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U.S. 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
FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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
- ------------------- -------------------
None None
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
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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
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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 $26,034,000.
The aggregate market value of voting Common Stock, $.01 par value, held
by non-affiliates on March 20, 1998, was approximately $7,776,000.
The number of shares outstanding of the Registrant's Common Stock, $.01
par value and Preferred Stock, $.01 par value, as of March 20, 1998, was
4,540,404 and 40,556, 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 JANUARY 3, 1998
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 21, 1998.
Transitional Small Business Disclosure Format Yes No X
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FORM 10-KSB INDEX
PART I
<TABLE>
<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, and its
subsidiaries.
The Company consummated a merger transaction concurrently with the
closing of its Initial Public Offering on July 2, 1993. As of January 3, 1998,
the Company's operations included 32 Company-operated Restaurants and 45
franchised Restaurants located in a total of 15 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 three 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 is to serve great tasting food in inviting
surroundings. During 1998, the Company will continue its evolution to "fast
casual" by adding dining rooms whose design will match the standards set by the
quality of the food. This evolution will be communicated through a creative and
well-balanced marketing campaign and a focus on delivering the best possible
service.
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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 January 3, 1998.
Company-operated
(32 Restaurants)
<TABLE>
<CAPTION>
TENNESSEE: MISSISSIPPI: ARKANSAS:
<S> <C> <C>
Bartlett (1) Horn Lake (1) Benton (1)
Brentwood (1) Conway (1)
Collierville (1) TEXAS: Jacksonville (1)
Columbia (1) Austin (1) Little Rock (5)
Cordova (1) North Little Rock (2)
Franklin (2)
Germantown (1)
Memphis (10)
Millington (1)
Nashville (1)
<CAPTION>
Franchised
(45 Restaurants)
ALABAMA: ARKANSAS: TEXAS:
<S> <C> <C>
Anniston (1) Fayetteville (1) Texarkana (1)
Birmingham (1) Fort Smith (1)
Jonesboro (1) TENNESSEE:
KANSAS: West Memphis (1) Chattanooga (1)
Mission (1) Cleveland (1)
Olathe (1) Hixson (1)
Overland Park (2) KENTUCKY: Jackson (1)
Paducah (1) Knoxville (3)
FLORIDA: LOUISIANA: MISSOURI:
Deerfield Beach (1) Bossier City (1) Blue Springs (1)
Fort Lauderdale (1) Springfield (1)
Orlando (1) OHIO:
Sarasota (1) Wooster (1) NORTH CAROLINA:
Asheville (1)
MISSISSIPPI: Boone (1)
OKLAHOMA: Clarksdale (1) Charlotte (2)
Tulsa (1) Cleveland (1) Fayetteville (2)
Jackson (1) Hope Mills (1)
GEORGIA: Meridian (1) Lenoir (1)
Marietta (2) Picayune (1)
Tupelo (1) SOUTH CAROLINA
Greenville (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.
<TABLE>
<CAPTION>
52-Week Period Ended 53-Week Period Ended
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December 28, 1996 January 3, 1998 (a)
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<S> <C> <C>
Company-operated $22,281,000 $24,150,000
Franchised 27,234,000 31,648,000
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System-wide $49,515,000 $55,798,000
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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>
Year Ended
-----------------------------------------------------------------
12/31 12/31 1/1 12/31 12/30 12/28 1/3
1991 1992 1993 1994 1995 1996 1998
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<S> <C> <C> <C> <C> <C> <C> <C>
Restaurants
Company-operated
Open beginning of period 3 2 3 15 26 32 34
Opened during period -- 1 1 10 5 2 1
Converted from Franchised -- -- 11 1 2 1 --
Converted to Franchised -- -- -- -- -- (1) (1)
Closed during period (1) -- -- -- (1) -- (2)
--- --- --- --- --- --- ---
Open at end of period 2 3 15 26 32 34 32
--- --- --- --- --- --- ---
Franchised (b)
Open beginning of period 19 27 39 36 39 36 47
Opened during period 10 13 11 16 7 11 4
Converted to Company-operated -- -- (11) (1) (2) (1) 1
Converted from Company-
operated -- -- -- -- -- (1) --
Closed during period (2) (1) (3) (12) (8) -- (7)
--- --- --- --- --- --- ---
Open at end of period 27 39 36 39 36 47 45
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Total Restaurants 29 42 51 65 68 81 77
=== === === === === === ===
</TABLE>
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(a) As a result of the Company's fiscal year ending on the Saturday
closest to December 31, fiscal 1997 contains 53 weeks versus 52 weeks for fiscal
1996. As a result, sales for fiscal 1997 are not directly comparable to those of
fiscal 1996.
(b) Subsequent to January 3, 1998, (i) one franchised Restaurant closed
in each of Fort Smith, Arkansas, Fort Lauderdale, Florida and Deerfield Beach,
Florida, (ii) one Company-operated Restaurant was converted to a franchised
Restaurant in Austin, Texas and (iii) one franchised Restaurant was opened in
each of Jackson, Mississippi and Oxford, Mississippi.
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 i) single drive-thru
with indoor dining, ii) double drive-thru without indoor dining and iii) 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 Restaurant size ranges 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. Since that time, the Company has
added a number of indoor dining facilities to its operations, including the
retrofitting of many existing double drive-thru restaurants to include indoor
dining. At January 3, 1998, the number of Restaurants with indoor dining was 17
for Company-operated facilities and 27 for Franchised facilities.
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.
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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 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 15 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. For Company-operated Restaurants, management 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 continued
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 committed
and enthusiastic 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 only
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
franchised Restaurants in defined geographic areas. Each franchise district
manager has been fully trained by the Company to assist franchisees in
implementing the
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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 and cleanliness and
maintenance of facilities. The franchisees receive a written report of the
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 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 January 3, 1998, 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 25
Restaurants by the end of April 30, 2002. Of the 45 franchised Restaurants as of
January 3, 1998, 28 were being operated under Area Development Agreements by
multiple unit franchisees and 17 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. During the past three years, the Company has
exercised its right to terminate 14 Area Development Agreements, five during
1997, for lack of performance by multiple unit franchisees with respect to their
projected development schedules. Additionally, during the past three years, one
Franchise Agreement was terminated, in 1995, because of a lack of performance by
a single unit franchisee 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.
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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, 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, 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
three largest hamburger chains (i.e., McDonald's, Burger King and Wendy'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 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 and may have an adverse effect on the
Company's operating margins.
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EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
Name and Age Title
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<S> <C>
Lattimore M. Michael Mr. Michael has been Chairman and Chief Executive Officer since
(54) 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 Operating Officer since
(38) 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 Memphis area.
William N. Griffith Mr. Griffith has been Executive Vice President and
(35) 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 and Principal
(46) Accounting Officer since July 1993. From 1988 to 1993, Mr.
King was the Comptroller for Southland Racing Corporation.
Prior to 1988, Mr. King practiced accounting at Price Waterhouse.
Michael C. McDermott Executive Vice President - Company Operations. Mr. McDermott
(51) 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. From 1992 to 1995, he was a
regional manager for Country Harvest Buffet, Inc. Prior to March
1992, Mr. McDermott was Vice President of Operations for
O'Charley's Inc.
Stephen C. Reid Vice President-Research and Development. Mr. Reid has been an
(39) executive officer of the Company since 1988.
</TABLE>
EMPLOYEES
As of March 20, 1998, the Company employed approximately 1,000
persons in its Restaurant operations, 17 of whom are corporate personnel, 106 of
whom are Restaurant management and supervisory personnel and the remainder of
whom are hourly Restaurant personnel. Of the 17 corporate employees, 6 are in
management positions and 11 are administrative or office employees.
9
<PAGE> 12
ITEM 2. PROPERTIES
Of the 32 Company-operated Restaurants as of January 3, 1998, the
Company has entered into ground leases, as lessee, for 21 Restaurants. The
Company owns the real property for three Restaurants. The Company's leases are
generally written for a term of five to 15 years with one or more five-year
renewal options. The Company's average monthly lease cost for the 21
Company-operated Restaurants located on leased sites is approximately $2,900 per
month. For the eight Restaurants where the Company leases the building as well
as the site, the average monthly cost is approximately $4,820 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 32 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 expires on October 15, 1998, and provides for a minimum
annual rent of $44,500. Also, BYB Properties, Inc., a wholly-owned subsidiary of
the Company, leases nominal office space at 103 Faulk Road, Suite 200,
Wilmington, Delaware 19803. This lease expires on September 30, 1998, and
provides for annual rent of $3,850.
ITEM 3. LITIGATION
The Company is involved in certain litigation matters incidental to its
business, including, but not necessarily limited to, claims alleging violations
of the Civil Rights Act of 1964 and/or violations of federal and state
discrimination laws. 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 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". The following table sets
forth, for all periods indicated, the high and low bid prices for the Common
Stock as reported by Nasdaq. 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 28, 1997..................... $2.25 $1.75
June 28, 1997...................... $2.00 $1.63
September 27, 1997................. $2.00 $1.75
January 3, 1998.................... $3.63 $1.94
</TABLE>
At March 20, 1998, the Common Stock was held of record by approximately
515 record stockholders. On March 20, 1998, the last sale price for the Common
Stock as reported by Nasdaq was $2.88 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 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 21, 1998.
ITEM 7. FINANCIAL STATEMENTS
Incorporated herein by reference from the Company's Annual Report for
the Annual Meeting of Stockholders to be held May 21, 1998.
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 21, 1998, to be
filed pursuant to Regulation 14A. Certain 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 21, 1998, 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 21, 1998, 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 21, 1998, to be
filed pursuant to Regulation 14A.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<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 28,
1993.(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)
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)
</TABLE>
12
<PAGE> 15
<TABLE>
<S> <C>
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 commitment by and between Phoenix Leasing Incorporated and Back
Yard Burgers, Inc. dated October 4, 1996. (8)
10.13 Loan commitment by and between Trust One Bank and Back Yard Burgers,
Inc. dated January 23, 1997. (8)
10.14* Capital Contribution Agreement between Back Yard Burgers, Inc. and BYB
Properties, Inc. dated October 10, 1997.
10.15* Trademark Assignment by Back Yard Burgers, Inc. to BYB Properties, Inc.
dated October 10, 1997.
10.16* Trademark License Agreement between BYB Properties, Inc. and
Back Yard Burgers, Inc. dated October 10, 1997.
10.17* Revolving Loan Agreement regarding Uncommitted Line of Credit
Agreement from BYB Properties, Inc. to Back Yard Burgers, Inc.
dated October 10, 1997.
10.18* Promissory Note of Back Yard Burgers, Inc. to BYB Properties,
Inc. dated October 10, 1997 in the original principal amount of
$6,000,000.
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C>
10.19* Tax Sharing Agreement between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997.
10.20* Loan Agreement by and between Trust One Bank and Back Yard
Burgers, Inc. dated December 15, 1997.
10.21* Promissory Note of Back Yard Burgers, Inc. to Trust One Bank in
the original principal amount of $460,000 dated December 15,
1997.
11* Statement re: Computation of Net Income (Loss) per Share
13* Registrant's Annual Report to Stockholders for the 53-week
period ended January 3, 1998. Portions of the Annual Report not
specifically incorporated by reference herein are not deemed to
be filed herewith.
21* Subsidiaries of the Registrant.
27 Financial Data Schedule (for SEC use only) (9)
</TABLE>
- --------------
* Filed herewith.
(1) Previously filed with the Securities and Exchange Commission (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.
(8) Previously filed with the Commission as an Exhibit to the Registrant's Form
10-KSB, dated December 28, 1996 and filed on March 28, 1997.
(9) Submitted electronically to the Securities and Exchange Commission for
information only and not filed.
(b) Reports on Form 8-K
None.
14
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, 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: April 2, 1998
-----------------------------------
In accordance with the Exchange Act, 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 April 2, 1998
- -------------------------------------------- and Director
Lattimore M. Michael
/s/ Joseph L. Weiss President, Chief Operating Officer April 2, 1998
- -------------------------------------------- and Director
Joseph L. Weiss
/s/ William N. Griffith Executive Vice President and Director April 2, 1998
- --------------------------------------------
William N. Griffith
/s/ Stephen J. King Chief Financial Officer April 2, 1998
- --------------------------------------------
Stephen J. King and Director
/s/ William B. Raiford, III Director April 2, 1998
- --------------------------------------------
William B. Raiford, III
/s/ W. Kurt Henke Director April 2, 1998
- --------------------------------------------
W. Kurt Henke
/s/ Joe Colonnetta Director April 2, 1998
- --------------------------------------------
Joe Colonnetta
</TABLE>
15
<PAGE> 1
EXHIBIT 10.14
CAPITAL CONTRIBUTION AGREEMENT
This Capital Contribution Agreement (this "Agreement") between Back
yard Burgers, Inc., a Delaware corporation whose principal office is located at
2768 colony Park Drive, Memphis, Tennessee 38118 ("Burgers"), and BYB
Properties, Inc., a Delaware corporation whose sole office is located at suite
200, 103 Foulk Road, Wilmington, DE 19803 ("BYB Properties"), as amended, and is
to be effective on this 10th day of October, 1997.
Whereas, BYB properties is a wholly-owned subsidiary of Burgers.
AND WHEREAS, pursuant to the terms and conditions set forth below, BYB
Properties and Burgers desire to enter into a transaction in which Burgers
contributes the following property as an additional contribution to the capital
of BYB Properties:
(I) An amount of cash or cash equivalents to be agreed upon between
the parties (the "Cash");
(ii) All right, title and interest in and to those certain trade
names, trademarks, and service marks, and all registrations and
applications for registration of the same, all of which are more
particularly identified on Exhibit A attached to this Agreement
and incorporated as a part hereof as if fully set forth herein
(the "Trademarks"), together with the goodwill of the business
symbolized by the Trademarks.
The cash and the Trademarks shall be referred to collectively
hereinafter as the "Additional Capital."
NOW THEREFORE, in consideration of the above premises and the promises
contained in this Agreement, and intending to be legally bound, Burgers and BYB
Properties agree as follows:
ss.1. Transfer of Additional Capital to BYB Properties.
Burgers hereby agrees to transfer and contribute the Additional
Capital to BYB Properties.
ss.2. Acceptance of Additional Capital and Covenant by BYB Properties.
BYB Properties hereby agrees to accept the contributions of the
Additional Capital described in ss.1 above, and covenants to allocate the entire
value of the Additional Capital to surplus.
ss.3. Agreement as to Consideration for Additional Capital.
BYB Properties and Burgers each agree that the Additional Capital
is not being transferred by Burgers to BYB Properties in exchange for goods or
services rendered.
ss.4. Appointment of BYB Properties as Attorney of Burgers with Respect
to the Additional Capital.
Burgers hereby appoints BYB Properties as Burgers' true and
lawful attorney, with full power of substitution, for Burgers, in the name and
stead of Burgers or otherwise, but on behalf and for the benefit of BYB
Properties, to demand and receive all right, title and interest in and to the
Additional Capital hereunder transferred to BYB Properties, or intended so to
be; to give receipts, releases and acquittances for or in respect of the
Additional Capital or any part thereof; to collect, assert or enforce any claim,
title, right, debt; or account hereby granted or transferred, or intended so to
be, and to endorse with the name of Burgers any checks received in respect to
the foregoing; to institute (or cause to be instituted) and prosecute (or cause
to be prosecuted) in the name of Burgers, but on behalf and for the benefit of
BYB Properties (or its delegate), any proceeding at law or in equity, or
otherwise, that BYB Properties may deem proper with respect to the Additional
Capital; and to defend and compromise any and all actions, suits or proceedings
in respect of the Additional Capital that BYB Properties may deem advisable.
ss.5. Warranties of BYB Properties.
ss.5.1 BYB Properties is a duly organized and validly existing
corporation under the laws of the State of Delaware,
with its sole office located in Wilmington, Delaware.
ss.5.2 To the best of the knowledge of its undersigned
officer, BYB Properties (I)is in good corporate
standing in Delaware, (ii) operates in no other states,
and (iii) has made no material foreign, federal, state
or local tax liabilities which are past due.
