majority of both Company-operated and
franchised Restaurants are located on leased land and the Company intends to
continue to use leased sites where possible.
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Restaurant Design and Service. The Restaurants are built to
Company-approved specifications in configurations including single drive-thru
with indoor dining, double drive-thru without indoor dining, and double
drive-thru with indoor dining. In limited circumstances, Restaurants may be
constructed via the conversion of buildings used previously by other concepts,
including other restaurants. The size of the Restaurants range from 820 square
feet to 3,400 square feet. The Restaurants also include Company-approved
interior and exterior decor, equipment, fixtures, furnishings, signs, parking,
and site improvements. The Restaurants have a highly visible, distinctive, and
uniform look that is intended to appeal to customers of all ages.
Prior to 1994, the Company operated and franchised predominately double
drive-thru restaurants without indoor dining. From 1994 - 1996, seven
Company-operated Restaurants and 19 franchised Restaurants were added that
contained indoor dining facilities and one Company-operated Restaurant and five
franchised Restaurants were retrofitted to include indoor dining facilities.
This brings the total number of Restaurants with indoor dining to 12
Company-operated and 25 Franchised.
It is the Company's objective to serve customers within 60 seconds of
their arrival at the drive-thru window. Each Restaurant has a computerized
point-of-sale system which displays each individual item ordered on a monitor
in front of the food and drink preparers. This enables the preparers to begin
filling an order before the order is completed and totaled and thereby
increases the speed of service to the customer and the number of sales per
hour. The Restaurants are generally open from 12 to 15 hours per day, seven
days a week, for lunch, dinner and late-night snacks and meals.
Supplies. The Company and its franchisees purchase their food, beverages
and supplies from Company-approved suppliers. All products must meet standards
and specifications set by the Company. Management constantly monitors the
quality of the food, beverages and supplies provided to the Restaurants. The
Company has been successful in negotiating price concessions from suppliers for
bulk purchases of food and paper supplies used by the Restaurants. The Company
believes that these arrangements have achieved cost savings, improved food
quality and consistency and helped decrease volatility of food and supply costs
for the Restaurants. All essential food and beverage products are available
or, upon short notice, could be made available from alternate qualified
suppliers.
Management and Employees. Each Company-operated Restaurant employs an
average of approximately 25 hourly employees, many of whom work part-time. The
management staff of a typical Restaurant operated by the Company consists of a
unit supervisor and two co-unit supervisors. Each Company-operated Restaurant
unit supervisor reports directly to a district manager. The district managers
are able to provide close, hands-on management of each Company-operated
Restaurant since they have responsibility for only five to eight Restaurants.
Each district manager reports directly to a director of operations.
Supervision and Training. The Company believes that training and
personnel development is crucial for the success of the Company. The Company's
training program is an intensive four week program consisting of both in-store
and classroom training. The in-store training stresses food quality, fast,
friendly customer service, restaurant cleanliness, and proper management
operations of a quick service restaurant. The classroom training consists of
such topics as food safety and sanitation, employment laws and regulations,
interviewing and hiring of employees, and systems to control both food and
labor costs. Prior to opening, each Restaurant must have a minimum of three
trained and certified managers that have successfully completed the Company
training program.
For new store openings, the Company sends a store opening team for each
new Restaurant opening. The team arrives prior to the opening and stays during
the first several days of operation. The primary function of the store opening
team is to ensure a smooth and successful new store opening by assisting the
franchisee's management staff in the training and development of their
employees.
The Company has a staff of three franchise district managers that visit
each Restaurant in their territory every eight to ten weeks. Franchise
district managers act as business consultants to franchisees to ensure that
each Restaurant is providing quality products and fast, friendly service. The
franchise district manager acts as the
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communication link between the Company and each franchisee. In addition, the
district manager assists in developing business and marketing plans, as well as
assisting in the training and development of the franchisee's staff. Presently,
the Company has one franchise district manager for each 16 Restaurants. That
ratio will increase as existing franchisees develop new stores within existing
territories. Franchise district managers are compensated on a fixed salary
basis.
Advertising and Promotion. Marketing promotions are planned by the
Company's national marketing committee made up of four Company employees and
four franchisees, two chosen by the Company's franchise association and two
chosen by the Company and certain of its executive officers. Production of some
marketing materials is paid for through a national advertising fund which
collects 1% of taxable sales from each franchisee and Company-operated
Restaurant. Of that 1%, 50% goes toward the creation of marketing tools such as
advertising copy for use on local radio and television, ad slicks, four-color
art, design and other collateral pieces and marketing expenses and 50% goes
toward testing new products and systems, market research, improvements in
operation methods and techniques or for other such purposes that the Company
shall deem to be in the interest of improving operations and earnings of
Restaurants.
Franchisees are required to participate in the seasonal promotions which
are supported by television, radio, newspaper, banners, point-of-purchase
materials, and other local store marketing activities. The Company's marketing
manual outlines advertising and public relations promotions as well as new
store opening information, grand opening information, trade area surveys and
describes how to write a marketing plan and budget for the franchisee's area.
Marketing is supported by a staff consisting of a marketing director and
marketing managers who coordinate plans and implementation with a national
advertising agency. Approved suppliers are set up to facilitate such things as
uniforms and collateral materials.
Restaurant Reporting. Each Restaurant has a computerized point-of-sale
system monitored by the management of the Restaurant. With this system, managers
are able to monitor sales, labor and food costs, customer counts and other
pertinent information every 30 minutes that the Restaurant is open. This
information allows a manager to better control labor utilization, inventories
and operating costs. With respect to each of the Restaurants it operates, the
management of the Company monitors sales, food and labor costs, product mix,
inventories and customer counts on a weekly basis and profit and loss statements
and balance sheets on a monthly basis.
FRANCHISE OPERATIONS
Strategy. In addition to the operational development of Company-operated
Restaurants, the Company will focus on (i) the retrofitting of existing double
drive-thru Restaurants into single drive-thru concepts integrated with indoor
dining, (ii) the addition of strategically placed Company-operated Restaurants,
(iii) the operational development of Company-operated Restaurants, (iv) the
development of additional franchised Restaurants expected to be opened pursuant
to existing Area Development Agreements and Franchise Agreements (as defined)
and (v) the pursuit of additional franchised Restaurants pursuant to new area
Development Agreements and Franchise Agreements. The Company believes that it
has attracted a hard working group of franchisees as a result of the strength of
its concepts and operating strategies.
Franchisee Support Services. The Company maintains a staff of well-trained
and experienced Restaurant operations personnel whose sole responsibilities are
to help train and assist franchisees in opening new Restaurants and to monitor
the operations of existing Restaurants. These services are provided as part of
the Company's franchise program. Upon the opening of a new franchised
Restaurant, the Company sends an opening team to the Restaurant to assist the
franchisee during the first several days that the Restaurant is open. This
management team works in the Restaurant to monitor compliance with the Company's
standards as to quality of product and service. The Company employs three
franchise district managers, each of whom supervises approximately 12 to 18
franchised Restaurants in defined geographic areas. Each franchise district
manager has been fully trained by the Company to assist franchisees in
implementing the operating procedures and policies of the Company once a
Restaurant is open. As part of these services, the franchise service
representative rates the Restaurant's hospitality, food quality, speed of
service
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and cleanliness and maintenance of facilities. The franchisees receive a written
report of his findings and, if any deficiencies are noted, recommended
procedures to be followed to correct such deficiencies.
The Company also provides construction support services to its franchisees.
All site plans must be approved by the Company before construction or site
improvements begin. These plans include information detailing building location,
internal traffic patterns and curb cuts, location of utilities, walkways,
driveways, signs and parking lots and a complete landscape plan. The Company
also approves all plans and specifications for the Restaurant building to ensure
uniformity of design of the building and the site improvements. The Company's
personnel also visit the site during construction, to meet with the franchisees
and verify that all standards are met.
Area Development and Franchise Agreements. Except in those instances where
a franchisee operates a single Restaurant under a single Franchise Agreement,
each franchisee is required to execute two agreements (consisting of an "Area
Development Agreement" and a "Franchise Agreement"). The Area Development
Agreement grants to the franchisee the right to develop and open a specified
number of Restaurants within a limited period of time and in a defined
geographic area (the "Territory") and thereafter to operate each Restaurant in
accordance with the terms and conditions of the Franchise Agreement. The
Franchise Agreement grants to the franchisee an exclusive license at a specified
location to operate a Restaurant in accordance with the Back Yard Burgers system
and to utilize the Company's trademarks, service marks and other rights of the
Company relating to the sale of its menu items. The term of a Franchise
Agreement is 10 years, renewable for successive five year periods, if certain
conditions pertaining to such renewal are met, including the payment of a $500
renewal fee.
Each Area Development Agreement establishes the number of Restaurants the
franchisee is to construct and open in the Territory during the term of the Area
Development Agreement after considering many factors, including the residential,
commercial and industrial characteristics of the area, geographic factors,
population of the area and the previous experience of the franchisee. The
franchisee's development schedule for the Restaurants is set forth in the Area
Development Agreement. As of December 28, 1996, the Company had entered into
Franchise Agreements and Area Development Agreements with certain franchisees
which require them to open or have under construction a minimum of 23
Restaurants by the end of January 1, 2000. Of the 47 Restaurants as of December
28, 1996, 32 were being operated under Area Development Agreements by multiple
unit franchisees and 15 were being operated under single Franchise Agreements by
single unit franchisees. The Company may revoke an Area Development Agreement of
any franchisee who is unsuccessful in meeting its projected development
schedule. To date, the Company has exercised its right to terminate 30 Area
Development Agreements (but none during the 52-week period ended December 28,
1996) for lack of performance of multiple unit franchisees with respect to their
projected development schedules, as well as ten single Franchise Agreements
because of a lack of performance by single unit franchisees with respect to
certain Franchise Agreement requirements. The Company believes that its overall
experience with franchisees who commit to develop Restaurants under Franchise
Agreements and Area Development Agreements has been favorable, although there
can be no assurance that future performance by franchisees under these
agreements will be successful.
The Franchise Agreement and Area Development Agreement require that the
franchisee submit information regarding proposed Restaurant sites to the Company
for its review. The Company does not arrange or make any provisions for
financing the development of Restaurants by its franchisees. Each franchisee is
required to purchase all fixtures, equipment, inventory, products, ingredients,
materials and other supplies used in the operation of its Restaurants from
approved suppliers, all in accordance with the Company's specifications. The
Company provides a training program for management personnel of its franchisees.
Under the terms of the Franchise Agreement, the Company has adopted standards of
quality, service and food preparation for franchised Restaurants. Each
franchisee is required to comply with all of the standards for Restaurant
operations as published from time to time in the Company's operations manual.
The Company may terminate a Franchise Agreement for several reasons,
including among others, the franchisee's bankruptcy or insolvency, default in
the payment of royalties or advertising fees to the Company, failure to maintain
standards set forth in the Franchise Agreement or operations manual, material
violation of any law,
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ordinance or governmental rule or regulation or cessation of business. In such
event, the Company may also elect to terminate a multiple unit franchisee's Area
Development Agreement.
