<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
or
[ ] Transition report under 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
------------------- -------------------
Common Stock, $.01 par value Nasdaq SmallCap 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 X
--- ---
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 $27,364,000.
The aggregate market value of voting common stock held by
non-affiliates on March 1, 1999 was approximately $5,468,926.
The number of shares outstanding of the issuer's common stock as of
March 1, 1999 was 4,600,397.
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CERTAIN PORTIONS OF PART II ARE INCORPORATED BY REFERENCE FROM THE
ISSUER'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED JANUARY 2, 1999 AND
CERTAIN PORTIONS OF PART III ARE INCORPORATED BY REFERENCE FROM THE ISSUER'S
PROXY STATEMENT RELATING TO THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY
20, 1999. Transitional Small Business Disclosure Format Yes No X
--- ---
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Back Yard Burgers operates and franchises quick-service and fast-casual
restaurants in Memphis, Little Rock, Nashville and other markets across 15
states. Our restaurants specialize in charbroiled, freshly prepared,
great-tasting food. As our name implies, we strive to offer the same
high-quality ingredients and special care typified by outdoor grilling in your
own back yard. Our menu features made-to-order gourmet hamburgers and chicken
sandwiches, charbroiled over an open flame, fresh salads, chili and other
special entrees as well as hand-dipped milkshakes, fresh-made lemonade and
fresh-baked cobblers. As of January 2, 1999, our operations included 33
company-operated restaurants and 48 franchised restaurants.
CORPORATE HISTORY
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. The company consummated its initial public
offering on July 2, 1993 and its common stock has traded on the Nasdaq SmallCap
Market since that time. Unless the context requires otherwise, references in
this annual report to the "company" and its operations mean Back Yard Burgers,
Inc., a Delaware corporation and its subsidiaries.
OPERATING STRATEGY
Our 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. Our 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 an inviting indoor dining area, which
projects a uniform image and creates pleasing curb appeal;
- serving high quality, great tasting food comparable to that of
the best full-service casual restaurants;
- providing fast and friendly service with emphasis on a
positive customer experience; and
- actively training, supervising and supporting franchised and
company-operated restaurants.
GROWTH STRATEGY
During 1999, we will continue to focus on increasing same-store sales
by emphasizing quality food and service. Our growth strategy is to continue to:
- set our restaurants apart from the fast-food competition by
evolving into a "fast-casual" concept by adding dining rooms
to existing locations where possible and enhancing dine-in
facilities, so the design and feel of the facilities will
match the standards set by the quality of the food;
- open additional company-operated restaurants with the
"fast-casual" design in selective locations in our existing
markets; and
- develop additional franchised restaurants with a committed and
enthusiastic group of franchisees.
<PAGE> 3
RESTAURANT OPERATIONS
RESTAURANT LOCATIONS. The following tables set forth the number of
restaurants located in each market of the company's system at January 2, 1999.
<TABLE>
<CAPTION>
COMPANY-OPERATED: FRANCHISED:
----------------- -----------
Core Markets Number of Restaurants Core Markets Number of Restaurants
------------ --------------------- ------------ ---------------------
<S> <C> <C> <C>
Memphis, TN Area 18 Kansas City, KS Area 5
Little Rock, AR Area 9 Fayetteville, NC Area 3
Nashville, TN Area 6 Knoxville, TN Area 3
-- Chattanooga, TN Area 2
Total 33 Jackson, MS Area 2
== Marietta, GA Area 2
<CAPTION>
Other Markets (a) Number of Restaurants
------------- ---------------------
<S> <C>
Mississippi 6
Arkansas 4
North Carolina 4
Alabama 2
Florida 2
Kentucky 2
Missouri 2
South Carolina 2
Tennessee 2
Texas 2
Louisiana 1
Ohio 1
Oklahoma 1
--
Total 48
==
</TABLE>
- -----------------------
(a) The "Other Markets" portion of the table reflects the total
number of restaurants located in such markets by state. Other markets for the
restaurants range from small towns to large cities where franchisees have only
one restaurant.
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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>
53-Week Period Ended 52-Week Period Ended
-------------------- --------------------
January 3, 1998 (a) January 2, 1999
------------------- ---------------
<S> <C> <C>
Company-operated $24,150,000 $25,082,000
Franchised 31,648,000 34,482,000
----------- -----------
System-wide $55,798,000 $59,564,000
=========== ===========
</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
-------------------------------------------
12/30 12/28 1/3 1/2
1995 1996 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Restaurants (b)
Company-operated
Open beginning of period 26 32 34 32
Opened during period 7 3 1 3
Closed during period (1) (1) (3) (2)
--- --- --- ---
Open at end of period 32 34 32 33
--- --- --- ---
Franchised
Open beginning of period 39 36 47 45
Opened during period 7 12 5 8
Closed during period (10) (1) (7) (5)
--- --- --- ---
Open at end of period 36 47 45 48
--- --- --- ---
Total Restaurants 68 81 77 81
=== === === ===
</TABLE>
- --------------------
(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 1998. As a result, sales for fiscal 1997 are not directly comparable
to those of fiscal 1998.
(b) Subsequent to January 2, 1999, (1) one franchised restaurant
closed in Knoxville, Tennessee, (2) one company-operated restaurant opened in a
convenience store in Bartlett, Tennessee, (3) one franchised restaurant opened
in each of Clinton, Mississippi and Maryville, Tennessee and (4) one franchised
restaurant converted to a dining room with a single drive-thru in each of
Anniston, Alabama and Cleveland, Mississippi.
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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.
RESTAURANT DESIGN AND SERVICE. The restaurants are built to
company-approved specifications in configurations including:
- single drive-thru with indoor dining; and
- double drive-thru without 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 2, 1999, the number of restaurants with indoor dining was 23
for company-operated facilities and 31 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.
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SUPERVISION AND TRAINING. The company believes that training and
personnel development is crucial for the success of the company. The company's
training program is an intensive four week program consisting of both in-store
and classroom training. The in-store training stresses food quality, fast,
friendly customer service, restaurant cleanliness, and proper management
operations of a quick service restaurant. The classroom training consists of
such topics as food safety and sanitation, employment laws and regulations,
interviewing and hiring of employees, and systems to control both food and labor
costs. Prior to opening, each restaurant must have a minimum of three trained
and certified managers that have successfully completed the company training
program.
For new store openings, the company sends a store opening team for each
new restaurant opening. The team arrives prior to the opening and stays during
the first several days of operation. The primary function of the store opening
team is to ensure a smooth and successful new store opening by assisting the
franchisee's management staff in the training and development of their
employees.
The company has a staff of three franchise district managers that visit
each restaurant in their territory every eight to ten weeks. Franchise district
managers act as business consultants to franchisees to ensure that each
restaurant is providing quality products and fast, friendly service. The
franchise district manager acts as the 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.
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FRANCHISE OPERATIONS
STRATEGY. In addition to the development of company-operated
restaurants, the company will continue to emphasize the development of
additional franchised restaurants expected to be opened pursuant to existing
area development agreements and franchise agreements as well as 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 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 also is required to execute an area development
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 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 2, 1999, 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 December 31, 2003. Of the 48 franchised restaurants as
of January 2, 1999, 28 were being operated under area development agreements by
multiple unit franchisees and 20 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 9 area development agreements, three during
1998, for lack of performance by multiple unit franchisees with respect to their
projected development schedules. Additionally, during the past three years,
three franchise agreements were terminated because of a lack of performance by
single unit franchisees with respect to certain franchise agreement
requirements. The company
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believes that its overall experience with franchisees who commit to develop
restaurants under franchise agreements and area development agreements has been
favorable, although there can be no assurance that future performance by
franchisees under these agreements will be successful.
The franchise agreement and area development agreement require that the
franchisee submit information regarding proposed restaurant sites to the company
for its review. The company does not arrange or make any provisions for
financing the development of restaurants by its franchisees. Each franchisee is
required to purchase all fixtures, equipment, inventory, products, ingredients,
materials and other supplies used in the operation of its restaurants from
approved suppliers, all in accordance with the company's specifications. The
company provides a training program for management personnel of its franchisees.
Under the terms of the franchise agreement, the company has adopted standards of
quality, service and food preparation for franchised restaurants. Each
franchisee is required to comply with all of the standards for restaurant
operations as published from time to time in the company's operations manual.
The company may terminate a franchise agreement for several reasons,
including among others, the franchisee's bankruptcy or insolvency, default in
the payment of royalties or advertising fees to the company, failure to maintain
standards set forth in the franchise agreement or operations manual, material
violation of any law, 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 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
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 any subsequent $22,000 franchise fee) 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 primary direct competitors consist of
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
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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 is constantly 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.
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 regulation and
several state laws which regulate the offer and sale of franchises. The company
is also subject to state laws that regulate substantive aspects of the
franchisor -- franchisee relationship. The FTC's Trade Regulation Rule on
Franchising requires the company to furnish to prospective franchisees a
franchise offering circular containing information prescribed by this 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 rules 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.
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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.
EMPLOYEES
As of March 1, 1999, 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.
ITEM 2. PROPERTIES
Of the 33 company-operated restaurants as of January 2, 1999, the
company has entered into ground leases, as lessee, for 19 restaurants. The
company owns the real property for six 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 19
company-operated restaurants located on leased sites is approximately $3,070 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 33 company-operated
restaurants, management believes that its commercial insurance coverage is
adequate. Also see "Business-Restaurant Operations."
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 provides for a minimum annual rent of $44,500. The company
is currently leasing these offices on a month-to-month basis and is considering
moving to a larger space to accommodate its current and foreseeable needs. 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 August 31, 2003, 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.
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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 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 29, 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
April 4, 1998...................... $3.63 $2.25
July 4, 1998....................... $3.63 $2.63
October 3, 1998.................... $2.81 $2.25
January 2, 1999.................... $2.38 $1.88
Through March 26, 1999............. $2.13 $1.50
</TABLE>
At March 26, 1999, the common stock was held of record by approximately
520 record stockholders. On March 26, 1999, the last sale price for the common
stock as reported by Nasdaq was $1.81 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 to
the stockholders for the year ended January 2, 1999, filed as Exhibit 13 to this
Form 10-KSB.
ITEM 7. FINANCIAL STATEMENTS
Incorporated herein by reference from the company's annual report to
the stockholders for the year ended January 2, 1999, filed as Exhibit 13 to this
Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No items are reportable hereunder.
