<PAGE> 1
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT FOR THE TRANSITION PERIOD FROM TO
--------------- ----------------
Commission file number 1-12104
BACK YARD BURGERS, INC.
(Exact name of small business issuer as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 64-0737163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2768 COLONY PARK DRIVE, MEMPHIS, TENNESSEE 38118
(Address of principal executive offices)
(901) 367-0888
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class - Common stock, par value $.01 per share
Outstanding at November 5, 1998 - 4,595,275
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
1
<PAGE> 2
BACK YARD BURGERS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements:
Balance Sheet as of October 3, 1998 and January 3, 1998 3
Statement of Income for the Thirteen and Thirty-Nine Weeks Ended
October 3, 1998 and September 27, 1997 4
Statement of Cash Flows for the Thirty-Nine Weeks Ended
October 3, 1998 and September 27, 1997 5
Notes to Unaudited Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-12
Part II - Other Information
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote
of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
<PAGE> 3
BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 703 $ 1,328
Receivables, net 268 384
Inventories 197 176
Prepaid expenses and other current assets 116 73
----------- -----------
Total current assets 1,284 1,961
Note receivable 69 68
Property and equipment, at depreciated cost 12,370 9,451
Intangible assets 1,378 1,457
Other assets 266 218
----------- -----------
$ 15,367 $ 13,155
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 337 $ 653
Accrued expenses 635 786
Current installments of long-term debt 356 217
----------- -----------
Total current liabilities 1,328 1,656
Long-term debt, less current installments 4,459 2,864
Other deferred liabilities 134 122
Deferred franchise fees 300 215
----------- -----------
Total liabilities 6,221 4,857
----------- -----------
Commitments and contingencies - -
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized;
23,123 shares issued and outstanding at October 3, 1998
(289,600 at January 3, 1998) - 3
Common stock, $.01 par value, 12,000,000 shares authorized;
4,591,382 outstanding at October 3, 1998
(4,276,723 at January 3, 1998) 46 42
Paid-in capital 10,088 9,982
Retained deficit (988) (1,729)
----------- -----------
Total stockholders' equity 9,146 8,298
----------- -----------
$ 15,367 $ 13,155
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements
3
<PAGE> 4
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 6,506 $ 6,218 $ 18,912 $ 17,709
Franchise fees 47 - 97 21
Royalty fees 336 286 981 872
Advertising fees 123 75 360 227
Other 86 71 248 247
----------- ----------- ----------- -----------
Total revenues 7,098 6,650 20,598 19,076
----------- ----------- ----------- -----------
Expenses:
Cost of restaurant sales 2,126 2,031 6,113 5,854
Restaurant operating expenses 3,099 2,968 8,931 8,560
General and administrative 804 768 2,448 2,289
Advertising 397 347 1,126 976
Depreciation and amortization 338 285 913 820
----------- ----------- ----------- -----------
Total expenses 6,764 6,399 19,531 18,499
----------- ----------- ----------- -----------
Operating income 334 251 1,067 577
Interest income 5 5 19 11
Interest expense (124) (54) (334) (160)
Other, net (5) 2 (11) (5)
----------- ----------- ----------- -----------
Income before income taxes 210 204 741 423
Income taxes - - - -
----------- ----------- ----------- -----------
Net income $ 210 $ 204 $ 741 $ 423
=========== =========== =========== ===========
Income per share:
Basic $ .05 $ .05 $ .16 $ .10
=========== =========== =========== ===========
Diluted $ .05 $ .04 $ .16 $ .09
=========== =========== =========== ===========
Weighted average number of common shares
and common equivalent shares outstanding
Basic 4,590 4,270 4,513 4,255
=========== =========== =========== ===========
Diluted 4,660 4,572 4,660 4,586
=========== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements
4
<PAGE> 5
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------------
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 741 $ 423
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of property and equipment 785 730
Amortization of intangible assets 79 78
Amortization of preopening costs 49 12
Provision for losses on receivables 144 113
Increase in assets
Receivables (28) (33)
Inventories (21) (30)
Prepaid expenses and other current assets (92) (42)
Other assets and notes receivable (49) (1)
Increase (decrease) in liabilities
Accounts payable and accrued expenses (467) (294)
Other deferred liabilities 12 11
Deferred franchise and area development fees 85 114
---------- -------------
Net cash provided by operating activities 1,238 1,081
---------- -------------
Cash flows from investing activities:
Additions to property and equipment (3,704) (1,817)
Proceeds on sale of assets - 13
---------- -------------
Net cash used in investing activities (3,704) (1,804)
---------- -------------
Cash flows from financing activities:
Issuance of stock 22 21
Principal payments on long-term debt and capital leases (456) (270)
Proceeds from issuance of long-term debt 2,190 310
Proceeds from exercise of stock options 85 -
---------- -------------
Net cash provided by (used in) financing activities 1,841 61
---------- -------------
Net decrease in cash and cash equivalents (625) (662)
Cash and cash equivalents
Beginning of period 1,328 1,101
---------- -------------
End of period $ 703 $ 439
---------- -------------
Supplemental disclosure of cash flow information
Income taxes paid $ - $ -
---------- -------------
Interest paid $ 210 $ 160
---------- -------------
</TABLE>
See accompanying notes to unaudited financial statements
5
<PAGE> 6
BACK YARD BURGERS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Back Yard Burgers, Inc. (the "Company") owns and operates quick-service
restaurants and is engaged in the sale of franchises and the collection of
royalties based upon related franchise sales. The Company grants franchise
rights for the use of "Back Yard Burgers," "BYB" or "BY Burgers" trade names and
other associated trademarks, signs, emblems, logos, slogans and service marks
which have been or may be developed.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB and therefore do not include all
information and notes necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. The statements do reflect all adjustments (consisting of
only normal recurring accruals) which are, in the opinion of management,
necessary to present fairly the financial position and results of operations and
cash flows in conformity with generally accepted accounting principles. The
statements should be read in conjunction with the Notes to Financial Statements
for the year ended January 3, 1998 included in the Company's 1997 Annual Report.
The financial statements include the accounts of Back Yard Burgers, Inc.
and its wholly-owned subsidiaries, Little Rock Back Yard Burgers, Inc., Atlanta
Burgers BYB Corporation and BYB Properties, Inc., as well as the Back Yard
Burgers National Advertising Fund. All significant intercompany transactions
have been eliminated.
The results of operations for the thirteen-week and thirty-nine week
periods are not necessarily indicative of the results to be expected for the
full year.
The Company maintains its financial records on a 52-53 week fiscal year
ending on the Saturday closest to December 31.
NOTE 2 - NET INCOME PER SHARE
The Company calculates earnings per share 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 3 - DEFERRED FRANCHISE FEES
Amounts received for certain franchise and area development rights, net of
commissions paid, have been deferred. Revenues on individual franchise fees are
recognized when substantially all of the initial services required of the
Company have been performed, which generally coincides with the opening of the
franchises. Under the terms of the franchise agreements, these fees are
non-refundable, and may be recognized as income should the franchisee fail to
perform as agreed. Area development fees are recognized on a pro-rata basis as
each unit opens. At October 3, 1998, deferred fees include franchise and area
development rights sold during the following years:
<TABLE>
<S> <C>
1998 $ 165
1997 51
Previous Years 84
--------
$ 300
========
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Company is party to several pending legal proceedings and claims. Although
the outcome of the proceedings and claims cannot be determined with certainty,
management of the Company is of the opinion that it is unlikely that these
proceedings and claims will have a material adverse effect on the financial
condition or results of operations of the Company.
NOTE 5 - PREFERRED STOCK
Each share of the Company's 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 eventually be converted.