CAPITAL CONTRIBUTION AGREEMENT
BYB PROPERTIES, INC.
PAGE 1
<PAGE> 2
ss.5.3 To the best of the knowledge of the undersigned officer
of BYB Properties, there is no legal action or
proceeding pending against BYB Properties which would
inhibit the transaction of BYB properties' ordinary
business or prevent BYB Properties from validly
entering into this Agreement.
ss.5.4 BYB Properties has the corporate power to enter into
this Agreement and the officer executing this Agreement
on behalf of BYB Properties has been duly authorized to
do so.
ss.5.5 To the best of the knowledge of the undersigned officer
of BYB Properties, the execution and performance of the
obligations contained in this Agreement do not
constitute a violation, breach or default under any
other agreement by which BYB Properties is bound.
ss.6. Warranties of Burgers.
ss.6.1 Burgers is a duly organized and validly existing
corporation under the laws of the State of Delaware,
with its principal office located in Memphis,
Tennessee.
ss.6.2 to the best of the knowledge of its undersigned
officer, burgers (I) is in good corporate standing in
Delaware, Tennessee, and in every other jurisdiction
where its ownership, lease or operation of property or
the conduct of its business requires qualification as a
foreign corporation except to the extent that the
failure to so qualify as a foreign corporation would
not have a material adverse effect on burgers, and (ii)
has no material foreign national, provincial or local,
nor any material U.S. federal, state or local tax
liabilities which are past due.
ss.6.3 To the best of the knowledge of the undersigned officer
of Burgers, there is no legal action or proceeding
pending against Burgers which would inhibit the
transaction of Burgers' ordinary business or prevent
burgers from validly entering into this Agreement.
ss.6.4 Burgers has the corporate power to enter into this
Agreement, and the undersigned officer executing this
Agreement on behalf of burgers has been duly authorized
to do so.
ss.6.5 To the best of the knowledge of the undersigned officer
of Burgers, the execution and performance of the
obligations contained in this Agreement do not
constitute a violation, breach or default under any
other agreement by which Burgers is bound.
ss.6.6 At the time of the transfer described in ss.1 above,
Burgers owns all right, title and interest in and to
the Trademarks.
ss.7. Mutuality of Consent.
BYB Properties and burgers each acknowledge that this Agreement,
and every agreement made in connection with this Agreement, represent the mutual
and voluntary consent and understanding of the parties hereto.
ss.8. Each Party Familiar with Operations of other Party.
BYB Properties and burgers acknowledge that they (I) are familiar
with the operations of the other party, (ii) have been provided access to all
necessary financial records, statements, accounts or other materials of the
other party, which such party requested, and (iii) are competent to evaluate the
risks associated with the performance of their respective obligations under this
Agreement.
ss.9. Execution and Delivery of other Documents.
BYB Properties and Burgers covenant to perform all acts necessary
or proper to effectuate the intent and purposes of this Agreement, including the
execution and delivery of all other required or proper documents.
CAPITAL CONTRIBUTION AGREEMENT
BYB PROPERTIES, INC.
PAGE 2
<PAGE> 3
ss.10. Governing Law.
This Agreement has been executed and delivered by Burgers and
BYB properties (and will be deemed to be made) in the State of Delaware. This
Agreement will be interpreted and the rights and liabilities of the parties
hereto determined in accordance with the laws of the State of Delaware. Each of
Burgers and BYB properties hereby submits to the jurisdiction of any state or
federal court located within New Castle County, Delaware, and consents that all
service of process be made by certified mail directed to the relevant party at
its address set forth above.
ss.11. Successors; Non-assignability.
This Agreement shall be binding upon and inure to the benefit
of BYB properties and Burgers and their respective successors and assigns;
provided, however, that this Agreement, or any portion thereof, may not be
assigned without the written consent of the non-assigning party, which consent
shall not be unreasonably withheld.
ss.12. Severability.
If any provision of this Agreement is determined by a court of
competent jurisdiction to be invalid or unenforceable, such invalidity or
unenforceability shall not affect the remaining provisions of this Agreement.
ss.13. Entire Agreement.
This Agreement constitutes the entire understanding of the
parties with respect to the subject matter hereof and supersedes all prior
contracts, understandings and agreements between the parties.
ss.14. Amendment.
This Agreement may not be amended or modified without the
written consent of each party hereto.
ss.15 Expenses.
Each party agrees to pay its respective expenses incurred with
respect to this Agreement and the consummation of the transactions contemplated
thereby.
ss.16. Counterparts.
This Agreement may be executed in counterparts, each of which
when so executed and delivered shall constitute a complete and original
instrument but all of which together shall constitute one and the same
agreement, and it shall not be necessary when making proof of this Agreement or
any counterpart thereof to account for any other counterpart.
IN WITNESS WHEREOF, the undersigned have duly executed this Capital
Contribution Agreement to be effective on this 10th day of October, 1997.
BYB PROPERTIES, INC. BACK YARD BURGERS, INC.
BY: BY:
------------------------------- -----------------------------------
Name: Name:
Title: Title:
CAPITAL CONTRIBUTION AGREEMENT
BYB PROPERTIES, INC.
PAGE 3
<PAGE> 4
EXHIBIT A
TO
CAPITAL CONTRIBUTION AGREEMENT
IDENTIFICATION OF TRADEMARKS ASSIGNED TO BYB PROPERTIES
U.S. TRADEMARKS
<TABLE>
<CAPTION>
Mark Registration Number Issue Date
- ---- ------------------- ----------
<S> <C> <C>
Great Little Burger 1,744,113 December 29, 1992
Stylized Cooking Grill
w/Flames Emanating
From the Grill 1,679,739 March 17, 1992
Back Yard Burgers 1,679,702 March 17, 1992
BYBurgers 1,518,494 December 27, 1988
</TABLE>
CAPITAL CONTRIBUTION AGREEMENT
BYB PROPERTIES, INC.
PAGE 4
<PAGE> 1
EXHIBIT 10.15
TRADEMARK ASSIGNMENT
THIS ASSIGNMENT dated this 10th day of October, 1997, by Back
Yard Burgers, Inc., a Delaware corporation whose principal office is located at
2768 Colony Park Drive, Memphis, Tennessee 38118 (or "Burgers"), recites and
provides:
WHEREAS, Burgers is the owner of all right, title and interest
in and to the registered and unregistered trade names, trademarks and service
marks, as well as the applications for registration of trade names, trademarks
and service marks, identified on Schedule A, which is attached hereto and made a
part hereof (the "Trademarks");
AND WHEREAS, BYB Properties, Inc., a Delaware corporation with
its only office located at Suite 200, 103 Foulk Road, Wilmington, DE 19893, is
desirous of acquiring said Trademarks and the registrations thereof:
AND WHEREAS, it is desired that the assignment of said
Trademarks be made of record in the United States Patent and Trademark Office.
NOW, THEREFORE, for good and valuable consideration, receipt
of which is hereby acknowledged, Burgers does hereby assign and transfer unto
said BYB, and for BYB's successors and assigns, all right, title and interest in
and to each of said Trademarks, together with the goodwill of the business
symbolized by said Trademarks, and the registrations thereof; and for aforesaid
considerations Burgers hereby covenants, agrees and undertakes to execute
whenever requested by requested by BYB, all applications, assignments, lawful
oaths and any other papers that BYB may reasonably deem necessary or desirable
for securing to BYB, or for maintaining for BYB, all the Trademarks hereby
assigned or agreed to be assigned; all without further compensation to Burgers.
BACK YARD BURGERS, INC.:
ATTEST:
By: By:
------------------------------- ----------------------------------
Name: Name:
Title: Title:
Date:
-----------------------------
U.S. ASSIGNMENT DOCUMENT
BYB PROPERTIES, INC.
<PAGE> 2
EXHIBIT A
IDENTIFICATION OF TRADEMARKS
<TABLE>
<CAPTION>
Mark Registration Number Issue Date
- ---- ------------------- ----------
<S> <C> <C>
Great Little Burger 1,744,113 December 29, 1992
Stylized Cooking Grill
w/Flames Emanating
From the Grill 1,679,739 March 17, 1992
Back Yard Burgers 1,679,702 March 17, 1992
BYBurgers 1,518,494 December 27, 1988
</TABLE>
U.S. ASSIGNMENT DOCUMENT
BYB PROPERTIES, INC.
<PAGE> 1
EXHIBIT 10.16
TRADEMARK LICENSE AGREEMENT
This Agreement, dated the 10th day of October, 1997, is made
between BYB Properties, inc., a Delaware corporation with its sole office
located at suit 200, 103 Foulk Road, Wilmington, Delaware, 19803 ("BYB"), and
Back Yard Burgers, Inc., a Delaware corporation with its principal offices
located at 2768 Colony Park Drive, Memphis, Tennessee 38118 ("Burgers").
RECITALS
WHEREAS, BYB is the owner of all right, title and interest in
and to those certain trademarks, trade names and service marks, and all related
registrations and applications for registration, as more particularly identified
on Exhibit A which is attached hereto and made a part hereof (collectively, the
"Trademarks").
WHEREAS, Burgers desires to acquire the right to use the
Trademarks as part of its corporate name and in connection with its business of
operating and franchising a chain of fast-food restaurants in the Territory (as
defined herein), and to acquire the right to franchise or sub-license the
Trademarks to its franchisees, sublicensees, affiliates and subsidiaries;
WHEREAS, BYB is willing to authorize and license Burgers such
rights under the Trademarks.
NOW THEREFORE, for good and valuable consideration, the receipt
and adequacy of which are acknowledged by the parties, BYB and Burgers,
intending to be legally bound, agree as follows:
ARTICLE I - DEFINITIONS
1.1 "Trademarks" shall mean all those certain registered and
unregistered trade names, trademarks, service marks, and all
related registrations and applications for registration,
identified on Exhibit A hereto, and any future trade names,
trademarks and service marks added to the scope of this
Agreement by the mutual agreement of the parties.
1.2 "Licensed products" shall mean all services and products of
Burgers delivered under the Trademarks.
1.3 "Territory" shall mean the continental United States of
America.
1.4 "Affiliate" or "Subsidiary" - shall mean any entity in which
Burgers owns at least a majority of the voting control of such
entity.
1.5 "Franchisee" or "Sublicensee" - shall mean any entity in which
Burgers does not own a majority of the voting control of such
entity to whom Burgers grants a franchise or sublicense of the
Trademarks.
ARTICLE II - GRANT OF LICENSE
2.1 BYB grants Burgers the non-exclusive, non-assignable right and
license to use the Trademarks in Burgers' corporate name and in
connection with packaging, selling, marketing, operating and
distributing the Licensed Products within the Territory.
2.2 BYB further authorizes Burgers to grant appropriate sublicenses
hereunder to Affiliates or Subsidiaries, all subject to the
terms and conditions hereinafter stated.
2.3 BYB further authorizes Burgers to franchise and sublicense the
Trademarks to Franchisees and Sublicensees, all subject to the
terms and conditions hereinafter stated. BYB reserves the right
to disallow any Franchise or Sublicense of the Trademarks
within 30 days of BYB receiving notice of the grant of such
Franchise or Sublicense.
1
<PAGE> 2
ARTICLE III - QUALITY CONTROL
3.1 BYB shall have the right to exercise quality control over
Burgers' use of the Trademarks and Licensed Products to a
degree reasonably necessary to maintain the validity of the
Trademarks and to protect the goodwill associated therewith.
BYB recognizes and approves the quality of Burgers' products
heretofore sold by Burgers under the trademarks now termed the
Trademarks in the territory now termed the Territory.
3.2 Burgers shall use the Trademarks on or in connection only with
those Licensed products that conform to the specifications and
standards of quality which BYB prescribes. BYB adopts as said
standards of quality those standards embodied in said products
sold heretofore by Burgers, and Burgers will not deviate
materially from those standards without prior written approval
from BYB.
3.3 In order to verify compliance with Paragraph 3.2 hereof, BYB
may from time to time require Burgers to submit samples of
Licensed Products, packaging and promotional materials
therefor, and other items bearing the Trademarks, or submit
reports and documents prepared in the ordinary course of
business, and BYB, or its delegate, may inspect the licensed
Products, packaging, or promotional materials on Burgers'
premises during business hours, upon forty-eight (48) hours
advance notice.
3.4 Burgers shall use its best efforts to ensure that the Licensed
Products, and packaging or promotional materials therefor,
comply with all applicable ordinances, laws, and statutes
governing the manufacture, packaging, promotion, and sale of
such products.
ARTICLE IV - USE OF THE TRADEMARKS
4.1 Burgers shall use its best efforts to promote and extend demand
for the Licensed Products sold under the Trademarks in the
Territory.
4.2 Burgers recognizes the great value and goodwill associated with
the Trademarks and acknowledges BYB's ownership in same.
Burgers is a related company as defined in Section 45 of the
Trademark Act of the United States, 15 U.S.C. ss.1127, and
Burgers' use of the Trademarks inures to the benefit of BYB for
all purposes including trademark registration. Burgers shall
not, however:
(a) challenge the validity of the Trademarks or any
registration therefor;
(b) contest the fact that its rights under this Agreement
are solely those of a licensee;
(c) attempt to register any of the Trademarks in its own
name;
(d) use the Trademarks in any manner that would jeopardize
BYB's rights in the Trademarks; or
(e) knowingly do any act that would invalidate or be likely
to invalidate the BYB's trademark registrations.
4.3 Burgers shall affix as a trademark registration notice to the
Licensed Products, and on the packaging, advertising,
promotional items used in conjunction with the Licensed
products the symbol for registered trademarks and TM for
unregistered trademarks.
4.4 Burgers may not combine the Trademarks with any other marks,
names or symbols unless it obtains BYB's prior written consent.
4.5 Burgers may not make any significant change in the presentation
of the Trademarks as affixed to the licensed products, or used
on packaging or promotional materials, unless it obtains BYB's
prior written consent.
4.6 BYB shall be responsible for trademark registration and
maintenance. Burgers shall cooperate with BYB and shall execute
any documents reasonably required by BYB or supply BYB with any
samples or other materials reasonably necessary to maintain the
Trademarks.
2
<PAGE> 3
4.7 Burgers is authorized to use the Trademarks in connection with
the advertisement of its products and services in any manner it
deems appropriate, including without limitation use of the
Trademarks on apparel, print media, radio and television. This
authorization is conditioned, however, on such advertising
complying with all applicable local, state and federal laws.
Also, if sales of advertising products are made by Burgers,
such sales will be included with the calculation of the Royalty
under Section 7.1 of this Agreement.
ARTICLE V - TRADEMARK ENFORCEMENT
5.1 In the event that Burgers learns of any infringement or
unauthorized use of any of the Trademarks, it shall promptly
notify BYB. BYB has the right to transmit notices of
infringement to or bring infringement actions against
infringing parties. If requested to do so, Burgers shall
cooperate with and assist BYB in any such action, including
joining the action as a party if necessary, at BYB's expense.
Any award, or portion of an award, recovered by BYB in any such
action or proceeding commenced by BYB shall belong solely to
BYB after recovery by both parties of their respective actual
out-of-pocket costs.
5.2 If BYB determines not to bring any such action, Burgers may
then bring such action in its own name at its own expense
provided it obtains the consent of BYB, which consent shall not
be unreasonably withheld. If requested to do so, BYB shall
cooperate with Burgers in any such action, including joining
the action as a party if necessary, at Burgers' expense. Any
award, or portion of an award, recovered by Burgers shall
belong solely to Burgers after recovery by both parties of
their respective actual out-of-pocket costs.
5.3 In the event a third party institutes an infringement action
against Burgers for its use of the Trademarks as provided in
this Agreement, Burgers shall promptly notify BYB of such suit
in writing. BYB shall defend, at its own expense, any such
action, and Burgers shall cooperate in such defense as
reasonably requested by BYB, at BYB's expense. BYB shall pay
all judgments and settlements resulting from such suits. Any
award received by BYB in such an action shall belong solely to
BYB.