Franchise Fees and Royalties. Under the current Franchise Agreement, each
franchisee is generally required to pay a franchise fee (the "Franchise Fee") of
$25,000. If a franchisee purchases an area pursuant to an Area Development
Agreement, the franchisee must pay $25,000 for the first Restaurant and agree to
pay a Franchise Fee of $22,000 for each additional Restaurant covered under the
agreement. With respect to the Area Development Agreement, the amount of the fee
(the "Area Development Fee") varies depending upon the number of Restaurants the
Company estimates can be developed within the Territory. Upon signing the Area
Development Agreement, the franchisee will pay to the Company a Franchise Fee of
$25,000 for the first Restaurant, plus a $5,000 (per Restaurant) Area
Development Fee (to be credited toward the subsequent $22,000 Franchise Fees(s))
for subsequent Restaurants covered under the Area Development Agreement. For
example, for a franchisee whose Area Development Agreement requires the
development of five Restaurants, the Franchise Fee will be $25,000 for the first
Restaurant, and $17,000 ($22,000 less $5,000) for each of the next four
Restaurants for an aggregate total of $113,000. Each franchisee is also
generally required to pay the Company a weekly royalty of 4% of the Restaurant's
taxable sales and to pay 1% of the Restaurant's weekly taxable sales to the
Company's national advertising fund. Each Restaurant is required to spend 2% of
the Restaurant's taxable sales on local store marketing.
COMPETITION
Restaurant Operations. The restaurant industry, and particularly the fast
food segment is highly competitive with respect to price, service, food quality
and location and there are numerous well-established competitors possessing
substantially greater financial, marketing, personnel and other resources than
the Company. The Company believes that its direct competitors consist of the
four largest hamburger chains (i.e., McDonald's, Burger King, Wendy's and
Hardee's). In addition, there are other national, regional and local fast food
chains, many of which specialize in or offer hamburger products. The Company can
also be expected to face competition from a broad range of other restaurants and
food service establishments. Many of the Company's competitors have achieved
significant national, regional and local brand name and product recognition and
engage in extensive advertising and promotional programs, both generally and in
response to efforts by additional competitors to enter new markets or introduce
new products. In addition, the fast food industry is characterized by the
frequent introduction of new products, accompanied by substantial promotional
campaigns. In recent years, numerous companies in the fast food industry have
introduced products positioned to capitalize on growing consumer preference for
food products which are, or are perceived to be, healthful, nutritious low in
calories and low in fat content. It can be expected that the Company will be
subject to competition from companies whose products or marketing strategies
address these consumer preferences. In addition, the market for suitable
Restaurant locations is highly competitive in that fast food companies, major
restaurant companies and non-food companies compete for prime real estate sites.
Certain Factors Affecting the Fast Food Restaurant Industry. The Company
will be required to respond to various factors affecting the restaurant
industry, including changes in consumer preferences, tastes and eating habits,
demographic trends and traffic patterns, increases in food and labor costs and
national, regional and local economic conditions. A number of fast food
restaurant companies have recently been experiencing flattening growth rates and
declines in average sales per restaurant, in response to which certain of such
companies have adopted "value pricing" strategies. Such strategies could have
the effect of drawing customers away from companies which do not engage in
discount pricing and could also negatively impact the operating margins of
competitors, including the Company, which do attempt to match competitors' price
reductions.
Franchise Operations. In addition to its Restaurant operations, the Company
competes with fast food chains, major restaurant chains and other franchisors
for franchisees. Many franchisors, including those in the restaurant industry
have greater market recognition and greater financial, marketing and human
resources.
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TRADEMARKS AND SERVICE MARKS
The Company believes its trademarks and service marks have significant
value and are important to its marketing efforts. The Company has registered
certain trademarks and service marks (including the name "Great Little Burger")
with the United States Patent and Trademark Office. The Company has also
registered the name "Back Yard Burgers" and the kettle and flame design as
service marks. The Company's policy is to pursue registration of its marks
whenever possible and to oppose vigorously any infringement of its marks.
GOVERNMENT REGULATIONS
The Company is subject to Federal Trade Commission ("FTC") regulation and
several state laws which regulate the offer and sale of franchises. The Company
is also subject to a number of state laws which regulates substantive aspects of
the franchisor -- franchisee relationship. The FTC's Trade Regulation Rule on
Franchising (the "FTC Rule") requires the Company to furnish to prospective
franchisees a franchise offering circular containing information prescribed by
the FTC Rule.
State laws that regulate the offer and sale of franchises and the
franchisor -- franchisee relationship presently exist in a substantial number of
states. Such laws generally require registration of the franchise offering with
state authorities and regulate the franchise relationship by, for example,
requiring the franchisor to deal with its franchisees in good faith, prohibiting
interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisee and regulating
discrimination against franchisees in charges, royalties or fees. Although such
laws may restrict a franchisor in the termination of a franchise agreement by,
for example, requiring "good cause" to exist as a basis for the termination,
advance notice to the franchisee of the termination, an opportunity to cure a
default and a repurchase of inventory or other compensation, these provisions
have not had a significant effect on the Company's franchise operations. The
Company is not aware of any pending franchise legislation which in its view is
likely to affect significantly the operations of the Company. The Company
believes that its operations comply in all material respects with the FTC Rule
and the applicable state franchise laws.
Each Company-operated and franchised Restaurant is subject to licensing and
regulation by a number of governmental authorities, which may include health,
sanitation, safety, fire, building and other agencies in the state or
municipality in which the Restaurant is located. Difficulties in obtaining or
failure to obtain the required licenses or approvals could delay or prevent the
development of a new Restaurant in a particular area. The Company is subject to
federal and state environmental regulations, but these have not had a material
effect on the Company's operations. More stringent and varied requirements of
local governmental bodies with respect to zoning, land use and environmental
factors could delay or prevent the development of a new Restaurant in a
particular area.
The Company is also subject to state and federal labor laws that govern its
relationship with its employees, such as minimum wage requirements, overtime and
working conditions and citizenship requirements. Significant numbers of the
Company's food service and preparation personnel are paid at rates governed by
the federal minimum wage. Accordingly, further increases in the minimum wage
would increase the Company's labor costs.
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EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Name and Age Title
- ------------ -----
<S> <C>
Lattimore M. Michael Mr. Michael has been Chairman and Chief
(53) Executive Officer since 1993. From 1987 to
1992, Mr. Michael was the Company's
President and Chief Executive Officer.
Joseph L. Weiss Mr. Weiss has been President and Chief
(37) Operating Officer since 1993; From 1989 to
1993, Mr. Weiss was the Company's
Secretary/Treasurer; From 1989 to 1993, Mr.
Weiss was also the President of Double S
Development, Inc., a Mississippi
corporation, which owned and operated
franchised Company restaurants in the
metropolitan area.
William N. Griffith Mr. Griffith has been Executive Vice
(34) President and Secretary/Treasurer of the
Company since 1993; From 1989 to 1992, Mr.
Griffith was the Company's Senior Vice
President - Operations.
Stephen J. King Mr. King has been Chief Financial Officer
(45) and Principal Accounting Officer since July
1993. From 1988 to 1993, Mr. King was the
Comptroller for Southland Racing
Corporation, a greyhound racing facility in
West Memphis, Arkansas. Prior to 1988, Mr.
King practiced accounting at Price
Waterhouse.
Michael C. McDermott Executive Vice President - Company
(50) Operations. Mr. McDermott joined the
Company in September, 1996; From April 1996
to September 1996, he was an operating
partner for Wyatt's Cafeterias; From August
1995 to November 1995, he was an
owner/operator of Hudson's Grills; and from
1992 to 1995, he was a regional manager for
Country Harvest Buffet, Inc. Prior to 1992,
Mr. McDermott was Vice President of
Operations for O'Charley's Inc.
Stephen C. Reid Vice President-Research and Development.
(38) Mr. Reid has been an executive officer of
the Company since 1988.
John C. Arnold Vice President-Training. Mr. Arnold has
(42) been an executive officer of the Company
since 1990.
</TABLE>
EMPLOYEES
As of February 28, 1997, the Company employed approximately 1,050 persons
in its Restaurant operations, 20 of whom are corporate personnel, 100 of whom
are Restaurant management and supervisory personnel and the remainder of whom
are hourly Restaurant personnel. Of the 20 corporate employees, 8 are in
management positions and 12 are administrative or office employees.
9
<PAGE> 12
ITEM 2. PROPERTIES
Of the 34 Restaurants which were operated by the Company as of December 28,
1996, the Company has entered into ground leases, as lessee for 32 Restaurants.
The Company owns the real property for two Company-operated Restaurants. The
Company's leases are generally written for a term of from five to 15 years with
one or more five year renewal options. The Company's average monthly lease cost
for the 23 Company-operated Restaurants located on leased sites is approximately
$2,900 per month. For the nine Restaurants where the Company leases the
building as well as the site, the average monthly cost is approximately
$4,500 per month. Most leases are treated as operating leases. Leasehold
improvements made by the Company generally become the property of the landlord
upon expiration or earlier termination of the lease; however, in most
instances, if the Company is not in default under the lease, modular buildings
remain the property of the Company and can be removed from the site upon
expiration of the ground lease. With respect to the buildings and equipment
relating to the 34 Company-operated Restaurants, management believes that its
commercial insurance coverage is adequate.
The Company's executive offices are located in approximately 4,800 square
feet of leased space at 2768 Colony Park Drive, Memphis, Tennessee 38118. The
Company's lease will expire on October 15, 1997, and provides for a minimum
annual rent of $44,400.
ITEM 3. LITIGATION
The Company is involved in 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 of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No items are reportable hereunder.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.01 par value (the "Common Stock") is traded
and quoted on The Nasdaq SmallCap Market tier of the National Association of
Securities Dealers Automated Quotation System ("Nasdaq") under the symbol "BYBI"
and on the Chicago Stock Exchange (the "CSE") under the symbol "BYB." However,
due to the low trading volume and expense associated with the Company's listing
on the CSE, the Company intends to seek stockholder approval at its Annual
Meeting of Stockholders to be held May 22, 1997 of a proposal for the CSE to
de-list the shares from trading. The following table sets forth, for all the
periods indicated, the high and low bid prices for the Common Stock as reported
by Nasdaq, the market on which the majority of trades involving the Common Stock
occur. Such price information contains inter-dealer prices, without retail
mark-up, mark-down or commissions paid, and may not necessarily reflect actual
transactions.
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
March 30, 1996 ...... $2.00 $1.50
June 29, 1996 ....... $2.63 $1.50
September 28, 1996 .. $2.44 $1.75
December 28, 1996 ... $2.44 $1.75
</TABLE>
At February 28, 1997, the Common Stock was held of record by approximately
800 record stockholders. On February 28, 1997, the last sale price for the
Common Stock as reported by Nasdaq was $2.00 per share.
The Company has not paid or declared cash distributions or dividends and
does not intend to pay cash dividends on the Common Stock or its Preferred
Stock, $.01 par value, in the foreseeable future. Future cash dividends, if any,
will be determined by the Board of Directors based on the Company's earnings,
financial condition, capital requirements and other relevant factors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference from the Company's Annual Report for the
Annual Meeting of Stockholders to be held May 22, 1997.
ITEM 7. FINANCIAL STATEMENTS
Incorporated herein by reference from the Company's Annual Report for the
Annual Meeting of Stockholders to be held May 22, 1997.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No items are reportable hereunder.
11
<PAGE> 14
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 22, 1997, to be
filed pursuant to Regulation 14A. Information concerning the Company's executive
officers is contained in response to Item 1 of Part I.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 22, 1997, to be
filed pursuant to Regulation 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 22, 1997, to be
filed pursuant to Regulation 14A.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 22, 1997, to be
filed pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ---------
<S> <C>
3.1 Restated Certificate of Incorporation.(6)
3.2 Amended and Restated By-Laws.(3)
4.1 Specimen Common Stock Certificate.(3)
4.2 Warrant of ABYB delivered to a stockholder of ABYB, who received
a like number of ABYB shares (the "Bridge Investor") as part of
certain short-term unsecured financing provided to ABYB in
February 28993.(1) Such Warrant is now a Warrant for a like
number of the Registrant's common shares.