6
<PAGE> 7
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 related to construction,
financing, franchising, new product development and the impact of Year 2000
issues on the Company, 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
As of October 3, 1998, the Back Yard Burgers system included 80 restaurants, of
which 33 were Company-operated and 47 were franchised. The Company's revenues
are derived primarily from Company-operated restaurant sales, franchise and area
development fees and royalty fees. Certain expenses (cost of restaurant sales,
restaurant operating expenses, depreciation and amortization and advertising)
relate directly to Company-operated restaurants, while general and
administrative expenses relate to both Company-operated restaurants and
franchise operations. The Company's revenues and expenses are affected by the
number and timing of the opening of additional restaurants. Sales for new
restaurants in the period immediately following their opening tend to be high
because of trial by public and promotional activities. As a result, the timing
of openings can affect the average volume and other period-to-period
comparisons.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenue,
unless otherwise indicated, of certain items included in the Company's
historical operations and operating data for the periods indicated.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------------
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
<S> <C> <C>
Revenues
Restaurant sales 91.8% 92.8%
Franchise fees .5 .1
Royalty fees 4.8 4.6
Advertising fees 1.7 1.2
Other operating revenue 1.2 1.3
---------- -------------
Total revenue 100.0% 100.0%
========== =============
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
----------------------------
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
<S> <C> <C>
Costs and Expenses
Cost of restaurant sales (1) 32.3% 33.1%
Restaurant operating expenses (1) 47.2 48.3
General and administrative 11.9 12.0
Advertising 5.5 5.1
Depreciation and amortization 4.4 4.3
Operating income 5.2 3.0
Interest income .1 .1
Interest expense (1.6) (.8)
Other, net (.1) -
Income before income taxes 3.6 2.2
Income taxes - -
Net income 3.6 2.2
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------------
OCTOBER 3, SEPTEMBER 27,
1998 1997
---------- -------------
($000'S)
<S> <C> <C>
System-wide restaurant sales
Company-operated $ 18,912 $ 17,709
Franchised 25,315 23,518
---------- -------------
Total $ 44,227 $ 41,227
========== =============
Average annual sales per restaurant open for a
full year (2)
Company-operated $ 788 $ 735
Franchised $ 743 $ 671
System-wide $ 763 $ 698
Number of restaurants
Company-operated 33 32
Franchised 47 43
---------- -------------
Total 80 75
========== =============
</TABLE>
(1) As a percentage of restaurant sales.
(2) Includes sales for restaurants open for entire trailing twelve-month
period. Restaurants are included in the calculation after the completion
of eighteen months of operation as sales during the six-month period
immediately after the opening tend to be higher due to promotions and
trial by public.
8
<PAGE> 9
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTEEN WEEKS ENDED OCTOBER 3, 1998
AND SEPTEMBER 27, 1997.
RESTAURANT SALES increased 4.6% to $6,506,000 during the thirteen weeks
ended October 3, 1998 compared to $6,218,000 for the same 1997 period. This
increase is primarily the result of an increase in same-store sales at
restaurants open for more than one year of 3.3%, which includes a menu price
increase of approximately 3.0% effective at the beginning of September, 1997.
The increase in same-store sales, coupled with new stores not included in the
same-store sales calculation, accounted for approximately $761,000 in additional
sales. This increase was partially offset by the loss of sales from one
restaurant which was closed and one restaurant which was converted to a
franchised restaurant. Company management believes that the increases in
same-store sales are the results of improved customer service; the retrofit of
four double drive-thrus to dine-in facilities with single drive-thrus since the
end of the 1997 third quarter; and the menu price increase noted above.
ROYALTY FEES increased 17.5% to $336,000 during the thirteen week period
ended October 3, 1998 compared to $286,000 during the same period in 1997. The
increase is due to an increase in franchised restaurant sales upon which the
fees are based. Comparable same-store sales at franchised restaurants open for
more than one year increased 2.0%, representing an increase in royalty fees of
approximately $6,000. Additionally, nine franchised restaurants were opened, one
Company-operated restaurant was converted to a franchised unit and six
franchised restaurants were closed since September 27, 1997.
ADVERTISING FEES increased 64.0% to $123,000 for the thirteen weeks ended
October 3, 1998 compared to $75,000 during the comparable period in 1997. The
increase is primarily due to a voluntary increase of 50% in the national
advertising fee by 40 of the 47 franchised restaurants to be used for a direct
mail program. The increase is also related to the increase in franchised
restaurant sales as noted above.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$2,126,000 for the thirteen weeks ended October 3, 1998 and $2,031,000 during
the same period in 1997, remained level at 32.7% as a percentage of restaurant
sales for both the thirteen week periods ended October 3, 1998 and September 27,
1997. Although the cost of beef, the largest single component of cost of
restaurant sales, decreased approximately 1.7% and there were decreases in
certain condiment and paper costs, these decreases were offset by increases in
certain produce and dairy products.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies, utilities,
rent and certain other unit level operating expenses, increased to $3,099,000
for the thirteen weeks ended October 3, 1998 from $2,968,000 in the same prior
year period. The increase of $131,000 is due primarily to operating expenses
from a net increase of two new Company operated-restaurants which opened since
the beginning of the 1997 third quarter, as well as the expenses associated with
the expanded operations from the retrofit of two double drive-thru restaurants
to single drive-thrus with dining room facilities. As a percentage of restaurant
sales, restaurant operating expenses decreased to 47.6% from 47.7% for the same
period in 1997. As a percentage of restaurant sales, this decrease relates
primarily to a decrease of approximately .5% in promotional activities, as well
as an increase in same-store sales at existing restaurants of 3.3%. A same-store
sales increase results in expenses of a fixed and semi-variable nature, such as
management payroll, rent, utilities, taxes and insurance, representing a smaller
percentage of sales. These decreases were partially offset by increases in
repairs and maintenance, operating supplies and equipment rental expense.
GENERAL AND ADMINISTRATIVE COSTS increased to $804,000 for the thirteen
weeks ended October 3, 1998 from $768,000 in the same year earlier period. This
represents a decrease as a percentage of total revenue to 11.3% from 11.5% for
the same period in 1997. The increase of $36,000 is primarily the result of
adding two new positions, one in the training department and one in Company
operations management, the goal of both positions being to facilitate superior
customer service; and annual raises which became effective at the beginning of
the second quarter of 1998.
ADVERTISING EXPENSE which increased to $397,000 for the thirteen weeks
ended October 3, 1998 from $347,000 in the same period in 1997, increased as a
percentage of total revenues to 5.6% from 5.2%. This is the result of an
increase in advertising fees, as described above, which, in addition to the
direct mail program noted above, are used for the development and production of
marketing campaigns and collateral material.
INTEREST EXPENSE increased 130% to $124,000 for the thirteen weeks ended
October 3, 1998 from $54,000 in the same year earlier period. This is due to a
net increase in long-term debt of $2,616,000, or 119%, since the end of the
third quarter last year.
9
<PAGE> 10
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 3,
1998 AND SEPTEMBER 27, 1997.
RESTAURANT SALES increased 6.8% to $18,912,000 during the thirty-nine weeks
ended October 3, 1998 compared to $17,709,000 for the same 1997 period. This
increase is primarily the result of an increase in same-store sales at
restaurants open for more than one year of 8.2%, which includes menu price
increases of approximately 4.0% and 3.0% effective at the beginning of May 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 $2,305,000 in additional sales. This increase was partially offset
by the loss of sales from three restaurants which were closed and two
restaurants which were converted to franchised restaurants. Company management
believes that the increases in same-store sales are the results of improved
customer service; the retrofit of six double drive-thrus to dine-in facilities
with single drive-thrus; and the menu price increases noted above.