5.4 BYB and Burgers shall keep one another informed of the status
of, and their respective activities regarding, any litigation
concerning the Trademarks. Burgers may not enter into a
settlement or consent judgment involving the trademarks,
however, unless it obtains BYB's prior written consent.
ARTICLE VI - INDEMNITY
6.1 Burgers shall indemnify and hold harmless BYB and its
affiliated entities and their respective officers, employees,
and agents, from any and all claims, suits, damages, attorney's
fees, costs, and expenses arising from Burgers' performance and
activities under this Agreement, whenever and however asserted
and established.
6.2 Burgers shall indemnify and hold harmless Burgers and its
affiliated entities and their respective officers, employees,
and agents, from any and all claims, suits, damages, attorney's
fees, costs, and expenses arising from any claim by any other
person, firm or corporation of either a superior right in and
to the Licensed Products or any feature thereof or infringement
action arising out of the manufacture and sale of the Licensed
Products by Burgers.
ARTICLE VII - ROYALTY
7.1 In consideration of the rights granted herein, burgers shall
pay to BYB a royalty equivalent to a percentage of all gross
sales (less sales tax) of the Licensed products sold by Burgers
and its Affiliates, such percentage currently being three and
one-half percent (3.5%) (the "Royalty"). Burgers and BYB shall
each have the right to require that a new royalty be determined
in accordance with an independent valuation of the Trademarks
which shall be performed by an independent appraiser mutually
agreed upon by the parties (costs to be paid by requesting
party). Once a party exercises its right to require a
valuation, that party shall not have the right to request
another valuation for three (3) years from the date of issuance
of the final draft of the valuation report. The royalty
percentage determined by the valuation study shall then be
applied prospectively to the gross sales (less sales tax) of
Burgers from the date of issuance of the final draft of the
valuation report.
7.2 In consideration of the right to Franchise or Sublicense the
Trademarks hereunder, Burgers shall pay a royalty equivalent to
the Royalty, which shall be calculated against all gross sales
(less sales tax) of Licensed products sold by Franchisees or
sublicensees in the Territory (the "Franchise Fees").
3
<PAGE> 4
7.3 Unless agreed to the contrary, Burgers shall calculate the
royalty and Franchise Fees payable to BYB on the last day of
each fiscal month of Burgers occurring during the term of this
Agreement, and shall pay or cause to have paid to BYB such
Royalty and Franchise Fees within thirty (30) days after the
last day of each fiscal month occurring during the term of this
Agreement. Notwithstanding the foregoing, the royalty and
Franchise Fees shall be deemed to accrue from day to day.
Simultaneous with submission of the royalty and Franchise Fees,
Burgers shall deliver to BYB a detailed report of the Royalty
and Franchise Fees payable for the month.
7.4 BYB shall have the right to assess interest on any royalty or
Franchise Fe due and remaining unpaid in the manner and on the
date stipulated for payment hereunder at a rate of one percent
(1%) point per annum above the average prime rate as reported
in The Wall Street Journal for the period of default, such
interest being compounded at the end of each fiscal year.
7.5 Burgers shall maintain complete and accurate records showing in
detail the net sales of the Licensed Products. BYB, or its duly
authorized representative, is entitled to inspect Burgers'
records at all reasonable times.
7.6 BYB agrees to provide instructions to, accept payments from,
and deliver any report, document, or other information
pertaining to this Agreement or the transactions contemplated
by this Agreement to, the management company or other designee
appointed to transact business on behalf of Burgers, if
requested to do so by Burgers.
ARTICLE VIII - TERM AND TERMINATION
8.1 This Agreement will remain in force and effect for a period of
one year from the effective date of this Agreement, and shall
renew automatically for successive yearly periods until either
party provides written notice to terminate the Agreement within
forty-five (45) days before the expiration of the then current
term.
8.2 In the event either party commits a material breach of this
Agreement, the other party may, upon written notice, terminate
the Agreement; provided, however, that the Agreement will not
be terminated if the breaching party cures the breach within
thirty (30) days of receipt of said notice (the "Cure period").
Further, if the breaching party is unable to cure its breach
within the Cure Period for reasons of force majeure, or because
of actions or omissions of the non-breaching party, the
breaching party shall have up to an additional thirty (30) days
in which to cure, so long as the Agreement has not expired.
8.3 Notwithstanding anything to the contrary in paragraph 8.2,
either party may, by written notice to the other party,
terminate this Agreement if any of the following events occur:
(a) the other party goes into liquidation other than a
voluntary liquidation for the purpose of reorganization;
(b) the other party ceases to carry on business;
(c) the other party or a significant part of its business,
assets, ownership, management, or right of disposition
are confiscated, requisitioned, nationalized,
expropriated, or in any other manner acquired without
consent of the other party or its shareholders, as the
case may be, by or on behalf of or under any law or at
the instance of any Government de jure or de facto.
ARTICLE IX - MISCELLANEOUS
9.1 This Agreement contains the entire understanding between the
parties.
9.2 This Agreement may be amended, modified, or supplemented, and
any provision hereof waived, only by a written agreement of the
parties hereto.
9.3 Burgers is not an agent of BYB, and nothing in this Agreement
places the parties in a relationship as partners or joint
venturers.
9.4 any waiver of a breach by either party is not a waiver of any
subsequent or other breach.
4
<PAGE> 5
9.5 this Agreement has been executed and delivered by Burgers and
BYB (and will be deemed to be made) in the State of Delaware.
This Agreement will be interpreted and the rights and
liabilities of the parties hereto determined in accordance with
the laws of the State of Delaware. Each of Burgers and BYB
hereby submits to the jurisdiction of any state or federal
court located within New Castle County, Delaware, and consents
that all service of process be made by certified mail directed
to the relevant party at its address set forth above.
9.6 any notice required to be given to a party hereunder shall be
in writing and may be delivered by (I) hand, (ii) United States
first class mail, postage prepaid, (iii) Federal Express (or
any other nationally recognized courier), and delivery charge
prepaid, or (iv) telecopy or any other similar facsimile
device, provided a confirmation sheet is available to confirm
transmission. Each notice shall be addressed to the recipient
at such recipient's last known address (or telecopy number) as
it appears below. Such notice shall be effective: (I) if hand
delivered or couriered when received; (ii) if mailed five (5)
days after the same has been deposited into the U.S. Mails; and
(iii) if dispatched by telecopy or facsimile device, two (2)
days after dispatch. Addresses of the parties are as follows:
BYB: BYB Properties, Inc.
Suite 200
103 Foulk Road
Wilmington, Delaware 19803
Fax: (302) 652-8667
Burgers: Back Yard Burgers, Inc.
2768 Colony Park Drive
Memphis, Tennessee 38118
(901) 367-0999
9.7 This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and
permitted assigns.
9.8 This Agreement may be executed in counterparts, each of which
when so executed and delivered shall constitute a complete and
original instrument but all of which together shall constitute
one and the same agreement, and it shall not be necessary when
making proof of this Agreement or any counterpart thereof to
account for any other counterpart.
IN WITNESS WHEREOF, each of the undersigned represents that he or she
is authorized to bind his or her company to the terms of this Agreement, signed
to be effective this 10th day of October, 1997:
BYB PROPERTIES, INC.
By:
----------------------------------
Name:
Title:
BACK YARD BURGERS, INC.
By:
----------------------------------
Name:
Title:
5
<PAGE> 6
EXHIBIT A
TO
LICENSE AGREEMENT
IDENTIFICATION OF TRADEMARKS
U.S. TRADEMARKS
<TABLE>
<CAPTION>
Mark Registration Number Issue Date
- ---- ------------------- ----------
<S> <C> <C>
Great Little Burger 1,744,113 December 29, 1992
Stylized Cooking Grill
w/Flames Emanating
From the Grill 1,679,739 March 17, 1992
Back Yard Burgers 1,679,702 March 17, 1992
BYBurgers 1,518,494 December 27, 1988
</TABLE>
6
<PAGE> 1
EXHIBIT 10.17
BYB PROPERTIES, INC.
SUITE 200
103 FOULK ROAD
WILMINGTON DE 19803
October 10, 1997
Back Yard Burgers, Inc.
2768 Colony Park Drive
Memphis, Tennessee 38118
RE: Uncommitted line of Credit Agreement.
Gentlemen:
This letter agreement (this "Agreement") will confirm that BYB Properties,
Inc., a Delaware corporation ("BYB" or "Lender"), has approved a Six Million
Dollar $6,000,000.00) uncommitted line of credit to Back Yard Burgers, Inc., a
Delaware corporation ("Burgers" or "Borrower"). The line of credit may be used
for general corporate purposes for the benefit of the Borrower.
All advances made or letters of credit issued under the line of credit (if
any) shall be unsecured. Burgers may request advances or the issuance of letters
of credit until 11;59 p.m. on April 9, 1999, or until BYB designates by written
notice to the Borrower that this Agreement is terminated and that no additional
advances will be granted by Lender to Borrower ("Final Maturity").
All advances made under the line of credit (if any) will be due and payable
upon Final Maturity, and at all times will be subject to the terms and
conditions set forth in this Agreement and in the Promissory Note enclosed
herewith. Burgers promises to pay upon Final Maturity the aggregate principal
amount of Six million Dollars ($6,000,000.00) to BYB, or such lesser amount as
shall remain outstanding hereunder.
Burgers further promises to pay interest in the manner set forth below from
the date hereof on the unpaid principal balance outstanding hereunder at a rate
per annum equal to the Prime rate (as reported in the Wall Street Journal from
time to time) plus Two Percent (2%), such interest to vary as and when reported,
without notice to Borrower. Interest shall be calculated on the basis of a year
comprised of 360 days over the actual number of days in the period.
Burgers shall make quarterly payments of all interest that accrues during
each fiscal quarter of Borrower to BYB within forty-five (45) days after the
last day of each such fiscal quarter occurring during the term of this
Promissory Note.
Any payment of principal or interest under this Agreement must be received
by BYB by 2:00 p.m. prevailing Eastern Time on a business day in order to be
credited on such date. If any payment under this Agreement shall become due on a
Saturday, Sunday or public holiday under the laws of the State of Delaware, such
payment shall be made on the next succeeding business day and such extension of
time shall be included in computing interest in connection with such payment.
Payments received by BYB shall be applied to charges, fees and expenses
(including attorneys' fees), accrued interest, and principal in any order BYB
may in its sole discretion choose.
REVOLVING LOAN AGREEMENT
BYB PROPERTIES, INC.
<PAGE> 2
Back Yard Burgers, Inc.
October 10, 1997
Page Two
- -----------------------
This Agreement and the Promissory Note evidence a revolving line of credit.
Once the total principal amount of this Agreement and Promissory Note has been
advanced, Borrower is only entitled to further loan advances upon repayment of a
corresponding amount of principal. Borrower agrees to be liable for all sums
advanced hereunder. The unpaid principal balance owing on this Agreement and
Promissory Note, or by Lender's records, which shall be conclusive of
indebtedness. The indebtedness evidenced by this Agreement and the promissory
Note may be prepaid in whole or in part at any time without penalty.
This is not a committed line of credit. The Borrower acknowledges and
agrees that advances made under this line of credit, if any, shall be made at
the sole discretion of the officers of BYB. BYB's officers may decline to make
advances or under the line, or terminate the line, at any time and for any
reason without prior notice to the Borrower. This Agreement sets forth certain
terms and conditions solely to assure that the parties understand each other's
expectations and to assist the parties in evaluating and monitoring the line of
credit.
BYB's willingness to consider making advances or issue letters of credit
under this facility is subject to the Borrower's ongoing agreement (a) to
promptly furnish BYB, upon BYB written request, the Borrower's unaudited
consolidating financial statements and such other financial information as BYB
may reasonably request from time to time, and (b) to notify BYB as soon as
practicable following the occurrence of any Event of Default, as defined herein
(or event which, with the passage of time or giving of notice or both, would
become an Event of Default) under any direct or contingent obligation of the
Borrower, which would have a materially adverse effect on the ability of the
Borrower to conduct its business on an ongoing basis.
An "Event of Default" shall exist if any of the following occurs: (a)
Borrower fails to make any payment required by this Agreement or the Promissory
Note when due and the same is not cured within ten (10) Business Days; (b)
Borrower breaks any promise that Borrower has made to BYB, or fails to perform
promptly at the time and strictly in the manner provided in this Agreement or in
the Promissory Note; (C) any representation or statement made to BYB by Borrower
or on Borrower's behalf is false or misleading in any material respect; (d)
Borrower becomes insolvent, a receiver is appointed for any part of Borrower's
property; (e) Borrower makes any material assignment for the benefit of
creditors; (f) any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency law and such proceeding is not cured
within forty-five (45) days; or (g) Borrower commits an actual default in the
prompt payment or other performance required with respect to any of its
indebtedness (other than to BYB hereunder) for loans, advances or any other
forms of borrows (but not including any indebtedness for the purchase of goods
or services in the ordinary course of business) or under any agreement under
which such indebtedness is outstanding or secured.
Following an event of Default, this principal balance outstanding under
this Agreement shall bear interest at a rate per annum which shall be one
percentage point (1%) in excess of the rate in effect from time to time under
this Agreement, but not more than the maximum rate allowed by law (the "Default
Rate"). The Default Rate shall continue to apply whether or not judgment shall
be entered on this Agreement.
During the existence of an Event of Default, Lender may: (i) increase the
applicable rate of interest to the Default Rate as set forth herein; (ii) demand
payment in full or in part of all principal amounts outstanding hereunder, and
accelerate any and all accrued and unpaid interest due hereunder to be
immediately due and payable; and (iii) exercise all of its rights under this
Agreement, the Promissory Note or at law in order to satisfy the indebtedness of
Borrower.
REVOLVING LOAN AGREEMENT
BYB PROPERTIES, INC.
<PAGE> 3
Back Yard Burgers, Inc.
October 10, 1997
Page Three
- -----------------------
This Agreement has been delivered to and accepted by Burgers and BYB and
will be deemed to be made in the State of Delaware. This Agreement will be
interpreted and the rights and liabilities of the parties hereto determined in
accordance with the laws of the State of Delaware. The Borrower hereby submits
to the jurisdiction of any state or federal court located within New Castle
County, Delaware, and consents that all service of process be made by certified
mail directed to the Borrower at the Borrower's address set forth herein for
notices and service so made will be deemed to be completed five (5) business
days after the same has been deposited in the U.S. Mail, postage prepaid;
provided that nothing contained herein shall prevent BYB from bringing any
action or exercising any rights against any security or against the Borrower, or
against any property of the Borrower within any other state or nation to enforce
any award or judgment obtained in the forum specified above. The Borrower waives
any objection to venue and any objection based on a more convenient forum in any
action instituted hereunder.
THE BORROWER HEREBY FOREVER WAIVES ALL OF ITS RIGHTS TO PRESENTMENT,
DEMAND, PROTEST, NOTICE OF DISHONOR, NONPAYMENT OR DEFAULT AND ANY OTHER NOTICES
OF ANY KIND. THE BORROWER WAIVES ANY AND ALL RIGHTS THE BORROWER MAY HAVE TO A
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS
AGREEMENT, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS AGREEMENT
(INCLUDING THE PROMISSORY NOTE) OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH
DOCUMENTS AND ACKNOWLEDGES THAT THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
No failure to exercise, and no delay in exercising, on the part of the
Lender, any right, power or privilege hereunder shall operate as a waiver of the
same, nor shall any single or partial exercise of any right, power or privilege
preclude any other or future exercise thereof, or the exercise of any other
power or right. The rights and remedies herein provided are cumulative and not
exclusive of any rights or remedies provided by law.
This Agreement shall bind the Borrower and the successors and assigns of
the Borrower, and the benefits hereof shall inure to the benefit of BYB and its
successors and assigns.