10
<PAGE> 12
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information required herein is incorporated by reference from
the company's definitive proxy statement for the annual meeting of stockholders
to be held May 20, 1999, to be filed pursuant to Regulation 14A. Set forth below
is certain information regarding the company's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lattimore M. Michael 55 Chairman, Chief Executive Officer and Director
Joseph L. Weiss 39 President, Chief Operating Officer and Director
William N. Griffith 36 Executive Vice President, Sec./Treasurer and Director
Michael C. McDermott 52 Executive Vice President - Company Operations
Michael G. Webb 30 Chief Financial Officer
Stephen C. Reid 40 Vice President-Research and Development
W. Kurt Henke 40 Director
Stephen J. King 47 Director
William B. Raiford, III 38 Director
</TABLE>
Mr. Michael has been chairman and chief executive officer of the
company since 1993. From 1987 to 1992, he was the company's president and chief
executive officer. He has been a director since 1987.
Mr. Weiss has been president and chief operating officer of the company
since 1993. From 1989 to 1993, he was the company's secretary/treasurer. He has
been a director since 1989.
Mr. Griffith has been executive vice president and secretary/treasurer
of the company since 1993. From 1989 to 1992, he was the company's senior vice
president of operations. He has been a director since 1989.
Mr. McDermott has been executive vice president - company operations
since 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.
Mr. Webb has been chief financial officer since March 1999. From 1995
to 1999, he was the controller for Shepherd Tissue, Inc. From 1993 to 1995 he
was a senior financial analyst for The Promus Companies. Prior to 1993, Mr. Webb
was an auditor for KPMG Peat Marwick.
Mr. Reid has been vice president-research and development since 1988.
Mr. Henke has been a director since 1993. He has been an attorney with
Henke, Heaton & Bufkin since 1992.
Mr. King has been a director since 1995 and served as chief financial
officer of the company from 1993 until his resignation as of March 19, 1999.
Such resignation was on good terms. Mr. King is a CPA and continues to serve the
company as an outside consultant and director.
Mr. Raiford has been a director since 1993. He has been an attorney
with, Merkel & Cocke, P.A. since 1989.
11
<PAGE> 13
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 20, 1999, 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 20, 1999, 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 20, 1999, 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.(5)
3.2 Amended and Restated By-Laws.(2)
4.1 Specimen Common Stock Certificate.(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.(2)
10.3 Form of Employment Agreement executed as of June 6, 1993, between
the Registrant and William N. Griffith.(2)
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.(4)
</TABLE>
12
<PAGE> 14
<TABLE>
<S> <C>
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.(4)
10.8 1995 Employee Stock Purchase Plan of Back Yard Burgers, Inc.(5)
10.9 The 1995 Incentive Award Plan of Back Yard Burgers, Inc.(5)
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.(5)
10.11 Line of Credit Commitment by and between Trust One Bank and Back
Yard Burgers, Inc. dated December 20, 1995.(6)
10.12 Loan commitment by and between Phoenix Leasing Incorporated and
Back Yard Burgers, Inc. dated October 4, 1996. (7)
10.13 Loan commitment by and between Trust One Bank and Back Yard
Burgers, Inc. dated January 23, 1997. (7)
10.14 Capital Contribution Agreement between Back Yard Burgers, Inc. and
BYB Properties, Inc. dated October 10, 1997. (8)
10.15 Trademark Assignment by Back Yard Burgers, Inc. to BYB Properties,
Inc. dated October 10, 1997. (8)
10.16 Trademark License Agreement between BYB Properties, Inc. and Back
Yard Burgers, Inc. dated October 10, 1997. (8)
10.17 Revolving Loan Agreement regarding Uncommitted Line of Credit
Agreement from BYB Properties, Inc. to Back Yard Burgers, Inc. dated
October 10, 1997. (8)
10.18 Promissory Note by and between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997. (8)
10.19 Tax Sharing Agreement between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997. (8)
10.20 Loan Agreement by and between Trust One Bank and Back Yard
Burgers, Inc. dated December 15, 1997. (8)
10.21 Promissory Note by and between Trust One Bank and Back Yard
Burgers, Inc. dated December 15, 1997. (8)
</TABLE>
13
<PAGE> 15
<TABLE>
<S> <C>
10.22 Business Loan Agreement by and between Cavalry Banking and Back
Yard Burgers, Inc., dated January 26, 1998. (9)
10.23 Promissory Note by and between Cavalry Banking and Back Yard
Burgers, Inc., dated January 26, 1998. (9)
10.24 Loan Agreement by and between Trust One Bank and Back Yard
Burgers, Inc., dated February 4, 1998. (9)
10.25 Promissory Note by and between Trust One Bank and Back Yard
Burgers, Inc., dated February 4, 1998. (9)
10.26 Promissory Note by and between Trust One Bank and Back Yard
Burgers, Inc., dated February 4, 1998. (9)
10.27 Promissory Note by and between Eagle Bank & Trust Company and
Back Yard Burgers, Inc., dated March 18, 1998. (9)
10.28 Promissory Note by and between Bank of Mississippi and Back Yard
Burgers, Inc., dated April 20, 1998. (10)
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)
10.30* Promissory Note by and between the Bank of Mississippi and Back Yard
Burgers, Inc. dated October 27, 1998.
10.31* Promissory Note by and between the Bank of Mississippi and Back Yard
Burgers, Inc. dated November 10, 1998.
11* Statement re: Computation of Net Income per Share.
13* Registrant's annual report to stockholders for the 52-week period ended January
2, 1999. 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 (12)
(b) Reports on Form 8-K
None
</TABLE>
- --------------
* Filed herewith.
14
<PAGE> 16
(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. 2 to Form SB-2 on June 25, 1993 (File No. 33-61356).
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-KSB dated January 3, 1998 and filed on April 3, 1998.
(9) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-QSB dated April 4, 1998 and filed on May 19, 1998.
(10) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-QSB dated July 4, 1998 and filed on August 14, 1998.
(11) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-QSB dated October 3, 1998 and filed on November 17, 1998.
(12) Submitted electronically to the Securities and Exchange Commission for
information only.
15
<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: March 31, 1999
---------------------------------
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 March 31, 1999
- -------------------------------------------- and Director
Lattimore M. Michael
/s/ Joseph L. Weiss President, Chief Operating Officer March 31, 1999
- -------------------------------------------- and Director
Joseph L. Weiss
/s/ William N. Griffith Executive Vice President and Director March 31, 1999
- --------------------------------------------
William N. Griffith
/s/ Michael G. Webb Chief Financial Officer and March 31, 1999
- -------------------------------------------- Principal Accounting Officer
Michael G. Webb
/s/ W. Kurt Henke Director March 31, 1999
- --------------------------------------------
W. Kurt Henke
/s/ Stephen J. King Director March 31, 1999
- --------------------------------------------
Stephen J. King
/s/ William B. Raiford, III Director March 31, 1999
- --------------------------------------------
William B. Raiford, III
</TABLE>
16
<PAGE> 1
EXHIBIT 10.30
BANK OF MISSISSIPPI MASTER PROMISSORY NOTE
MAKER(S): Back Yard Burgers, Inc. CUSTOMER NO. 1439256
--------------------------------------------
AMOUNT: $788,000.00 DATE: October 27 1998
--------------------------------------------- ---------------- ----
FOR VALUE RECEIVED, the Obligor(s) [which term is used throughout this note and
which shall include the undersigned marker(s) together with all endorsers(s),
surety (sureties), co-maker(s), and guarantor(s) of this note], jointly and
severally, promise to pay to the order of BANK OF MISSISSIPPI, Tupelo,
Mississippi, negotiable and payable at the Bank's office in OLIVE BRANCH,
Mississippi (herein called "Bank"), its successors and assigns, in current funds
of the principal sum of: -------SEVEN HUNDRED EIGHTY-EIGHT THOUSAND AND NO/100--
- ------------------------------------------------------($788,000.00) Dollars,
together with interest, calculated on the principal debt evidenced hereby from
(check appropriate provision) [ ] 360 day year, [X] 365 day year, on the
principal debt evidenced hereby from (check appropriate provision) [ ]________to
maturity, [ ] date to maturity, [X] date(s) of the disbursement of the proceeds
hereof to maturity, and payable as hereinafter set forth. This note shall
mature, and said principal debt, and interest thereon, shall be due and payable
as provided in the sub-paragraph(s) as follows (check appropriate provisions):
As to PRINCIPAL Only:
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] On _____________________,_________________; or
[ ] In ______________ installments of $___________________________ each, commencing on ________________,
and on the same day of each and every [ ] month, [ ] quarter, [ ] six (6) months, or [ ] year thereafter, plus a final
installment of the balance of the principal and interest thereon on ____________________________________________,________.
[ ] Other (Specify)____________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
As To INTEREST Only:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] On January 27, 1999, and on the same day of each and every [ ] month, [X] quarter, [ ] six (6) months, or [ ] year
thereafter; or
[ ] Paid in advance to maturity by discount of the principal; or
[ ] At maturity.
[ ] Other (Specify)____________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
As to JOINT Principal and Interest:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] In ________ installments of $______________________ each, commencing on _________________________________,_________________
and on the same day of each and every [ ] month, [ ] quarter, [ ] six (6) months, or [ ] year thereafter, plus a final
installment of the balance of the principal and interest thereon on ______________________________________,______________
[X] On July 27, 1999.
Said payment(s) shall be applied first to the payment of interest at the per annum rate provided hereinbelow and any amount
remaining after payment of said interest shall be applied in reduction of the unpaid principal of the note.
[ ] Other (Specify)____________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
The RATE of Interest:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] ______________% per annum.
[ ] A floating rate of interest per annum equal to [ ] Bank of Mississippi Prime Rate, [ ] national Prime Rate;
[X] A floating rate of interest per annum equal to .5 % above [X] Bank of Mississippi Prime Rate, [ ] national Prime Rate;
Said Bank of Mississippi Prime Rate being that of interest as periodically determined by Bank of Mississippi, One
Mississippi Plaza, Tupelo, Mississippi, and said national Prime Rate being the base rate on corporate loans at large United
States money center commercial banks, as published in The Wall Street Journal. In the event that more than one national
Prime Rate is published, the higher of the published rates will apply. The said interest rate is not necessarily the best
rate which the bank may, from time to time, offer or contract or charge.