ROYALTY FEES increased 12.5% to $981,000 during the thirty-nine week period
ended October 3, 1998 compared to $872,000 during the same period in 1997. The
increase is due to an increase in franchised restaurant sales upon which the
fees are based. Comparable same-store sales at franchised restaurants open for
more than one year increased 6.0%, representing an increase in royalty fees of
approximately $44,000. Nine franchised restaurants were opened, two
Company-operated restaurants were converted to franchised units and 11
franchised restaurants were closed since the beginning of 1997.
ADVERTISING FEES increased 58.6% to $360,000 for the thirty-nine weeks
ended October 3, 1998 compared to $227,000 during the comparable period in 1997.
The increase is primarily due to a voluntary increase of 50% in the national
advertising fee by 40 franchised restaurants to be used for a direct mail
program. The increase is also related to the increase in franchised restaurant
sales as noted above.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$6,113,000 for the thirty-nine weeks ended October 3, 1998 and $5,854,000 during
the same period in 1997, decreasing as a percentage of restaurant sales to 32.3%
from 33.1%. This percentage decrease is primarily the result of a decrease of
approximately 2.7% in the cost of beef, the largest single component of cost of
restaurant sales, decreases in certain condiment and paper costs, as well as the
menu price increases noted above.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies, utilities,
rent and certain other unit level operating expenses, increased to $8,931,000
for the thirty-nine weeks ended October 3, 1998 from $8,560,000 in the same
prior year period. This represents a decrease as a percentage of restaurant
sales to 47.2% from 48.3% for the same period in 1997. The decrease, as a
percentage of sales, relates primarily to a decrease of approximately 1.2% in
promotional activities, as well as an increase in same-store sales at existing
restaurants of 8.2%. This results in expenses of a fixed and semi-variable
nature, such as management payroll, repairs, rent, utilities, taxes and
insurance, representing a smaller percentage of sales. These decreases were
partially offset by increases in operating supplies and equipment rental
expense.
GENERAL AND ADMINISTRATIVE COSTS which increased to $2,448,000 for the
thirty-nine weeks ended October 3, 1998 from $2,289,000 in the same year earlier
period, decreased as a percentage of total revenue to 11.9% from 12.0% for the
thirty-nine week periods ended October 3, 1998 and September 27, 1997,
respectively. The increase of $159,000 is primarily the result of (1) adding two
new positions, one in the training department and one in Company operations
management, the goal of both positions being to facilitate superior customer
service; and (2) annual raises which became effective at the beginning of the
second quarter. Additionally, the Company employed an MIS specialist to direct
point of sale maintenance during a portion of the first half of 1998. This
position was filled during the last half of the third quarter of 1998.
ADVERTISING EXPENSE which increased to $1,126,000 for the thirty-nine weeks
ended October 3, 1998 from $976,000 in the same period in 1997, increased as a
percentage of total revenues to 5.5% from 5.1%. This is the result of an
increase in advertising fees, as described above, which, in addition to the
direct mail program noted above, are used for the development and production of
marketing campaigns and collateral material.
INTEREST EXPENSE increased 109% to $334,000 for the thirty-nine weeks ended
October 3, 1998 from $160,000 in the same year earlier period. This is due to a
net increase in long-term debt of $2,656,000, or 123%, since the beginning of
1997.
10
<PAGE> 11
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews the carrying value of its long-lived and intangible assets
for possible impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. A new cost basis is
established for impaired assets based on the fair value of these assets as of
the date the assets are determined to be impaired.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $3,704,000 for the thirty-nine weeks ended October
3, 1998 and $1,817,000 for the same period of 1997. Generally, the Company
purchases its restaurant buildings and leases the properties for its
Company-operated restaurants. The average monthly lease cost for the 19
Company-operated restaurants on leased sites at October 3, 1998 is approximately
$3,100 per month. For the eight restaurants where the Company leases the
building as well as the site, the average monthly lease cost is approximately
$4,800.
Cash from operations for the Company is primarily affected by net earnings
adjusted for deferred franchise fees and non-cash expenses which consist
primarily of depreciation and amortization. Depreciation and amortization
totaled $913,000 for the thirty-nine weeks ended October 3, 1998 and $820,000
for the same 1997 period. This increase is primarily the result of the addition
of dine-in facilities and the related furniture and equipment at certain
Company-operated restaurants since September 27, 1997. Receivables, net,
decreased $116,000 during the thirty-nine weeks ended October 3, 1998, primarily
due to an increase in the provision for uncollectible accounts.
Cash provided by operations for the thirty-nine week period ended October
3, 1998 and September 27, 1997 totaled $1,238,000 and $1,081,000, respectively.
Since December 29, 1996, the addition of restaurants and equipment has been
financed primarily through cash from operations and debt.
The Company maintains a commitment with a leasing company that provides the
Company with up to $2,000,000 and bears interest of approximately 14.1%.
Borrowings in the amount of $1,124,000 have been drawn under the above
commitment as of October 3, 1998.
During the first nine months of 1998, the Company entered into loan
agreements with various financial institutions for an aggregate amount of
$1,302,000 at interest rates from 9.0% to 9.5%. These loans are secured by real
and personal property to be constructed and/or purchased with the proceeds,
certain accounts receivable and a certificate of deposit in the amount of
$50,000.
In August, 1998, the Company invested $50,000 for a 25% interest in
Lester's Back Yard Burgers Joint Venture IV ("JV IV"). JV IV purchased one
building from the Company for $230,000 and land from third parties. No gain or
loss was recorded by the Company in connection with the sale of the building.
The Company entered into a long-term lease with JV IV for purpose of operating a
Back Yard Burgers restaurant. Additionally, JV IV will fund the addition of a
dining room to the current building. The transaction related to the building
sale is accounted for as a financing lease and the building is recorded in the
Company's balance sheet along with the present value of the future lease
commitments. The transaction related to the land is accounted for as an
operating lease. The Company has guaranteed 25% of the amount to be borrowed to
finance the building addition, or approximately $141,000.
The Company believes that it currently has sufficient resources to fund
anticipated capital expenditures of approximately $3,500,000 during the
remainder of 1998 and first half of 1999. 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 its operations in a
material manner, first quarter results are generally 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 the thirty-nine weeks ended October 3, 1998. Increases in food, labor or
other operating costs could adversely affect the Company's operations.
11
<PAGE> 12
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the Year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.
The Company is in the process of reviewing and evaluating its information
and operating systems and hardware to identify any components that could be
affected by the Year 2000 issue. It is anticipated that all Year 2000 compliance
testing and any necessary modifications or replacements will be completed by
mid- 1999. Due to the fact that the Company's information, telecommunication and
point of sales equipment are relatively new, the costs to achieve compliance are
not expected to be material. The Company presently believes that its Year 2000
plans related to the above are sufficient, but will modify such plans as
necessary in the future.
The Company also 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 presently believes that no risk of material adverse consequences
exists. Nonetheless, the Company intends to further monitor the Year 2000
readiness of such entities and the potential impact thereof on the Company's
operations as it deems appropriate.
KNOWN TRENDS AND UNCERTAINTIES
Labor supply will continue to be a critical factor for the Company 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 quick-service
restaurant industry, but in practically all retail and service industries. It
will be crucial for the Company to attract and retain quality employees. The
Clinton Administration is advocating an increase of $1.00 per hour in the
minimum wage in two phases over a set period of time. This increase, if enacted,
could have a negative impact on operating margins.
During the thirty-nine weeks ended October 3, 1998, the cost of beef
declined approximately 2.7% and the cost of chicken was relatively stable;
however, management of the Company anticipates increases in these costs in the
future and believes that it will be difficult to raise menu prices to fully
cover these anticipated increases due to the competitive state of the
quick-service restaurant industry. Additional margin improvements would have to
be made through operational improvements, equipment advances and increased
volumes to help offset these potential increases.