Notwithstanding the foregoing, however, this Agreement shall not be
assigned by the Borrower without the prior express written consent of BYB. All
references herein to the "Borrower" or "Burgers" shall be deemed to apply to
Burgers and its successors and assigns. All references herein to "lender" and
"BYB" shall be deemed to apply to BYB and its successors and assigns.
BYB agrees to provide instructions to, deliver funds to the account of,
accept payments from, and deliver any report, document, or other information
pertaining to this Agreement and the Promissory Note (or the transactions
contemplated by this Agreement and the Promissory Note), to Burgers' management
company or other designee appointed to transact business on behalf of Borrower,
if requested to do so by Borrower.
Enclosed for execution is the Promissory note evidencing the facility.
Please indicate the Borrower's agreement to the terms and conditions of this
Agreement by having a duly authorized officer or other delegate execute this
Agreement on behalf of Burgers. Prior to the making of any advances hereunder,
the Borrower must deliver to BYB a duly executed original of the Promissory Note
and any such other documents that BYB may reasonably request.
REVOLVING LOAN AGREEMENT
BYB PROPERTIES, INC.
<PAGE> 4
Back Yard Burgers, Inc.
October 10, 1997
Page Four
- -----------------------
The Borrower acknowledges that it has read and understood all provisions of
this Agreement and has been advised by counsel as necessary or appropriate.
Very truly yours,
BYB PROPERTIES, INC.
A Delaware Corporation
By:
--------------------
Name:
Title:
WITH THE INTENT TO BE LEGALLY BOUND, THE ABOVE TERMS AND CONDITIONS ARE HEREBY
AGREED TO AND ACCEPTED THIS OCTOBER 10, 1998.
BACK YARD BURGERS, INC.
A Delaware Corporation
By:
--------------------
Name:
Title:
REVOLVING LOAN AGREEMENT
BYB PROPERTIES, INC.
<PAGE> 1
EXHIBIT 10.18
PROMISSORY NOTE
U.S. $6,000,000.00 October 10, 1997
Wilmington Delaware
ss.1. Promise to Pay.
ss.1.1 For value received, BACK YARD BURGERS, INC., a Delaware
corporation whose principal office address is 2768 Colony Park Drive,
Memphis, Tennessee 3818 (the "Borrower"), promises to pay on or before
11:59 p.m. on April 9, 1999 (the "Final Maturity"), to the order of BYB
PROPERTIES, INC., a Delaware corporation ("BYB" or "Lender"), or its
successors or assigns, in lawful money of the United States of America,
in immediately available funds, at its sole office located at Suit 200,
103 Foulk Road, Wilmington, DE 19803, or at such other location as
lender may from time to time designate, the sum of SIX MILLION DOLLARS
($6,000,000.00), or if less, the aggregate principal balance remaining
outstanding hereunder, together with interest accruing on the
outstanding principal balance from the date hereof, at the rate set
forth herein.
ss.1.2 This is an uncommitted line of credit and the extension of funds
under this Promissory Note is subject to the sole discretion of Lender
and the principal amount outstanding under this Promissory Note shall
not exceed the amount set forth in ss.1.1 above.
ss.2. Other Loan Documents
This Promissory Note is issued in connection with a letter agreement
dated as of October 10, 1997, by and between borrower and BYB, which letter
agreement may be amended from time to time (the "Letter Agreement"), and is not
secured by any property of the Borrower, nor guaranteed by any person or entity.
Any capitalized term not defined herein shall have the same meaning as given in
the Letter Agreement.
ss.3. Interest.
During the term of this Promissory Note, interest on the outstanding
balance hereunder shall accrue and be payable at the Prime rate (as reported in
the Wall Street Journal from time to time) plus Two Percent (2%), such interest
to vary as and when reported, without notice to Borrower. Interest shall be
calculated on the basis of a year comprised of 360 days over the actual number
of days in the period.
ss.4. Term.
This Promissory Note shall be payable on or before 11:59 p.m. on April
9, 1999.
ss.5. Payments.
Borrower shall make quarterly payments of all interest that accrues
during each fiscal quarter of borrower to BYB within forty-five (45) days after
the last day of each such fiscal quarter occurring during the term of this
Promissory Note. Borrower shall pay lender each payment required hereunder at
Lender's address shown above or, if requested by lender, by wire transfer to the
accounts of Lender.
ss.6. Prepayments.
The indebtedness evidenced by this Promissory Note may be prepaid in
whole or in part at any time without penalty.
PROMISSORY NOTE
BYB PROPERTIES, INC.
PAGE 1
<PAGE> 2
ss.7. Default.
Borrower shall be in Default if any of the following occurs:
(a) Borrower fails to make any payment required by the Letter Agreement or this
Promissory Note when due and the same is not cured within ten (10) business
Days; (b) Borrower breaks any promise that Borrower has made to BYB, or fails to
perform promptly at the time and strictly in the manner provided in the Letter
Agreement or this Promissory Note; (c) any representation or statement made to
BYB by Borrower or on Borrower's behalf is false or misleading in any material
respect; (d) Borrower becomes insolvent, a receiver is appointed for any part of
Borrower's property; (e) Borrower makes any material assignment for the benefit
of creditors; (f) any proceeding is commenced either by Borrower or against
Borrower under any bankruptcy or insolvency law and such proceeding is not cured
within forty-five (45) days; or (g) Borrower commits an actual default in the
prompt payment or other performance required with respect to any of its
indebtedness (other than to BYB hereunder) for loans, advances or any other
forms of borrowings (but not including any indebtedness for the purchase of
goods or services in the ordinary course of business) or under any agreement
under which such indebtedness is outstanding or secured.
ss.8. Default Rate
Following an event of Default, this Promissory Note shall bear interest
at a rate per annum which shall be one percentage point (1%) in excess of the
rate in effect from time to time under this Promissory Note, but not more than
the maximum rate allowed by law (the "Default Rate"). The Default Rate shall
continue to apply whether or not judgment shall be entered on this Promissory
Note.
ss.9. Lender's Rights.
During the existence of an Event of Default, Lender may: (I) increase
the applicable rate of interest to the Default Rate as set forth herein; (ii)
demand payment in full or in part of any principal amounts outstanding
hereunder, and accelerate any interest due hereunder to be immediately due and
payable; and (iii) exercise all of its rights under this Promissory Note, the
Letter Agreement or at law in order to satisfy the indebtedness.
ss.10. Revolving Line of credit.
This Promissory Note and the Letter Agreement evidence a revolving line
of credit. Once the total principal amount of this Promissory Note has been
advanced, Borrower is only entitled to further advances upon repayment of a
corresponding amount of principal. Borrower agrees to be liable for all sums
advanced hereunder. The unpaid principal balance owing on this promissory Note
at any time may be evidenced by endorsements on the Note, or by Lender's
records, which shall be conclusive of indebtedness.
ss.11. General provisions.
ss.11.1 No failure to exercise, and no delay in exercising, on the part
of the Lender, any right, power or privilege hereunder shall operate as
a waiver of the same, nor shall any single or partial exercise of any
right, power or privilege preclude any other or future exercise
thereof, or the exercise of any other power or right. The rights and
remedies herein provided are cumulative and not exclusive of any rights
or remedies provided by law. BORROWER HEREBY WAIVES ALL OF ITS RIGHTS
TO PRESENTMENT, DEMAND, PROTEST, NOTICE OF DISHONOR, NONPAYMENT OR
DEFAULT AND ANY OTHER NOTICES OF ANY KIND.
PROMISSORY NOTE
BYB PROPERTIES, INC.
PAGE 2
<PAGE> 3
ss.11.2 This Promissory Note has been delivered to and accepted by
Lender and will be deemed to be made in the State of Delaware. This
promissory Note will be interpreted and the rights and liabilities of
the parties hereto determined in accordance with the laws of the State
of Delaware (to the extent not in conflict with federal substantive
law). The Borrower hereby submits to the jurisdiction of any state or
federal court located within New Castle county, Delaware, and consents
that all service of process be made by certified mail directed to the
Borrower at the Borrower's address set forth herein, and notices and
service so made will be deemed to be completed five (5) business days
after the same has been deposited in the U.S. Mail, postage prepaid;
provided that nothing contained herein shall prevent lender from
bringing any action or exercising any rights against any security or
against the Borrower, or against any property of the Borrower within
any other state or nation to enforce any award or judgment obtained in
the forum specified above. The Borrower waives any objection to venue
and any objection based on a more convenient forum in any action
instituted hereunder.
ss.12.3 This Promissory Note shall bind the Borrower and the successors
and assigns of the Borrower, and the benefits hereof shall inure to the
benefit of BYB and its successors and assigns. Notwithstanding the
foregoing, however, this Promissory Note shall not be assigned by the
Borrower without the prior express written consent of BYB.
ss.24. Waiver of Jury Trial.
THE BORROWER WAIVES ANY AND ALL RIGHTS THE BORROWER MAY HAVE TO A TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR CLAIM OF ANY NATURE RELATING TO THIS
PROMISSORY NOTE, ANY DOCUMENTS EXECUTED IN CONNECTION WITH THIS PROMISSORY NOTE
OR ANY TRANSACTION CONTEMPLATED IN ANY OF SUCH DOCUMENTS AND ACKNOWLEDGES THAT
THE FOREGOING WAIVER IS KNOWING AND VOLUNTARY.
IN WITNESS WHEREOF, Borrower has executed this Promissory Note on this
10th day of October, 1997.
THE BORROWER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS PROMISSORY NOTE AND HAS BEEN ADVISED BY COUNSEL AS
NECESSARY OR APPROPRIATE.
BACK YARD BURGERS, INC.
Witness:
By: By:
--------------------------------- --------------------------
Name: Name:
Title: Title:
PROMISSORY NOTE
BYB PROPERTIES, INC.
PAGE 3
<PAGE> 1
EXHIBIT 10.19
TAX SHARING AGREEMENT
This TAX SHARING AGREEMENT ("this Agreement") is made as of the 10th day
of October, 1997, and is between BYB Properties, Inc., a Delaware corporation,
whose sole office is located at Suite 200, 103 Foulk Road, Wilmington, DE 19803
("Subsidiary"), and Back Yard Burgers, Inc., a Delaware corporation whose
principal office is located at 2768 Colony Park Drive, Memphis, Tennessee 38118
("Parent").
BACKGROUND
Subsidiary is a member of an "affiliated group," as defined in ss.1504
of the Internal Revenue Code of 1986, as amended from time to time, and the
regulations thereunder (the "Code"), of which Parent is the common parent
corporation.
Subsidiary shall properly execute and deliver to parent, upon written
request from Parent, a Form 1122, "Authorization and Consent of Subsidiary
Corporation to be Included in a Consolidated Tax Return," in order to be
properly included in the consolidated U.S. federal income tax return of Parent.
The purpose of this Agreement is to set forth the obligations of
Subsidiary under the consolidated reporting rules of the Code, as directed by
Parent, including without limitation the provisions of Treas. Regs.
ss.1.1502-33(d)(2) and ss.1.1552-1(b)(2), and to provide for payment by
Subsidiary to Parent of all such tax liability properly allocated to Subsidiary.
AGREEMENT
For valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound, the parties agree as follows:
ss.1. This Agreement is to be effective beginning with the tax year of
Parent ending January 3, 1998. The term of this Agreement shall continue until
terminated in accordance with the terms hereof.
ss.2. Subsidiary agrees to comply with all requests of Parent in
connection with this Agreement and pursuant to the consolidated reporting
requirements of the Code.
ss.3. Subsidiary agrees to execute, or cause the execution of any
further documentation, including returns or elections, necessary or appropriate
in connection with or pursuant to the terms of this Agreement.
ss.4. In order to fulfill subsidiary's obligations under this Agreement
and the Code, Subsidiary agrees to pay to Parent within fifteen (15) days of
receipt of written request therefor, all amounts sufficient to pay for
Subsidiary's allocable share of U.S. federal income tax liabilities as
calculated pursuant to Treas. Reg. ss.1.1552-1, as may be adopted by Parent from
time to time.
ss.5. Parent is authorized to invoice Subsidiary as frequently as once
per fiscal quarter for federal income tax liability actually accrued or
estimated hereunder. Subsidiary also agrees, requested to do so by Parent, to
pay such amounts to a member of the affiliated group other than Parent if Parent
has designated another affiliate to serve as the affiliate responsible for
collecting and remitting taxes on behalf of the affiliated group. Subsidiary
further agrees to accept instructions, remit payments and deliver any report,
document, or other information pertaining to this Agreement or the transactions
contemplated by this Agreement to Parent's management company or other designee
if requested to do so by Parent.
ss.6. Parent's determination of the Subsidiary's allocable share of
federal income tax liability shall be conclusive. Any U.S. federal tax liability
of Subsidiary which arises by reason of the provisions of this Agreement will be
reported by Subsidiary in accordance with generally accepted accounting
principles.
ss.7. If adjustments are made to a consolidated U.S. federal income tax
return that result in a final deficiency or overpayment that would have required
a larger or smaller payment by Subsidiary to Parent, or by Parent to Subsidiary,
if made
TAX SHARING AGREEMENT
BYB PROPERTIES, INC.
PAGE 1
<PAGE> 2
on the original return in accordance with the method of computations described
herein, Parent shall pay to Subsidiary, or Subsidiary shall pay to Parent,
within fifteen (15) days of receipt of written request therefor, an appropriate
amount to reflect such deficiency or overpayment, as the case may be.
ss.8. This Agreement shall be applicable only with respect to periods
for which Subsidiary and Parent are members of the same affiliated group filing
a consolidated U.S. federal income tax return. No adjustments shall be made with
respect to periods for which either Subsidiary or Parent files a separate return
or is a member of another affiliated group filing a consolidated return for
federal income tax purposes.
ss.9. This Agreement may be terminated by mutual written agreement, or
if either party ceases to be a member of the same affiliated group, or if the
affiliated group to which Parent and Subsidiary belong elects not to file a
consolidated U.S. federal return for any taxable year. However, notwithstanding
termination, this Agreement shall remain in effect with respect to any period
during the tax year in which termination occurred for which the income of
Subsidiary is includable in such consolidated return of parent. Notwithstanding
any such termination, if upon audit by the Internal Revenue Service of the
consolidated return for a period during which Subsidiary and Parent were members
of an affiliated group, or as a result of any final administrative or judicial
proceedings for any such period, there is any adjustment to U.S. federal taxable
income, special deductions or credits, then such resulting change in the
consolidated return will be allocated to Subsidiary in accordance with the
provisions of this Agreement.
ss.10. This Agreement has been executed and delivered by Parent and
Subsidiary (and will be deemed to be made) in the State of Delaware. This
Agreement will be interpreted and the rights and liabilities of the parties
hereto determined in accordance with the laws of the State of Delaware. Each of
Parent and Subsidiary hereby submits to the jurisdiction of any state or federal
court located within New Castle county, Delaware, and consents that all service
of process be made by certified mail directed to the relevant party at its
address set forth above.
ss.11. This Agreement shall not be assigned without the written consent
of the non-assigning party.
ss.12. If any provision of this Agreement is determined by a court of
competent jurisdiction to be invalid or unenforceable, such invalidity or
unenforceability shall not affect the remaining provisions of this Agreement.
ss.13. This Agreement may not be amended or modified without the
written consent of each party hereto.
ss.14. Each party agrees to pay its respective expenses incurred with
respect to this Agreement and the consummation of the transactions contemplated
thereby.
ss.15. This Agreement may be executed in counterparts, each of which
when so executed and delivered shall constitute a complete and original
instrument but all of which together shall constitute one and the same
agreement, and it shall not be necessary when making proof of this Agreement or
any counterpart thereof to account for any other counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the 10th day of October, 1997.
BYB PROPERTIES, INC. BACK YARD BURGERS, INC.
BY: BY:
-------------------------------- --------------------------
Name: Name:
Title: Title:
TAX SHARING AGREEMENT
BYB PROPERTIES, INC.