4.3 Underwriter's Warrant delivered to Franklin-Lord, Inc.(2)
</TABLE>
12
<PAGE> 15
<TABLE>
<S> <C>
10.1 Employment Agreement, dated April 15, 1993, between the
Registrant and Lattimore M. Michael.(1)
10.2 Form of Employment Agreement executed as of June 6, 1993, between
the Registrant and Joseph L. Weiss.(3)
10.3 Form of Employment Agreement executed as of June 6, 1993, between
the Registrant and William N. Griffith.(3)
10.4 Form of Incentive Stock Option Plan of 1993.(1)
10.5 Lease, dated February 1, 1990, between Trezevant Properties and
the Registrant.(1)
10.6 Joint Venture Agreement of Lester's Back Yard Burgers Joint
Venture I by and among William L. Lester, Pattie F. Lester,
Patricia B. Litow, Elizabeth B. Fox and Back Yard Burgers, Inc.,
dated November 15, 1994.(5)
10.7 Joint Venture Agreement of Lester's Back Yard Burgers Joint
Venture II by and among William L. Lester, Pattie F. Lester,
Patricia B. Litow, Elizabeth B. Fox, Charles B. Fox, David P. Fox
and Back Yard Burgers, Inc., dated November 15, 1994.(5)
10.8 1995 Employee Stock Purchase Plan of Back Yard Burgers, Inc.(6)
10.9 The 1995 Incentive Award Plan of Back Yard Burgers, Inc.(6)
10.10 Joint Venture Agreement of Lester's Back Yard Burgers Joint
Venture III by and among Pattie F. Lester, Patricia B. Litow,
Elizabeth B. Fox, Charles B. Fox, David P. Fox, Alexandra B.
Litow, Andrew R. Litow and Back Yard Burgers, Inc., dated
September 12, 1995.(6)
10.11 Line of Credit Commitment by and between Trust One Bank
and Back Yard Burgers, Inc. dated December 20, 1995.(7)
10.12* Loan committment by and between Phoenix Leasing Incorporated and
Back Yard Burgers, Inc. dated October 4, 1996.
10.13* Loan committment by and between Trust One Bank and Back Yard
Burgers, Inc. dated January 23, 1997.
11* Statement re: Computation of Net Income (Loss) per Share
13* Registrant's Annual Report to Stockholders for the 52-week period
ended December 28, 1996. Portions of the Annual Report not
specifically incorporated by reference herein are not deemed to
be filed herewith.
</TABLE>
13
<PAGE> 16
21 Subsidiaries of the Registrant.(4)
______________
* Filed herewith.
<TABLE>
<S> <C>
(1) Previously filed with the Commission as an Exhibit to the Registrant's
Form SB-2 on April 20, 1993 (File No. 33-61356).
(2) Previously filed with the Commission as an Exhibit to the Registrant's
Amendment No. 1 to Form SB-2 on June 11, 1993 (File No. 33-61356).
(3) Previously filed with the Commission as an Exhibit to the Registrant's
Amendment No. 2 to Form SB-2 on June 25, 1993 (File No. 33-61356).
(4) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-KSB, dated January 1, 1994 and filed on March 30, 1994.
(5) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-KSB, dated December 31, 1994 and filed on March 31, 1995.
(6) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-QSB, dated September 30, 1995 and filed on November 14, 1995.
(7) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-KSB, dated December 30, 1995 and filed on March 29, 1996.
(b) Reports on Form 8-K
None.
</TABLE>
14
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BACK YARD BURGERS, INC.
By: /s/ Lattimore M. Michael
------------------------------
Lattimore M. Michael, Chairman
and Chief Executive Officer
Date: MARCH 26, 1997
------------------------------
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Lattimore M. Michael Chairman, Chief Executive Officer March 26,1997
- --------------------------- and Director
Lattimore M. Michael
/s/ Joseph L. Weiss President, Chief Operating Officer March 26, 1997
- --------------------------- and Director
Joseph L. Weiss
/s/ William N. Griffith Executive Vice President and Director March 26, 1997
- ---------------------------
William N. Griffith
/s/ Stephen J. King Chief Financial Officer March 26, 1997
- --------------------------- and Director
Stephen J. King
/s/ William B. Raiford, III Director March 26, 1997
- ---------------------------
William B. Raiford, III
/s/ W. Kurt Henke Director March 26, 1997
- ---------------------------
W. Kurt Henke
/s/ Joe Colonnetta Director March 26, 1997
- ---------------------------
Joe Colonnetta
</TABLE>
15
<PAGE> 1
Exhibit 10.12
October 4, 1996
Lattimore M. Michael
Back Yard Burgers, Inc.
dba: Back Yard Burgers
2768 Colony Park Drive
Memphis, TN 38118
Dear Mr. Michael:
Phoenix Leasing Incorporated is pleased to offer your organization a commitment
for the loan transaction described below subject to the terms and conditions
listed below:
<TABLE>
<S> <C>
Borrower: Back Yard Burgers, Inc. ("Borrower")
Lender: Phoenix Leasing Incorporated ("PLI")
Transaction Structure: Secured Loan
Commitment Amount: $2,000,000.00
Term of Loan: 72 months End Position: 10%
Rate Factor: .01820 for 72 months and 1% Origination Fee with 1
payment due at closing.
One time .5% Documentation Fee.
Guarantors: Back Yard Burgers, Inc.
Additional Collateral: None
</TABLE>
Borrower must return the following documentation and other items in form and
substance acceptable to PLI with this signed and dated commitment letter.
Articles of Incorporation (if a corporation).
Copy of all Deeds of Trust or Space Leases (including legal
description) covering the real property
where collateral will be located.
Additional deposit of $11,000.00
UPON RECEIPT OF THE ABOVE ITEMS, PLI WILL SEND TO YOU THE FOLLOWING FORMS:
Senior Loan and Security Agreement and Promissory
Note to be properly executed and notarized.
Corporate Resolution to Borrow (if a corporation).
UCC-1 and UCC fixture financing statement.
Acceptance Notice.
Landlord waivers (for non-company owned properties).
<PAGE> 2
October 4, 1996
Back Yard Burgers, Inc.
Page 2
ADDITIONAL DOCUMENTS AND PROCEDURES REQUIRED PRIOR TO FUNDING:
Insurance Certificate showing Phoenix as loss payee and additional
insured, minimum equipment and leasehold coverage.
Equipment to be inspected and tagged prior to each funding. (PLI will
arrange.) Origination Fee equal to 1% of the total principal amount on
each Note/draw. Any other documents PLI may reasonably require.
THIS COMMITMENT EXPIRES THIRTY (30) DAYS AFTER THE DATE HEREOF IF THIS LETTER
IS NOT SIGNED AND RETURNED TO PLI WITH ANY REQUIRED DEPOSIT WITHIN SUCH 30 DAY
PERIOD. IN ALL EVENTS, PLI'S COMMITMENT TO ENTER INTO THE LOAN AND SECURITY
AGREEMENT AND FUND THE LOAN UNDER THE TERMS OF THIS COMMITMENT EXPIRES ON MARCH
24, 1997; PROVIDED, HOWEVER, PLI MAY REVOKE THIS COMMITMENT AT ANY TIME IF (I)
PLI DETERMINES IN ITS SOLE DISCRETION THERE HAS BEEN A MATERIAL ADVERSE CHANGE
IN BORROWER'S'S OR AN AFFILIATE OF BORROWER'S FINANCIAL CONDITION, (II) PLI
RECEIVES ADDITIONAL ADVERSE INFORMATION RELATING TO THE CREDITWORTHINESS,
FINANCIAL CONDITION OR STABILITY, SOLVENCY AND/OR SOUNDNESS OF BORROWER, ANY
AFFILIATE OF BORROWER, ANY GUARANTOR OF BORROWER, OR THE LOAN TRANSACTION OR
(III) AN EVENT OF DEFAULT OCCURS UNDER THE LOAN AND SECURITY AGREEMENT. ALL
FEES AND DEPOSITS WHICH BORROWER PAYS IN CONNECTION WITH THIS TRANSACTION ARE
NONREFUNDABLE (EXCEPT TO THE EXTENT PROVIDED BELOW).
Borrower has previously paid to PLI a deposit of $500.00. If Borrower enters
into a Loan with PLI, PLI will apply the deposit first to reimburse PLI for all
out-of-pocket costs, including, but not limited to, UCC search and preparation
costs, documentation preparation costs in an amount equal to $300.00, title
search costs and attorney's fees, if any. Deposit of $11,000.00 will be used to
cover out of pocket costs and $10,000.00 Documentation Fee. The balance of the
deposit less $10,000.00 Documentation Fee, will be returned to Borrower unless
Borrower (a) fails to execute final documents with PLI, (b) chooses not to use
at least $20,000 of the Commitment Amount, or (c) PLI revokes Borrower's
commitment pursuant to the paragraph above (items I, II or III). If any event
described in (a), (b) or (c) occurs, PLI shall retain the deposit in full. If
out-of-pocket costs exceed $11,500.00, Borrower shall pay any excess in advance.
Borrower acknowledges if this commitment expires before Borrower has utilized
the full amount of the Commitment Amount, and if Borrower wishes to continue
drawing on the commitment Amount, Borrower may reapply and pay PLI an additional
deposit of $500.00 subject to the same conditions described above. PLI may, in
it sole discretion, then extend the period of this commitment.
Borrower acknowledges the Origination Fee is due prior to PLI funding each
Note/draw, and Borrower further acknowledges and agrees that the Origination Fee
shall be refunded to Borrower if PLI does not fund such Note/draw, unless PLI
does not fund such Note/draw due to an Event of Default under the Senior Loan
and Security Agreement. In that event, PLI may retain such Origination Fee.
Borrower acknowledges the 0.5% Documentation Fee is due with this signed
Commitment Letter. This is a one time charge of $10,000.00 which will not be
refunded.
<PAGE> 3
October 4, 1996
Back Yard Burger, Inc.
Page 3
This commitment letter constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes all previous agreements,
promises or representations. This commitment may not be changed or modified
except by an instrument in writing signed by duly authorized representatives of
Borrower and PLI.
By signing below, Borrower acknowledges and agrees that PLI shall have no
liability or obligation to Borrower, including, but not limited to, funding the
loan, until all of the above conditions have been satisfied.
Sincerely,
PHOENIX LEASING INCORPORATED
By:
----------------------------------
Name: Rick Anderson
Title: General Manger, Franchising
ACKNOWLEDGED AND AGREED:
Back Yard Burgers, Inc.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Date:
--------------------------------
<PAGE> 1
Exhibit 10.13
January 23, 1997
Mr. Lattimore Michael
Mr. Steve King
Back Yard Burgers, Inc.
2678 Colony Park Drive
Memphis, TN 38118
Dear Sirs,
Trust One Bank is pleased to make the following commitment:
Borrower: Back Yard Burgers, Inc.
Loan Amount: Up to $765,000, subject to the lower of 80% of cost or appraised
value.
Construction Loan Interest Rate: Trust One Bank Prime Rate plus one percent
(1.0%), floating.
Construction Loan Fee: One-half of one percent, or $3,825.00.
Collateral: First mortgage on property with approximately 29,500 feet and
building to be constructed at the corner of Germantown Parkway and Dexter. All
ff&e at this location also to be taken as collateral
Terms: Construction period of up to 6 months, with interest only payable
monthly. Loan to convert to a term loan at the completion of construction or at
six months, whichever occurs first. The term loan shall be amortized over a 10
year period with a 5 year maturity.
Term loan interest rate: Prime plus one percent, fixed at the time of conversion
to the term loan.
Loan Charges: Borrower hereby agrees to pay all expenses directly related to the
loan incurred, or to be incurred, in its making, servicing, or collection,
including, without limitation, appraisal fee, survey, title search, title
polciy, envirnomental survey, recording fees, attorneys fees, and any other
closing fees.