Due to the competitive nature of the restaurant industry, site selection
will become 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 8.2% during the first three quarters of 1998.
Management believes that this increase is an indication that the Company's
improved customer service, marketing efforts and the addition of dine-in
facilities have been effective. The Company will continue this strategy
throughout 1998, however, there are no assurances the increases in same-store
sales will continue.
The future success of the Company will be determined, to a great extent, by
its ability to positively address these issues.
12
<PAGE> 13
PART II OTHER INFORMATION
Item 1 Legal Proceedings
The Company is involved in litigation incidental to its
business, including, but not necessarily limited to, claims
alleging violations of the Civil Rights Act of 1964 and/or
discrimination. Aside from the cost of defense, such
litigation is not presently considered by management to be
material to the financial condition or results of operations
of the Company.
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
Exhibits
10.29 - Form of Joint Venture agreement of Lester's Back
Yard Burgers Joint Venture IV by and among William L. Lester,
Pattie F. Lester, Alexandra B. Litow, Andrew R. Litow and Back
Yard Burgers, Inc., dated August 28, 1998.
11 - Calculation of Income Per Share
27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission for
information only and not filed.
Reports on Form 8-K
None
13
<PAGE> 14
SIGNATURES
In accordance with the requirements 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.
Date: November 16, 1998 By:/s/Lattimore M. Michael
- - ----------------------- --------------------------------------
Lattimore M. Michael
Chairman and Chief Executive
Officer
Date: November 16, 1998 By:/s/Stephen J. King
- - ----------------------- --------------------------------------
Stephen J. King
Chief Financial Officer
14
<PAGE> 1
Exhibit 10.29
JOINT VENTURE AGREEMENT
OF
LESTER'S BACK YARD BURGERS JOINT VENTURE IV
THIS JOINT VENTURE AGREEMENT is hereby made and entered into on this
28th day of August, 1998, by and among PATTIE F. LESTER, W. LAMBETH LESTER, BACK
YARD BURGERS INC., a Delaware corporation, ALEXANDRA B. LITOW and ANDREW R.
LITOW (hereinafter sometimes referred to together as the "Joint Venturers" and
individually as a "Joint Venturer").
ARTICLE I
FORMATION AND PURPOSE
1.01. Formation. The parties hereto hereby form and establish a joint
venture (hereinafter referred to as the "Joint Venture") to be conducted under
the name of LESTER'S BACK YARD BURGERS JOINT VENTURE IV.
1.02. Purposes of the Joint Venture. The purposes of the Joint Venture
are:
a. To acquire ownership of certain land and any improvements located at
2744 Elm Hill Pike, Nashville, Davidson County, Tennessee 37214, and being more
particularly described on Exhibit A attached hereto and incorporated herein by
this reference;
b. To construct a restaurant facility and related improvements on such
land;
c. To lease the land, restaurant facility and any other improvements
thereon to Back Yard Burgers, Inc., a Delaware corporation, to be operated
initially as a company-operated Back Yard Burgers restaurant;
d. To mortgage and otherwise encumber the land, improvements and other
real property (but excluding equipment, signage, any and all restaurant and
related equipment and all other items specifically belonging to the tenant) in
connection with such restaurant facility on 2744 Elm Hill Pike, Nashville,
Davidson County, Tennessee 37214 (hereinafter all together sometimes referred to
as the "Project");
e. To sell the Project at some date in the future;
f. To otherwise own, maintain, manage, operate, lease and sell the
Project or any part thereof; and
g. To do all things necessary for or incidental to the foregoing.
The Joint Venture shall not engage in any other business or activity without the
written consent of all Joint Venturers.
1.03. Place of Business. The principal place of business of the Joint
Venture shall be located at 215 Lynwood Terrace, Nashville, Tennessee 37205.
1.04. Term. The term of the Joint Venture shall commence on the date
hereof and shall continue until , 20 , provided, however, that the Joint
Venture shall be dissolved prior to such date upon the sale or disposal of the
Project and the payment or satisfaction of all debts of the Joint Venture. The
termination date may be extended or moved forward by the mutual consent of all
Joint Venturers.
Upon the death, assignment for the benefit of creditors, legal
incapacity, the filing of any proceedings under any bankruptcy or other
insolvency laws by or against a Joint Venturer, or the occurrence of any event
which results in the termination or transfer of the interest of a Joint Venturer
or the dissolution of a Joint Venturer as a matter of law, any remaining Joint
Venturer or Joint Venturers, as the case may be, shall have the right to
continue the business of the Joint Venture, and the Joint Venture shall not, as
a result of any such event, terminate, nor shall a liquidation or winding up of
its affairs be required.
ARTICLE II
JOINT VENTURE CAPITAL
2.01. Capital Accounts. Separate capital accounts shall be maintained
for each Joint Venturer and shall consist of the sum of their respective
contributions to the capital of the Joint Venture plus their share of the
profits of the Joint Venture, less their share of any losses of the Joint
Venture, and less any distributions to or withdrawals made by or attributed to
them from the Joint Venture.
<PAGE> 2
2.02. Capital Contributions. Each Joint Venturer shall make an initial
capital contribution to the Joint Venture on or before , 199 , as set forth
below beside his, her or its respective name:
<TABLE>
<CAPTION>
JOINT VENTURER INITIAL CAPITAL CONTRIBUTION
-------------- ----------------------------
<S> <C>
W. Lambeth Lester $ 75,000.00
Back Yard Burgers, Inc. $ 50,000.00
Pattie F. Lester $ 25,000.00
Alexandra B. Litow $ 25,000.00
Andrew R. Litow $ 25,000.00
-----------
TOTAL $200,000.00
</TABLE>
Thereafter, the Joint Venturers each agree to advance to the Joint
Venture, from time to time and as needed to properly carry out the purposes set
out herein, additional capital in cash and in the same proportion as his, her or
its respective percentage interest, as set forth in Article III. Such sums shall
be payable within ten (10) days after notice, and if for any reason, any Joint
Venturer does not contribute his, her or its respective proportionate share,
then, in that event, the Joint Venturers advancing additional funds as a result
of such failure and/or refusal shall be entitled to acquire the proportionate
share of the non-contributing Joint Venturer's interest as the percentage of a
given contributing Joint Venturer's respective interest in the Joint Venture
bears to the total percentage of the interests in the Joint Venture held by all
of the Joint Venturers contributing, provided, however, that the interest
retained by the non-contributing Joint Venturer, after the contribution and
adjustment of relative percentage ownership, shall represent not less than the
same book value (in dollars) as his, her or its interest represented prior to
the contribution by the Joint Venturers, it being the express intention of the
parties hereto that the monetary value of a non-contributing Joint Venturer's
share shall not be diminished by the voluntary contributions of the remaining
Joint Venturers even though the non-contributing Joint Venturer's percentage
interest in the Joint Venture may be adjusted in accordance with the formula set
forth hereinabove. However, the calculation to determine a Joint Venturer's
revised interest in the Joint Venture shall be done without regard to the
unequal allocation of profits and losses for tax purposes and shall be based
solely on the initial and any future contribution to the Joint Venture.
For example, A, B, C, and D each own 25% of the Joint Venture, which
has a book value of $400.00 ($100.00 for each Joint Venturer). The determination
is made that the Joint Venture requires another $400.00 in order to continue
doing business. A, B, and D each agree to contribute $100.00. C refuses. D is
unwilling to contribute any more than his additional $100.00. A and B agree to
contribute an additional $50.00 each to cover the shortfall left by C's refusal.