PAGE 2
<PAGE> 1
EXHIBIT 10.20
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement"), made and entered into this 15th day
of December, 1997, by and between TRUST ONE BANK, a Tennessee state banking
corporation with its principal office at 2171 Judicial Drive, Suite #101,
Germantown, Tennessee 38138 ("Lender") and BACK YARD BURGERS, INC., a Delaware
corporation, located at 2678 Colony Park Drive, Memphis, Tennessee 38118
("Borrower").
WITNESSETH:
WHEREAS, Borrower has requested that Lender extend financial
accommodations to it; and
WHEREAS, Lender has agreed to extend financial accommodations to
Borrower in the form of a $460,000.00 loan, to be made in accordance with, and
subject to, the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the terms and conditions contained
herein, and of any loan or other financial accommodation heretofore, now or
hereafter made by Lender to or on behalf of Borrower, the parties hereto hereby
agree as follows:
SECTION I: AMOUNTS AND TERMS OF THE LOAN:
Lender agrees, based upon the terms and conditions of this Agreement, as well as
the various documents to be executed in connection herewith and the
representations, warranties, covenants and undertakings of the Borrower herein,
to make a secured loan to the Borrower in the amount of $460,000.00 plus
interest, as herein provided.
A. THE NOTE AND PAYMENT OF INTEREST AND PRINCIPAL:
As evidence for the indebtedness hereunder, the Borrower will execute a
promissory note (the "Note") in the principal sum of $460,000.00, with interest
fixed at nine and three-quarters percent (9.75%) per annum, payable in
fifty-nine (59) monthly principal and interest installments of $6,050.31 each,
based upon a ten (10) year amortization, and one final payment of all accrued
interest and any outstanding principal due under the Note. Interest will be
computed on the basis of actual days elapsed over a 360-day year. In case of any
default with respect to the Note, the Note shall bear interest at a default rate
equal to the highest interest rate allowed by applicable law.
The indebtedness may be pre-paid in whole or in part at Borrower's election at
any time and from time to time without penalty or premium. Pre-payments shall,
at Lender's option, first be applied to any accrued and unpaid interest, with
the remainder being credited to principal. Partial prepayments of principal
shall not have the effect of suspending or deferring any monthly payments due on
the Note, and the same shall continue to be due and payable on each due date
subsequent to such partial payment of principal but shall operate to effect full
payment of the principal at an earlier date.
B. PLACE OF PAYMENTS:
All payment of principal and interest on the indebtedness evidenced by the Note
and other documents and all payments of fees required hereunder shall be made to
the Lender at 2171 Judicial Drive, Suite #101, Germantown, Tennessee 38138.
C. PURPOSE OF LOAN:
The loan proceeds shall be applied towards the purchase of the real property
known as 2110 West Street, Germantown, Tennessee and described in attached
Exhibit "A" (the "Land").
<PAGE> 2
SECTION II: CONDITIONS OF LENDING CONDITIONS PRECEDENT TO MAKING LOAN:
The obligation of the Lender to make the loan or any advances thereunder is
subject to the condition precedent that the Borrower shall have delivered to the
Lender such documents as the Lender shall require including, but not limited to,
the following:
(a) A properly executed promissory note in the form attached
hereto as Exhibit "B";
(b) A title commitment issued by Chicago Title Insurance Company
insuring the Lender's first deed of trust on the Land.
(c) A properly executed first deed of trust and security agreement
(the "Deed of Trust") on the Land and in the personal property
thereon in favor of Lender, in the form attached hereto as
Exhibit "C";
(d) A survey of the Land in standard ALTA form;
(e) Properly executed U.C.C. financing statements;
(f) Affidavit of Borrower as to the status of the title to the
Land in the form attached hereto as Exhibit "D";
(g) An environmental survey of the Land, satisfactory to Lender;
(h) A certificate of insurance on the Land in a form and with a
company satisfactory to the Lender, with Lender named as the
mortgage holder; and
(i) Payment of a loan commitment fee of $1,150.00.
SECTION III: COLLATERAL
All advances to Borrower and all obligations of Borrower pursuant to this
Agreement shall be secured by the Deed of Trust.
SECTION IV: REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants that:
(a) Borrower is a Delaware corporation, authorized and doing
business in the State of Tennessee and the sole owner of the
Land. Borrower is not a party to any contract or other
agreement which would prevent it from executing this Agreement
or limit his ability to carry out the terms of this Agreement;
(b) The Land is free and clear of any and all liens or
encumbrances of whatever kind or character.
(c) There is no action, suit or proceeding at law or in equity or
by or before any governmental instrumentality or other agency
now pending, or to the knowledge of the Borrower, threatened
against or affecting Borrower or the Land, or any properties
or rights of Borrower, which if, adversely determined, would
materially affect the financial or any other condition of
Borrower or the Land;
(d) Borrower is not a party to any agreement or instrument nor is
he subject to any charter or other restrictions adversely
affecting its business, properties or assets, operations or
conditions (financial or otherwise);
(e) Borrower is not in default in the performance, observance or
fulfillment of any of his obligations, covenants or conditions
contained in any agreement or instrument; and
(f) The financial statements of Borrower heretofore delivered to
the Lender, are true and correct in all respects and no
materially adverse change has occurred in the financial
conditions reflected therein since the respective dates
thereof.
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<PAGE> 3
SECTION V: AFFIRMATIVE COVENANTS OF BORROWER:
Borrower covenants and agrees that from the date hereof and until payment in
full of the principal and interest on the indebtedness evidenced by the Note and
other documents, unless the Lender shall otherwise consent in writing, such
consent to be at the discretion of the Lender, Borrower will:
(a) Keep the Land and other Collateral free and clear of all
encumbrances, liens, mortgages, security interests and
secondary financing, except for matters approved in writing by
the Lender, and the Borrower shall not, without the prior
written consent of the Lender, sell, transfer or convey all or
any part of his interest in the Land or any portion thereof.
(b) Not lease any portion of the Land to any person or entity.
(c) Notify Lender immediately of any change of address of the
Borrower.
(d) Pay all of his indebtedness and obligations promptly in
accordance with normal terms and practices and pay and
discharge or cause to be paid and discharged promptly all
taxes, assessments, and governmental charges or levies imposed
upon him, the Land or any of the other Collateral, before the
same shall become in default, as well as all lawful claims for
labor, materials, and supplies which otherwise, if unpaid
might become a lien or charge upon such Land or other
Collateral or any part thereof, unless such amounts are being
properly protested by the Borrower.
(e) Provide Lender with quarterly 10Q reports within ten (10) days
of their filing, as well as copies of annual audited financial
statements within ten (10) days of their preparation.
(f) Furnish such other information regarding the operation,
business affairs, and financial condition of the Borrower, as
the Lender may reasonably request.
(g) Maintain its operating accounts with Lender.
(h) Maintain a debt service ratio of at least 2:0 to 1:0. (This
convenant shall be measured quarterly and shall be calculated
as net income, plus depreciation and interest, divided by
total banks and leasing debt service requirements.)
SECTION VI: NEGATIVE COVENANTS
Borrower covenants and agrees that from the date hereof and until payment in
full of the principal of and interest on the indebtedness evidenced by the Note
and other documents, unless the Lender shall otherwise consent in writing, such
consent to be at the discretion of the Lender, Borrower will not:
(a) Incur any additional debt, except in the ordinary course of
business;
(b) Make any loans to others; or
(c) Guarantee any indebtedness.
SECTION VII: EVENTS OF DEFAULT
An "Event of Default" of this Agreement shall exist if, at any time, any of the
following shall occur and such occurrence shall continue for ten (10) days after
receipt of notice by Borrower from Lender specifying such default:
(a) The Borrower defaults in the time a payment of any installment
is due under the terms of the Note;
- 3 -
<PAGE> 4
(b) The Borrower defaults with respect to any other agreement with
Lender to which he is a party or with respect to any other
indebtedness to Lender when due or the performance of any
obligation incurred in connection with any indebtedness for
borrowed money, if the effect of such default is to accelerate
the maturity of such indebtedness, or if the effect of such
default is to permit the holder thereof to cause such
indebtedness to come due prior to its stated maturity;
(c) Any representation or warranty made by Borrower, herein, or in
any report, certificate, financial statement or other writing
furnished in connection with or pursuant to this Agreement
shall prove to be false, misleading or incomplete in any
material respect on the date of which made;
(d) The Borrower defaults on the performance or observance of any
of the covenants, terms or conditions contained herein;
(e) Any judgment shall be entered against Borrower which Lender
reasonably believes could, in the reasonable judgment of
Lender and its counsel, substantially impair the ability of
Borrower to perform any of his obligations contained in this
Agreement or any of the loan documents;
(f) If there is any material adverse change in the property or
financial condition of the Borrower; and
(g) Borrower shall file for protection under any bankruptcy or
state receivership law or shall be placed into bankruptcy or
receivership by any outside creditor, and such petition is not
dismissed in 60 days.
SECTION VIII: REMEDIES UPON AN EVENT OF DEFAULT
After notice as required herein to Borrower from Lender of an Event of Default
and failure of Borrower to cure the default within the notice period, Lender
shall have the right to:
(a) Accelerate the balance due under the Note;
(b) Exercise all rights under the terms of the Note evidencing the
indebtedness, the Deed of Trust and any other loan documents;
and
(c) After any acceleration, as provided above, Lender shall have,
in addition to the rights and remedies given it by this
Agreement, the Note, the Deed of Trust and any other loan
documents, all those rights and remedies allowed by all
applicable law including, without limitation, the Uniform
Commercial Code as enacted in the State of Tennessee.
The enumeration of Lender's rights and remedies set forth in this Agreement is
not intended to be exhaustive and the exercise by Lender of any right or remedy
and shall not preclude the exercise of any other rights or remedies, all of
which shall be cumulative, and shall be in addition to any other right or remedy
given hereunder, or under any other agreement between Borrower or Lender or
which may now or hereafter exist in law or in equity or by suit or otherwise. No
delay or failure to take action on the part of Lender in exercising any right,
power or privilege shall operate as a waiver thereof, nor shall any single or
partial exercise of any such right, power or privilege preclude other or further
exercise thereof or the exercise of any other right, power or privilege or shall
be construed to be a waiver of any Event of Default. No course of dealing
between Borrower and Lender or its agents or employees, except as may be
otherwise waived in writing by Lender, shall be effective to change, modify or
discharge any provision of this Agreement or to constitute a waiver of any Event
of Default. Lender shall not, under any circumstances or in any event
whatsoever, have any liability for any error, omission or delay of any kind
occurring in the liquidation of the collateral or for any damages resulting
therefrom.
All the remedies provided in this agreement, and any of the other documents
executed pursuant to the terms of this agreement, at law or in equity are
cumulative; and Lender, at its option, may exercise such remedies concurrently
or sequentially in such order as it may choose.
- 4 -
<PAGE> 5
SECTION IX: MISCELLANEOUS.
(a) Borrower covenants, warrants and represents to Lender that all
representations and warranties of Borrower contained in this
Agreement and any other loan document shall be true at the
time of Borrower's execution of this Agreement and the other
loan documents and shall survive the execution, delivery and
acceptance thereof by the parties thereto and the closing of
the transactions described therein or related thereto.
(b) This Agreement shall remain in full force and effect until all
obligations of Borrower to Lender have been paid in full.
(c) The provisions of this Agreement, Deed of Trust, other loan
documents and the Note from time to time may be amended,
modified, or waived, with the consent of the Lender, if such
amendment, modification, or waiver is in writing and signed by
the party to be charged with the amendment, modification, or
waiver.
(d) All notices, requests and demands to or upon the respective
parties hereto shall be deemed to have been given or made when
delivered in person or deposited in the mail, certified,
postage pre-paid, return receipt requested, or in the case of
telegraphic notice, when delivered to the telegraph company
addressed to the parties described in this Agreement and at
such addresses as are set forth above or at such other
addresses as may be provided by the parties pursuant to this
paragraph.
(e) Should any one of more of the provisions of this Agreement be
determined to be illegal or unenforceable, all other
provisions, nevertheless, shall remain effective and binding
on the parties hereto.
(f) Borrower shall not assign or transfer his rights or
obligations hereunder.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this
Agreement to be duly executed as of the day and year first above written.
Borrower:
BACK YARD BURGERS, INC.
By:
---------------------------------------
Title:
------------------------------------
Lender:
TRUST ONE BANK
By:
---------------------------------------
Title:
------------------------------------
- 5 -
<PAGE> 1
EXHIBIT 10.21
PROMISSORY NOTE
Germantown, Tennessee $460,000.00
December 15, 1997
FOR VALUE RECEIVED, the undersigned (hereinafter referred to as
"Maker") hereby promises to pay to the order of Trust One Bank (hereinafter
referred to as "holder"), at the office of Holder, 2171 Judicial Drive, Suite
101, Germantown, Tennessee 38138, or at such other place as the Holder may from
time to time designate, the principal sum of Four Hundred Sixty Thousand and
NO/100 Dollars ($460,000.00) with interest at the fixed rate of nine and
three-quarters percent (9.75%) per annum. Maker shall pay fifty-nine (59) equal
monthly principal and interest installments of Six Thousand Fifty and 31/100
($6,050.31), based on a ten (10) year amortization, and one final payment in
full of any remaining principal, accrued interest and all other sums due under
this Note. Payments shall commence January 15, 1998, and shall continue on the
same day of each month thereafter through December 15, 2002. Interest shall be
calculated on a daily basis (computed on the basis of actual days elapsed over a
year of 360 days).
PRE-PAYMENT. The indebtedness evidenced hereby may be pre-paid in whole
or in part at Maker's election at any time and from time to time without penalty
or premium. Pre-payments hereunder shall, at Holder's option, first be applied
to any accrued and unpaid interest, with the remainder being credited to
principal. Partial prepayments of principal shall not have the effect of
suspending or deferring the monthly payments herein provided for, and the same
shall continue to be due and payable on each due date subsequent to such partial
payment of principal, but shall operate to effect full payment of the principal
at an earlier date.
TIME. Time is of the essence of this Note.
DEFAULT. If the Maker fails to pay when due any amount payable
hereunder and such failure shall continue for ten (10) days after receipt of
notice by Maker from the Holder specifying such default; or fails to perform,
defaults under, or breaches any covenant, agreement or undertaking in any Loan
Document, and such failure shall continue for ten (10) days after receipt of
notice by Maker from the Holder specifying such failure to perform, default or
breach; then, in any such event, there shall be deemed to be an "Event of
Default" hereunder. In such event, Holder, at its option, may declare the
outstanding principal balance of the indebtedness evidenced hereby, together
with any other sums advanced hereunder, or under the Loan Documents, together
with all unpaid interest accrued thereon, without notice to Maker, immediately
due, payable and collectable regardless of the date of maturity. Upon any Event
of Default, unpaid principal and interest shall bear interest thereafter until
paid at the highest rate allowed by applicable law. From and after any Event of
Default, Holder may exercise its remedies as a secured party under the Uniform
Commercial Code as adopted in Tennessee and cause the Trustee under the Trust
Deed to sell the Mortgaged property at a trustee sale or otherwise foreclose all
liens (including the lien of the Trust Deed) securing indebtedness evidenced by
this Note, whether by judicial proceeding or otherwise, all at the Holder's
option.
SECURITY FOR THIS NOTE. This Note is secured, among other things, by
(i) a certain Deed of Trust and Security Agreement of even date herewith (herein
"Trust Deed"); (ii) financing statements of even date herewith; and (iii) any
other Loan Documents which may be required by Holder.
<PAGE> 2
LATE CHARGE. In the event Holder, in its sole and exclusive discretion,
determines that it shall from time to time accept a payment more than fifteen
(15) days past its due date, as a condition preceding such acceptance, maker
agrees to hereby pay the Holder a late charge of an additional five percent (5%)
of the unpaid interest of the payment then due.