Other terms and conditions:
1) Borrower shall provide Bank with quarterly 10Q reports, as well as copies of
annual audited financial statements.
2) Borrower shall maintain their operating accounts with Trust One Bank.
3) Borrower shall provide certificate of insurance, with bank named as mortgage
holder on the collateral.
4) Borrower agrees to provide bank with appraisal, title policy, survey, and
environmental phase I survey.
<PAGE> 2
5) Borrower agrees to provide evidence of builders risk, workers compensation
and and general liability.
6) The borrower shall maintain a debt service coverage ratio of 2:01:1.00. This
covenant shall be measured quarterly, The coverage shall be calculated as net
income+dep.+interest divided by total bank and leasing debt service requirement.
7) The $250,000.00 line of credit will be renewed until this trancaction is
closed, at which time the line shall be lowered to $150,000.00. The $75,000
certificate of deposit which serves as partial collateral for the line of credit
will be reduced to $50,000. The maturity of the line of credit shall be January
22, 1998.
Please note that this commitment letter merely highlights the terms and
conditions of the commitment, with the terms and conditions fully detailed in
our loan documentation. Should you wish to accept this commitment, please
indicate by signing below. The commitment letter shall have a maturity date of
May 1, 1997.
Sincerely,
Julie L. Cutler
Senior Vice President
Accepted and agreeded to this _____day of _____________, 1997.
By:
------------------------------
Mr. Steve King
Title:
---------------------------
By:
------------------------------
Mr. Lattimore Michael
Title:
---------------------------
<PAGE> 1
EXHIBIT 11
BACK YARD BURGERS, INC.
COMPUTATION OF NET INCOME PER SHARE
(Unaudited)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended
December 28, December 30,
1996 1995
---- ----
<S> <C> <C>
Net Income (Loss) $ 357 ($2,953)
======= =======
Weighted average number of common
shares and common share equivalents
outstanding during the period 4,543 4,533
------- -------
4,543 4,533
======= =======
Primary income (loss) per share .08 (0.65)
======= =======
Primary weighted average number of
common shares and common share
equivalents outstanding during the period 4,543 4,533
------- -------
4,543 4,533
======= =======
Fully diluted income (loss) per share .08 (0.65)
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 13
ABOUT THE COMPANY
Back Yard Burgers operates and franchises quick-service restaurants that
specialize in charbroiled, freshly prepared, great tasting food. As its name
implies, Back Yard Burgers strives to offer the same high quality ingredients
and special care typified by outdoor grilling in the back yard. Its menu
features gourmet hamburgers, chicken sandwiches and other sandwich items, name
brand condiments and beverages, as well as hand-dipped milkshakes, fresh-made
lemonade, and fresh-baked cobblers.
The Company's strategy is to "serve the finest food, delight the customer, and
create quality relationships." Depending on markets and locations, Back Yard
Burgers has a unit format that enables it to pair single or double drive-thru
service with in-store dining.
FINANCIAL HIGHLIGHTS
(in thousands, except per share amounts and units)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30, DECEMBER 31,
FOR THE YEAR ENDED 1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Restaurant sales $ 22,281 $ 21,196 $ 15,606
Total revenues 24,041 22,743 17,244
Net income (loss) 357 (2,953) 683
Net income (loss) per share:
Primary .08 (.65) .20
Fully diluted .08 (.65) .15
Weighted average shares outstanding:
Primary 4,543 4,533 3,333
Fully diluted 4,543 4,533 4,533
System-wide sales $ 49,515 $ 43,665 $ 36,355
Units in operation:
Company-owned 34 32 26
Franchised 47 36 39
Total 81 68 65
</TABLE>
<PAGE> 2
To Our Stockholders:
"For the fifty-two weeks ended December 28, 1996, total revenues rose 5.7% to
$24,041,000 compared with $22,743,000 for the prior year. Net income was
$357,000 or $.08 per share compared with a net loss of $2,953,000 or $.65 per
share in 1995. Excluding special charges (a non-cash charge of $2,564,000 or
$.57 per share for impaired assets (related to the adoption of a new accounting
standard), as well as a charge of $100,000 related to a note receivable from a
former modular building supplier which declared bankruptcy) the net loss for
1995 was $289,000 or $.06 per share. Same-store sales at Company-operated stores
were even for the fourth quarter and declined 4.2% for the year. On a
system-wide basis, which includes franchised units, same-store sales increased
1.3% for the fourth quarter. For the full year, system wide same-store sales
remained slightly negative at 0.2%." (Excerpted from the text of the Company's
February 20, 1997 press release, "Back Yard Burgers Reports Fourth Quarter
Results.")
At that time my comment was "Although the Company posted a net loss for the
quarter, the results were significantly better than the prior year and continued
the positive direction reported in the previous two quarters. We continue to be
encouraged by the improvement in earnings compared with the prior year.
Same-store sales at Company-operated units were flat during the fourth quarter,
however, this breaks a string of seven quarters of negative same-store
comparisons at Company-operated units. We are continuing our focus on restaurant
operations and marketing programs to restore sales growth to acceptable levels."
I feel that this excerpt accurately reflects 1996. We are looking forward to
1997.
1997 represents a crucial crossroad for Back Yard Burgers and our system of
operators and locations. Sales began to stabilize during 1996 with few
exceptions, and Back Yard Burgers is ready to reposition itself as a true "fast
casual" dining concept through the conversion of existing double drive-thru
locations to more traditional dine-in/drive-thru restaurants. Our product has
been superior since inception. Our facility will now better reflect our "fast
casual" niche. Finally, we will concentrate on our core strength of serving
great tasting food.
Our enthusiasm over the stabilization of sales, plans to convert double
drive-thrus to single drive-thrus with indoor dining, wherever possible, and our
momentum is high. We sense that we are all on the right train, on the right
track and moving in the right direction. In 1997, Back Yard Burgers will
capitalize on this momentum. We are taking steps toward aggressive new product
development, toward meeting operational goals, and we are using competitive
levels of advertising to insure this momentum is sustained.
In 1996, we committed to "raise the bar" by bringing experienced talent on board
to move our concept forward. In 1997, we will provide the training, improved
operational and promotional programs and create superior customer service. We
cannot create and sustain acceptable levels of sales growth without investment.
We will Serve it hot! Serve it right! With a smile! We will provide leadership
through demonstration.
Back Yard Burgers' strategy for 1997 is in line with the core concept on which
this Company is founded. That is delivering high quality, premium products to
our guests at a fair price. Our menu and promotional product offerings in 1997
will continue to leverage this strategy. By offering premium products such as
the Chili Cheeseburger, Grilled Chicken Club, Blackened Chicken and other
premium 1/3 pound burgers and chicken sandwiches served hot off the grill, we
will move to position ourselves as THE leader in quality.
Consumers will not find these products at McDonald's, Burger King or Wendy's. We
will provide the service they deserve and the quality they demand. Through
aggressive marketing, we will educate our points of difference, and consumers
will find their way to us. And once they taste the difference hot off the grill,
our competitors' products will not compare at any price.
Sincerely,
Lattimore M. Michael
Founder, Chairman and Chief Executive Officer
1
<PAGE> 3
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 herein 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
At December 28, 1996, the Back Yard Burgers system included 81 restaurants.
Thirty-four (34) were Company-operated and 47 were franchised.
The Company's revenues are derived primarily from Company-operated
restaurant sales, franchise and area development 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 revenues,
unless otherwise indicated, of certain items included in the Company's
historical operations and operating data for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Restaurant sales 92.7% 93.2% 90.5%
Franchise and area development fees .7 .8 2.1
Royalty fees 4.2 3.8 4.5
Advertising fees 1.1 1.0 1.2
Other operating revenue 1.3 1.2 1.7
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
COSTS AND EXPENSES
Cost of restaurant sales (1) 33.3% 35.1% 35.9%
Restaurant operating expenses (1) 49.5 47.8 42.2
General and administrative 11.8 14.4 15.2
Advertising 4.4 4.1 3.9
Depreciation and amortization 4.6 6.4 5.5
Impairment of long-lived assets -- 11.3 --
Operating income (loss) 2.3 (12.3) 4.7
Interest income .1 .1 .4
Interest expense (.9) (1.3) (.3)
Other, net -- -- .2
Income (loss) before taxes 1.5 (13.5) 5.1
Income tax (benefit) provision (2) -- (3.5) 22.0
Net income (loss) 1.5 (13.0) 4.0
</TABLE>
(1) As a percentage of restaurant sales.
(2) As a percentage of income before taxes.
<TABLE>
<S> <C> <C> <C>
OPERATING DATA
Restaurant sales (000's)
Company-operated $22,281 $21,196 $15,606
Franchised 27,234 22,469 20,749
------ ------ ------
Total $49,515 $43,665 $36,355
======= ======= =======
AVERAGE ANNUAL SALES PER RESTAURANT OPEN
FOR A FULL YEAR (1)
Company-operated $645,000 $651,000 $732,000
Franchised $586,000 $560,000 $582,000
System-wide $615,000 $600,000 $639,000
NUMBER OF RESTAURANTS (2)
Company-operated 34 32 26
Franchised 47 36 39
-- -- --
Total 81 68 65
== == ==
</TABLE>
(1) Includes sales for restaurants open for entire trailing twelve-month
period. Restaurants are included in the calculation after the completion
of six months of operations, as sales during the period immediately after
opening tend to be higher due to promotions and trial by public.
(2) Subsequent to December 28, 1996, one Company-operated restaurant was
converted to a franchised restaurant and two restaurants were closed (one
Company-operated and one franchised).
3
<PAGE> 5
COMPARISON OF YEAR ENDED DECEMBER 28, 1996
TO YEAR ENDED DECEMBER 30, 1995
RESTAURANT SALES increased 5.1% to $22,281,000 during 1996 compared to
$21,196,000 during 1995. This increase is primarily the result of a price
increase of approximately 3.5% effective at the beginning of the 1996 third
quarter and the opening of five new Company-operated restaurants subsequent to
January 1, 1995 and the acquisition of three franchised restaurants subsequent
to June 30, 1995. The price increase and the new restaurants accounted for
approximately $2,175,000 in sales. These increases were partially offset by
decreases in same-store sales of approximately $1,090,000.
FRANCHISE AND AREA DEVELOPMENT FEES were $175,000 during 1996, a decrease of
9.8% from $194,000 in 1995. Eleven new franchised restaurants were opened in
1996, as compared to seven new franchised units opened in 1995. This increase in
franchised restaurant openings was offset by a decrease of approximately $60,000
from fees recognized from franchise and area development agreements which
expired in 1995.
ROYALTY FEES increased 17.6% to $1,011,000 during 1996, compared to $860,000 in
1995. The increase is due to an increase in franchised restaurant sales upon
which the fees are based. The sales increase resulted primarily from a net
increase of 11 franchised restaurants. Eleven franchised restaurants were opened
and none closed during 1996. Additionally, comparable same-store sales at
franchised restaurants open for more than one year increased 3.7%, representing
an increase in royalty fees of approximately $21,000.
ADVERTISING FEES increased 19.5% to $264,000 in 1996, from $221,000 in the prior
year. This increase is related to the increase in franchised restaurants' sales
as noted above.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled $7,429,000
for 1996 and $7,431,000 during 1995, decreasing as a percentage of restaurant
sales to 33.3% from 35.1% in 1995. This percentage decrease is due primarily to
decreases in the cost of beef and certain other raw ingredients 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
0.6%. 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 $11,032,000 for
1996 from $10,085,000 in 1995. This represents an increase as a percentage of
restaurant sales to 49.5% for 1996 from 47.8% in 1995. The increase, as a
percentage of sales, relates primarily to a) an increase in labor costs of
approximately 1.0% as a percentage of restaurant sales, representing
approximately $223,000, as a result of increasing employee counts to appropriate
levels; and b) a decrease in same-store sales at existing restaurants of 4.2%
which results in expenses of a fixed and semi-variable nature, such as store
management payroll, repairs, rent, utilities, taxes and insurance, representing
a greater percentage of sales.