Immediately after the contribution, the book value of the Joint Venture as a
whole is $800.00. D, having made only his $100.00 additional contribution, now
has an interest in the Joint Venture of $200.00 and is, therefore, still the
owner of 25% of the Joint Venture. C, however, having made no contribution,
still has an investment in the Joint Venture of $100.00, and accordingly, owns
only 12.5% of the Joint Venture, the book value of which is $800.00 after the
contribution. A and B, on the other hand, having contributed an additional
$150.00 each, now have interests in the Joint Venture of $250.00 each, and are,
therefore, the owners of 31.25% of the Joint Venture, respectively (each having
contributed 1/2 of the necessary amount, and each, therefore, being entitled to
1/2 of 12.5% which would otherwise have been left to C had C elected to make his
portion of the contribution). From and after the time of the contributions and
until another contribution is made, the profits and losses of the Joint Venture
will be divided on the basis of the revised percentages, instead of the original
ones.
Any adjustments to the percentage interests of Joint Venturers to be
made pursuant to the requirements of this Section 2.02 shall likewise be made in
Article III.
2.03. Financing. The Managing Joint Venturer shall arrange for such
financing as may be required by the Joint Venture for purposes of acquiring,
constructing, developing, adding to, leasing, and/or operating the Project. The
terms and conditions of all such loans shall be subject to the prior written
approval of all Joint Venturers.
2.04. Obligation of the Joint Venturers. The Joint Venturers shall
endorse, assume, and/or guarantee such obligations of the Joint Venture as the
Joint Venturers may mutually agree upon or as may be required to enable the
Joint Venture to carry out its purposes as set forth herein.
2
<PAGE> 3
ARTICLE III
PERCENTAGE INTEREST IN THE JOINT VENTURE
The Joint Venturers shall have and own the respective percentage
interests in the Joint Venture as set forth below:
<TABLE>
<CAPTION>
JOINT VENTURER PERCENTAGE INTEREST
-------------- -------------------
<S> <C>
W. Lambeth Lester 37.50%
Back Yard Burgers, Inc. 25.00%
Pattie F. Lester 12.50%
Alexandra B. Litow 12.50%
Andrew R. Litow 12.50%
--------
TOTAL 100.000%
</TABLE>
The above percentage interests may be adjusted as provided in Section 2.02 above
or as mutually agreed upon by the parties. References elsewhere in this
Agreement to Article III shall take into account any such adjustments to the
percentage interests.
ARTICLE IV
PROFITS, LOSSES, AND DISTRIBUTIVE SHARES OF TAX ITEMS
4.01. Allocation of Profits and Losses. The Joint Venture's net profits
and losses for each fiscal year of the Joint Venture and each item of income,
gain, loss, deduction, or credit entering into the computation thereof, shall be
allocated to the Joint Venturers, both for income tax and book purposes, as
follows:
a. Net profits shall be allocated among the Joint Venturers in the same
proportion as distributable income for such fiscal year as distributed pursuant
to Section 4.02 hereof.
b. Net losses shall be allocated among the Joint Venturers in the
following manner and order of priority:
(i) To the Joint Venturers in proportion to their respective
capital accounts and to the extent of any positive balance in such capital
account; and then
(ii) To the Joint Venturers in accordance with their
respective percentage interests as set forth in Article III hereof.
c. Any tax credits available to the Joint Venture shall be allocated to
the Joint Venturers in accordance with their respective percentage interests as
set forth in Article III hereof.
d. Gain from the sale or exchange of all or any part of the Project
shall be allocated among the Joint Venturers in the following manner and order
of priority:
(i) To the Joint Venturers in proportion to any negative
balances in the respective capital accounts, to the extent of such negative
balances; and then
(ii) The balance, if any, to the Joint Venturers in accordance
with their respective percentage interests as set forth in Article III hereof.
4.02. Distributable Income. The distributable income derived by the
Joint Venture shall be determined as of the end of each fiscal year of the Joint
Venture and shall be the net profits and losses derived by the Joint Venture
during each such year from its activities as ascertained through the use of
sound cash basis accounting practices, consistently applied, increased by:
a. Depreciation and other non-cash charges deducted in computing the
net profits derived by the Joint Venture from the operation of leasing of the
Project; and
b. Any cash that becomes available during each such fiscal year by
reason of the reduction in any reserves referred to below in paragraphs (d) and
(e); and decreased by:
c. Principal payments made on any debts of the Joint Venture with
respect to the Project during each such fiscal year;
d. Additions to any reserves deemed necessary by the Joint Venturers
during such fiscal year for capital improvements and/or asset replacements with
respect to the Project; and
3
<PAGE> 4
e. Additions to any reserves deemed necessary by the Joint Venturers
during each such fiscal year to meet working capital requirements of the Project
and any contingent or unforeseen liabilities of the Joint Venture with respect
to the Project and the Joint Venture.
4.03. Distribution of Distributable Income. Income distributions for
each fiscal year shall be apportioned and distributed to the Joint Venturers in
accordance with their respective percentage interests as set forth in Article
III hereof. The Joint Venturers may, in their sole discretion, make estimated
distributions of distributable income on a monthly basis after the payment of
all just debts.
4.04. Distribution of Proceeds of Refinancing, Sale, or Liquidation.
The net cash proceeds to the Joint Venture resulting from (a) the refinancing of
any loan or mortgage on, or the sale, exchange, condemnation (or similar eminent
domain taking), casualty, or other disposition of all, or any substantial part
of, the Project or any other assets of the Joint Venture, or (b) from the
liquidation of the assets of the Joint Venture following the dissolution of the
Joint Venture, shall be distributed and applied in the following manner and
order of priority:
a. To the payment of debts and liabilities of the Joint Venture, other
than items referred to in the succeeding clauses of this Section;
b. To the establishment of any reserves deemed necessary for any
contingent or unforeseen liabilities or obligations of the Joint Venture;
c. To the repayment of any liabilities or debts of the Joint Venture,
other than capital accounts, to any of the Joint Venturers;
d. The balance, if any, to the Joint Venturers in accordance with the
respective percentage interests as set forth in Article III hereof.
4.05. Profits and Losses. The terms "Net Profits" and "Net Losses" as
used in this Agreement shall mean net profits and net losses, respectively,
including capital gains and losses, as determined on and reflected by the Joint
Venture's annual federal income tax return, taking into account all items of
income and deduction reports on Schedule K of such return and after deduction of
the amount of all guaranteed payments due under Article VI hereof.
ARTICLE V
LEGAL TITLE TO THE PROJECT
The Joint Venturers agree that the legal title to the Joint Venture
property and assets, including the Project, shall remain in the name of the
Joint Venture.
ARTICLE VI
DUTIES, REPRESENTATIONS AND POWERS OF JOINT VENTURERS
6.01. Duties of Managing Joint Venturers. Pattie F. Lester shall be
Managing Joint Venturer for the Joint Venture. Except as may be limited by the
provisions of this Agreement, she shall have the authority to act on behalf of
the Joint Venture and to act alone without the joinder of any other Joint
Venturer. The Managing Joint Venturers shall be reimbursed for all reasonable,
direct, out-of-pocket costs and expenses which they may incur in performing her
duties. However, in no event shall the Managing Joint Venturer be paid a fee for
such services. Further, all reimbursements shall be for direct costs, and not
for any items such as conventions, out-of-state trips, seminars which the
Managing Joint Venturer could claim would make her a better manager of the Joint
Venture or would help educate her about certain matters important to the Joint
Venture. Her duties shall include the following:
a. Managing the day-to-day activities of the Joint Venture;
b. Keeping the books of account and financial statements with respect
to all transactions of the Joint Venture and the Project;
c. Arranging for any financing required by the Joint Venture and
negotiating the terms of any sale made by or to the Joint Venture, all subject
to the approval of the other Joint Venturers;
d. Negotiating the terms of any lease to or by the Joint Venture;
e. Executing the documents on behalf of the Joint Venture relating to
its operations or the Project;
f. Signing checks on behalf of the Joint Venture;
g. Preparing, filing, and delivering in a timely manner all tax returns
required for the Joint Venture; and
4
<PAGE> 5
h. Performing all other day-to-day duties required to maintain and
operate the Joint Venture. The Managing Joint Venturer may also from time to
time delegate any or all of her duties under 6.01.b and 6.01.g above to another
Joint Venturer (including Back Yard Burgers, Inc.), provided such Joint Venturer
agrees to properly carry them out until otherwise directed by the Managing Joint
Venturer, or hire some outside firm or person to keep and prepare those items
set forth in 6.01.b and 6.01.g above. The Joint Venture shall pay all
reasonable, direct, out-of-pocket costs incurred for preparing those items set
forth in 6.01.b and 6.01.g above.