[ ] Other (Specify)____________________________________________________________________________________________________________
Said rate of interest is to be adjusted if and as provided herein below.
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Effective Date of Rate ADJUSTMENT:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[X] The same day that the rate of interest as set out above changes during the term of this note.
[ ] On the first day of the month following a change in the rate of interest as set out above during the term of this note.
[ ] On the first day of the next calendar quarter (January, April, July, October ) following a change in the rate of interest as
set out above during the term of this note.
[ ] Other (Specify)____________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
Provided, however, that the rate of interest under this note shall not
be adjusted below a minimum of n/a % nor above a maximum of n/a % except that in
no event shall the rate of interest under this note exceed the maximum amount
permitted by applicable law for a bank chartered under the laws of the State of
Mississippi. In the event that the interest rate indicated herein and/or the
interest payments made hereunder shall be or shall become usurious, said
interest rate and/or interest payment shall be considered to be an error, and
immediately upon discovery thereof, such rate shall be renegotiated between Bank
and Maker(s) and/or that portion of such interest payments that is usurious
shall be refunded. From the date of default, or at any time during the
continuance of any event of default, or at any time from and after maturity, at
Bank's option, and notwithstanding the provisions concerning minimum and maximum
interest rates provided in the first sentence of this paragraph, interest is
payable per annum at (check appropriate provision) [ ] the maximum rate of
interest which the Bank as a bank chartered under the laws of the State of
Mississippi is permitted by law to contract and charge; [X] 2.0 % in excess of
the rate of interest per annum provided hereinabove in the section of this note
entitled "The RATE of Interest;" said rate to remain in effect until such
default is cured to the Bank's satisfaction, is waived in writing without notice
to the Obligor(s) hereto as stated hereinabove. Obligor(s) waive(s) notice of
any rate adjustments.
Upon demand Obligor(s) agree(s) to pay all expenses directly related to
the loan evidenced hereby incurred or to be incurred in this making, servicing
or collection, including, but not limited to, reasonable attorney's fees, filing
and recording fees, insurance premiums and taxes. The Obligor(s) further
agree(s) to pay to Bank, upon demand, all charges for services rendered or to be
rendered by its officers and employees or others with whom the Bank shall
contract or otherwise engage for such services directly for inspecting,
verifying and servicing the collaterals securing the obligation set forth herein
and for the collection of said loan.
The Obligor(s) has/have granted to Bank a lien or security interest in,
has/have deposited with Bank or has/have pledged as collateral security for the
payment of this and any other present or future indebtedness or liability of the
Obligor(s) to Bank, whether now due or hereafter to become due, directly or
indirectly (as principal, endorser, surety, guarantor, or otherwise), the
property described as follows:
(Description of collateral begins here!)
First Deed of Trust on Lot 9, Second Addition, South Lake Commercial
Subdivision, (.96 acres) Southaven, DeSoto County, MS and 2,906 SF Back Yard
Burger Restaurant to be constructed thereon.
S/A and F/S on all Furniture, Fixtures and Equipment, now owned or hereafter
acquired by Back Yard Burgers, Inc., to be located at their place of business at
Lot 9, Second Addition, South Lakes Commercial Subdivision, Southaven, MS
(check appropriate provision[s]):
[ ] REPLENISHABLE MASTER NOTE: This is a Revolving Master Note, upon
which the maker(s) can borrow, repay, and reborrow up to the amount of
this Note during the term of the Note provided that Obligor(s) is (are)
in compliance with all terms, conditions, and covenants stated herein
and/or in corresponding credit agreements(s).
[X] NON-REPLENISHABLE MASTER NOTE: This is a Revolving Master Note, upon
which the maker(s) can borrow in various amounts up to the amount of
this Note during the term of the Note provided that Obligor(s) is (are)
in compliance with all terms, conditions, and covenants stated herein
and/or in corresponding credit agreements(s).
[X] If a payment is more than 15 days past due, a late payment charge of
the lesser of $50.00 or 4% of the delinquency will be charged. This
charge will be collected only one time on a specific installment and
will not be collected on a partial payment resulting from the deduction
of a late payment charge from a regular scheduled payment.
In the event of the prepayment in whole or in part of the indebtedness
evidenced hereby, (check appropriate provision);
[X] No prepayment penalty will apply;
[ ] the following prepayment penalty will apply:__% of the principal
amount(s) paid prior to maturity and during the first year of the term
hereof; % of the principal amount(s) paid prior to maturity and during
the second year of the term hereof; % of the principal amount(s) paid
prior to maturity and during the third year of the term hereof.
Upon the happening of any of the following events, all of the aforesaid
liabilities shall, without notice, at the option of the Bank, become immediately
due without demand for payment thereof: (a) The failure of any Obligor to
perform any agreement hereunder or related to the loan evidenced hereby,
including but not limited to the non-payment at maturity of this note, any
interest accrued thereon, or any other liability to said Bank or holder; (b) the
death of any Obligor; (c) the filing of any petition under any Bankruptcy Act,
Federal or State, by or against any Obligor; (d) the filing of any application
for the appointment of a receiver or the making of a general assignment for the
benefit of creditors by, or any other act of insolvency of any Obligor, however
expressed or indicated; (e) the entry of any judgement against any Obligor; (f)
the issuing of any attachment or garnishment or the filing of any lien against
any property of any Obligor; (g) the determination by Bank that a material
adverse change has occurred in the financial condition of any Obligor; (h) the
dissolution, merger, consolidation or reorganization of any Obligor; (i) the
sale or assignment by any Obligor of any equity or other right in any of the
collateral without the written consent of Bank; (j) the taking of possession of
any substantial part of the property of any Obligor at the instance of any
governmental authority; (k) the failure to pay when due all expenses and taxes
as required hereinabove and the premium on any life insurance policy assigned as
collateral to the Bank; and/or the failure to pay the premium when due on any
other type of insurance policy required by Bank concerning this note and/or said
collateral security; (1) the Bank deeming itself to be insecure; (m) the failure
to promptly furnish sufficient additional security, when in the opinion of the
Bank or holder hereof such is needed, upon twenty-four hours notice, verbal or
written at the option of said Bank or holder; (n) the adjudication of any
Obligor a bankrupt; (o) the transfer, without the written consent of Bank, of
any collateral securing this note to any state other than the state in which
said Bank's lien(s) on said collateral security is (are) and/or shall be
perfected.
No delay or omission on the part of the Bank, or the holder, in
exercising any right hereunder or related to the obligations evidenced hereby
shall operate as a waiver of such right or of any other right. A waiver on any
one occasion shall not be construed as a bar to or waiver of any such right
and/or remedy on any future occasion.
Every maker, surety, endorser, guarantor, or other party, whether
primarily or secondarily liable on this note or the indebtedness evidenced
hereby, agrees that any monies or other property at any time in the possession
of Bank belonging to any of said parties and any deposits, balance of
<PAGE> 3
deposits, balance of deposits or other sums at any time credited by or due from
bank to any of said parties, may at all time, at the option of Bank, be held and
treated as collateral security for the payment of any liability of Obligor(s) to
Bank, whether due or not due, and Bank may, at its sole option and at anytime
before or after default, set off the amount due or to become due hereon against
any claim of any of said parties against Bank.
Every maker, surety, endorser and guarantor of this note or the
obligation set forth herein waives presentment, demand, notice, protest and all
other demands and notices in connection with the delivery, acceptance,
performance, default or endorsement of this Note or their respective obligations
hereon; consents to any extensions or postponements of the due date or time of
payment hereof, or of any other indebtedness [with or without concurrence of the
Obligor(s)] in whole or in part without notice to the Obligor(s) and without
limitation as to the number of such extensions or the period or periods thereof;
and consents to any substitution, exchange or release of collateral and/or to
the addition or release of any other party or person whether primarily or
secondarily liable. Each extension granted shall be noted herein by the Bank or
holder with a new date of maturity clearly indicated.
OBLIGOR(S) WAIVE)(S) RIGHT OF TRAIL BY JURY. Any provision(s) herein
that is (are) or that shall become void or unenforceable shall not render any
other provisions(s) hereof void or unenforceable.
All rights and powers of Bank hereunder shall inure to the benefit of
any subsequent holder or assignee of this Note and the owner of any part of the
debt evidenced thereby.
This instrument shall be governed by and construed in accordance with
the laws of the State of Mississippi and applicable Federal law.
It is agreed by all parties hereto that the proceeds of this loan
(check appropriate provision) [X] will not [ ] will be used primarily for
personal, family, or household purposes.
<TABLE>
<CAPTION>
ADDRESS(ES) SIGNATURE(S) OF MAKER(S)
<S> <C>
2768 Colony Park Drive Back Yard Burgers, Inc.
- ---------------------------------------------------------- -----------------------------------------------------
Memphis, TN 38118
- ----------------------------------------------------------
- ---------------------------------------------------------- -----------------------------------------------------
Lattimore M. Michael, Chief Executive Officer
- ----------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.31
BANK OF MISSISSIPPI MASTER PROMISSORY NOTE
MAKER(S): Back Yard Burgers, Inc. CUSTOMER NO. 1439256
--------------------------------------------- --------------
AMOUNT: $703,936.00 DATE: November 10, 1998
----------------------------------------------- -------------------
FOR VALUE RECEIVED, the Obligor(s) [which term is used throughout this note and
which shall include the undersigned marker(s) together with all endorsers(s),
surety (sureties), co-maker(s), and guarantor(s) of this note], jointly and
severally, promise to pay to the order of BANK OF MISSISSIPPI, Tupelo,
Mississippi, negotiable and payable at the Bank's office in OLIVE BRANCH,
Mississippi (herein called "Bank"), its successors and assigns, in current funds
of the principal sum of: -------SEVEN HUNDRED THREE THOUSAND NINE HUNDRED
THIRTY-SIX DOLLARS AND NO/100 ----------------------------------- ($703,936.00)
Dollars, together with interest, calculated on the principal debt evidenced
hereby from (check appropriate provision) [ ] 360 day year, [X] 365 day year, on
the principal debt evidenced hereby from (check appropriate provision) [ ]___ to
maturity, [ ] date to maturity, [X] date(s) of the disbursement of the proceeds
hereof to maturity, and payable as hereinafter set forth. This note shall
mature, and said principal debt, and interest thereon, shall be due and payable
as provided in the sub-paragraph(s) as follows (check appropriate provisions):
<TABLE>
<CAPTION>
As to PRINCIPAL Only:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] On __________________________________________,_______________________; or
[ ] In ______________ installments of $___________________________________________ each, commencing on _______________________,
and on the same day of each and every [ ] month, [ ] quarter, [ ] six (6) months, or [ ] year thereafter, plus a final
installment of the balance of the principal and interest thereon on ____________________________________________________.