GENERAL AND ADMINISTRATIVE COSTS which decreased to $2,840,000 for 1996 from
$3,059,000 in 1995, decreased as a percentage of total revenue in 1996 to 11.8%
from 14.4% in 1995. The decrease, as a percentage of total revenues, is
primarily the result of increased sales and royalty fees combined with decreases
in bad debts, legal and investor relations expenses of approximately 0.3%, 0.2%
and 0.2%, respectively. Additionally, efficiencies were realized by the addition
of eight Company-operated restaurants (five new restaurants and three franchised
restaurants converted to Company-operated) and a net increase of 11 franchised
restaurants without a corresponding increase in corporate administrative
expense.
ADVERTISING EXPENDITURES which increased to $1,066,000 for 1996 from $940,000 in
1995, increased as a percentage of total revenues to 4.4% for 1996 from 4.1% in
1995. The increase as a percentage of total revenues is the result of aggressive
advertising efforts to improve the Company's name recognition and to offset, to
the extent possible, the effect of competitors' marketing programs in the
Company's existing marketing areas.
INTEREST EXPENSE which decreased to $228,000 for 1996 from $295,000 in 1995,
decreased as a percentage of total revenues to 0.9% for 1996 from 1.3% in 1995.
The decrease as a percentage of total revenues is due primarily to the
conversion of financing leases to ground leases for two Company-operated
restaurant locations. This resulted in payments recorded as rent expense in 1996
that were recorded as interest expense in 1995.
4
<PAGE> 6
INCOME TAXES were $0, compared to a benefit of $107,000 in 1995. During the
second quarter of 1995, the Company fully reversed a deferred tax asset
valuation allowance established during 1993. This reversal had the effect of
significantly reducing income tax expense for 1995. The Company recorded a
provision for income taxes at the full statutory rate in both the third and
fourth quarters of 1995. In the fourth quarter of 1995, as a result of the 1995
operating loss, the Company established a deferred tax asset valuation allowance
and reversed the deferred tax liability previously recorded, which resulted in a
tax benefit of $107,000. The income taxes were $0 for 1996 due to the release
of a portion of the valuation allowance provision discussed above.
COMPARISON OF YEAR ENDED DECEMBER 30, 1995
TO YEAR ENDED DECEMBER 31, 1994
RESTAURANT SALES increased 35.8% to $21,196,000 during 1995 compared to
$15,606,000 during 1994. This increase is due to: a) four new Company-operated
restaurants which were opened during 1995 and accounted for approximately
$2,141,000 in sales, b) the acquisition of one franchised restaurant on December
31, 1994 and three franchised restaurants during the first half of 1995 which
accounted for approximately $1,537,000 in sales and, c) ten Company-operated
restaurants which were opened during 1994 and accounted for approximately
$3,005,000 in additional sales as a result of being open for the entire year.
These increases were partially offset by a decrease in same-store sales at
stores open for more than one year of approximately 10.9%, or $1,093,000.
FRANCHISE AND AREA DEVELOPMENT FEES were $194,000 during 1995, a decrease of
47.0% from $366,000 in 1994. Seven new franchised restaurants were opened in
1995, as compared to sixteen new franchised units opened in 1994. Additionally,
there was a decrease of approximately $25,000 from 1994 in fees recognized from
franchise and area development agreements which expired.
ROYALTY FEES increased 10.7% to $860,000 during 1995, compared to $777,000 in
1994. During 1995, three franchised restaurants were converted to
Company-operated restaurants. Although there was a net decrease of three
franchised restaurants during 1995, compared to a net increase of four during
1994, the new franchised restaurants achieved higher sales levels than the
franchised restaurants which closed, thereby increasing the base on which
royalty fees are calculated.
ADVERTISING FEES increased 8.3% to $221,000 in 1995, from $204,000 in the prior
year. This increase is related to the increase in franchised restaurants' sales
levels as noted above.
COST OF RESTAURANT SALES includes food and paper supplies and decreased as a
percentage of restaurant sales to 35.1% ($7,431,000) during 1995, compared to
35.9% ($5,600,000) in 1994. This decrease is due primarily to a decrease in the
cost of beef and chicken of approximately 9.0% and 4.0%, respectively, from the
prior year. However, this decrease was offset in part by increases in the cost
of certain dessert and produce items.
RESTAURANT OPERATING EXPENSES, which include all other unit-level expenses
comprised primarily of labor, supplies and occupancy costs, increased as a
percentage of restaurant sales in 1995 to 47.6% ($10,085,000) of revenues
compared to 42.2% ($6,589,000) in 1994. This increase is due primarily to: a)
higher labor costs in the Nashville market where three Company-operated
restaurants have opened since October 1, 1994, and an overall increase in labor
cost of approximately 2.8% in salaries as a percentage of restaurant sales due
to tightening labor markets in areas where the Company operates restaurants, b)
an increase in promotional activities at the restaurants of .8% of restaurant
sales, c) an increase in repairs and maintenance of .8% of restaurant sales, and
d) a decrease in same-store sales at existing restaurants resulting in higher
expenses as a percentage of restaurant sales due to the fixed and semi-variable
nature of certain expenses such as rent and utilities.
GENERAL AND ADMINISTRATIVE COSTS decreased as a percentage of total revenue in
1995 to 14.4% ($3,059,000) of revenues compared to 15.2% ($2,613,000) in 1994.
This decrease is the result of the economies of scale in adding additional
restaurants without a corresponding pro-rata increase in administrative costs.
ADVERTISING EXPENDITURES increased to 4.1% ($940,000) of sales in 1995 from 3.9%
($681,000) in 1994. This increase is the result of an increase in advertising
efforts to increase the Company's name recognition and to offset, to the extent
possible, the effect of competitors' marketing programs in the Company's
existing marketing areas.
5
<PAGE> 7
INCOME TAXES provided a benefit of $107,000 in 1995, compared to an expense of
$193,000 in 1994. During the second quarter of 1994, the Company fully reversed
a deferred tax asset valuation allowance established during 1993. This reversal
had the effect of significantly reducing income tax expense for 1994. The
Company recorded a provision for income taxes at the full statutory rate in both
the third and fourth quarters of 1994. In the fourth quarter of 1995, as a
result of the 1995 operating loss, the Company established a deferred tax asset
valuation allowance and reversed the deferred tax liability previously recorded,
which resulted in a tax benefit of $107,000.
ACQUISITIONS
Effective October 16, 1996, the Company purchased a franchised restaurant in Ft.
Smith, Arkansas 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. On February 23, 1997, this restaurant was
converted to a franchised restaurant through an operating lease agreement for
the restaurant facility.
IMPAIRMENT OF LONG-LIVED ASSETS
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. A new cost basis is
established for impaired assets based on the fair value of these assets as of
the date the assets are determined to be impaired.
In 1995, certain of the Company's restaurants in the central Arkansas area
experienced significant declines in operating performance. Based upon market
conditions for these restaurants and an analysis of projected undiscounted
future cash flows, the Company determined that the carrying amount of certain
long-lived assets of these restaurants may not be recoverable. The resultant
calculated impairment of long-lived assets necessitated a write-down of $2.56
million as follows: 1) $1.27 million of goodwill which represented the excess of
cost over net assets, related to these restaurants, of the acquisition of a
franchisee's five restaurants and area development rights in central Arkansas on
October 1, 1993 and 2) $1.29 million of buildings, building and site
improvements and equipment for these restaurants.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $863,000 for 1996, $2,404,000 for 1995 and
$5,576,000 for 1994. Generally, the Company constructs its restaurant buildings
on leased properties for its Company-operated restaurants. The average monthly
lease cost for the 23 Company-operated restaurants on leased sites is
approximately $2,900 per month. For the nine restaurants where the Company
leases the building as well as the site, the average monthly cost is
approximately $4,500 per month.
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 and, in 1995, a charge for impaired
assets related to the adoption of a new accounting standard. Depreciation and
amortization totaled $1,112,000 for 1996, $1,460,000 for 1995 and $952,000 for
1994. This increase relates to the addition of buildings, equipment and other
depreciable items resulting from the addition of one Company-operated restaurant
in 1996, four in 1995 and ten in 1994. The charge for impaired assets totaled
$2,564,000 in 1995, as noted above.
Cash from operations totaled $1,596,000, $1,044,000 and $1,436,000 for
1996, 1995 and 1994. Since January 1, 1994, cash from operations, debt and the
Company's 1993 stock offerings have been used for the additions of restaurants
and equipment.
On October 4, 1996, the Company received a commitment (the "Commitment")
from a leasing company for a loan transaction. The Commitment provides the
Company with up to $2,000,000 and bears interest of approximately 13.0%. The
commitment is secured by certain real and personal property to be constructed
and/or acquired with the commitment proceeds. There are no borrowings
outstanding under the Commitment at December 28, 1996.
On January 23, 1997, the Company entered into a loan agreement with a
financial institution (the "Agreement"). The Agreement provides the Company
with a loan commitment of up to $765,000 and bears interest at prime rate plus
1%. The Agreement is secured by real and personal property to be constructed
and/or acquired with the proceeds of the Agreement.
6
<PAGE> 8
The Company believes that it currently has sufficient resources to fund
anticipated capital expenditures of approximately $3,000,000 during 1997.
These resources include the borrowing commitments described above in addition
to the Company's internally generated cash flow. Additional growth in 1998 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
effect on income during 1996. Increases in food, labor or other operating
costs could adversely affect the Company's operations. In the past, however,
the Company generally has been able to increase menu prices or modify its
operating procedures to substantially offset increases in its operating costs.
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 has 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
December 28, 1996, 890,473 shares had been converted.
ACCOUNTING FOR STOCK-BASED COMPENSATION
During 1996, the Company adopted SFAS 123, Accounting for Stock-Based
Compensation. Under the provisions of SFAS 123, companies can elect to account
for stock-based compensation plans using a fair-value based method or continue
measuring compensation expense for those plans using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees and related Interpretations. The Company elected to
continue using the intrinsic value method to account for its stock-based
compensation plans, therefore there was no impact on the Company's financial
position or results of operations from adopting this standard.
KNOWN TRENDS AND UNCERTAINTIES
Labor will continue to be a critical factor through 1997. In most areas where
the Company operates restaurants, there is a shortage of suitable labor. This,
in itself, could result in higher wages as the competition for employees
intensifies, not only in the 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. On October 1, 1996, the minimum wage
was increased from $4.25 per hour to $4.75 per hour. The impact of this
increase in the minimum wage was to increase personnel costs by approximately
$20,000 on an annualized basis. The second phase of the minimum wage law will
go into effect on September 1, 1997 and will increase the minimum wage to $5.15
per hour. This increase could have a negative impact on operating margins.
During 1996, the price of beef and chicken, the largest single component
of the cost of restaurant sales, was below prices of recent years. Management
of the Company expects beef and chicken prices to rise at some time in the
future, and that 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 potential increases.
Due to the competitive nature of the restaurant industry, site selection
will become even 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 4.2% during 1996, an improvement from the
decline of 10.9% experienced in 1995. The Company implemented a new marketing
strategy focused on increasing customer awareness and improving store-level
margins. Should same-store sales improvement falter during 1997, the Company
is prepared to become more aggressive in marketing activities.
The future success of the Company will be determined, to a great extent,
by the ability to positively address these issues.