Should Pattie F. Lester be unable, incapable or unwilling to serve as
Managing Joint Venturer, then shall thereupon be the successor Managing
Joint Venturer of the Joint Venture and shall have all of the powers, duties,
rights and authority as the original Managing Joint Venturer.
6.02. Back Yard Burgers, Inc. Back Yard Burgers, Inc., a Delaware
corporation, is a Joint Venturer but is also the tenant under a lease which the
Joint Venture (as landlord) anticipates entering into in , 199 V . Under
such lease, Back Yard Burgers, Inc. will lease the Project for fifteen years
(from the completion of the building and improvements) and also have three
five-year renewal options. If Back Yard Burgers, Inc. fails to pay any amounts
due under the Lease, then it shall thereupon forfeit to the Joint Venture its
Joint Venture interest and may thereafter have no ownership interest or voting
rights in the Joint Venture; however, notwithstanding the foregoing, any funds
in its capital account shall be applied to help offset any obligations and
amounts owed by Back Yard Burgers, Inc. under the lease. However, this
forfeiture shall not relieve Back Yard Burgers, Inc. from any guaranties
(including without limitation any loan guaranties), liabilities, or other
obligations arising out of the Joint Venture or otherwise for which it may have
been liable or responsible (in whole or in part) prior to the forfeiture.
This Joint Venture is not a partnership or joint venture in the
operation of a restaurant, but is a joint venture in the ownership and leasing
of real property and constructing a restaurant building and related improvements
thereon. Back Yard Burgers, Inc. is solely responsible for operating the
restaurant on the real property comprising the Project in accordance with the
terms of its lease and shall in no way be construed to be the agent of the Joint
Venture in the operation of such restaurant. Likewise, this Agreement gives the
Joint Venture no agency rights to act for Back Yard Burgers, Inc. in the actual
operation of the restaurant.
6.03. Powers of Joint Venturers.
a. Unanimous Consent. The following powers may be exercised only upon
the consent of all of the Joint Venturers:
1. The power to borrow money on the general credit of the Joint
Venture in any amount, or to create, assume, or incur any indebtedness to any
person or entity;
2. The power to make loans in any amount, to guarantee obligations
of any person or entity, or to make any other pledge or extension of credit;
3. The power to purchase or otherwise acquire any other property
except in the ordinary course of business of the Joint Venture;
4. The power to sell, encumber, mortgage, or refinance any mortgage
on any of the Joint Venture property;
5. The power to confess any judgment against the Joint Venture, or
to create, assume, incur, or consent to any charge (including any mortgage or
deed of trust, pledge, encumbrance, or security interest of any kind) upon any
property or assets of the Joint Venture; and
6. The power to make any expenditure of capital improvement or
renovation funds or any other expenditures except for routine day-to-day
maintenance and operation of the Project.
b. Majority. Except for those powers set forth in Section 6.03.a above
and the other powers and duties specifically designated or assigned to a Joint
Venturer or to the Managing Joint Venturer elsewhere in this Agreement, all
other actions and powers of the Joint Venture shall require the consent of a
majority of the percentage ownership (as set forth in Article III) of the Joint
Venture.
c. Specifically Authorized Actions. Notwithstanding anything else
contained in this Agreement, all of the Joint Venturers hereby agree and consent
to the following actions by the Joint Venture:
1. Purchasing the land for the Project and borrowing such funds as
are necessary to fund the purchase.
5
<PAGE> 6
2. Constructing a restaurant facility and any needed improvements
therewith on the land.
3. Borrowing such funds as are necessary from financial institutions
(including The Bank of Nashville in Nashville, Tennessee) to help finance the
purchase of the land, the construction of the restaurant facility and needed
improvements, and to obtain permanent financing, and granting such financial
institutions (including The Bank of Nashville) deeds of trust, assignments of
rents and security agreements on the land and/or Project to secure such loans.
4. Leasing the Project to Back Yard Burgers, Inc. for a fifteen year
initial term, together with the option for three five-year renewal terms.
Notwithstanding anything else herein contained, all of the Joint Venturers
hereby specifically authorize the Managing Joint Venturer, Pattie F. Lester (or
as the successor Managing Joint Venturer if she is unable, incapable or
unwilling to serve), to execute on behalf of the Joint Venture any and all
documents needed to accomplish and effectuate the foregoing actions, including
without limitation any settlement statement, closing statement, commitment
letter, affidavit, promissory note, lease agreement, guaranty, unlimited
guaranty, subordination, nondisturbance and attornment agreement, and deed of
trust, assignment of rents and security agreement, whether any of the foregoing
related to the purchase of the land and/or the financing thereof, the
construction financing, and/or the permanent financing. All of the Joint
Venturers specifically authorize the Managing Joint Venturer to execute the
foregoing documents on behalf of the Joint Venture without the necessity or
signature of any other Joint Venturer, although any Joint Venturer may join in
their execution if he, she or it so desires.
6.04. Deadlock. In the event a Joint Venturer(s) shall refuse to
consent to the exercise of any power set forth in Section 6.03.a when the
majority of the percentage ownership (as set forth in Article III) of the Joint
Venture have so agreed or consented, or in the event the Joint Venturers are
divided on a material issue and cannot agree on the conduct of the business and
affairs of the Joint Venture, then a deadlock between the Joint Venturers shall
be deemed to have occurred. Upon the occurrence of a deadlock, the other Joint
Venturers (hereinafter referred to as the "Offerors") may elect to purchase the
Joint Venture interest of the Joint Venturer(s) refusing to consent to the
exercise of such power or to proposals relative to the conduct of the business
and affairs of the Joint Venture (hereinafter referred to as the "Offeree") at
the price calculated as the Offeree's percentage interest in the total value (as
determined solely by the Offerors without the need for outside assistance) of
all of the assets of the Joint Venture, but such total value shall never be less
than their book value. The Offerors shall notify the Offeree in writing of the
election to purchase, stating the total value of all of the assets of the Joint
Venture, and the price offered for the Offeree's Joint Venture interest
expressed as the Offeree's percentage interest in the Joint Venture (as set
forth in Article III) multiplied by the total value of all of the assets of the
Joint Venture. The Offeree shall have the right to buy the interest of the
Offerors on the same terms based upon the Offerors' percentage interests in the
total value of all Joint Venture assets (as stated by the Offerors), or to sell
the Offeree's interest to the Offerors at the designated price and terms,
whichever the Offeree may elect. The Offeree shall have thirty (30) days from
the receipt of such offer to make his, her or its election, that is, either to
buy such interest of the Offerors or to sell his, her or its own interest, which
shall be made in writing executed by the Offeree and stating the nature of the
election. A Joint Venturer who is then obligated to purchase the interest of
another Joint Venturer pursuant to the provisions hereof shall have twenty (20)
days from the date of receipt of the written election from such other Joint
Venturer to pay the specified price and satisfy the terms of such purchase.
