<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12104
BACK YARD BURGERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 64-0737163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2768 COLONY PARK DRIVE, MEMPHIS, TENNESSEE 38118
(Address of principal executive offices)
(901) 367-0888
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common stock, par value $.01 per share
Outstanding at November 1, 1999 - 4,613,407
<PAGE> 2
BACK YARD BURGERS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements:
Balance Sheet as of October 2, 1999 and January 2, 1999 3
Statement of Income for the Thirteen and Thirty-Nine Weeks Ended
October 2, 1999 and October 3, 1998 4
Statement of Cash Flows for the Thirty-Nine Weeks Ended
October 2, 1999 and October 3, 1998 5
Notes to Unaudited Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities and Use of Proceeds 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 2, JANUARY 2,
1999 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 550 $ 815
Receivables, net 289 200
Inventories 218 202
Current deferred tax asset 220 104
Prepaid expenses and other current assets 11 96
-------- --------
Total current assets 1,288 1,417
Property and equipment, at depreciated cost 14,950 13,365
Intangible assets, net 1,274 1,352
Noncurrent deferred tax asset 457 452
Note receivable 93 98
Other assets 266 264
-------- --------
$ 18,328 $ 16,948
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 357 $ 467
Accrued expenses 844 850
Income taxes payable 219 205
Current installments of long-term debt 445 361
-------- --------
Total current liabilities 1,865 1,883
Long-term debt, less current installments 5,352 5,097
Deferred franchise and area development fees 397 254
Other deferred income 741 --
Other deferred liabilities 132 128
-------- --------
Total liabilities 8,487 7,362
======== ========
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized; 19,763 shares
issued and outstanding at October 2, 1999 (23,123 at January 2, 1999) -- --
Common stock, $.01 par value, 12,000,000 shares authorized;
4,613,407 shares issued and outstanding at October 2, 1999
(4,596,471 at January 2, 1999) 46 46
Paid-in capital 10,121 10,098
Retained deficit (326) (558)
-------- --------
Total stockholders' equity 9,841 9,586
-------- --------
$ 18,328 $ 16,948
======== ========
</TABLE>
See accompanying notes to unaudited financial statements
3
<PAGE> 4
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
-------------------- -----------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 6,923 $ 6,506 $ 20,209 $ 18,912
Franchise and area development fees 43 47 97 97
Royalty fees 393 336 1,133 981
Advertising fees 146 123 425 360
Other 170 86 425 248
------- ------- -------- --------
Total revenues 7,675 7,098 22,289 20,598
------- ------- -------- --------
Expenses:
Cost of restaurant sales 2,349 2,126 6,921 6,113
Restaurant operating expenses 3,278 3,099 9,607 8,931
General and administrative 997 804 2,722 2,448
Advertising 420 397 1,271 1,126
Depreciation and amortization 338 338 985 913
------- ------- -------- --------
Total expenses 7,382 6,764 21,506 19,531
------- ------- -------- --------
Operating income 293 334 783 1,067
Interest income 7 5 21 19
Interest expense (142) (124) (415) (334)
Other, net (8) (5) (24) (11)
------- ------- -------- --------
Income before income taxes 150 210 365 741
Income taxes 47 -- 133 --
------- ------- -------- --------
Net income $ 103 $ 210 $ 232 $ 741
======= ======= ======== ========
Income per share:
Basic $ .02 $ .05 $ .05 $ .16
======= ======= ======== ========
Diluted $ .02 $ .05 $ .05 $ .16
======= ======= ======== ========
Weighted average number of common shares
and common equivalent shares outstanding
Basic 4,612 4,590 4,606 4,513
======= ======= ======== ========
Diluted 4,663 4,660 4,645 4,660
======= ======= ======== ========
</TABLE>
See accompanying notes to unaudited financial statements
4
<PAGE> 5
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-----------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 232 $ 741
Adjustments to reconcile net income to net cash provided
(used) in operating activities
Depreciation and amortization of property and equipment 907 785
Deferred income taxes (121) 0
Amortization of intangible assets 78 79
Amortization of preopening costs -- 49
Provision for losses on receivables 130 144
Gain on sales of assets (6) --
(Increase) decrease in assets
Receivables (220) (28)
Inventories (16) (21)
Prepaid expenses and other current assets 85 (92)
Other assets (3) (49)
Increase (decrease) in liabilities
Accounts payable and accrued expenses (116) (467)
Income taxes payable 14 --
Other deferred income 741 --
Other deferred liabilities 4 12
Deferred franchise and area development fees 143 85
------ ------
Net cash provided by operating activities 1,852 1,238
------ ------
Cash flows from investing activities:
Proceeds from sale of property and equipment 8 --
Additions to property and equipment (2,487) (3,704)
------ ------
Net cash used in investing activities (2,479) (3,704)
------ ------
Cash flows from financing activities:
Issuance of stock 23 22
Principal payments on long-term debt and capital leases (346) (456)
Proceeds from issuance of long-term debt 685 2,190
Proceeds from exercise of stock options -- 85
------ ------
Net cash provided by financing activities 362 1,841
------ ------
Net (decrease) in cash and cash equivalents (265) (625)
Cash and cash equivalents
Beginning of period 815 1,328
====== ======
End of period$ 550 $ 703
====== ======
Supplemental disclosure of cash flow information
Income taxes paid $ 240 $ --
====== ======
Interest paid$ 415 $ 210
====== ======
</TABLE>
See accompanying notes to unaudited financial statements
5
<PAGE> 6
BACK YARD BURGERS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Back Yard Burgers, Inc. owns and operates quick-service and fast-casual
restaurants and is engaged in the sale of franchises and the collection of
royalties based upon related franchise sales. The company grants franchise
rights for the use of "Back Yard Burgers," "BYB" or "BY Burgers" trade names
and other associated trademarks, signs, emblems, logos, slogans and service
marks which have been or may be developed.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and therefore do not include all
information and notes necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. The statements do reflect all adjustments (consisting of
only normal recurring accruals) which are, in the opinion of management,
necessary to present fairly the financial position and results of operations
and cash flows in conformity with generally accepted accounting principles. The
statements should be read in conjunction with the Notes to Financial Statements
for the year ended January 2, 1999 included in the company's 1998 Annual
Report.