7
<PAGE> 9
BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
===============================================================================
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,101 $ 528
Receivables, less allowance for doubtful accounts of
$130 ($67 in 1995) 363 259
Inventories 150 167
Income taxes refundable -- 22
Prepaid expenses and other current assets 31 174
-------- --------
Total current assets 1,645 1,150
Note receivable 30 8
Property and equipment, at depreciated cost 8,131 8,128
Intangible assets 1,561 1,664
Other assets 205 199
-------- --------
$ 11,572 $ 11,149
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 564 $ 327
Accrued expenses 507 511
Current installments of long-term debt 328 232
-------- --------
Total current liabilities 1,399 1,070
Long-term debt, less current installments 1,831 2,066
Other deferred liabilities 110 85
Deferred franchise and area development fees 122 200
-------- --------
Total liabilities 3,462 3,421
-------- --------
Commitments and contingencies (Notes 6, 7 and 9)
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized;
309,506 shares issued and outstanding in 1996
(329,415 in 1995) 3 3
Common stock, $.01 par value; 12,000,000
shares authorized; 4,240,766 shares issued
and outstanding in 1996 (4,205,531 in 1995) 42 42
Paid-in capital 9,956 9,931
Retained deficit (1,891) (2,248)
-------- --------
Total stockholders' equity 8,110 7,728
-------- --------
$ 11,572 $ 11,149
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 10
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
===============================================================================
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Restaurant sales $ 22,281 $ 21,196 $ 15,606
Franchise and area development fees 175 194 366
Royalty fees 1,011 860 777
Advertising fees 264 221 204
Other 310 272 291
-------- -------- --------
Total revenues 24,041 22,743 17,244
-------- -------- --------
Expenses:
Cost of restaurant sales 7,429 7,431 5,600
Restaurant operating expenses 11,032 10,085 6,589
General and administrative 2,840 3,059 2,613
Advertising 1,066 940 681
Depreciation and amortization 1,114 1,460 952
Impairment of long-lived assets -- 2,564 --
-------- -------- --------
Total expenses 23,481 25,539 16,435
-------- -------- --------
Operating income (loss) 560 (2,796) 809
Interest income 16 20 75
Interest expense (228) (295) (48)
Other, net 9 11 40
-------- -------- --------
Income (loss) before income taxes 357 (3,060) 876
Income tax provision (benefit) -- (107) 193
-------- -------- --------
Net income (loss) $ 357 $ (2,953) $ 683
======== ======== ========
Income (loss) per share:
Primary $ .08 $ (0.65) $ 0.20
======== ======== ========
Fully diluted $ .08 $ (0.65) $ 0.15
======== ======== ========
Weighted average number of common shares and
common equivalent shares outstanding:
Primary 4,543 4,533 3,333
======== ======== ========
Fully diluted 4,543 4,533 4,533
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 11
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
===============================================================================
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK RETAINED
------------------ ---------------- PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------ ------ ------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 1,199,979 $12 3,332,553 $33 $9,820 $ 22 $9,887
Recognition of tax effect
of stock option exercise 108 108
Net income 683 683
--------- -- --------- --- ------ ------- ------
Balance at December 31, 1994 1,199,979 12 3,332,553 33 9,928 705 10,678
Conversion of preferred stock (870,564) (9) 870,564 9
Exercise of stock options 100
Employee stock purchases 2,314 3 3
Net loss (2,953) (2,953)
--------- -- --------- --- ------ ------- ------
Balance at December 30, 1995 329,415 3 4,205,531 42 9,931 (2,248) 7,728
Conversion of preferred stock (19,909) 19,909 -
Exercise of stock option 2,400 4 4
Employee stock purchases 12,926 21 21
Net income 357 357
--------- -- --------- --- ------ ------- ------
Balance at December 28, 1996 309,506 $3 4,240,766 $42 $9,956 $(1,891) $8,110
========= == ========= === ====== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 12
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
===============================================================================
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------------
DECEMBER 28, DECEMBER 30, DECEMBER 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 357 $(2,953) $ 683
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of property
and equipment 939 979 617
Impairment of long-lived assets -- 2,564 --
Deferred income taxes -- (107) 175
Amortization of intangible assets 103 175 172
Amortization of preopening costs 70 209 163
Provision for losses on receivables 119 174 185
Gain on sale of assets (3) -- --
(Increase) decrease in assets
Receivables (275) (82) (92)
Inventories 17 (15) (55)
Prepaid expenses and other current assets 73 (68) (360)
Income taxes refundable 22 20 (42)
Other assets and notes receivable (6) (2) 120
Increase (decrease) in liabilities
Accounts payable and accrued expenses 233 120 103
Other deferred liabilities 25 25 4
Deferred franchise and area development fees (78) 5 (237)
------- ------- -------
Net cash provided by operating activities 1,596 1,044 1,436
------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (863) (1,980) (5,576)
Proceeds from sale of property and equipment 45 916 5
Sales of certificates of deposit -- -- 4,061
Investment in joint ventures -- (100) (50)
Acquisitions of businesses, net of cash acquired -- (424) --
------- ------- -------
Net cash used in investing activities (818) (1,588) (1,560)
------- ------- -------
Cash flows from financing activities:
Issuance of stock 21 3 --
Principal payments on long-term
debt and capital leases (230) (206) (147)
Proceeds from issuance of long-term debt -- 856 600
Proceeds from exercise of stock options 4 -- --
------- ------- -------
Net cash provided (used) by financing activities (205) 653 453
------- ------- -------
Net increase in cash and cash equivalents 573 109 329
Cash and cash equivalents:
Beginning of year 528 419 90
------- ------- -------
End of year $ 1,101 $ 528 $ 419
======= ======= =======
Supplement disclosure of cash flow information:
Income taxes paid (received) $ (22) $ (24) $ 60
======= ======= =======
Interest paid $ 228 $ 294 $ 40
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 13
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY. Back Yard Burgers, Inc. (the "Company") owns and operates
quick-service restaurants and is engaged in the sale of franchises in Back Yard
Burgers 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. At
December 28, 1996, the Company operated 34 restaurants in four states
(Arkansas, Mississippi, Tennessee and Texas) and franchised 47 restaurants in
16 states.
CONSOLIDATION POLICY. 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 Back Yard Burgers
National Advertising Fund. Significant intercompany transactions have been
eliminated.
FISCAL YEAR. The Company maintains its financial records on a 52-53 week
fiscal year ending on the Saturday closest to December 31.
USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. The Company considers cash on hand, deposits in
banks and short-term investments with an original maturity of less than three
months as cash and cash equivalents for purposes of the statement of cash
flows.
INVENTORIES. Inventories primarily consist of food and beverage products and
are valued at the lower of cost or market; cost is determined by the first-in,
first-out ("FIFO") method.
INCOME TAXES. Deferred income taxes are provided for the tax effects of
temporary differences between the financial reporting basis and income tax
basis of the Company's assets and liabilities.
FRANCHISE AND AREA DEVELOPMENT FEE INCOME. Franchise fees are recognized as
revenue when substantially all of the initial services required of the Company
have been performed, which generally coincides with the opening of the
franchises. Such services include training and assistance with site location,
equipment vendors, structural design and operation policies. Area development
fees arise when franchisees are awarded the right to develop, own and operate
additional Back Yard Burgers restaurants in specific geographical areas
pursuant to the terms of an Area Development Agreement. Such fees are based on
the number of restaurants the franchisee expects to develop. These fees are
included as revenue in accordance with the franchise fee recognition policy as
each additional restaurant is opened.
Under the terms of the franchise and area development agreements, the fees are
non-refundable and may be recognized as revenue should the franchisee fail to
perform as agreed. Commission costs associated with the sales of franchise and
area development rights are expensed when related revenues are recognized.
ROYALTY AND ADVERTISING FEE INCOME. As part of its franchise agreements, the
Company receives a percentage of each unit's gross sales (generally 4%). The
franchise agreements also provide that franchisees are required to pay an
additional 1% of gross sales to the National Advertising Fund (see Note 11).
These fees are recorded on the accrual basis of accounting.
12
<PAGE> 14
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses include all costs
associated with the operation of the restaurant except corporate overhead,
advertising, depreciation and amortization.
DEPRECIATION. Depreciation is computed using the straight-line method over
the estimated useful lives of the respective assets. Leasehold costs and
improvements are amortized over the lesser of their estimated useful lives or
the remaining lease term. The average depreciable lives are as follows:
building and improvements - 15 to 18 years; fixtures and equipment - 5 to 7
years; and transportation vehicles - 3 to 5 years.
PREOPENING COSTS. Preopening costs consist of incremental amounts directly
associated with opening a new restaurant. These costs, which principally
include the initial hiring and training of employees, store supplies and other
expendable items, are capitalized and amortized over the twelve-month period
following the restaurant opening. Unamortized preopening costs totaled $12,000
and $58,000 at December 28, 1996 and December 30, 1995, respectively.
ADVERTISING COSTS. Advertising costs, including production costs, are charged
to expense as incurred on the first date of the advertising period.
INTANGIBLE ASSETS. Intangible assets consist of the excess of the cost of
acquired companies and assets over the values assigned to net tangible assets.
These intangibles are being amortized by the straight-line method over an
18-year period. Accumulated amortization totaled $334,000 at December 28, 1996
and $231,000 at December 30, 1995, after taking into account the impairment
discussed below.
At each balance sheet date, the Company assesses whether there has been an
impairment in the value of such intangibles by determining whether projected
undiscounted future cash flows from operations for each restaurant, as defined
in Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, exceeds its net book value as of the assessment date. At December 30,
1995, $1,266,000 of intangible assets were written down to their fair value due
to an impairment recognized in the fourth quarter of 1995 (see Note 12).
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 has 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 December 28, 1996, 890,473 shares had been
converted.
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.
NOTE 2 - ACQUISITIONS
Effective January 31, 1995, the Company entered into an agreement with a
franchisee for the purchase of the franchisee's sole unit in Austin, Texas for
$335,000 in cash. As part of the agreement, the franchisee agreed to surrender
all area development rights and withdraw all legal claims brought against the
Company. The fair market value of the restaurant exceeded the purchase price
and the entire payment was allocated to the fixed assets acquired.
Effective June 30, 1995, the Company entered into an agreement with a
franchisee for the purchase of the
13
<PAGE> 15
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
franchisee's two units in Nashville, Tennessee for approximately $89,000 in cash
and the assumption of $451,500 in debt. The purchase price paid in excess of the
fair value totaling $195,000 was recorded as goodwill and is being amortized
over an 18-year period. The assumption of $451,500 in debt is considered a
noncash transaction, and, therefore, the debt and a corresponding amount of
fixed assets acquired have been excluded from the Statement of Cash Flows.