ADDITIONAL GROUNDS FOR ACCELERATION. The indebtedness evidenced by this
note, may, at Holder's option, be declared due and payable if the Mortgaged
Property or any interest therein is leased (except in the ordinary course of
business), sold, assigned, conveyed, transferred (whether voluntary or
involuntary), unless the Holder first approves in writing the creditworthiness
of the lessee, optionee, transferee, vendor, assignee, grantee, encumbrancer,
mortgagee or partner. The Holder agrees that such approval shall not be
unreasonably withheld or delayed.
ATTORNEY'S FEE AND EXPENSES. If an Event of Default shall have
occurred, and holder employs and attorney or incurs other expenses for the
collection of the amounts payable under this note or to protect the security
therefor, as described in the Loan Documents, whether suit be brought or not,
including those expenses and fees incurred in foreclosure, or court proceedings,
or any other litigation or proceeding affecting this Note or its security, or
reasonably incurred in any other way, then, in any such event, Maker shall pay
to Holder the sum of Holder's reasonable attorney's fees and collection
expenses.
ADVANCES BY HOLDER. Should Holder either before or after an Event of
Default advance any sum pursuant to the provisions of this Note or the Loan
Documents, in order to pay any sum which the Maker is required to pay, or to pay
any sum to cure any default of Maker, or to do or perform any such act on behalf
of Maker, then Holder, at Holder's option, shall make such payment, or do or
perform any such act on behalf of Maker. All such payments made by Holder and
all costs and expenses incurred by Holder in doing or performing such acts shall
become immediately due and payable and, until paid, shall be and become part of
this indebtedness and shall bear interest at the highest rate of interest per
annum allowed by applicable law.
NO WAIVER BY HOLDER. No failure to accelerate the indebtedness
evidenced hereby by reason of an Event of Default hereunder, acceptance of a
past due installment, or indulgences granted from time to time shall be
construed (i) as a novation of this Note or as reinstatement of the indebtedness
hereby evidenced or as a waiver of such right of acceleration, or the right of
Holder thereafter to insist upon strict compliance with the terms of this Note
or (ii) to prevent the exercise of such right of acceleration or any right
granted hereunder or by the laws of the State of Tennessee; and maker hereby
expressly waives benefit of any statute or rule of law or equity now provided,
or which may hereafter be provided, which would produce a result contrary to it
or in conflict with the foregoing. No extension of time for payment of this Note
or any installment hereunder, made by agreement with any person now or hereafter
liable for payment of this Note shall operate or release, discharge, modify,
change or affect the original liability of Maker under this Note, either in
whole or in part, unless Holder otherwise agrees in writing. This Note may not
be changed orally, but only by agreement in writing signed by the party against
whom enforcement of any waiver, change, modification or discharge is sought.
2
<PAGE> 3
WAIVER OF NOTICE. Maker and all who may become liable for same, jointly
and severally, waive presentment for payment, protest, notice of protest, notice
of non-payment, demand and all legal diligence in enforcing collection, and
hereby expressly agree that the Holder of this Note may defer or postpone
collection of the whole or any part thereof, either principal and/or interest,
or may extend or renew the whole or any part thereof, either principal and/or
interest, or may accept additional collateral or security for the payment of
this Note, or may release the whole or any part of any collateral security
and/or liens given to secure payment of this Note, or may release from liability
on account of this Note, maker or other parties, all without notice to them or
any of them; and such delay, postponement, renewal, extension, acceptance of
additional collateral or security and/or release shall not in any way operate to
release, modify, change or affect the obligation of maker or any other parties
liable for this Note, or any who may become liable for the payment hereof.
LIMIT OF VALIDITY. It is the intention of the parties hereto to comply
strictly with the applicable usury laws; and, accordingly, in no event and upon
no contingency shall the Holder ever be entitled to receive, collect, or apply
as interest, any interest, fees, charges or other payments equivalent to
interest, in excess of the maximum rate which the Holder may lawfully charge
under applicable law in effect from time to time; and in the event that the
Holder ever receives, collects or applies as interest to any such excess, such
amount which, but for this provision, would be excessive interest, the same
shall be applied to the reduction of the principal amount of the indebtedness
hereby evidenced; and, if the principal amount of the indebtedness evidenced
hereby, and all lawful interest thereon, is paid in full, any remaining excess
shall forthwith be paid to the Maker, or any other party lawfully entitled
thereto. In determining whether or not the interest paid or payable under any
specific contingency exceeds the highest rate which the Holder hereof may
lawfully charge under applicable laws in effect from time to time, the parties
hereto shall, to the maximum extent permitted under applicable law, characterize
any non-principal payment as a reasonable loan charge rather than as interest.
Any provision hereof, or any other agreement that operates to bind, obligate, or
compel the Maker to pay interest in excess of such maximum rate shall be
construed to require the payment of the maximum rate only. The provisions of
this paragraph shall be given precedence over any other provision contained
herein and in any other agreement that is in conflict with the provisions of
this paragraph.
GOVERNING LAW. This Note shall be governed and construed in accordance
with the laws of the State of Tennessee from time to time in effect, except to
the extent that applicable federal law may permit the charging of a higher rate
of interest than under applicable state law, in which event such applicable
federal laws, as amended and supplemented from time to time, shall govern and
control the maximum rate of interest permitted to be charged hereunder.
SUCCESSORS AND ASSIGNS. The term "Holder" shall include the party named
herein as holder and any subsequent holder or holders of this Note. The terms of
this Note shall be binding upon and inure to the benefit of the parties hereto,
their respective heirs, personal representatives, successors and assigns, as if
they were in eery case named and expressed, and whether ever references are made
to either of the parties hereto the same shall be held to include and apply to
their heirs, legal executors, administrators, successors, and assigns, as if
they were in every case named and expressed.
3
<PAGE> 4
DEFINITIONS. Whenever used in this Note the following words and terms
shall have the meanings respectfully ascribed to them.
1. "Loan Documents" shall mean any and all instruments executed by the
Maker to evidence or secure or which pertain to the payment of the indebtedness
under this Note or the performance or discharge of the obligations under this
Note, including, without limiting the generality of the foregoing, the Trust
Deed, the financing statements and any and all other documents related to the
indebtedness now or hereafter executed by Maker.
2. "Mortgaged property" shall be broadly meant to include all of the
property described in the Trust Deed of event date securing the indebtedness
evidenced by this Note.
3. "Indebtedness' shall be broadly meant to include all sums owing
under this Note, including, without limiting the generality of the foregoing,
the unpaid principal balance, together with all accrued interest, advances
hereunder and all other sums owing under this Note.
LAWFUL MONEY. Principal, interest, and all other sums due or that
become due under this Note are payable in the lawful money of the United States.
TITLES. Titles of paragraphs are for convenience only and neither limit
nor amplify the provisions of this Note.
SET-OFF. Holder shall have a right of set-off, in the full amount of
all of Maker's obligations to the Holder against any deposits, assets held by,
or other amounts owed by the Holder to, or held by the Holder for, the Maker, as
well as a lien on any and all property of the maker which is or may be in the
Holder's possession, at any time or from time to time, without notice to the
Maker or to any other person, any such notice being hereby expressly waived.
NOTICE. Any notice required under the terms of this Note shall comply
with ss.7.6 of the Trust Deed.
BACK YARD BURGERS, INC.
By:
-------------------------------
Title:
----------------------------
By:
-------------------------------
Title:
----------------------------
4
<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
January 3 December 28, December 30,
1998 (a) 1996 1995
--------- ------------ -------------
<S> <C> <C> <C>
Net Income (loss) $ 162 $ 357 $(2,953)
====== ====== =======
Weighted average number of common
shares outstanding during the period 4,261 4,221 3,842
====== ====== =======
Basic income (loss) per share $ 0.04 $ 0.08 $ (0.77)
====== ====== =======
Basic weighted average number of
common shares outstanding during
the period 4,261 4,221 3,842
Preferred shares convertible to
common shares 298 322 691
Stock Options 28 -- --
------ ------ -------
4,587 4,543 4,533
====== ====== =======
Diluted income (loss) per share $ 0.04 $ 0.08 $ (0.65)
====== ====== =======
</TABLE>
- --------------------
(a) As a result of the Registrant's fiscal year ending on the Saturday
closest to December 31, fiscal 1997 contains 53 weeks versus 52 weeks for fiscal
1996 and 1995. As a result, sales for fiscal 1997 are not directly comparable to
those of fiscal 1996 and 1995.
<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,
high-quality condiments and name-brand beverage, as well as hand-dipped
milkshakes, fresh-made lemonade and fresh-baked cobblers.
The Company's strategy is to serve great-tasting food in inviting surroundings.
During 1998, the Company will continue its evolution to "fast casual" by adding
dining rooms, the design of which will match the standards set by the quality of
the food. This evolution will be communicated through a creative and
well-balanced marketing campaign and a focus on delivering the best possible
service.
FINANCIAL HIGHLIGHTS*
(in thousands, except per share amounts and units)
<TABLE>
<CAPTION>
January 3, December 28, December 30,
1998 1996 1995
FOR THE YEAR ENDED: ---------- ------------ ------------
<S> <C> <C> <C>
Restaurant sales $24,150 $22,281 $ 21,196
Total revenues 26,034 24,041 22,743
Net income (loss) 162 357 (2,953)
Net income (loss) per share:
Basic .04 .08 (.65)
Diluted .04 .08 (.65)
Weighted average shares outstanding:
Basic 4,261 4,543 4,533
Diluted 4,587 4,543 4,533
System-wide sales $55,798 $49,515 $ 43,665
Units in operation:
Company-owned 32 34 32
Franchised 45 47 36
Total 77 81 68
</TABLE>
<TABLE>
<CAPTION>
[GRAPH] [GRAPH] [GRAPH]
1995 1996 1997 1995 1996 1997 1995 1996 1997
- ------- ------- ------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$22,743 $24,041 $26,034 (-10.9)% (-4.2)% 7% ($232) $560 $771
Revenues Same-Store Sales Operating Income (Loss)**
($000's) ($000's)
</TABLE>
* The year ended January 3, 1998 contains 53 weeks while the years ended
December 28, 1996 and December 30, 1995 contained 52 weeks.
** Excludes non-cash charges for impairment of long-lived assets of
$377,000 and $2,564,000 in 1997 and 1995, respectively.
<PAGE> 2
To Our Shareholders:
Welcome to our Back Yard! 1997 proved to be a pivotal year for our
Company and our system of restaurants. In 1997, Back Yard Burgers invested
significant resources in training, new operational personnel and marketing
efforts and, as a result, I believe that our system is stronger than ever. We
resumed awarding franchises, and we began to build our brand as a "fast casual"
concept. In short, we began to rebuild our Company from the ground up.
At the beginning of 1997, I believed Back Yard Burgers was at a
crossroads. Today, I am proud to say I feel confident we have chosen the
correct path to lead us to greater profitability, growth and a new era for the
Company.
Same-store sales of 1997 increased 7.0% for Company-operated restaurants
and 6.5% for franchised restaurants. This comes after decreases in each of the
two previous years, and I believe this increase is attributable to four primary
tactical enhancements; i) the increased attention to hiring the best available
team members and training them to serve our guests in a friendly manner to
provide a greater experience; ii) the impact of converting eleven double
drive-thrus to traditional dine-in/drive-thrus so our guests can enjoy our
great-tasting food in inviting surroundings; iii) a well-balanced, focused
marketing campaign to add brand awareness, increase our guests' frequency of
visits and increase the number of first time guests, and; iv) a dedicated
franchise family.
Our enthusiasm is at an all time high. Under-performing markets and
locations have been addressed and improvements made. Eleven double drive-thru
locations were converted to traditional dine-in/drive-thru restaurants with
spectacular results. This included five Company-operated and six franchised
restaurants. Of the 31 Company-operated and franchised restaurants still
operating as double drive-thrus, 12 have the potential for conversion to
dine-in/drive-thrus and three of those are currently in the process of being
converted. Additionally, five new restaurants were opened during 1997, one
Company-operated and four franchised.
In 1998, we expect the return on these investments to continue. We are
aggressively pursuing new store openings within the Company's markets, as well
as new stores from existing and new franchises. Operationally, we are
performing better than ever, and our marketing campaign continues to deliver
positive results.
More importantly, we have chosen not to sacrifice quality for price.
Although we have committed to finding better value for our guests, we have not
deviated from our core concept of delivering high quality, premium products
that taste great, and at a fair price. New product development is at an all
time high as we prepare to test products throughout our system for possible
launch in the Fall of 1998 and into 1999.
As we enter our 11th year, I am proud of our achievements, our commitment
to providing our guests with the best possible tasting food and our new
growth. Most importantly, I am proud of the foundation we built in 1997, and I
look forward to executing the positive strategy we designated for 1998 and
achieving the level of success our system is capable of producing. We are
creating a difference, and like our Company's positioning line says, we are
creating that difference "Hot Off The Grill!"
Sincerely,
Lattimore M. Michael
Founder, Chairman and Chief Executive Officer
<PAGE> 3
FORWARD-LOOKING INFORMATION
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. Forward-looking statements made by the Company are based upon
estimates, projections, beliefs and assumptions of management at the time of
such statements and should not be viewed as guarantees of future performance.
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, increased competition within the industry for
customers, qualified labor and desirable locations, increased costs for beef,
chicken or other food products and management decisions relating to
construction, financing, franchising and new product development, as well as
items described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes thereto, included
elsewhere in this annual report. Because Back Yard Burgers' fiscal year ends on
the Saturday closest to December 31, fiscal 1997 contains 53 weeks versus 52
weeks for 1996 and 1995. As a result, operating results for fiscal 1997 are not
directly comparable with those of the prior 52-week periods.
The Back Yard Burgers system included 77 restaurants, of which 32 were
Company-operated and 45 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 time 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
-------------------
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES
Restaurant Sales 92.8% 92.7% 93.2%
Franchise and area development fees .3 .7 .8
Royalty fees 4.5 4.2 3.8
Advertising fees 1.2 1.1 1.0
Other operating revenue 1.2 1.3 1.2
------ ------ ------
Total revenue 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
JANUARY 3, DECEMBER 29, December 30,
1998 1996 1995
---- ---- ----
<S> <C> <C> <C>
COSTS AND EXPENSES
Cost of restaurant sales(1) 32.8% 33.3% 35.1%
Restaurant operating expenses(1) 48.3 49.5 47.8
General and administrative 12.3 11.8 14.4
Advertising 5.1 4.4 4.1
Depreciation and amortization 4.4 4.6 6.4
Impairment of long-lived assets 1.4 - 11.3
Operating income (loss) 1.5 2.3 (12.3)
Interest income .1 .1 .1
Interest expense (.9) (.9) (1.3)
Other, net - - -
Income (loss) before taxes .6 1.5 (13.5)
Income tax (benefit) provision(2) - - (3.5)
Net income (loss) .6 1.5 (13.0)
</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 $ 24,150 $ 22,281 $ 21,196
Franchised 31,648 27,234 22,469
---------- ---------- ----------
Total $ 55,798 $ 49,515 $ 43,665
========== ========== ==========
AVERAGE ANNUAL SALES PER RESTAURANT OPEN
FOR A FULL YEAR(1)
Company-operated $ 731,000 $ 645,000 $ 651,000
Franchised $ 703,000 $ 586,000 $ 560,000
System-wide $ 716,000 $ 615,000 $ 600,000
NUMBER OF RESTAURANTS(2)
Company-operated 32 34 32
Franchised 45 47 36
---------- ---------- ----------
Total 77 81 68
========== ========== ==========
</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 January 3, 1998, one Company-operated restaurant was
converted to a franchised restaurant, two franchised restaurants were
opened and three franchised restaurants were closed.
3
<PAGE> 5
COMPARISON OF YEAR ENDED JANUARY 3, 1998
TO YEAR ENDED DECEMBER 28, 1996
BACK YARD BURGERS' FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO DECEMBER 31. AS A
RESULT, FISCAL 1997 CONTAINS 53 WEEKS VERSUS 52 WEEKS FOR THE PRIOR YEAR.