[ ] Other (Specify) ___________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
As To INTEREST Only:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[X] On February 10 , 1999, and on the same day of each and every [ ] month, [X] quarter, [ ] six (6) months, or [ ] year
thereafter; or
[ ] Paid in advance to maturity by discount of the principal; or
[ ] At maturity.
[ ] Other (Specify)____________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
As to JOINT Principal and Interest:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] In ______________ installments of $_________________________________________ each, commencing on __________________,_______
and on the same day of each and every [ ] month, [ ] quarter, [ ] six (6) months, or [ ] year thereafter, plus a final
installment of the balance of the principal and interest thereon on ____________________________________________________,
[X] On August 10, 1999.
Said payment(s) shall be applied first to the payment of interest at the per annum rate provided hereinbelow and any amount
remaining after payment of said interest shall be applied in reduction of the unpaid principal of the note.
[ ] Other (Specify)____________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
The RATE of Interest:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[ ] __________________% per annum.
[ ] A floating rate of interest per annum equal to [ ] Bank of Mississippi Prime Rate, [ ] national Prime Rate;
[X] A floating rate of interest per annum equal to .5 % above [X] Bank of Mississippi Prime Rate, [ ] national Prime Rate; Said
Bank of Mississippi Prime Rate being that of interest as periodically determined by Bank of Mississippi, One Mississippi
Plaza, Tupelo, Mississippi, and said national Prime Rate being the base rate on corporate loans at large United States
money center commercial banks, as published in The Wall Street Journal. In the event that more than one national Prime Rate
is published, the higher of the published rates will apply. The said interest rate is not necessarily the best rate which
the bank may, from time to time, offer or contract or charge.
[ ] Other (Specify)____________________________________________________________________________________________________________
Said rate of interest is to be adjusted if and as provided hereinbelow.
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Effective Date of Rate ADJUSTMENT:
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[X] The same day that the rate of interest as set out above changes during the term of this note.
[ ] On the first day of the month following a change in the rate of interest as set out above during the term of this note.
[ ] On the first day of the next calendar quarter (January, April, July, October ) following a change in the rate of interest as
set out above during the term of this note.
[ ] Other (Specify) ___________________________________________________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
Provided, however, that the rate of interest under this note shall not
be adjusted below a minimum of n/a % nor above a maximum of n/a % except that in
no event shall the rate of interest under this note exceed the maximum amount
permitted by applicable law for a bank chartered under the laws of the State of
Mississippi. In the event that the interest rate indicated herein and/or the
interest payments made hereunder shall be or shall become usurious, said
interest rate and/or interest payment shall be considered to be an error, and
immediately upon discovery thereof, such rate shall be renegotiated between Bank
and Maker(s) and/or that portion of such interest payments that is usurious
shall be refunded. From the date of default, or at any time during the
continuance of any event of default, or at any time from and after maturity, at
Bank's option, and notwithstanding the provisions concerning minimum and maximum
interest rates provided in the first sentence of this paragraph, interest is
payable per annum at (check appropriate provision) [ ] the maximum rate of
interest which the Bank as a bank chartered under the laws of the State of
Mississippi is permitted by law to contract and charge; [X] 2.0 % in excess of
the rate of interest per annum provided hereinabove in the section of this note
entitled "The RATE of Interest;" said rate to remain in effect until such
default is cured to the Bank's satisfaction, is waived in writing without notice
to the Obligor(s) hereto as stated hereinabove. Obligor(s) waive(s) notice of
any rate adjustments.
Upon demand Obligor(s) agree(s) to pay all expenses directly related to
the loan evidenced hereby incurred or to be incurred in this making, servicing
or collection, including, but not limited to, reasonable attorney's fees, filing
and recording fees, insurance premiums and taxes. The Obligor(s) further
agree(s) to pay to Bank, upon demand, all charges for services rendered or to be
rendered by its officers and employees or others with whom the Bank shall
contract or otherwise engage for such services directly for inspecting,
verifying and servicing the collaterals securing the obligation set forth herein
and for the collection of said loan.
The Obligor(s) has/have granted to Bank a lien or security interest in,
has/have deposited with Bank or has/have pledged as collateral security for the
payment of this and any other present or future indebtedness or liability of the
Obligor(s) to Bank, whether now due or hereafter to become due, directly or
indirectly (as principal, endorser, surety, guarantor, or otherwise), the
property described as follows:
(Description of collateral begins here!)
First Deed of Trust on Phase II, Lot 2, Village Shops of Crumpler Place, Olive
Branch, Desoto County, MS, Back Yard Burger Restaurant to be constructed
thereon.
S/A and F/S on all Furniture, Fixtures and Equipment, now owned or hereafter
acquired by Back Yard Burgers, Inc., to be located at their place of business at
Phase II, Lot 2, Village Shops of Crumpler Place, Olive Branch, Desoto County,
MS.
(check appropriate provision[s]):
[ ] REPLENISHABLE MASTER NOTE: This is a Revolving Master Note, upon
which the maker(s) can borrow, repay, and reborrow up to the amount of
this Note during the term of the Note provided that Obligor(s) is (are)
in compliance with all terms, conditions, and covenants stated herein
and/or in corresponding credit agreements(s).
[X] NON-REPLENISHABLE MASTER NOTE: This is a Revolving Master Note, upon
which the maker(s) can borrow in various amounts up to the amount of
this Note during the term of the Note provided that Obligor(s) is (are)
in compliance with all terms, conditions, and covenants stated herein
and/or in corresponding credit agreements(s).
[X] If a payment is more than 15 days past due, a late payment charge of
the lesser of $50.00 or 4% of the delinquency will be charged. This
charge will be collected only one time on a specific installment and
will not be collected on a partial payment resulting from the deduction
of a late payment charge from a regular scheduled payment.
In the event of the prepayment in whole or in part of the indebtedness
evidenced hereby, (check appropriate provision);
[X] No prepayment penalty will apply;
[ ] the following prepayment penalty will apply: % of the principal
amount(s) paid prior to maturity and during the first year of the term
hereof; % of the principal amount(s) paid prior to maturity and during
the second year of the term hereof; % of the principal amount(s) paid
prior to maturity and during the third year of the term hereof.
Upon the happening of any of the following events, all of the aforesaid
liabilities shall, without notice, at the option of the Bank, become immediately
due without demand for payment thereof: (a) The failure of any Obligor to
perform any agreement hereunder or related to the loan evidenced hereby,
including but not limited to the non-payment at maturity of this note, any
interest accrued thereon, or any other liability to said Bank or holder; (b) the
death of any Obligor; (c) the filing of any petition under any Bankruptcy Act,
Federal or State, by or against any Obligor; (d) the filing of any application
for the appointment of a receiver or the making of a general assignment for the
benefit of creditors by, or any other act of insolvency of any Obligor, however
expressed or indicated; (e) the entry of any judgement against any Obligor; (f)
the issuing of any attachment or garnishment or the filing of any lien against
any property of any Obligor; (g) the determination by Bank that a material
adverse change has occurred in the financial condition of any Obligor; (h) the
dissolution, merger, consolidation or reorganization of any Obligor; (i) the
sale or assignment by any Obligor of any equity or other right in any of the
collateral without the written consent of Bank; (j) the taking of possession of
any substantial part of the property of any Obligor at the instance of any
governmental authority; (k) the failure to pay when due all expenses and taxes
as required hereinabove and the premium on any life insurance policy assigned as
collateral to the Bank; and/or the failure to pay the premium when due on any
other type of insurance policy required by Bank concerning this note and/or said
collateral security; (1) the Bank deeming itself to be insecure; (m) the failure
to promptly furnish sufficient additional security, when in the opinion of the
Bank or holder hereof such is needed, upon twenty-four hours notice, verbal or
written at the option of said Bank or holder; (n) the adjudication of any
Obligor a bankrupt; (o) the transfer, without the written consent of Bank, of
any collateral securing this note to any state other than the state in which
said Bank's lien(s) on said collateral security is (are) and/or shall be
perfected.
No delay or omission on the part of the Bank, or the holder, in
exercising any right hereunder or related to the obligations evidenced hereby
shall operate as a waiver of such right or of any other right. A waiver on any
one occasion shall not be construed as a bar to or waiver of any such right
and/or remedy on any future occasion.
Every maker, surety, endorser, guarantor, or other party, whether
primarily or secondarily liable on this note or the indebtedness evidenced
hereby, agrees that any monies or other property at any time in the possession
of Bank belonging to any of said parties and any deposits, balance of
<PAGE> 3
deposits, balance of deposits or other sums at any time credited by or due from
bank to any of said parties, may at all time, at the option of Bank, be held and
treated as collateral security for the payment of any liability of Obligor(s) to
Bank, whether due or not due, and Bank may, at its sole option and at anytime
before or after default, set off the amount due or to become due hereon against
any claim of any of said parties against Bank.
Every maker, surety, endorser and guarantor of this note or the
obligation set forth herein waives presentment, demand, notice, protest and all
other demands and notices in connection with the delivery, acceptance,
performance, default or endorsement of this Note or their respective obligations
hereon; consents to any extensions or postponements of the due date or time of
payment hereof, or of any other indebtedness [with or without concurrence of the
Obligor(s)] in whole or in part without notice to the Obligor(s) and without
limitation as to the number of such extensions or the period or periods thereof;
and consents to any substitution, exchange or release of collateral and/or to
the addition or release of any other party or person whether primarily or
secondarily liable. Each extension granted shall be noted herein by the Bank or
holder with a new date of maturity clearly indicated.
OBLIGOR(S) WAIVE)(S) RIGHT OF TRAIL BY JURY. Any provision(s) herein
that is (are) or that shall become void or unenforceable shall not render any
other provisions(s) hereof void or unenforceable.