NOTE 3 - ACCOUNTS RECEIVABLE
Corporate receivables and National Advertising Fund receivables represent
amounts due from franchisees for contractual obligations and for product
purchases. A summary of accounts receivable follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
------------ ------------
1996 1995
----- ----
<S> <C> <C>
Corporate receivables $205 $160
National Advertising Fund receivables 70 61
Loan receivable from officer 30 30
Other 188 75
---- ----
493 326
Allowance for doubtful receivables (130) (67)
---- ----
$363 $259
==== ====
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Summaries of property and equipment follow (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
------------ -------------
1996 1995
------- -------
<S> <C> <C>
Land $1,102 $1,102
Buildings 2,914 2,718
Building and site improvements 2,800 2,627
Equipment 3,788 3,529
Automobiles 174 190
Construction in progress 180 -
------ ------
10,958 10,166
Accumulated depreciation and amortization (2,827) (2,038)
------ ------
$8,131 $8,128
====== ======
</TABLE>
14
<PAGE> 16
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 5 - INDEBTEDNESS
Long-term debt is secured by property and equipment with a net book value
aggregating $2,762,000 and guaranteed by the personal endorsements of certain
stockholders. The balances consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
------------ -----------
1996 1995
------ ------
<S> <C> <C>
Note payable to a financial institution, payable in monthly
installments of $7,500 including interest at 9.5% with a
final payment of $18,292 on November 15, 1997 $89 $166
Note payable to a financial institution, payable in monthly
installments of $5,258 including interest at 9.8% with a
final payment of $65,081 on March 8, 1997 74 127
Note payable to a financial institution, payable in
monthly installments of $1,626 including interest
through September 17, 2003, interest at prime
plus 1.5% (10.0% at 12/31/96) 108 113
Financing lease transaction to Lester's Back Yard
Burgers Joint Venture I (see Note 6), payable in monthly
installments of $6,500 through November 15, 2009 (effective
interest rate is 12.0%) 563 582
Financing lease transaction to Lester's Back Yard
Burgers Joint Venture II (see Note 6), payable in monthly
installments of $7,009 through March 1, 2010 (effective
interest rate is 12.0%) 615 633
Note payable to a financial institution, payable in monthly
installments of $3,311 including interest at 9.8% with a
final payment of $219,893 on March 17, 1997 224 241
Note payable to a financial institution, payable in monthly
installments of $2,264 including interest at 7.0% with a
final payment of $18,770 on November 1, 2000 100 117
Note payable to a financial institution, payable in monthly
installments of $4,321 including interest at 10.0% with a
final payment of $205,979 on June 30, 2000 298 317
Note payable to an individual, payable in monthly installments
of $3,244 including interest at 8.0% with a final payment of
$74,976 on June 1, 1997 88 -
Other notes payable - 2
2,159 2,298
------ ------
Less current installments 328 232
------ ------
Total $1,831 $2,066
====== ======
</TABLE>
Due to the Company's intent and ability to refinance $298,000 of debt, which
matures in March 1997, this amount is classified as long-term. The principal
maturities of all long-term debt subsequent to 1997 are as follows: $136,000
in 1998; $122,000 in 1999; $332,000 in 2000; $79,000 in 2001 and $1,162,000
thereafter.
On December 20, 1995, the Company and a financial institution entered into a
Line of Credit Agreement (the "Agreement"). The Agreement provides the Company
with a line of credit commitment of up to $250,000 and bears interest at prime
rate plus 1%. The Agreement extends one year and borrowings under the Agreement
are subject to a borrowing base, as defined. The Agreement is secured by a first
position security interest in accounts
15
<PAGE> 17
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
receivable and a $75,000 certificate of deposit. There were no borrowings
outstanding under the Agreement at December 28, 1996.
On October 4, 1996, the Company received a commitment (the "Commitment") from a
leasing company for a loan transaction. The Commitment provides the Company with
up to $2,000,000 and bears interest of approximately 13.0%. The Commitment is
secured by certain real and personal property to be constructed and/or acquired
with the commitment proceeds. There are no borrowings outstanding under the
Commitment at December 28, 1996.
On January 23, 1997, the Company entered into a loan agreement with a financial
institution (the "Agreement"). The Agreement provides the Company with a loan
commitment of up to $765,000 and bears interest at prime rate plus 1%. The
Agreement is secured by real and personal property to be constructed and/or
acquired with the proceeds of the Agreement.
NOTE 6 - INVESTMENT IN JOINT VENTURES
In November 1994, the Company invested $50,000 for a 23% interest in Lester's
Back Yard Burgers Joint Venture I ("JV I"). JV I purchased one building and
the related land from the Company for $600,000. No gain or loss was recorded
in connection with the sale. The Company entered into a long-term lease with
JV I for the building and the property for purposes of operating a Back Yard
Burgers restaurant. The transaction was accounted for as a financing lease and
the fixed assets are recorded in the Company's balance sheet along with the
present value of the future lease commitments. The Company has guaranteed 23%
($79,000 at December 28, 1996) of the long-term debt that JV I obtained to
finance the purchase.
In March 1995, the Company invested $50,000 for a 23% interest in Lester's Back
Yard Burgers Joint Venture II ("JV II"). JV II purchased one building and the
related land from the Company for $647,000. No gain or loss was recorded in
connection with the sale. The Company entered into a long-term lease with JV
II for the building and the property for purposes of operating a Back Yard
Burgers restaurant. The transaction was accounted for as a financing lease and
the fixed assets are recorded in the Company's balance sheet along with the
present value of the future lease commitments. The Company has guaranteed 23%
($91,000 at December 28, 1996) of the long-term debt that JV II obtained to
finance the purchase.
In September 1995, the Company invested $50,000 for a 25% interest in Lester's
Back Yard Burgers Joint Venture III ("JV III"). JV III constructed one
building on land purchased from a third party. The Company entered into a
long-term lease with JV III for the building and the property for purposes of
operating a Back Yard Burgers restaurant. The transaction is accounted for as
an operating lease. The Company has guaranteed 25% ($72,000 at December 28,
1996) of the long-term debt that JV III obtained to finance the construction
and purchase.
Each of the above investments is recorded at cost as there is no material
difference between the cost and equity method of accounting for any of these
three investments.
16
<PAGE> 18
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 7 - DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES
At December 28, 1996, deferred fees received for certain franchise and area
development rights, net of commissions paid, include amounts sold during the
following years (in thousands):
<TABLE>
<S> <C>
1995 $ 59
Previous years 63
--------
$ 122
========
</TABLE>
NOTE 8 - INCOME TAXES
For the year ended December 30, 1995, the income tax benefit of $107,000 was
comprised of a current deferred benefit of $60,000 and a noncurrent deferred
benefit of $47,000. For the year ended December 31, 1994, income tax expense
of $193,000 was comprised of $18,000 in current federal expense, $60,000 in
current deferred expense and $115,000 in noncurrent deferred expense.
Deferred income taxes are provided in recognition of temporary differences in
reporting certain revenues and expenses for financial statement and income tax
purposes.
The year-end deferred tax assets (liabilities) comprise the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
------------ ------------
1996 1995
---- ----
<S> <C> <C>
Current
Current deferred tax assets - bad debts $ 49 $ 25
Current deferred tax liabilities - preopening costs (4) (22)
------- -------
Net current deferred tax asset 45 3
Deferred tax asset valuation allowance (45) (3)
------- -------
$ - $ -
======= =======
Noncurrent
Noncurrent deferred tax assets
Franchise fees $ 46 $ 76
Net operating loss carryforwards 731 601
Goodwill amortization 417 459
Other 42 57
------- -------
Gross noncurrent deferred tax assets 1,236 1,193
------- -------
Noncurrent deferred tax liabilities
Depreciation (417) (181)
------- -------
Gross noncurrent deferred tax liabilities (417) (181)
------- -------
Net noncurrent deferred tax asset 819 1,012
Deferred tax asset valuation allowance (819) (1,012)
------- -------
$ - $ -
======= =======
</TABLE>
17
<PAGE> 19
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
The ultimate realization of these assets is dependent upon the generation of
future taxable income sufficient to offset the related deductions and loss
carryforwards within the applicable carryforward period. A recorded valuation
allowance is based on management's conclusion that sufficient positive evidence
regarding realization of certain tax carryforward items does not currently
exist. In 1994, $156,000 of tax asset valuation allowance was released due to
the Company's deferred tax liabilities exceeding the deferred tax assets.
A reconciliation of the statutory Federal income tax rate to the income tax
provision is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ----------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax $ 125 35.0% $(1,071) (35.0)% $306 35.0%
State income taxes, net of
Federal income tax effect 16 4.5 (121) (4.0) 26 3.0
Goodwill amortization 14 3.9 13 0.4 13 1.5
Valuation allowance
provision (release) (151) (42.3) 1,015 33.2 (156) (17.8)
Other (4) (1.1) 57 1.9 4 .3
----- ----- ------- ---- ---- -----
$ - 0.0% $ (107) (3.5)% $193 22.0%
===== ===== ======= ==== ==== =====
</TABLE>
At December 28, 1996, the Company has net operating loss carryforwards
available for federal and state income tax reporting purposes on a consolidated
basis of approximately $1,935,000 and $1,742,000, respectively. These net
operating loss carryforwards expire between 2004 and 2011. Approximately
$20,000 of these net operating loss carryforwards were acquired in certain
purchase transactions and are subject to annual limitations on their usage.
These carryforwards expire during the period 2004 through 2008.
NOTE 9 - OPERATING LEASES
Operating leases relate to leased land sites for Company-operated restaurants
and office space for corporate operations. All leases contain renewal options.
Rent expense was $1,093,000, $913,000, and $606,000 in 1996, 1995 and 1994,
respectively. The future minimum rental payments under operating lease
agreements as of December 28, 1996, are as follows (in thousands):
<TABLE>
<S> <C>
1997 $1,064
1998 931
1999 803
2000 792
2001 676
Thereafter 3,045
------
$7,311
======
</TABLE>
18
<PAGE> 20
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 10 - RELATED PARTY TRANSACTIONS
In connection with a 1993 acquisition of American Back Yard Burgers Franchise
Corporation ("ABYB"), the Company acquired a $100,000 unsecured loan to American
Modular Industries, Inc. ("AMI"), a development stage company that manufactured
and produced modular buildings primarily for the restaurant industry. The note
bore interest, payable annually, at 7% and the principal was due and payable on
or before March 31, 1996. During 1993 and 1994, certain stockholders and
directors of the Company had a beneficial ownership interest in AMI. The Company
purchased one modular building structure in 1995 and five in 1994. Total
payments to AMI aggregated $70,000 and $541,000 for 1995 and 1994, respectively.
In the fourth quarter of 1995, AMI filed for bankruptcy protection, and the
Company wrote-off its unsecured loan. No interest income was recognized in 1995.
A franchised restaurant that was owned by one of the Company's officers was
being operated and managed by the Company during 1994. The Company received 5%
of gross sales which totaled $33,000 in 1994. As of December 30, 1994, the
Company acquired the restaurant, which had a net deficit book value of $5,000,
for 100 shares of stock valued at $300. Included in the assets acquired was a
receivable from the officer for $45,000, $30,000 of which remains outstanding at
December 28, 1996.
NOTE 11 - NATIONAL ADVERTISING FUND
As part of the standard franchise agreement, each operating unit contributes 1%
of its sales to a National Advertising Fund. Under the terms of the agreement,
at least 50% of these funds must be spent on the creation of marketing tools,
such as advertising copy for use on local radio and television, and other
collateral material for the operating units. As a general rule, the funds are
not used for the purchase and placement of media advertising. The remaining
funds are available for use by the Company on such items as testing and
development of new products, investigating improvements in operating methods, or
for other such purposes that the Company shall deem to be in the interest of
improving operations and earnings of the Company and its franchisees.
NOTE 12 - IMPAIRMENT OF LONG-LIVED ASSETS
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. A new cost basis is
established for impaired assets based on the fair value of these assets as of
the date the assets are determined to be impaired.
In 1995, certain of the Company's restaurants in the central Arkansas area
experienced significant declines in operating performance. Based upon the market
conditions for these restaurants and an analysis of projected undiscounted
future cash flows, the Company determined that the carrying amount of certain
long-lived assets of these restaurants may not be recoverable. The calculated
impairment of long-lived assets necessitated a write-down of $2.56 million as
follows: (1) $1.27 million of goodwill which represented the excess of cost over
net assets, related to these restaurants, of the acquisition of a franchisee's
five restaurants and area development rights in central Arkansas on October 1,
1993 and (2) $1.29 million of buildings, building and site improvements and
equipment for these restaurants.