Should a Joint Venturer who has received an offer to buy fail to make
the election required herein in a timely fashion, then such non-responding party
will be deemed to have elected and agreed to sell, as the case may be, according
to the terms of the offer. No offers under this Section may be revoked in an
attempt to try to defeat the provisions of this Section.
ARTICLE VII
TRANSFERS OF JOINT VENTURERS' INTERESTS
7.01. Transfers of the Joint Venturers' Interests.
a. In General. Except in accordance with the procedures set forth in
Section 7.03 and elsewhere herein, no Joint Venturer may sell, transfer (whether
by operation of law or otherwise), assign, encumber, or allow to be encumbered
his, her or its interest in the Joint Venture, or admit additional Joint
Venturers, without the prior written consent of all of the other Joint
Venturers. Any attempt to transfer or encumber any interest in the Joint Venture
in violation of this Article shall be null and void.
b. Family Dispositions. Notwithstanding anything else herein contained,
the requirements of Section 7.01.a and Section 7.03 shall not apply to spousal
transfers, whether by voluntary action or otherwise, transfers by reason of
death, or transfers into a trust for the sole benefit of the individual
transferor and/or his or her family members of the first or second degree.
However, no Joint Venturer shall make any disposition which would cause the
Joint Venture to be treated as an association taxable as a corporation for
federal income tax purposes.
6
<PAGE> 7
7.02. Obligations and Rights of Transferees.
a. Any person or entity which acquires in any manner whatsoever any
interest in the Joint Venture, irrespective of whether such person has accepted
and adopted in writing the terms and provisions of this Agreement, shall be
deemed by the acceptance of the enefit of the acquisition thereof to have agreed
to, and shall, be subject to and bound by all the obligations of this Agreement
that any predecessor in interest of such a person or entity was subject to or
bound by.
b. The person or entity acquiring an interest in the Joint Venture
shall have only such rights, and shall be subject to all of the obligations, as
are set forth in this Agreement; and, without limiting the generality of the
foregoing, such a person or entity shall not have any right to have the value of
his, her or its interest ascertained or receive the value of such interest or,
in lieu thereof, profits attributable to any right in the Joint Venture, except
as herein set forth.
7.03. Right of First Refusal. If any Joint Venturer or his, her or its
heirs, successors or representatives should desire at any time to transfer or
dispose of any or all of his, her or its interest in the Joint Venture, such
Joint Venturer, or other party, shall first offer to sell the same to the other
Joint Venturers on a pro-rata basis, or as the other Joint Venturers may
otherwise agree. The offer, which shall be given in writing to the other Joint
Venturers, shall state the sale price asked and the terms of the payment for
such interest. Within thirty (30) days after any such offer, the other Joint
Venturers may, at their option, elect to purchase the interest offered on a
pro-rata basis, or as they may otherwise agree among themselves. To exercise the
option to purchase, the other Joint Venturers shall give written notice of such
intention to the offering Joint Venturer, or other party. If the other Joint
Venturers fail to purchase the interest so offered, the offering Joint Venturer,
or other party, shall then have the right for a period of one hundred eighty
(180) days thereafter to offer such interest to any person or entity, but still
shall not sell such interest without giving the other Joint Venturers the right
to purchase such interest as hereinbefore set out within thirty (30) days at the
price and on the terms being offered by such person or entity. The offering
Joint Venturer shall give the other Joint Venturers written notice of such offer
to purchase that he, she or it proposes to accept, and this notice shall be
accompanied by a copy of the offer to purchase, which shall be in writing and
shall specify the exact interest to be purchased, the purchase price, the
payment terms (if any), and the name and address of the party making the offer
to purchase, and such offer to purchase must be bona fide.
7.04. Death or Legal Incompetency. Upon the death or legal incompetency
of an individual Joint Venturer, his or her personal representative shall have
all of the rights of a Joint Venturer for the sole purpose of settling and
managing his or her estate and such power as the decedent or incompetent
possessed to constitute a successor as an assignee of his or her interest in the
Joint Venture, subject to the provisions contained in Section 7.03 above, and
the other provisions in this Agreement.
7.05. Execution of Documents by Transferees. The transferees of any
interest in the Joint Venture must agree to execute any and all documents
requested by the Joint Venture and other Joint Venturers consistent with the
terms and intent of this Agreement and to be bound by the terms hereof before
becoming a Joint Venturer.
ARTICLE VIII
BANK ACCOUNTS, BOOKS, AND REPORTS, ETC.
8.01. Bank Accounts. The funds of the Joint Venture shall be kept in a
separate bank account or accounts in the name of the Joint Venture, at The Bank
of Nashville in Nashville, Tennessee, or such other financial institution as may
be designated by the Joint Venturers. All withdrawals from such account or
accounts shall be made only upon the signature of those persons shown on the
account signature card who have been designated by the Joint Venture.
8.02. Fiscal Year. The fiscal year of the Joint Venture shall be the
calendar year.
8.03. Books of Accounts. As provided in Section 6.01., the Joint
Venture's books of accounts and financial statements shall be maintained by the
Managing Joint Venturer accordingly and shall be made available to any Joint
Venturer for review at reasonable times. However, the Managing Joint Venturer
may delegate her duty to maintain the books of account and financial statements
to another Joint Venturer (including Back Yard Burgers, Inc.), provided such
Joint Venturer agrees to properly maintain them until otherwise directed by the
Managing Joint Venturer, or may hire some outside firm or person to maintain
them, but they shall still be made available to any Joint Venturer for review at
reasonable times.
8.04. Method of Accounting. The Joint Venture's books of accounts shall
be maintained and kept in accordance with generally accepted accounting
principles, except as may be specified otherwise herein.
7
<PAGE> 8
8.05. Tax Returns. The Managing Joint Venturer shall cause tax returns
of the Joint Venture to be filed on a timely basis and shall, promptly after the
preparation thereof, transmit full and complete copies of the returns to each
Joint Venturer. The Managing Joint Venturer may from time to time delegate her
duties under this paragraph of Section 8.05 to another Joint Venturer (including
Back Yard Burgers, Inc.), provided such Joint Venturer agrees to properly
perform such duties timely and properly, or may hire an outside person or entity
to prepare, transmit and file the tax returns.
Pattie F. Lester is hereby appointed as "tax matters partner" (as
defined in Section 6231(1)(7) of the Internal Revenue Code of 1986, as amended)
for the Joint Venture and shall have all requisite authority and powers
necessary to carry out her duties as tax matters partner, notwithstanding
anything else herein contained. She shall be entitled to reimbursement for all
reasonable expenses incurred in carrying out her duties as tax matters partner.
If Pattie F. Lester is unable, incapable or unwilling to serve as "tax matters
partner," then shall be the successor if Pattie F. Lester is unable,
incapable or unwilling to so serve.
8.06. Certain Tax Provisions. Pursuant to Section 754 of the Internal
Revenue Code of 1986, as amended, in the event of a transfer or sale of a Joint
Venture interest or the death of the Joint Venturer, the Joint Venture shall
make the necessary Section 754 election with the Internal Revenue Service for an
adjustment to the basis of the Joint Venture assets as provided by Section 734
and 743 of the Internal Revenue Code.
The Managing Joint Venturer, on behalf of the Joint Venturers, shall
cause to be filed a proper election in accordance with Section 709(b) of the
Internal Revenue Code of 1986, as amended, to provide for the amortization of
organization expenses over a period of sixty (60) months.