All rights and powers of Bank hereunder shall inure to the benefit of
any subsequent holder or assignee of this Note and the owner of any part of the
debt evidenced thereby.
This instrument shall be governed by and construed in accordance with
the laws of the State of Mississippi and applicable Federal law.
It is agreed by all parties hereto that the proceeds of this loan
(check appropriate provision) [X] will not [ ] will be used primarily for
personal, family, or household purposes.
<TABLE>
<CAPTION>
ADDRESS(ES) SIGNATURE(S) OF MAKER(S)
<S> <C>
2768 Colony Park Drive Back Yard Burgers, Inc.
- ---------------------------------------------------------- -----------------------------------------------------
Memphis, TN 38118
- ----------------------------------------------------------
- ---------------------------------------------------------- -----------------------------------------------------
Lattimore M. Michael, Chief Executive Officer
- ----------------------------------------------------------
</TABLE>
<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 2, January 3, December 28,
1999 1998(a) 1996
---- ------- ----
<S> <C> <C> <C>
Net Income $1,171 $ 162 $ 357
====== ====== ======
Weighted average number of common
shares outstanding during the period 4,533 4,261 4,221
====== ====== ======
Basic income per share $ 0.26 $ 0.04 $ 0.08
====== ====== ======
Basic weighted average number of
common shares outstanding during
the period 4,533 4,261 4,221
Preferred shares convertible to
common shares 69 298 322
Stock Options 52 28 --
------ ------ ------
4,654 4,587 4,543
====== ====== ======
Diluted income per share $ 0.25 $ 0.04 $ 0.08
====== ====== ======
</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
1998 and 1996. As a result, sales for fiscal 1997 are not directly comparable to
those of fiscal 1998 and 1996.
<PAGE> 1
EXHIBIT 13
ABOUT THE COMPANY
Back Yard Burgers operates and franchises quick-service and fast-casual
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 made-to-order gourmet hamburgers and chicken
sandwiches charbroiled over an open flame, fresh salads, chili and other special
entrees, as well as hand-dipped milkshakes, fresh-made lemonade and fresh-baked
cobblers.
Our goal for 1999 is to continue to position Back Yard Burgers as a
favored regional "fast-casual" restaurant chain. We intend to add more
restaurants to our family and further enhance our existing dine-in facilities.
Our primary operating strategy includes serving great-tasting food and providing
the guest with a truly "ENJOYABLE" dining experience. We plan to creatively
communicate our points of differentiation -- charbroiled 1/3 pound hamburgers,
charbroiled chicken sandwiches and a variety of other "Back Yard" favorites.
FINANCIAL HIGHLIGHTS*
(in thousands, except per share amounts and units)
<TABLE>
<CAPTION>
December 28, January 3, January 2,
FOR THE YEAR ENDED: 1996 1998 1999
------- ------- -------
<S> <C> <C> <C>
Restaurant sales $22,281 $24,150 $25,082
Total revenues 24,041 26,034 27,364
Net income 357 162 1,171
Net income per share:
Basic .08 .04 .26
Diluted .08 .04 .25
Weighted average shares outstanding:
Basic 4,221 4,261 4,533
Diluted 4,543 4,587 4,654
System-wide sales $49,515 $55,798 $59,564
Units in operation:
Company-owned 34 32 33
Franchised 47 45 48
------- ------- -------
Total 81 77 81
======= ======= =======
</TABLE>
[GRAPH] [GRAPH] [GRAPH]
Revenues Operating Income** Same-Store Sales***
($000's) ($000's)
* The years ended January 2, 1999 and December 28, 1996 contained 52 weeks
while the year ended January 3, 1998 contained 53 weeks.
** Excludes non-cash charge for impairment of long-lived assets of $377,000 in
1997.
***Depicts percentage increase or decrease over the previous year's same-store
sales.
<PAGE> 2
To Our Shareholders:
Welcome to our Back Yard! 1998 proved to be a successful year for our
company and our system of restaurants. We continued to build our brand as a
"fast-casual" concept.
Today, I am confident we have chosen the correct path to lead us to
greater profitability, growth and a new era for the company. We believe our
continuing positive results are due to our decision to reposition the company
from primarily a quick-service, double drive-thru concept to primarily a
fast-casual, single drive-thru/dine-in concept.
Same-store sales for 1998 increased 6.3% for company-operated
restaurants and 5.8% for franchised restaurants. This comes on top of a 1997
increase for company-operated restaurants of 7.0% and for franchised restaurants
of 6.5%. I believe this increase is attributable to the four primary tactical
enhancements begun in 1997: (1) the increased attention to hiring the best
available team members and training them to serve our guests in a friendly
manner to provide a great experience; (2) the impact of converting double
drive-thrus to traditional dine-in/drive-thrus so our guests can enjoy our
great-tasting food in inviting surroundings; (3) 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; (4) the commitment of
a dedicated franchise family.
Our record results for 1998 demonstrate that we are on the right track.
We have had nine consecutive quarters of positive same-store sales. We see
benefits on the tactics we implemented in 1997 and 1998. Operationally, we are
performing better than ever, and our marketing campaign continues to deliver
positive results.
Under-performing markets and locations have been addressed regularly
and improvements made. In 1998, four additional double drive-thru locations were
converted to traditional dine-in/drive-thru restaurants with favorable results.
This included three company-operated restaurants and one franchised restaurant.
Additionally, ten new restaurants were opened during 1998, three
company-operated and seven franchised. While we have completed the majority of
the possible conversions of restaurants to single drive-thrus with indoor
seating, we hope to complete this process with an additional conversion in 1999.
Our 1998 strategy of leveraging our brand upward with a "fast-casual"
positioning created a trend of increased same- store sales and revenues. These
increases have been achieved despite heavy discounting by our major competitors.
We have chosen not to compete on price at the expense of quality. We have tested
a number of new menu items and are pleased with the initial results. These
results indicate that we are on course by serving great-tasting, premium
products at a fair price, along with a commitment to deliver outstanding guest
service. We believe we can successfully compete in a crowded marketplace.
In 1999, in addition to continuing to implement our basic growth
strategy of opening more company-operated restaurants in selective locations and
developing additional franchised restaurants, we have embarked on some new
concepts for our company-operated stores. For example, we opened our first
company-operated restaurant in a Chevron convenience store. We also were awarded
exclusive vending rights for the nationally famous Memphis Zoo.
As we enter our 12th 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 on which we continued
to build in 1998, and I look forward to executing our strategy in 1999 and
achieving the level of success our system is capable of producing. We are
creating a difference that I hope our customers and shareholders will
appreciate. ENJOY!
Sincerely,
Lattimore M. Michael
Founder, Chairman and Chief Executive Officer
1
<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 restaurant
growth, 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 1998 and 1996 contain 52 weeks
versus 53 weeks for 1997. As a result, operating results for fiscal 1998 are not
directly comparable with those of the prior 53-week period.
The Back Yard Burgers system included 81 restaurants, of which 33 were
company-operated and 48 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, amortization and advertising) relate directly
to company-operated restaurants, while general and administrative expenses
relate to both company-operated restaurants and franchise operations. The
company's revenues and expenses are affected by the number and timing of the
opening of additional restaurants. Sales for new restaurants in the period
immediately following their opening tend to be high because of trial by public
and promotional activities. As a result, the timing of openings can affect the
average volume and other period-to-period comparisons.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the company's
historical operations and operating data for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES
Restaurant sales 91.7% 92.8% 92.7%
Franchise and area development fees .5 .3 .7
Royalty fees 4.8 4.5 4.2
Advertising fees 1.7 1.2 1.1
Other operating revenue 1.3 1.2 1.3
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
COSTS AND EXPENSES
Cost of restaurant sales (1) 32.7% 32.8% 33.3%
Restaurant operating expenses (1) 47.2 48.3 49.5
General and administrative 11.9 12.3 11.8
Advertising 5.5 5.1 4.4
Depreciation and amortization 4.6 4.4 4.6
Impairment of long-lived assets -- 1.4 --
Operating income 4.7 1.5 2.3
Interest income 0.1 0.1 0.1
Interest expense (1.8) (0.9) (0.9)
Other, net -- -- --
Income before taxes 3.0 0.6 1.5
Income tax benefit (2) 42.8 -- --
Net income 4.3 0.6 1.5
</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 $ 25,082 $ 24,150 $ 22,281
Franchised 34,482 31,648 27,234
-------- -------- --------
Total $ 59,564 $ 55,798 $ 49,515
======== ======== ========
AVERAGE ANNUAL SALES PER RESTAURANT OPEN
FOR A FULL YEAR (1)
Company-operated $797,000 $731,000 $645,000
Franchised $759,000 $703,000 $586,000
System-wide $774,000 $716,000 $615,000
NUMBER OF RESTAURANTS (2)
Company-operated 33 32 34
Franchised 48 45 47
-------- -------- --------
Total 81 77 81
======== ======== ========
</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 2, 1999, one company-operated and two franchised
restaurants were opened and one franchised restaurant was closed.
3
<PAGE> 5
COMPARISON OF FISCAL YEAR 1998
TO FISCAL YEAR 1997
BACK YARD BURGERS' FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO DECEMBER 31. AS A
RESULT, FISCAL 1998 CONTAINS 52 WEEKS VERSUS 53 WEEKS FOR THE PRIOR YEAR.
THEREFORE, ALL REFERENCES TO FISCAL 1998 ARE FOR THE 52-WEEK PERIOD ENDED
JANUARY 2, 1999 AND ALL REFERENCES TO FISCAL 1997 ARE FOR THE 53-WEEK PERIOD
ENDED JANUARY 3, 1998.
RESTAURANT SALES increased 3.9% to $25,082,000 during 1998 compared to
$24,150,000 during 1997. This increase is primarily the result of an increase in
same-store sales at restaurants open for more than one year of 6.3%, 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
$2,650,000 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, as well as one less week of sales as noted
above. Company management believes that the increases in same-store sales are
the results of improved customer service; the retrofit of three double
drive-thrus to dine-in facilities with single drive-thrus during 1998; and the
menu price increase noted above.
FRANCHISE AND AREA DEVELOPMENT FEES were $142,000 during 1998, an
increase of 49% from $95,000 in 1997. Six new franchised restaurants were opened
in 1998, as compared to four new franchised units opened in 1997. This increase
in franchised restaurant openings was offset by a decrease of $15,000 in 1998
compared to 1997, in fees recognized from area development agreements which
expired.