THEREFORE, ALL REFERENCES TO FISCAL 1997 ARE FOR THE 53-WEEK PERIOD ENDED
JANUARY 3, 1998 AND ALL REFERENCES TO FISCAL 1996 ARE FOR THE 52-WEEK PERIOD
ENDED DECEMBER 28, 1996.
RESTAURANT SALES increased 8.4% to $24,150,000 during 1997 compared to
$22,281,000 during 1996. This increase is primarily the result of an increase in
same-store sales at restaurants open for more than one year of 7.0%, which
includes menu price increases of approximately 3.5%, 4.0% and 3.0% effective at
the beginning of July, 1996, May, 1997 and September 1997, respectively. The
increase in same-store sales, coupled with new stores not included in the
same-store sales calculation, accounted for approximately $2,130,000 in
additional sales. This increase was partially offset by the loss of two
restaurants which were closed, and one which was converted to a franchised
restaurant. Management of the Company believes that the increase in same-store
sales is the result of converting five double drive-thru units to dine-in
facilities with single drive-thrus and the menu price increases noted above, as
well as a balanced marketing campaign strategy which is focused on increasing
customer awareness and resultant sales.
FRANCHISE AND AREA DEVELOPMENT FEES were $95,000 during 1997, a decrease of
45.7% from $175,000 in 1996. Four new franchised restaurants were opened in
1997, as compared to 11 new franchised units opened in 1996. This decrease in
franchised restaurant opening was offset by an increase of $25,000 from fees
recognized from area development agreements which expired in 1997.
ROYALTY FEES increased 16.5% to $1,178,000 during 1997, compared to $1,011,000
in 1996. The increase is due to an increase in franchised restaurant sales upon
which the fees are based. The sales increase resulted primarily from an increase
in same-store sales of 6.5% at franchised restaurants open for more than one
year, representing an increase in royalty fees of approximately $46,000.
Although there was a net decrease of two franchised restaurants during 1997,
the new restaurants and those not included in the same-store sales calculation
because they had not been open the required length of time, contributed
approximately $121,000 in royalty fees. During 1997, four franchised
restaurants were opened, seven were closed and one Company-operated store was
converted to a franchised store.
ADVERTISING FEES increased 16.3% to $307,000 in 1997, from $264,000 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 $7,923,000
for 1997 and $7,429,000 during 1996, decreasing as a percentage of restaurant
sales to 32.8% from 33.3% in 1996. This percentage decrease is due primarily to
the menu price increases noted above coupled with a continuing focus on
improving operating procedures to reduce waste, as well as price decreases in
all paper costs. These decreases were partially offset by an increase of
approximately 6.3% in the cost of beef, as well as various other price increases
in certain dairy and produce items.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies, utilities, rent
and certain other unit level operating expenses, increased to $11,672,000 for
1997 from $11,032,000 in 1996. This represents a decrease as a percentage of
restaurant sales to 48.3% for 1997 from 49.5% in 1996. As a percentage of sales,
repair and maintenance activities increased approximately 0.3%. This increase
was more than offset by an increase in same-store sales at existing restaurants
of 7.0% which resulted in expenses of a fixed and semi-variable nature, such as
management payroll, rent, utilities, taxes and insurance, representing a smaller
percentage of sales.
GENERAL AND ADMINISTRATIVE COSTS which increased to $3,202,000 for 1997 from
$2,840,000 in 1996, increased as a percentage of total revenue in 1997 to 12.3%
from 11.8% in 1996. The increase of $362,000 is primarily the result of i) the
addition during the last quarter of 1996 of operations management personnel in
the Memphis and Little Rock markets, ii) at the corporate level, an individual
to reactivate franchise sales which were suspended during 1996, iii) an MIS
specialist to direct point of sale maintenance and upgrade programs, and iv)
personnel costs related to an increased level of restaurant management training
programs to facilitate improved customer service.
4
<PAGE> 6
ADVERTISING EXPENDITURES which increased to $1,323,000 for 1997 from $1,066,000
in 1996, increased as a percentage of total revenues to 5.1% for 1997 from 4.4%
in 1996. 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. This included an increase in the
amount allocated for local marketing and media purposes of 0.6% of restaurant
sales during 1997.
COMPARISON OF YEAR ENDED DECEMBER 28, 1996
TO YEAR ENDED DECEMBER 30, 1995
RESTAURANTS 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, 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 as 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 i) 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 ii) 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.
5
<PAGE> 7
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. In the fourth quarter of
1995, as 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.
IMPAIRMENT OF LONG-LIVED ASSETS
At each balance sheet date, the Company assesses whether there has been an
impairment in the value of all long-lived assets (including 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, exceed its net book value as of the
assessment date. 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.
Two stores became impaired during 1997, and changes in circumstances prompted
management to schedule them for closure. One store closed in 1997 and the other
closed subsequent to January 3, 1998. While some of the fixed assets at the
locations are mobile and can be utilized by other stores, certain assets are
fixed to the site and are deemed unrecoverable. Based on an analysis of
projected undiscounted cash flows for these locations, the Company determined
that the carrying value of certain long-lived assets necessitated a write-down
of $275,000 and a related accrual for future lease payments of $102,000.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $2,758,000 for 1997, $863,000 for 1996 and
$2,404,000 for 1995. Generally, the Company constructs its restaurant buildings
on leased properties for its Company-operated restaurants. The average monthly
lease cost for the 21 Company-operated restaurants on leased sites is
approximately $2,900 per month. For the eight restaurants where the Company
leases the building as well as the site, the average monthly cost is
approximately $4,800 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 1997 and 1995, a charge for
impaired assets. Depreciation and amortization totaled $1,143,000 for 1997,
$1,112,000 for 1996 and $1,460,000 for 1995. The increase from 1996 to 1997,
relates to the addition of buildings, equipment and other depreciable items
resulting from the addition of one Company-operated restaurant and five dining
room additions to existing Company-operated restaurants in 1997, one Company-
operated restaurant in 1996 and four in 1995. The charge for impaired assets
totaled $377,000 and $2,564,000 in 1997 and 1995, respectively, as noted above.
Cash from operations totaled $2,003,000, $1,596,000 and $1,044,000 for 1997,
1996 and 1995. Since January 1, 1995, 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 from a leasing company
for a loan transaction. The commitment provides the Company with up to
$2,000,000 and bears interest of approximately 14.1%. Borrowings in the amount
of $799,000 were outstanding under the above commitment at January 3, 1998.
On January 23, 1997, the Company entered into a loan agreement with a
financial institution which provided the Company with a loan commitment of up to
$765,000 and bears interest at prime rate plus 1%. There were no borrowings
under this agreement at January 3, 1998.
On December 15, 1997, the Company entered into a loan agreement with a
financial institution which provided the Company with $460,000 and bears
interest at 9.75%.
Each of the above agreements are secured by real and personal property to be
constructed and/or acquired with the proceeds of the agreement.
The Company believes that it currently has sufficient resources to fund
anticipated capital expenditures of approximately $3,500,000 during 1998. These
resources include the borrowing commitments described above in addition to the
Company's internally generated cash flow. Additional growth in 1999 may require
the Company to obtain additional debt or equity financing.
SEASONALITY AND INFLATION
While the Company does not believe that seasonality affects it 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 1997. 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.
6
<PAGE> 8
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
January 3, 1998, 910,379 shares had been converted.
IMPACT OF NEW ACCOUNTING STANDARDS
COMPREHENSIVE INCOME AND SEGMENT REPORTING. In June, 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." These statements are now effective, but are not expected
to have a material impact on the Company.
YEAR 2000
The Company recognizes the potential impact the Year 2000 issue may have
relative to its vendors, creditors and other service providers. The Company
has reviewed its exposure to business interruption or substantial loss in these
areas and believes no risk of material adverse consequences presently exists.
KNOWN TRENDS AND UNCERTAINTIES
Labor will continue to be a critical factor in the foreseeable future. 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 is crucial for the Company to develop and
maintain programs to attract and retain quality employees. On September 1,
1997, the minimum wage was increased from $4.75 per hour to $5.15 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 Clinton Administration is
advocating an additional increase of $1.00 per hour in the minimum wage in two
phases over a set period of time. This additional increase could have a
negative impact on operating margins.
During 1997, the price of beef and chicken, the largest single components of
the cost of restaurant sales, rose approximately 6.3% and 0.4%, respectively.
Management of the Company expects beef and chicken prices to continue to rise,
and that it will be difficult to raise menu prices to fully cover these
anticipated increases due to the competitive state of the quick-serve
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 increased 7.0% during 1997, an improvement from the decline
of 4.2% experienced in 1996. The Company implemented a balanced marketing
strategy focused on increasing guest awareness and increasing the frequency of
guest visits. The Company will continue this strategy in 1998, however, there
are no assurances that the frequency of guest visits. The Company will
continue this strategy in 1998, however, there are no assurances that the
increased in same-store sales will continue.
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>
JANUARY 3, DECEMBER 28,
1998 1996
---------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,328 $ 1,101
Receivables, less allowance for doubtful accounts of
$26 ($130 in 1996) 384 363
Inventories 176 150
Prepaid expenses and other current assets 73 31
---------- ------------
Total current assets 1,961 1,645
Notes receivable 68 30
Property and equipment, at depreciated cost 9,451 8,141
Intangible assets 1,457 1,561
Other assets 218 205
---------- ------------
$ 13,155 $ 11,572
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 653 $ 564
Accrued expenses 786 507
Current installments of long-term debt 217 328
---------- ------------
Total current liabilities 1,656 1,399
Long-term debt, less current installments 2,864 1,831
Other deferred liabilities 122 110
Deferred franchise and area development fees 215 122
---------- ------------
Total liabilities 4,857 3,462
---------- ------------
Commitments and contingencies (Notes 5, 6, 8 and 15)
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized;
289,600 shares issued and outstanding
(309,506 in 1996) 3 3
Common stock, $.01 par value; 12,000,000
shares authorized; 4,276,723 shares issued
and outstanding (4,240,766 in 1996) 42 42
Paid-in capital 9,982 9,956
Retained deficit (1,729) (1,891)
---------- ------------
Total stockholders' equity 8,298 8,110
---------- ------------
$ 13,155 $ 11,572
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 10
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
---------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Restaurant sales $ 24,150 $ 22,281 $ 21,196
Franchise and area development fees 95 175 194
Royalty fees 1,178 1,011 860
Advertising fees 307 264 221
Other 304 310 272
---------- ------------ ------------
Total revenues 26,034 24,041 22,743
---------- ------------ ------------
Expenses:
Cost of restaurant sales 7,923 7,429 7,431
Restaurant operating expenses 11,672 11,032 10,085
General and administrative 3,202 2,840 3,059
Advertising 1,323 1,066 940
Depreciation and amortization 1,143 1,114 1,460
Impairment of long-lived assets 377 - 2,564
---------- ------------ ------------
Total expenses 25,640 23,481 25,539
---------- ------------ ------------
Operating income (loss) 394 560 (2,796)
Interest income 14 16 20
Interest expense (242) (228) (295)
Other, net (4) 9 11
---------- ------------ ------------
Income (loss) before income taxes 162 357 (3,060)
Income tax provision (benefit) - - (107)
---------- ------------ ------------
Net income (loss) $ 162 $ 357 $ (2,953)
========== ============ ============
Income (loss) per share:
Basic $ 0.04 $ 0.08 $ (0.77)
========== ============ ============
Diluted $ 0.04 $ 0.08 $ (0.65)
========== ============ ============
Weighted average number of common shares and
common equivalent shares outstanding:
Basic 4,261 4,221 3,842
========== ============ ============
Diluted 4,587 4,543 4,553
========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 11
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
<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 December 31, 1994 1,199,979 $ 12 3,332,553 $ 33 $ 9,928 $ 705 $10,676
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 options 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
Conversion of preferred stock (19,906) 19,906
Employee stock purchases 16,051 26 26
Net income 162 162
--------- ------ --------- ------ ------- -------- -------
Balance at January 3, 1998 289,600 $ 3 4,276,723 $ 42 $ 9,982 $ (1,729) $ 8,298
========= ====== ========= ====== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 12
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------------------
JANUARY 3, DECEMBER 28, DECEMBER 30,
1998 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 162 $ 357 $ (2,953)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization of property
and equipment 1,002 939 979
Impairment of long-lived assets 377 -- 2,564
Deferred income taxes -- -- (107)
Amortization of intangible assets 104 103 175
Amortization of preopening costs 17 70 209
Provision for losses on receivables 163 119 174
Gain on sale of assets -- (3) --
(Increase) decrease in assets
Receivables (184) (275) (82)
Inventories (26) 17 (15)
Prepaid expenses and other current assets (59) 73 (68)
Income taxes refundable -- 22 20
Other assets and notes receivable 56 (6) (2)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 266 233 120
Other deferred liabilities 12 25 25
Deferred franchise and area development fees 93 (78) 5
--------- --------- --------
Net cash provided by operating activities 2,003 1,596 1,044
--------- --------- --------
Cash flows from investing activities:
Additions to property and equipment (2,758) (863) (1,980)
Proceeds from sale of property and equipment 34 45 916
Investment in joint ventures -- -- (100)
Acquisitions of businesses, net of cash acquired -- -- (424)
--------- --------- --------
Net cash used in investing activities (2,724) (818) (1,588)
--------- --------- --------
Cash flows from financing activities:
Issuance of stock 26 21 3
Principal payments on long-term debt (353) (230) (206)
Proceeds from issuance of long-term debt 1,275 -- 856
Proceeds from exercise of stock options -- 4 --
--------- --------- --------
Net cash provided (used) by financing activities 948 (205) 653
--------- --------- --------
Net increase in cash and cash equivalents 227 573 109
Cash and cash equivalents:
Beginning of year 1,101 528 419
--------- --------- ----------
End of year $ 1,328 $ 1,101 $ 528
========= ========= ==========
Supplemental disclosure of cash flow information:
Income taxes paid (received) $ -- $ (22) $ (24)
========= ========= ==========
Interest paid $ 232 $ 228 $ 294
========= ========= ==========
</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
January 3, 1998, the Company operated 32 restaurants in four states
(Mississippi, Arkansas, Tennessee and Texas) and franchised 45 restaurants in
15 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., BYB Properties, 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. The year ended January 3,
1998 contains 53 weeks while the years ended December 28, 1996 and December 30,
1995 contained 52 weeks.
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 these 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 the 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 - 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 $11,000
and $12,000 at January 3, 1998 and December 28, 1996, 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 $605,000 at January 3, 1998 and
$501,000 at December 28, 1996, after taking into account the impairment
discussed below.
IMPAIRMENT OF LONG-LIVED ASSETS. At each balance sheet date, the Company
assesses whether there has been an impairment in the value of all long-lived
assets (including 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,
exceed its net book value as of the assessment date. 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, buildings and site improvements and
equipment for these restaurants.
Two additional stores become impaired during 1997, and changes in circumstances
prompted management to schedule them for closure. One store closed in 1997 and
the other will be closed in 1998. While some of the fixed assets at these
locations are mobile and can be utilized by other stores, certain assets are
fixed to the site and are deemed unrecoverable. Based on an analysis of
projected undisclosed cash flows for these locations, the Company determined
that the carrying amount of certain long-lived assets necessitated a write-down
of $275,000 and a related accrual for future lease payments of $102,000.
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
January 3, 1998, 910,379 shares had been converted.
13
<PAGE> 15
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE. The Company calculates earnings per share in accordance with
Statement of Financial Accounting Standards No. 128. Earnings per share, which
requires the presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity (Note 14).
FAIR VALUE OF FINANCIAL INSTRUMENTS. At January 3, 1998, the Company did not
have outstanding any financial derivative instruments. The carrying amounts of
cash and receivables approximate fair value because of the short maturity of
those instruments. 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 January 3, 1998, the fair value
was approximately $3,079,000 versus a fair value of $2,156,000 at December 28,
1996.