ARTICLE IX
TERMINATION
9.01. Liquidation Distribution. Upon the termination of the Joint
Venture, the Joint Venturers shall proceed to liquidate the Joint Venture, and
all proceeds of such liquidation shall be applied and distributed in the manner
set forth in Section 4.04 hereof, subject, however, to the provisions of SS.
61-1-137, of the Tennessee Code Annotated.
9.02. Reasonable Time for Liquidation. A reasonable time shall be
allowed for the orderly liquidation of the Joint Venture's assets in order to
minimize losses normally attendant upon such liquidation.
9.03. Date of Dissolution. The Joint Venture shall terminate and
dissolve when all property owned by the Joint Venture shall have been sold or
otherwise disposed of and the debts of the Joint Venture have been paid or
satisfied.
ARTICLE X
MISCELLANEOUS
10.01. Notices. Any notice or other communication provided for or
required by this Agreement shall be in writing and shall be deemed to have been
given when delivered by hand or upon deposit in the United States mail,
certified, postage prepaid, return receipt requested, properly addressed to the
Joint Venturer to which such notice is intended to be given at such address as
such Joint Venturer may have previously furnished in writing to the Joint
Venture or to such Joint Venturer's last known address.
10.02. Partition. The Joint Venturers hereby mutually waive any right
of partition which they may have with respect to the Project and any other Joint
Venture assets.
10.03. Fees and Commissions. Each Joint Venturer hereby represents and
warrants to the other Joint Venturers that there are no claims for brokerage or
other commissions or finders or other similar fees in connection with the
transactions covered by this Agreement. Each Joint Venturer hereby agrees to
indemnify and hold harmless the others from and against all liabilities, costs,
damages, and expenses from any such claims incurred by him, her or it.
10.04. Waiver. If the Joint Venture or a Joint Venturer consents to or
waives, either expressly or by implication, a breach or default by another Joint
Venturer in the performance of the obligations hereunder, such consent or waiver
shall not be deemed or construed to be a consent to or waiver of any other
breach or default in the performance of the same or any other obligations
hereunder of such Joint Venturer. Failure on the part of the Joint Venture or a
Joint Venturer to complain of any act of another Joint Venturer or to declare a
Joint Venturer in breach or default, irrespective of how long such failure
continues, shall not constitute a waiver by the Joint Venture or such Joint
Venturer of any rights hereunder.
8
<PAGE> 9
10.05. Severability. If any provision of this Agreement or the
application thereof shall be determined by any court of competent jurisdiction
to be invalid and unenforceable to any extent, the remainder of this Agreement
and the application of the other provisions shall be valid and shall be enforced
to the fullest extent permitted by law. If any provision is determined to be
invalid or unenforceable, that provision shall be modified in such a way so that
it becomes valid and enforceable but reflects its original meaning and intent as
closely as possible.
10.06. Binding Effect. This Agreement shall inure to the benefit of and
be binding upon the Joint Venturers and their heirs, successors and assigns.
10.07. Counterparts. This Agreement may be executed in counterparts,
with all such counterparts together to be considered to be one complete
document.
10.08. Construction of Agreement.
a. The captions contained in this Agreement are inserted only as a
matter of convenience and in no way define, limit, extend, or describe the scope
of this Agreement or the intent of any provision thereof.
b. None of the provisions of this Agreement shall be for the benefit of
or enforceable by any creditor of the Joint Venture.
c. This Agreement shall be interpreted, construed, and enforced in
accordance with the laws of the State of Tennessee. Each Joint Venturer and his,
her, or its heirs, successors, assigns and personal and legal representatives,
hereby submits to the jurisdiction and venue of the courts in Nashville,
Davidson County, Tennessee, both federal and state, and agrees that any legal
action arising out of the Joint Venture, this Agreement, the Project, or a
dispute between Joint Venturers, shall be brought in a federal or state court in
Nashville, Davidson County, Tennessee, whichever is applicable.
10.09. Other Activities of Joint Venturers. Any Joint Venturer may
engage in other business ventures of every nature, including, but not limited
to, the ownership, development, management, and leasing of real estate wherever
located (including without limitation the leasing of other property to Back Yard
Burgers, Inc., for another company-operated Back Yard Burgers restaurant) and
the ownership and operation of restaurants and restaurant franchises wherever
located (including without limitation Back Yard Burgers restaurants), and
neither the Joint Venture nor any of the other Joint Venturers shall have any
right in such independent ventures or the income and profits derived therefrom
by virtue of this Joint Venture.
10.10. Entire Agreement. This Agreement is intended by the Joint
Venturers to be the final expression of their agreement and as the complete and
exclusive statement of the terms thereof notwithstanding any representations or
statements to the contrary heretofore made. This Agreement may be amended only
by a writing signed by all then-current Joint Venturers at the time of such
amendment.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
[SIGNATURES ON THE NEXT PAGE]
9
<PAGE> 10
JOINT VENTURERS:
Address: ---------------------------------
215 Lynwood Terrace PATTIE F. LESTER
Nashville, Tennessee 37205
SSN: ###-##-####
BACK YARD BURGERS, INC.
Address:
2768 Colony Park Drive
Memphis, Tennessee 38118 By:
EIN: 64-0737163 ------------------------------
LATTIMORE M. MICHAEL, Chairman
and Chief Executive Officer
Address: ---------------------------------
215 Lynwood Terrace W. LAMBETH LESTER
Nashville, Tennessee 37205
SSN: ###-##-####
Address:
---------------------------------
- - --------------------------- ALEXANDRA B. LITOW
- - ---------------------------
SSN:
-----------------------
Address:
-------------------------------
- - --------------------------- ANDREW R. LITOW
- - ---------------------------
SSN:
-----------------------
10
<PAGE> 11
EXHIBIT A
LEGAL DESCRIPTION
Land in Davidson County, Tennessee, being Lot No. 2 as shown on the
Plan of Gowda's Two Lot Subdivision of record in Book 8250, page 947, Register's
Office for said County.
11
<PAGE> 1
EXHIBIT 11
BACK YARD BURGERS, INC.
COMPUTATION OF INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------------- --------------------------
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
1998 1997 1998 1997
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net Income $ 210 $ 204 $ 741 $ 423
---------- ------------- ---------- -------------
Weighted average number
of common shares outstanding
during the period 4,590 4,270 4,513 4,255
---------- ------------- ---------- -------------
Basic income per share $ .05 $ .05 $ .16 $ .10
---------- ------------- ---------- -------------
Weighted average number
of common shares outstanding
during the period 4,590 4,270 4,513 4,255
Preferred shares convertible
to common shares 23 290 85 302
Stock options 47 12 62 29
---------- ------------- ---------- -------------
4,660 4,572 4,660 4,586
========== ============= ========== =============
Diluted income per share $ .05 $ .04 $ .16 $ .09
========== ============= ========== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT OCTOBER 3, 1998 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED OCTOBER 3, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-2-1999
<PERIOD-START> JAN-4-1998
<PERIOD-END> OCT-3-1998
<CASH> 703
<SECURITIES> 0
<RECEIVABLES> 268<F1>
<ALLOWANCES> 0
<INVENTORY> 197
<CURRENT-ASSETS> 1,284
<PP&E> 12,370<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 15,367
<CURRENT-LIABILITIES> 1,328
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 9,100
<TOTAL-LIABILITY-AND-EQUITY> 15,367
<SALES> 18,912
<TOTAL-REVENUES> 20,598
<CGS> 6,113
<TOTAL-COSTS> 12,505
<OTHER-EXPENSES> 4,335
<LOSS-PROVISION> 144
<INTEREST-EXPENSE> 334
<INCOME-PRETAX> 741
<INCOME-TAX> 0
<INCOME-CONTINUING> 741
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 741
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<FN>
<F1>Asset value represents net amount.
</FN>
</TABLE>