ROYALTY FEES increased 11.5% to $1,313,000 during 1998 compared to
$1,178,000 during 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 5.8%, representing
an increase in royalty fees of approximately $55,000. Additionally, seven
franchised restaurants were opened, one company-operated restaurant was
converted to a franchised unit and five franchised restaurants were closed
during 1998.
ADVERTISING FEES increased 55.7% to $478,000 for 1998 compared to
$307,000 during 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
$8,206,000 during 1998 and $7,923,000 during 1997, decreasing to 32.7% as a
percentage of restaurant sales during 1998 from 32.8% for 1997. The cost of
beef, the largest single component of cost of restaurant sales, decreased
approximately 2.4% and there were decreases in certain condiment and paper
costs. These decreases were partially offset by increases in the cost of chicken
and certain produce and dairy products.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, rent and certain other unit level operating expenses, increased to
$11,839,000 for 1998 from $11,672,000 during 1997. The increase of $167,000 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 three double drive-thru restaurants to single drive-thrus with
dining room facilities. As a percentage of restaurant sales, restaurant
operating expenses decreased to 47.2% from 48.3% for 1997. As a percentage of
restaurant sales, this decrease relates primarily to a decrease of approximately
0.5% in promotional activities, as well as an increase in same- store sales at
existing restaurants of 6.3%. 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 $3,261,000 during 1998
from $3,202,000 in 1997. This represents a decrease as a percentage of total
revenue to 11.9% from 12.3% for 1997. The increase of $59,000 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 of 1998.
ADVERTISING EXPENSE which increased to $1,513,000 for 1998 from
$1,323,000 during 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 100% to $485,000 for 1998 from $242,000 in
1997. This is due to a net increase in long-term debt of $2,377,000, or 77%,
during 1998. The borrowings from this increase in long-term debt were used to
add new restaurants and retrofit existing restaurants to include dine-in
facilities.
4
<PAGE> 6
INCOME TAX BENEFIT increased to $351,000 in 1998 from 1997. This
benefit results from the 1998 reversal of valuation allowances established in
prior years for the company's deferred tax assets. The 1998 reversal results
from a change in estimate with respect to the ultimate realization of such
assets.
COMPARISON OF FISCAL YEAR 1997
TO FISCAL YEAR 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 openings 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
(1) the addition during the last quarter of 1996 of operations management
personnel in the Memphis and Little Rock markets, (2) at the corporate level, an
individual to reactivate franchise sales which were suspended during 1996, (3)
an MIS specialist to direct point of sale maintenance and upgrade programs, and
(4) personnel costs related to an increased level of restaurant management
training programs to facilitate improved customer service.
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.
5
<PAGE> 7
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.
Although no stores became impaired in 1998, two stores became impaired
during 1997. One store closed in 1997 and the other closed in 1998. While some
of the fixed assets at the locations were utilized by other stores, certain
assets were fixed to the site and were unrecoverable. Based on an analysis of
projected undiscounted cash flows for these locations, the company determined in
1997 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 was recorded. In 1998, $51,000 of lease payments were incurred for
these closed stores and charged against this reserve. As of January 2, 1999, the
company's remaining accrual for future lease obligations was $51,000 for the
remaining lease payments due net of estimated sublease income.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $4,983,000 for 1998, $2,758,000 for 1997
and $863,000 for 1996. Generally, the company constructs its restaurant
buildings on leased properties for its company-operated restaurants. The average
monthly lease cost for the 19 company-operated restaurants on leased sites is
approximately $3,070 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.
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, a charge for
impaired assets. Depreciation and amortization totaled $1,270,000 for 1998,
$1,143,000 for 1997 and $1,112,000 for 1996. Year to year increases relate to
the addition of buildings, equipment and other depreciable items. The increases
from 1997 to 1998 resulted from the addition of two company-operated restaurants
and three dining room additions to existing company-operated restaurants during
the year. The increases from 1996 to 1997 resulted from the addition of one
company-operated restaurant and five dining room additions in 1997.
Cash from operations totaled $1,978,000, $2,003,000 and $1,596,000 for
1998, 1997 and 1996, respectively. Since January 1, 1996, cash from operations
and debt have been used for the addition of dining rooms to certain existing
double drive-thru restaurants, new restaurants and equipment.
As of January 2, 1999, the company had total long-term debt of
$5,458,000 and unused lines of credit and loan commitments of potential
additional borrowings of $1,780,000. 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%. At January 2, 1999, borrowings under the commitment were $1,034,000. On
January 23, 1997, the company received a loan commitment from a financial
institution which provided the company with potential borrowings of up to
$765,000 bearing interest at prime rate plus 1%. On December 15, 1997, the
company entered into a loan agreement with a financial institution which
provided the company with $460,000 bearing interest at 9.75%. On October 27,
1998, the company received a loan commitment from a financial institution which
provided the company with potential borrowings of $788,000 bearing interest at
prime rate plus 1/2%. At January 2, 1999, borrowings under the commitment were
$418,834. On November 10, 1998, the company received a loan commitment from a
financial institution which provided the company with potential borrowings of
$703,936 bearing interest at prime rate plus 1/2%. At January 2, 1999,
borrowings under the commitment were $309,493. 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 also guarantees certain debt of joint
ventures of which it is a party. See Note 4 to Consolidated Financial
Statements.
The company believes that it currently has sufficient resources to fund
anticipated capital expenditures of approximately $3,750,000 during 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 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 1998. Increases in food, labor or other
operating costs could adversely affect the company's operations. In the past,
however, the company generally has been able to increase menu prices or modify
its operating procedures to substantially offset increases in its operating
costs.
CONVERSION OF PREFERRED STOCK
In accordance with the provisions of the company's Certificate of
Incorporation regarding preferred stock, as a result of the company's having
attained after-tax net income in excess of $600,000 during 1994, each share of
preferred stock is convertible into one share of common stock, at the option of
the holder. The company has notified preferred
6
<PAGE> 8
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 2, 1999, only 23,123 shares have yet
to be 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 did not have a material
impact on the company.
YEAR 2000
The fact that many computers and other systems with embedded microchip
processors were programmed to record only the last two digits of the year for
all dates encountered gives rise to the year 2000 issue. On January 1, 2000,
many date-sensitive calculations could potentially go awry, creating substantial
negative ramifications throughout the business world.
The company has reviewed its computer systems and software and has
identified four major areas that are critical to the company with respect to the
year 2000 issue: (1) communications hardware and software, (2) network
hardware/software and accounting software, (3) point-of-sale terminals, and (4)
key third parties.
While the company has taken certain actions to address the year 2000
issue, it has not completed its analysis of the issue. During 1998, the company
upgraded its phone system with a system represented by the outside vendor to be
year 2000 compliant . The company also has communication software in place with
certain financial institutions and is in the process of confirming that such
software is in fact year 2000 compliant. The company has planned a network and
accounting software upgrade that is scheduled to be completed in the first half
of 1999. The upgrade includes the replacement of the existing network server as
well as the replacement and enhancement of certain personal computers. The
company's accounting software is supplied by an outside vendor, and the vendor
has confirmed that the software to be installed upon upgrading the network is
year 2000 compliant. The company is also in the process of determining whether
certain of its spreadsheet and database software will need to be upgraded during
1999. The company estimates the total cost of the software and hardware
enhancements and upgrades necessary to become year 2000 compliant to be
approximately $30,000.
All existing point-of-sale terminals used by the company and its
franchisees have been represented by outside suppliers to be year 2000 compliant
and all terminals currently being installed are also in compliance.
One of the greatest risks of year 2000 exists within the supply chain
of most businesses, and for the company, year 2000 compliance by key third
parties, including food product suppliers, energy providers and others, is
crucial to the continuing operations of the company. There is a certain amount
of uncontrollable risk associated with third party year 2000 readiness; however,
the company plans to gain assurance from key third parties, including all
franchisees and their suppliers, as to their year 2000 compliance efforts via
written confirmation by June 30, 1999.
The failure by the company to properly address its internal year 2000
issues or the inability of outside parties to supply goods and services
necessary to produce and sell the company's products could have a material
adverse impact on the results of operations, liquidity and the financial
condition of the company. These problems could ultimately result in the
cessation of material operations for an unknown period of time.
Although no formal contingency plan is currently in place, the
company's goals are to: (1) achieve internal year 2000 readiness with respect to
all material operations prior to September 30, 1999, (2) appropriately address
any material concerns over third party readiness with qualified alternate
suppliers as necessary, also prior to September 30, 1999, and (3) continue to
monitor the year 2000 issue and take all appropriate actions through early 2000.
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.
During 1998, the price of beef, the largest single component of the
cost of restaurant sales, decreased approximately 2.4%. Management of the
company expects beef and chicken prices to rise at some point in the future, and
that it will be difficult to raise menu prices to fully cover these anticipated
increases due to the competitive state of the quick-service restaurant industry.
Additional margin improvements would have to be made through operational
improvements, equipment advances and increased volumes to help offset these
potential increases.
Due to the competitive nature of the restaurant industry, site
selection will become even more difficult as an increasing number of businesses
will be vying for locations with similar characteristics. This could result in
higher occupancy costs for prime locations.