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 franchisee's two units in Nashville, Tennessee for
approximately $89,000 in cash and the assumption of $461,500 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
$451,600 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:
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---- -----
(in thousands)
<S> <C> <C>
Corporate receivables $ 178 $ 205
National Advertising Fund receivables 55 70
Loan receivable from officer 30 30
Other 147 188
----- -----
410 493
Allowance for doubtful receivables (26) (130)
===== =====
$ 384 $ 363
===== =====
</TABLE>
14
<PAGE> 16
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Summaries or property and equipment follow:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
---- ----
(in thousands)
<S> <C> <C>
Land $ 1,547 $ 1,102
Buildings 4,434 2,914
Buildings and site improvements 3,011 2,800
Equipment 4,380 3,788
Automobiles 168 174
Construction in progress - 180
-------- --------
13,540 10,958
Accumulated depreciation and amortization (4,089) (2,827)
======== ========
$ 9,451 $ 8,131
======== ========
</TABLE>
NOTE 5 - INVESTMENT IN JOINT VENTURES
The Company has invested a total of $150,000 for 23%-25% interests in three
joint ventures for the purpose of operating Back Yard Burgers restaurants. Two
of the joint ventures purchased the building and land from the Company. No gain
or loss was recorded by the Company in connection with these sales. The third
joint venture purchased land from a third party and built a building. The
Company then entered into a long-term lease with each joint venture. Two of the
leases are accounted for as financing leases and the fixed assets are recorded
on the Company's balance sheet along with the present value of the future lease
commitments. The remaining lease is accounted for as an operating lease. The
Company has guaranteed 23%-25% of the long-term debt obtained by the joint
ventures to finance the construction of the restaurants. At January 3, 1998,
$238,000 of such debt is guaranteed by the Company.
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.
NOTE 6 - DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES
At January 3, 1998, deferred fees received for certain franchise and area
development rights, net of commissions paid, include amounts sold during the
following years (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 123
Previous years 92
------------
$ 215
============
</TABLE>
15
<PAGE> 17
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INDEBTEDNESS
Long-term debt is secured by property and equipment with a net book value
aggregating $4,252,148 and guaranteed by the personal endorsements of certain
stockholders. The balances consist of the following:
<TABLE>
<CAPTION>
January 3, December 28,
1998 1996
---- ----
(IN THOUSANDS)
<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
Note payable to a financial institution, payable in monthly
installments of $5,299 including interest at 9.25% through
March 8, 1998 15 74
Note payable to a financial institution, payable in monthly
installments of $1,627 including interest through
September 17, 2003, interest at prime plus 1.5% (10.0% at
1/3/98) 102 108
Financing lease transaction to Lester's Back Yard Burgers
Joint Venture I (see Note 5), payable in monthly installments
of $6,500 through November 15, 2009 (effective interest rate
is 12.0%) 547 563
Financing lease transaction to Lester's Back Yard Burgers
Joint Venture II (see Note 5), payable in monthly installments
of $7,009 through March 1, 2010 (effective interest rate is 12.0%) 597 615
Note payable to a financial institution, payable in monthly
installments of $3,251 including interest at 9.75% with a
final payment of $182,338 on March 17, 1999 205 224
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 82 100
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 274 298
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
Note payable to a financial institution, payable in monthly
installments of $6,050 including interest at 9.75% with a
final payment of $288,131 on December 31, 2002 460 -
Note payable to a financial institution, payable in monthly
installments of $5,643 including interest of 14.1.% with a
final payment of $31,004 on October 1, 2004 306 -
Note payable to a leasing company, payable in monthly
installments of $5,636 including interest of 14.1% with a
final payment of $30,968 on August 1, 2004 301 -
Note payable to leasing company, payable in monthly
installments of $3,553 including interest of 14.1% with a
final payment of $19,522 on October 1, 2004 192 -
---------- -------
3,081 2,159
Less current installments 217 328
---------- -------
Total $ 2,864 $ 1,831
========== =======
</TABLE>
16
<PAGE> 18
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal maturities of all long-term debt subsequent to 1998 are as
follows: $393,000 in 1999; $431,000 in 2000; $195,000 in 2001; $496,000 in
2002 and $1,349,000 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%. Borrowings under the Agreement are subject to a borrowing base,
as defined. The Agreement is secured by a first position security interest in
accounts receivable and a $100,000 certificate of deposit. In conjunction with
the borrowings described below, the Company extended the agreement to February,
1999. The terms were changed to reduce the commitment to $150,000 and to
reduce the certificate of deposit securing it to $50,000. There were no
borrowings outstanding under the Agreement at January 3, 1998.
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 14.1%. The
Commitment is secured by certain real and personal property to be constructed
and/or acquired with the commitment proceeds. As of January 3, 1998,
borrowings outstanding under the commitment are $799,000.
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/acquired
with the proceeds of the Agreement. There were no borrowings outstanding under
the Agreement at January 3, 1998. During February, 1998, the Company borrowed
$463,000 under the Agreement.
NOTE 8 - OPERATING LEASES
Operating leases relate to leased land sites for Company-operated restaurants
and office space for corporate operations. All leases contain renewal
options. The future minimum rental payments under operating lease agreements
as of January 3, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 1,165
1999 1,011
2000 925
2001 767
2002 647
Thereafter 2,351
----------
$ 6,866
==========
</TABLE>
Rent expense was $1,167,000, $1,093,000 and $913,000 in 1997, 1996 and 1995,
respectively.
NOTE 9 - 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.
Deferred income taxes are provided in recognition of temporary differences in
reporting certain revenues and expenses for financial statement and income tax
purposes.
17
<PAGE> 19
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 3, DECEMBER 28,
1998 1996
---- ----
Current (IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets
Bad debts $ 10 $ 49
Accrued expenses 31 -
Reserve for store closings 39 -
---------- ------------
80 49
Current deferred tax liabilities - preopening costs (4) (4)
---------- ------------
Net current deferred tax asset 76 45
Deferred tax asset valuation allowance (76) (45)
---------- ------------
$ - $ -
========== ============
Noncurrent
Noncurrent deferred tax assets
Franchise fees $ 81 $ 46
Net operating loss carryforwards 683 731
Goodwill amortization 378 417
Other 26 42
---------- ------------
Gross noncurrent deferred tax assets 1,168 1,236
---------- ------------
Noncurrent deferred tax liabilities
Depreciation (458) (417)
---------- ------------
Gross noncurrent deferred tax liabilities (458) (417)
---------- ------------
Net noncurrent deferred tax asset 710 819
Deferred tax asset valuation allowance (710) (819)
---------- ------------
$ - $ -
========== ============
</TABLE>
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. The valuation
allowance is based on management's conclusion that certain tax carryforward
items will expire unused.
A reconciliation of the statutory Federal income tax rate to the income tax
provision is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ----------------- ------------------
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax $ 57 35.0% $ 125 35.0% $(1,071) (35.0)%
State income taxes, net of
Federal income tax effect 9 5.3 16 4.5 (121) (4.0)
Goodwill amortization 14 8.9 14 3.9 13 0.4
Valuation allowance
provision (release) (78) (48.0) (151) (42.3) 1,015 33.2
Other (2) (1.2) (4) (1.1) 57 1.9
------ ----- ------ ----- ------- -----
$ - 0.0% $ - 0.0% $ (107) (3.5)%
====== ===== ====== ===== ======= =====
</TABLE>
18
<PAGE> 20
BACKYARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of January 3, 1998, the Company has net operating loss carryforwards
available for federal and state income tax reporting purposes on a consolidated
basis of approximately $1,739,000 and $2,149,000, 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 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. Prior to 1995, certain
stockholders and directors of the Company had a beneficial ownership interest
in AMI. The company purchased one modular building structure in 1995. Total
payments to AMI aggregated $70,000 for 1995. 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. 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 January 3, 1998.
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 spend 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 other purposes that the Company shall deem to be in the interest of
improving operations and earnings of the Company and its franchisees.
NOTE 12 - 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 January 3, 1998, 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 January 3, 1998, none of the warrants have been exercised.
19
<PAGE> 21
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCK OPTION AND BENEFIT PLANS
In 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 1997, the Company granted options for an aggregate of 84,922
shares of common stock at exercise prices to $1.70 and $1.88 per share, which
equaled fair market value at grant date.
A summary of activity in the above two option plans for the years ended January
3, 1998, December 28, 1996 and December 30, 1995 follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 226,568 $3.72 168,242 $4.68 108,957 $5.84
Granted 84,922 1.87 80,800 1.71 70,757 3.02
Exercised -- -- (2,400) 1.50 (100) 5.50
Canceled (7,853) 2.04 (20,074) 3.87 (11,372) 5.54
------- ------- -------
Outstanding
at end of year 303,637 3.25 226,568 3.72 168,242 4.68
======= ======= =======
Exercisable
at end of year 269,226 3.41 195,706 3.94 146,354 4.76
======= ======= =======
</TABLE>
Exercise prices ranged from $1.50 to $6.00 in 1997 and 1996. The weighted
average contractual life of all options was 8 years at January 3, 1998.
20
<PAGE> 22
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant date for awards in
1997, 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 1997, 1996 and 1995 would have been reduced to the pro forma
amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss)
As reported $ 162 $ 357 $ (2,953)
Pro forma 69 298 (3,050)
Basics earnings (loss) per share
As reported .04 .08 (.77)
Pro forma .02 .07 (.79)
Diluted earnings (loss) per share
As reported .04 .08 (.65)
Pro forma .02 .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 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average expected life (years) 7.0 7.0 7.0
Average expected volatility 66.5% 67.0% 55.3%
Risk-free interest rates 6.1% 6.1% 5.5%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
The pro forma results reported above will not be representative of the effect
on operating results for future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.
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 1997 and 1996, 16,051 and
12,926 shares were purchased, respectively, under the ESPP.
21
<PAGE> 23
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - EARNINGS PER SHARE
A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------------------------
JANUARY 3, 1998 DECEMBER 28, 1996 DECEMBER 30, 1995
---------------------------- --------------------------- ---------------------------
PER-SHARE PER-SHARE PER-SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to
common stockholders $ 162 4,261 $ 0.04 $ 357 4,221 $ 0.08 $(2,953) 3,842 $(0.77)
EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock - 298 322 691
Stock options - 28 - - - -
------ ------ ------ ------ ----- ------ ------- ------ ------
DILUTED EPS
Income available to
common stockholders
plus assumed conversions $ 162 4,587 $ 0.04 $ 375 4,543 $ 0.08 $(2,953) 4,533 $(0.65)
====== ====== ====== ====== ===== ====== ======= ====== ======
</TABLE>
Options and warrants to purchase shares of the Company's common stock were
outstanding during the years 1997, 1996 and 1995 but were not included in the
computation of diluted EPS because the exercise price was greater that the
average market price of common shares. These options and warrants were still
outstanding as of January 3, 1998. Income available to common stockholders for
each year presented above has not been affected by preferred dividends because
the Company has not declared any dividends on its preferred shares.
NOTE 15 - 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 January 3, 1998, the Company's uninsured cash balance
totaled $1,372.000.
LITIGATION. The Company is party to certain 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
To the Board of Directors and Stockholders of [LOGO]
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 January 3, 1998 and December 28,
1996, and the results of their operations and their cash flows for each of the
three years in the period ended January 3, 1998, 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 5, 1998
MANAGEMENT'S STATEMENT OF RESPONSIBILITY FOR FINANCIAL STATEMENTS
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 1997 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 Stephen C. Reid
(attorneys-at-law) Vice President, Research and Development
William B. Raiford, III
Of Counsel
Merkel & Cocke
(attorneys-at-law)
Joe Colonetta
Vice Chairman and Chief Executive Officer
Of Del Monte-Latin America
</TABLE>
24
<PAGE> 26
CORPORATE INFORMATION
<TABLE>
<S> <C>
CORPORATE OFFICES STOCK MARKET INFORMATION
2768 Colony Park Drive The Company's common stock trades on the Nasdaq
Memphis, TN 38118 SmallCap Market tier of The Nasdaq Stock Market
901/367-0888 under the symbol BYBI. At March 27, 1998, the
Company had approximately 2,500 stockholders,
TRANSFER AGENT including beneficial owners holding shares in nominee
Union Planters Bank or "street" name.
6200 Poplar Avenue, Third Floor
P.O. Box 387 Back Yard Burgers completed its initial public offering
Memphis, Tennessee 38147 of common stock in June 1993 and began public
901/580-5523 trading on June 25, 1993. The table below sets forth
the high and low stock bid prices for the two-year
INDEPENDENT ACCOUNTANTS period ended January 3, 1998:
Price Waterhouse LLP
Memphis, Tennessee QUARTER ENDED: HIGH LOW
March 30, 1996 $ 2.00 $ 1.50
GENERAL COUNSEL June 29, 1996 $ 2.63 $ 1.75
Henke, Heaton & Bufkin September 28, 1996 $ 2.44 $ 1.75
Professional Corporation December 28, 1996 $ 2.44 $ 1.75
Clarksdale, Mississippi
March 29, 1997 $ 2.25 $ 1.75
SECURITIES COUNSEL June 28, 1997 $ 2.00 $ 1.63
Giroir, Gregory, Holmes & Hoover, PLC September 27, 1997 $ 2.00 $ 1.75
Little Rock, Arkansas January 3, 1998 $ 3.63 $ 1.94
ANNUAL MEETING OF STOCKHOLDERS The Company currently anticipates that it will retain all
The Company's 1998 annual meeting of stockholders of its earnings to support its operations and the
will be held at 10:00 a.m. local time on Thursday, development of its business. Therefore, the Company does
May 21, 1998, at the Country Suites by Carlson not pay any cash dividends on its outstanding common stock.
in Memphis, Tennessee. Stockholders of record as Future cash dividends, if any, will be at the discretion of
of March 27, 1998, are invited to attend this the Company's Board of Directors and will depend upon, among
meeting. other things, future operations and earnings, capital
requirements, general financial conditions, contractual
ANNUAL REPORT ON FORM 10-KSB restrictions, and other factors that the Board may consider
A copy of the Company's Annual Report on Form relevant.
10-KSB for the year ended January 3, 1998, as
filed with the Securities and Exchange
Commission, may be obtained by stockholders
of record without charge upon 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 Union Planters Bank
at the address or number listed above.
</TABLE>
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
Back Yard Burgers, Inc., a Delaware corporation, has three wholly-owned
subsidiaries:
(1) Little Rock Back Yard Burgers, Inc., a Delaware corporation, which owns
and operates Back Yard Burger Restaurants in the Central Arkansas area;
(2) Atlanta Burgers BYB Corporation, a Delaware corporation, which is
inactive; and
(3) BYB Properties, Inc., a Delaware corporation, which operates in
Delaware and has the rights to the Company's trademarks.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF BACKYARD BURGERS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH BALANCE SHEET AT JANUARY 3, 1998 AND THE
CONSOLIDATED STATEMENTS OF INCOME FOR THE 53 WEEKS ENDED JANUARY 3, 1998
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> JAN-03-1998
<CASH> 1,328
<SECURITIES> 0
<RECEIVABLES> 384<F1>
<ALLOWANCES> 0
<INVENTORY> 176
<CURRENT-ASSETS> 1,961
<PP&E> 9,451<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,155
<CURRENT-LIABILITIES> 1,656
<BONDS> 0
0
3
<COMMON> 42
<OTHER-SE> 8,253
<TOTAL-LIABILITY-AND-EQUITY> 13,155
<SALES> 24,150
<TOTAL-REVENUES> 26,034
<CGS> 7,923
<TOTAL-COSTS> 19,595
<OTHER-EXPENSES> 6,035
<LOSS-PROVISION> 163
<INTEREST-EXPENSE> 242
<INCOME-PRETAX> 162
<INCOME-TAX> 0
<INCOME-CONTINUING> 162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 162
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