19
<PAGE> 21
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 13 - STOCK WARRANTS
At the completion of the initial public offering of shares, the Company issued
to the underwriter, for $100, warrants to purchase up to 130,000 shares of
common stock at an exercise price of $6.60 per share. The Underwriter's warrants
are exercisable through 1998. As of December 28, 1996, none of the Underwriter's
warrants have been exercised. Additionally, warrants to purchase 70,000 shares
of the Company's common shares at $4.00 per share exist through 1998. As of
December 28, 1996, none of the warrants have been exercised.
NOTE 14 - STOCK OPTION AND BENEFIT PLANS
In April 1992, the board of directors of the Company and the shareholders
authorized the adoption of an Incentive Stock Option Plan ("ISOP") for the
Company's employees. As amended in 1993, an aggregate of 176,969 shares of
common stock may be granted under the ISOP. Options granted under the ISOP may
not be granted at a price less than the fair market value of the common stock on
the date of grant (or 110% of fair market value in the case of persons holding
10% or more of the voting stock of the Company). The aggregate fair market value
of shares for which options are granted to any employee during any calendar year
may not exceed $100,000. The options expire ten years from the date of grant.
In May 1995, the board of directors of the Company and the shareholders
authorized the adoption of an Incentive Award Plan ("IAP") for the Company's
employees. An aggregate of 225,000 shares of common stock may be granted under
the IAP. Options granted under the IAP may be designated by the Compensation
Committee of the Board of Directors as Incentive Stock Options or Non-Qualified
Stock Options. Non-Qualified Stock Options granted under the IAP may not be
granted at a price less than par value of the common stock. Incentive Stock
Options granted under the IAP may not be granted at a price less than the fair
market value of the common stock on the date of grant (or 110% of fair market
value in the case of persons holding 10% or more of the voting stock of the
Company). The aggregate fair market value of shares for which options are
granted to any employee during any calendar year may not exceed $100,000. The
term of the options shall be set by the Compensation Committee of the Board of
Directors and no term shall exceed a reasonable time period. In the case of
Incentive Stock Options, the term shall not be more than ten years from the date
of grant. During 1995, no options were awarded under the IAP. During 1996, the
Company granted options for an aggregate of 80,800 shares of common stock at
exercise prices ranging from $1.50 to $2.50 per share, which equaled fair market
value at grant date.
The following is a summary of activity for the above two option plans:
<TABLE>
<CAPTION>
DECEMBER 28, 1996 DECEMBER 30, 1995
----------------- -----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER PRICE NUMBER PRICE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Outstanding - beginning of year 168,242 $4.68 108,957 $5.84
Granted 80,800 1.71 70,757 3.02
Exercised (2,400) 1.50 (100) 5.50
Canceled (20,074) 3.87 (11,372) 5.54
------- -------
Outstanding - end of year 226,568 3.72 168,242 4.68
------- -------
Exercisable - end of year 195,706 3.94 146,354 4.76
======= =======
</TABLE>
Exercise prices ranged from $1.50 to $6.00 in 1996 and from $3.00 to $6.00 in
1995. The weighted average contractual life of all options was 8 years at
December 28, 1996.
20
<PAGE> 22
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
Additionally, under the IAP, the Compensation Committee of the Board of
Directors may award Restricted Stock and/or a Performance Award to selected
employees. A Performance Award shall mean cash bonus, stock bonus or other
performance or incentive award that is paid in cash, stock or a combination of
both. The Company has not issued any Restricted Stock or Performance Awards.
In May 1995, the board of directors of the Company and the shareholders
authorized the adoption of an Employee Stock Purchase Plan ("ESPP") for the
Company's employees. An aggregate of 225,000 shares of common stock may be
issued under the ESPP. Shares purchased under the ESPP shall be sold to
participants at 85% of the reported price and the maximum number of shares that
can be purchased by a participant is 1,000 shares per quarter. The ESPP shall
continue in effect through May 31, 2005. During 1996, 12,926 shares were
purchased under the ESPP.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards in 1996 and 1995 under the plan
consistent with the method prescribed by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's operating results for 1996 and 1995
would have been reduced to the pro forma amounts indicated below (in thousands,
except per share data):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income (loss)
As reported $357 $(2,953)
Pro forma 298 (3,050)
Income (loss) per share
As reported .08 (.65)
Pro forma .07 (.67)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions using grants in 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Average expected life (years) 7 7
Average expected volatility 67.0% 55.3%
Risk-free interest rates 6.1% 5.5%
Dividend yield 0.0% 0.0%
</TABLE>
The pro forma results reported above will not be representative of the effects
on operating results for future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 28, 1996, the Company did not have outstanding any financial
derivative instruments. The carrying amounts and estimated fair values of
the Company's financial instruments at December 28, 1996 are determined
pursuant to Financial Accounting Standards Board Statement No. 107, Disclosures
about Fair Value of Financial Instruments.
21
<PAGE> 23
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
- - CASH AND RECEIVABLES: The carrying amounts approximate fair value
because of the short maturity of those instruments.
- - LONG-TERM DEBT: The fair value of the Company's long-term debt is
estimated based on the current borrowing rates available to the Company
for bank loans with similar terms and average maturities. At December
28, 1996, the fair value was approximately $2,156,000.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF RISK. Financial instruments which potentially subject the
Company to concentration of credit risk are primarily cash and cash equivalents.
The Company places its cash and cash equivalents in insured depository
institutions and attempts to limit the amount of credit exposure to any one
institution. At December 28, 1996, the Company's uninsured cash balance totaled
$1,136,000.
LITIGATION. The Company is party to several pending legal proceedings and claims
in the normal course of business. 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 effect on the results of operations or the financial condition of the
Company.
22
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
[LOGO]
To the Board of Directors and Stockholders of
Back Yard Burgers, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Back Yard Burgers, Inc. and its subsidiaries at December 28, 1996 and December
30, 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 28, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Memphis, Tennessee
February 7, 1997
REPORT OF MANAGEMENT
The management of Back Yard Burgers, Inc. has the primary responsibility for the
preparation and integrity of the consolidated financial statements and other
financial information contained in the Annual Report. The consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied in all material respects and reflect estimates
and judgments by management where necessary. Financial information included
throughout this annual report is consistent with the consolidated financial
statements.
The Company maintains a system of internal accounting control which is adequate
to provide reasonable assurance that assets are safeguarded and transactions are
executed and recorded in accordance with management's authorization. The
adequacy of the Company's internal accounting controls are under the general
oversight of the Audit Committee of the Board of Directors, consisting of two
outside directors and one director who is an employee of the Company. The
Committee reviews with the independent auditors the scope and results of the
annual audit.
The 1996 consolidated financial statements have been audited by Price Waterhouse
LLP, independent accountants, in accordance with generally accepted auditing
standards. Price Waterhouse LLP was recommended by the Audit Committee of the
Board of Directors, selected by the Board of Directors and ratified by the
Company's stockholders. The independent accountants develop and maintain an
understanding of the Company's systems and procedures and perform such tests and
other procedures, including tests of the internal accounting controls, as they
deem necessary to enable them to express an opinion on the fairness of the
consolidated financial statements. Such opinion, based upon their audits of the
consolidated financial statements, is contained in this Annual Report.
Lattimore M. Michael Stephen J. King
Founder, Chairman and Chief Executive Officer Chief Financial Officer
23
<PAGE> 25
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS OFFICERS
<S> <C>
Lattimore M. Michael Lattimore M. Michael
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
Joseph L. Weiss Joseph L. Weiss
President and Chief Operating Officer President and Chief Operating Officer
William N. Griffith William N. Griffith
Executive Vice President Executive Vice President and Secretary-Treasurer
and Secretary-Treasurer
Michael C. McDermott
Stephen J. King Executive Vice President, Corporate Operations
Chief Financial Officer
Stephen J. King
W. Kurt Henke Chief Financial Officer
Partner
Henke, Heaton & Bufkin John C. Arnold
(attorneys-at-law) Vice President, Training
William B. Raiford, III Stephen C. Reid
Of Counsel Vice President, Research and Development
Merkel & Cocke
(attorneys-at-law)
Joe Colonnetta
Vice Chairman and Chief Executive Officer
of Del Monte-Latin America
</TABLE>
24
<PAGE> 26
CORPORATE INFORMATION
CORPORATE OFFICES
2768 Colony Park Drive
Memphis, Tennessee 38118
901/367-0888
TRANSFER AGENT
Boatman's Trust Co.
510 Locust Street
P. O. Box 14737
St. Louis, Missouri 63178-4737
314/466-1531
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
Memphis, Tennessee
GENERAL COUNSEL
Henke, Heaton & Bufkin
Professional Corporation
Clarksdale, Mississippi
SECURITIES AND SPECIAL CORPORATE COUNSEL
Giroir, Gregory & Holmes PLC
Little Rock, Arkansas
ANNUAL MEETING OF STOCKHOLDERS
The Company's 1997 annual meeting of stockholders will be held at 10:00 a.m.
local time on Thursday, May 22, 1997, at the Country Suites by Carlson in
Memphis, Tennessee. Stockholders of record as of April 4, 1997, are invited to
attend this meeting.
ANNUAL REPORT ON FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB for the year ended December
28, 1996, as filed with the Securities and Exchange Commission, may be obtained
by stockholders of record without charge upon written request to the Company.
STOCKHOLDER ACCOUNT ASSISTANCE
For address changes, registration changes, lost stock certificates, or if you
are receiving duplicate copies of the Annual Report, please contact Boatmen's
Trust Co. at the address or number listed above.
STOCK MARKET INFORMATION
The Company's common stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol BYBI and on the Chicago Stock Exchange
under the symbol BYB. At April 4, 1997, the Company had approximately 2,500
stockholders, including beneficial owners holding shares in nominee or "street"
name.
Back Yard Burgers completed its initial public offering of common stock in June
1993 and began public trading on June 25, 1993. The table below sets forth the
high and low stock prices for the two-year period ended December 28, 1996:
QUARTER ENDED: HIGH LOW
April 1, 1995 $ 4.75 $ 3.00
July 1, 1995 $ 3.88 $ 3.00
September 30, 1995 $ 3.00 $ 2.25
December 30, 1995 $ 2.38 $ 1.50
March 30, 1996 $ 2.00 $ 1.50
June 29, 1996 $ 2.63 $ 1.50
September 28, 1996 $ 2.44 $ 1.75
December 28, 1996 $ 2.44 $ 1.75
The Company currently anticipates that it will retain all of its earnings to
support its operations and the development of its business. Therefore, the
Company does not pay any cash dividends on its outstanding common stock. Future
cash dividends, if any, will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, future operations and
earnings, capital requirements, general financial conditions, contractual
restrictions, and other factors that the Board may consider relevant.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 28, 1996 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 1,101
<SECURITIES> 0
<RECEIVABLES> 363<F1>
<ALLOWANCES> 0
<INVENTORY> 150
<CURRENT-ASSETS> 1,645
<PP&E> 8,131<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 11,572
<CURRENT-LIABILITIES> 1,399
<BONDS> 0
0
3
<COMMON> 42
<OTHER-SE> 8,065
<TOTAL-LIABILITY-AND-EQUITY> 11,572
<SALES> 22,281
<TOTAL-REVENUES> 24,041
<CGS> 7,429
<TOTAL-COSTS> 18,461
<OTHER-EXPENSES> 5,020
<LOSS-PROVISION> 119
<INTEREST-EXPENSE> 228
<INCOME-PRETAX> 357
<INCOME-TAX> 0
<INCOME-CONTINUING> 357
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<EXTRAORDINARY> 0
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<NET-INCOME> 357
<EPS-PRIMARY> .08
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<F1>ASSET VALUE REPRESENTS NET AMOUNT
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