Same-store sales increased 6.3% during 1998, slightly below the rate of
increase of 7.0% experienced in 1997. 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 1999,
however, there are no assurances that the increases 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 2, JANUARY 3,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 815 $ 1,328
Receivables, less allowance for doubtful accounts of
$121 ($26 in 1997) 200 354
Inventories 202 176
Current deferred tax asset 104 --
Prepaid expenses and other current assets 96 73
-------- --------
Total current assets 1,417 1,931
Property and equipment, at depreciated cost 13,365 9,451
Intangible assets, net 1,352 1,457
Noncurrent deferred tax asset 452 --
Notes receivable 98 98
Other assets 264 218
-------- --------
$ 16,948 $ 13,155
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 467 $ 653
Accrued expenses 850 786
Income taxes payable 205 --
Current installments of long-term debt 361 217
-------- --------
Total current liabilities 1,883 1,656
Long-term debt, less current installments 5,097 2,864
Deferred franchise and area development fees 254 215
Other deferred liabilities 128 122
-------- --------
Total liabilities 7,362 4,857
-------- --------
Commitments and contingencies (Notes 4, 5, 7 and 13)
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized;
23,123 shares issued and outstanding (289,600 in 1997) -- 3
Common stock, $.01 par value; 12,000,000
shares authorized; 4,596,471 shares issued
and outstanding (4,276,723 in 1997) 46 42
Paid-in capital 10,098 9,982
Retained deficit (558) (1,729)
-------- --------
Total stockholders' equity 9,586 8,298
-------- --------
$ 16,948 $ 13,155
======== ========
</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 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Restaurant sales $ 25,082 $ 24,150 $ 22,281
Franchise and area development fees 142 95 175
Royalty fees 1,313 1,178 1,011
Advertising fees 478 307 264
Other 349 304 310
-------- -------- --------
Total revenues 27,364 26,034 24,041
-------- -------- --------
Expenses:
Cost of restaurant sales 8,206 7,923 7,429
Restaurant operating expenses 11,839 11,672 11,032
General and administrative 3,261 3,202 2,840
Advertising 1,513 1,323 1,066
Depreciation and amortization 1,271 1,143 1,114
Impairment of long-lived assets -- 377 --
-------- -------- --------
Total expenses 26,090 25,640 23,481
-------- -------- --------
Operating income 1,274 394 560
Interest income 24 14 16
Interest expense (485) (242) (228)
Other, net 7 (4) 9
-------- -------- --------
Income before income taxes 820 162 357
Income tax benefit 351 -- --
-------- -------- --------
Net income $ 1,171 $ 162 $ 357
======== ======== ========
Income per share:
Basic $ .26 $ 0.04 $ 0.08
======== ======== ========
Diluted $ .25 $ 0.04 $ 0.08
======== ======== ========
Weighted average number of common shares and
common equivalent shares outstanding:
Basic 4,533 4,261 4,221
======== ======== ========
Diluted 4,654 4,587 4,543
======== ======== ========
</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
--------------- ------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
Conversion of preferred stock (266,477) (3) 266,477 3
Exercise of stock options 40,071 1 88 89
Employee stock purchases 13,200 28 28
Net income 1,171 1,171
--------- ------- ---------- ------- -------- -------- --------
Balance at January 2, 1999 23,123 $ -- 4,596,471 $ 46 $ 10,098 $ (558) $ 9,586
========= ======= ========== ======= ======== ======== ========
</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 2, JANUARY 3, DECEMBER 28,
1999 1998 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,171 $ 162 $ 357
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization of property
and equipment 1,063 1,022 939
Impairment of long-lived assets -- 377 --
Deferred income taxes (556) -- --
Amortization of intangible assets 113 104 103
Amortization/write off of preopening costs 95 17 70
Provision for losses on receivables 216 163 119
Gain on sale of assets (42) -- (3)
(Increase) decrease in assets
Receivables (62) (184) (275)
Inventories (26) (26) 17
Prepaid expenses and other current assets (118) (59) 73
Other assets (4) 56 (6)
Increase (decrease) in liabilities
Accounts payable and accrued expenses (122) 266 233
Income taxes payable 205 -- 22
Other deferred liabilities 6 12 25
Deferred franchise and area development fees 39 93 (78)
------- ------- -------
Net cash provided by operating activities 1,978 2,003 1,596
------- ------- -------
Cash flows from investing activities:
Additions to property and equipment (4,983) (2,758) (863)
Proceeds from sale of property and equipment 48 34 45
Investment in joint ventures (50) -- --
------- ------- -------
Net cash used in investing activities (4,985) (2,724) (818)
------- ------- -------
Cash flows from financing activities:
Issuance of stock 28 26 21
Principal payments on long-term debt (543) (353) (230)
Proceeds from issuance of long-term debt 2,920 1,275 --
Proceeds from exercise of stock options 89 -- 4
------- ------- -------
Net cash provided (used) by financing activities 2,494 948 (205)
------- ------- -------
Net increase (decrease) in cash and cash
equivalents (513) 227 573
Cash and cash equivalents:
Beginning of year 1,328 1,101 528
------- ------- -------
End of year $ 815 $ 1,328 $ 1,101
======= ======= =======
Supplemental disclosure of cash flow information:
Income taxes refunded $ -- $ -- $ 22
======= ======= =======
Interest paid $ 462 $ 232 $ 228
======= ======= =======
</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 and fast-casual 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 2, 1999, the Company operated 33 restaurants in
three states (Mississippi, Arkansas and Tennessee) and franchised 48 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 2,
1999 contains 52 weeks while the years ended January 3, 1998 and December 28,
1996 contained 53 and 52 weeks, respectively.
USE OF ESTIMATES. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. The Company considers cash on hand, deposits in banks
and short-term investments with an original maturity of less than three months
as cash and cash equivalents for purposes of the statement of cash flows.
INVENTORIES. Inventories primarily consist of food and beverage products and are
valued at the lower of cost or market; cost is determined by the first-in,
first-out ("FIFO") method.
INCOME TAXES. Deferred income taxes are provided for the tax effects of
temporary differences between the financial reporting basis and 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 10).
These fees are recorded on the accrual basis of accounting.
12
<PAGE> 14
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses include all costs
associated with the operation of the restaurant except corporate overhead,
advertising, depreciation and amortization.
DEPRECIATION. Depreciation is computed using the straight-line method over the
estimated useful lives of the respective assets. Leasehold costs and
improvements are amortized over the lesser of their estimated useful lives or
the remaining lease term. The average depreciable lives are as follows: building
and improvements - 15 to 25 years; fixtures and equipment - 3 to 7 years; and
transportation vehicles - 3 to 5 years.
PREOPENING COSTS. Effective October 4, 1998, the Company recorded a charge of
approximately $11,000 to reflect the decision to write off all existing
preopening costs and to thereafter expense such costs as incurred. The Company
did not separately state this change as a cumulative effect of a change in
accounting principle due to the immaterial effect of the change. Previously, the
Company capitalized certain operating costs incurred prior to the opening of a
new restaurant and amortized such costs over a one-year period.
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 $710,000 at January 2, 1999 and
$605,000 at January 3, 1998.
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.
Management scheduled two stores for closure in 1997. One store closed in 1997,
and the other was closed in January 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 were deemed unrecoverable. Based on an analysis of
projected undiscounted 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 was for future lease payments of $102,000. In
1998, $51,000 of lease payments were incurred for these closed stores and
charged against this reserve. As of January 2, 1999, the Company's remaining
accrual for future lease obligations was $51,000 for the remaining lease
payments due net of estimated sub-lease income.
PREFERRED STOCK. In accordance with the provisions of the Company's Certificate
of Incorporation regarding preferred stock, each share of preferred stock is
convertible into one share of common stock, at the option of the holder. As of
January 2, 1999, all but 23,123 shares of preferred stock had been converted to
common stock.
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 12).
13
<PAGE> 15
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS. At January 2, 1999, 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 2, 1999, the carrying
value was $5,458,000 and the fair value was approximately $5,369,000 versus a
carrying value of $3,081,000 and a fair value of $3,079,000 at January 3, 1998.
NOTE 2 - 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 2, JANUARY 3,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Corporate receivables $ 170 $ 178
National Advertising Fund receivables 68 55
Other 83 147
----------- -----------
321 380
Allowance for doubtful receivables (121) (26)
----------- -----------
$ 200 $ 354
=========== ===========
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
Summaries of property and equipment follow:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Land $ 3,417 $ 1,547
Buildings 6,263 4,434
Building and site improvements 3,351 3,011
Equipment 5,234 4,380
Automobiles 240 168
------------ -----------
18,505 13,540
Accumulated depreciation and amortization (5,140) (4,089)
------------ -----------
$ 13,365 $ 9,451
============ ===========
</TABLE>
NOTE 4 - INVESTMENT IN JOINT VENTURES
The Company has invested a total of $200,000 for 23%-25% interests in four joint
ventures for the purpose of operating Back Yard Burgers restaurants. Two of the
joint ventures purchased the building and land from the
14
<PAGE> 16
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Company. No gain or loss was recorded by the Company in connection with these
sales. Two joint ventures purchased land from a third party and built a
building. The Company then entered into a long-term lease with each joint
venture. Three 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 2, 1999, $372,000 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
investments.
NOTE 5 - DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES
At January 2, 1999, deferred fees received for certain franchise and area
development rights, net of commissions paid, include amounts sold during the
following years (in thousands):
<TABLE>
<S> <C>
1998 $ 140
Previous years 114
-----------
$ 254
===========
</TABLE>
NOTE 6 - INDEBTEDNESS
Long-term debt is secured by property and equipment with a net book value
aggregating $6,809,133 and guaranteed by the personal endorsements of certain
stockholders. The balances consist of the following.
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Notes payable to financial institutions, payable in monthly
installments ranging from $1,626 to $9,788, including
interest ranging from 7.0% to 9.8% $ 3,083 $ 1,138
Financing lease transactions to Lester's Back Yard Burgers
Joint Venture I, II and IV (See Note 4), payable in monthly
installments ranging from $2,396 to $7,009 and effective
interest rates ranging from 12.0% to 12.5%. 1,341 1,144
Notes payable to a leasing company, payable in monthly
installments ranging from $1,123 to $5,643 including
interest of 14.1% 1,034 799
----------- -----------
5,458 3,081
Less current installments (361) (217)
----------- -----------
Total $ 5,097 $ 2,864
=========== ===========
</TABLE>
The principal maturities of all long-term debt subsequent to 1999 are as
follows: $490,000 in 2000; $697,000 in 2001; $789,000 in 2002; $659,000 in 2003
and $2,462,000 thereafter.
15
<PAGE> 17
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has a line of credit with a financial institution for $150,000. The
line of credit is secured by a $50,000 certificate of deposit. There were no
borrowings outstanding under the agreement at January 2, 1999.
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 2, 1999, borrowings outstanding
under the commitment are $1,034,000, and $876,000 remains available.
NOTE 7 - 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 2, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
1999 $ 1,095
2000 935
2001 804
2002 678
Thereafter 2,301
-----------
$ 5,813
===========
</TABLE>
Rent expense was $1,058,000, $1,187,000 and $1,093,000 in 1998, 1997 and 1996,
respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
In connection with the purchase of a franchised restaurant in 1994, the Company
acquired a note receivable of $45,000 from an officer of the Company of which a
remaining balance of $30,000 is included in notes receivable as of January 3,
1998, and January 2, 1999.
NOTE 9 - INCOME TAXES
Deferred income taxes are provided in recognition of temporary differences in
reporting certain revenues and expenses for financial statement and income tax
purposes.
16
<PAGE> 18
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 2, JANUARY 3,
1999 1998
---- ----
(IN THOUSANDS)
<S> <C> <C>
Current
Current deferred tax assets
Allowance for doubtful receivable $ 41 $ 10
Accrued expenses 59 31
Reserve for store closings 15 39
------- -------
115 80
Current deferred tax liabilities (11) (4)
------- -------
Net current deferred tax asset 104 76
Deferred tax asset valuation allowance -- (76)
------- -------
$ 104 $ --
======= =======
Noncurrent
Noncurrent deferred tax assets
Franchise fees $ 47 $ 81
Net operating loss carryforwards 531 683
Alternative minimum tax credit carryforwards 145 --
Goodwill amortization 349 378
Other 30 26
------- -------
Gross noncurrent deferred tax assets 1,102 1,168
------- -------
Noncurrent deferred tax liabilities
Depreciation (520) (458)
------- -------
Gross noncurrent deferred tax liabilities (520) (458)
------- -------
Net noncurrent deferred tax asset 582 710
Deferred tax asset valuation allowance (130) (710)
------- -------
$ 452 $ --
======= =======
</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. During 1998, the
Company evaluated the need for a valuation allowance and, based on the weight of
available evidence, has determined that it is more likely than not that certain
deferred tax assets will eventually be realized. The valuation allowance in 1998
is based on management's conclusion that it is more likely than not that certain
state tax carryforward items will expire unused. The valuation allowance in 1997
was based on management's conclusion that it was more likely than not that
certain state and federal tax carryforward items would expire unused.
17
<PAGE> 19
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A reconciliation of the statutory Federal income tax rate to the income tax
provision is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
AMOUNT % AMOUNT % AMOUNT %
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax $ 287 35.0% $ 57 35.0% $ 125 35.0%
State income taxes, net of
Federal income tax effect -- -- 9 5.3 16 4.5
Goodwill amortization 15 1.8 14 8.9 14 3.9
Valuation allowance
release (656) (79.6) (78) (48.0) (151) (42.3)
Other 3 -- (2) (1.2) (4) (1.1)
----- ----- ----- ----- ----- -----
$(351) (42.8)% $ -- 0.0% $ -- 0.0%
===== ===== ===== ===== ===== =====
</TABLE>
As of January 2, 1999, and 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 $1,177,000 and $3,300,000, 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 - NATIONAL ADVERTISING FUND
As part of the standard franchise agreement, each operating unit contributes 1%
of its sales to a National Advertising Fund. Under the terms of the agreement,
at least 50% of these funds must be spent on the creation of marketing tools,
such as advertising copy for use on local radio and television and other
collateral material for the operating units. As a general rule, the funds are
not used for the purchase and placement of media advertising. The remaining
funds are available for use by the Company on such items as testing and
development of new products, investigating improvements in operating methods, or
other purposes that the Company shall deem to be in the interest of improving
operations and earnings of the Company and its franchisees.
NOTE 11 - 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.
18
<PAGE> 20
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 450,000 shares of common stock may be granted under
the IAP, as amended in May 1997. 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 1998, the Company granted options for
an aggregate of 81,864 shares of common stock at a weighted average exercise
price of $2.35 per share, based upon fair market values at grant dates.
A summary of activity in the above two option plans for the years ended January
2, 1999, January 3, 1998 and December 28, 1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
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 303,637 $ 3.25 226,568 $ 3.72 168,242 $ 4.68
Granted 81,864 2.35 84,922 1.87 80,800 1.71
Exercised (40,071) 2.11 -- -- (2,400) 1.50
Canceled (48,303) 4.00 (7,853) 2.04 (20,074) 3.87
------- ------- -------
Outstanding
at end of year 297,127 3.03 303,637 3.25 226,568 3.72
======= ======= =======
Exercisable
at end of year 271,966 3.12 269,226 3.41 195,706 3.94
======= ======= =======
</TABLE>
19
<PAGE> 21
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of information about the Company's stock options outstanding at
January 2, 1999 follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE REMAINING AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS CONTRACTUAL EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE LIFE PRICE
- -------- ----------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$1.50-$2.00 97,179 7.8 1.72 91,223 7.8 1.72
2.00- 2.50 78,957 8.9 2.25 60,916 9.0 2.26
3.00- 3.50 51,653 6.3 3.05 50,489 6.4 3.06
5.50- 6.00 69,338 4.7 5.75 69,338 4.8 5.75
- ----------- ------- --- ---- ------- --- ----
$1.50-$6.00 297,127 7.1 3.03 271,966 7.0 3.12
=========== ======= === ==== ======= === ====
</TABLE>
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
1998, 1997 and 1996 under the plan consistent with the method prescribed by SFAS
No. 123, Accounting for Stock-Based Compensation, the Company's operating
results for 1998, 1997 and 1996 would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income
As reported $ 1,171 $ 162 $ 357
Pro forma 1,053 69 298
Basic earnings per share
As reported .26 .04 .08
Pro forma .23 .02 .07
Diluted earnings per share
As reported .25 .04 .08
Pro forma .23 .02 .07
</TABLE>
The weighted-average grant-date fair value of options granted during 1998, 1997
and 1996 was $1.70, $1.31, and $1.15, respectively. 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
1998, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average expected life (years) 7.0 7.0 7.0
Average expected volatility 64.4% 66.5% 67.0%
Risk-free interest rates 6.1% 6.1% 6.1%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
20
<PAGE> 22
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 1998, 1997 and 1996, 13,200,
16,051 and 12,926 shares were purchased, respectively, under the ESPP.
NOTE 12 - 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 2, 1999 JANUARY 3, 1998 DECEMBER 28, 1996
------------------------------- ------------------------------ ---------------------------
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 $1,171 4,533 $ 0.26 $162 4,261 $ 0.04 $357 4,221 $ 0.08
EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock 69 298 322
Stock options 52 28 --
------ ----- ------- ---- ----- ----- ---- ----- -------
DILUTED EPS
Income available to
common stockholders
plus assumed conversions $1,171 4,654 $ 0.25 $162 4,587 $ 0.04 $357 4,543 $ 0.08
====== ===== ========= ==== ===== ======== ==== ===== =======
</TABLE>
Options and warrants to purchase shares of the Company's common stock were
outstanding during the years 1998, 1997 and 1996 but were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of common shares. The options were still outstanding as of
January 2, 1999; however, the warrants expired as of that date. 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.
21
<PAGE> 23
BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - 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 2, 1999, the Company's uninsured cash balance totaled
$543,000.
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 (PRICEWATERHOUSECOOPERS LOGO)
To the Board of Directors and Stockholders of
Back Yard Burgers, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Back Yard Burgers, Inc. and its subsidiaries at January 2, 1999 and January 3,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, 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
January 22, 1999
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 1998 consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, in accordance with
generally accepted auditing standards. PricewaterhouseCoopers 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 Michael G. Webb
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
CPA, Consultant
Michael G. Webb
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)
</TABLE>
24
<PAGE> 26
CORPORATE INFORMATION
CORPORATE OFFICES
2768 Colony Park Drive
Memphis, TN 38118
901/367-0888
TRANSFER AGENT
Union Planters Bank
6200 Poplar Avenue, Third Floor
P. O. Box 387
Memphis, Tennessee 38147
901/580-5523
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Memphis, Tennessee
GENERAL COUNSEL
Henke, Heaton & Bufkin
Professional Corporation
Clarksdale, Mississippi
SECURITIES COUNSEL
Giroir, Gregory, Holmes & Hoover, PLC
Little Rock, Arkansas
ANNUAL MEETING OF STOCKHOLDERS The company's 1998 annual meeting of stockholders
will be held at 10:00 a.m. local time on Thursday, May 20, 1999, at the
Guesthouse Inn & Suites in Memphis, Tennessee. Stockholders of record as of
March 26, 1999, are invited to attend this meeting.
ANNUAL REPORT ON FORM 10-KSB
A copy of the company's Annual Report on Form 10- KSB for the year ended January
2, 1999, 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.
STOCK MARKET INFORMATION
The company's common stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol BYBI. At March 26, 1999, the company had
approximately 2,500 stockholders, including beneficial owners holding shares in
nominee or "street" name.
Back Yard Burgers completed its initial public offering of common stock in June
1993 and began public trading on June 25, 1993. The table below sets forth the
high and low stock bid prices for the two-year period ended January 2, 1999:
<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
<S> <C> <C>
March 29, 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
April 4, 1998 $ 3.63 $ 2.25
July 4, 1998 $ 3.63 $ 2.63
October 3, 1998 $ 2.81 $ 2.25
January 2, 1999 $ 2.38 $ 1.88
</TABLE>
The company currently anticipates that it will retain all of its earnings to
support its operations and the development of its business. Therefore, the
company does not pay any cash dividends on its outstanding common stock. Future
cash dividends, if any, will be at the discretion of the company's board of
directors and will depend upon, among other things, future operations and
earnings, capital requirements, general financial conditions, contractual
restrictions, and other factors that the board may consider relevant.
<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 BALANCE SHEET AT JANUARY 2, 1999 AND THE CONSOLIDATED STATEMENT OF
INCOME FOR THE YEAR ENDED JANUARY 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<EXCHANGE-RATE> 1
<CASH> 815
<SECURITIES> 0
<RECEIVABLES> 200<F1>
<ALLOWANCES> 0
<INVENTORY> 202
<CURRENT-ASSETS> 1,417
<PP&E> 13,365<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 16,948
<CURRENT-LIABILITIES> 1,883
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 9,540
<TOTAL-LIABILITY-AND-EQUITY> 16,948
<SALES> 25,082
<TOTAL-REVENUES> 27,364
<CGS> 8,206
<TOTAL-COSTS> 13,352
<OTHER-EXPENSES> 4,285
<LOSS-PROVISION> 216
<INTEREST-EXPENSE> 485
<INCOME-PRETAX> 820
<INCOME-TAX> (351)
<INCOME-CONTINUING> 1,171
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,171
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
<FN>
<F1>ASSET VALUE REPRESENTS NET AMOUNT.
</FN>
</TABLE>