The financial statements include the accounts of Back Yard Burgers, Inc.
and its wholly-owned subsidiaries, Little Rock Back Yard Burgers, Inc., Atlanta
Burgers BYB Corporation and BYB Properties, Inc., as well as the Back Yard
Burgers National Advertising Fund. All significant intercompany transactions
have been eliminated.
The results of operations for the thirteen and thirty-nine week periods
are not necessarily indicative of the results to be expected for the full year.
The company maintains its financial records on a 52-53 week fiscal year
ending on the Saturday closest to December 31.
NOTE 2 - 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 3 - DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES
Amounts received for certain franchise and area development rights, net of
commissions paid, have been deferred. Revenues on individual franchise fees are
recognized when substantially all of the initial services required of the
company have been performed, which generally coincides with the opening of the
franchises. Under the terms of the franchise agreements, these fees are
non-refundable, and may be recognized as income should the franchisee fail to
perform as agreed. Area development fees are recognized on a pro-rata basis as
each unit opens. At October 2, 1999, deferred franchise and area development
fees include franchise and area development rights sold during the following
years:
1999 $219
1998 76
Previous Years 102
---
$397
===
NOTE 4 - OTHER DEFERRED INCOME
Amounts received from certain vendors relating to future purchases by the
company have been deferred. These funds are recorded as income in a
proportionate manner with respective future purchases. Under the terms of
signed contracts, the company is required to purchase specific volumes in
future years. If these purchase volumes are not met, the funds related to the
volume shortages will be refunded to the vendors.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The company is party to several incidental legal proceedings and claims.
Although the outcome of the proceedings and claims cannot be determined with
certainty, management of the company is of the opinion that it is unlikely that
these proceedings and claims will have a material adverse effect on the
financial condition or results of operations of the company.
6
<PAGE> 7
FORWARD-LOOKING INFORMATION
Certain information included herein may contain statements that are
forward-looking, such as statements related to financial items and results,
plans for future expansion and other business development activities, capital
spending or financing sources, capital structure and the effects of regulation
and competition. Forward-looking statements made by the company are based upon
estimates, projections, beliefs and assumptions of management at the time of
such statements and should not be viewed as guarantees of future performance.
Such forward-looking information involves important risks and uncertainties
that could significantly impact anticipated results in the future and,
accordingly, such results may differ materially from those expressed in any
forward-looking statements by or on behalf of the company. These risks and
uncertainties include, but are not limited to, increased competition within the
industry for customers, qualified labor and desirable locations, increased
costs for beef, chicken or other food products and management decisions related
to restaurant growth, financing, franchising and new product development, as
well as items described under AManagement=s Discussion and Analysis of
Financial Condition and Results of Operations@ below.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
As of October 2, 1999, the Back Yard Burgers system included 88
restaurants, of which 37 were company-operated and 51 were franchised. The
company=s revenues are derived primarily from company-operated restaurant
sales, franchise and area development fees and royalty fees. Certain expenses
(cost of restaurant sales, restaurant operating expenses, depreciation and
amortization and advertising) relate directly to company-operated restaurants,
while general and administrative expenses relate to both company-operated
restaurants and franchise operations. The company's revenues and expenses are
affected by the number and timing of the opening of additional restaurants.
Sales for new restaurants in the period immediately following their opening
tend to be high because of trial by public and promotional activities. As a
result, the timing of openings can affect the average volume and other
period-to-period comparisons.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenue,
unless otherwise indicated, of certain items included in the company's
historical operations and operating data for the periods indicated.
THIRTY-NINE WEEKS ENDED
-----------------------
OCTOBER 2, OCTOBER 3,
1999 1998
--------- ----------
Revenues
Restaurant sales 90.7% 91.8%
Franchise and area development fees .4 .5
Royalty fees 5.1 4.8
Advertising fees 1.9 1.7
Other operating revenue 1.9 1.2
----- -----
Total revenue 100.0% 100.0%
===== =====
7
<PAGE> 8
THIRTY-NINE WEEKS ENDED
-------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
----------- ----------
Costs and Expenses
Cost of restaurant sales (1) 34.3% 32.3%
Restaurant operating expenses (1) 47.5 47.2
General and administrative 12.2 11.9
Advertising 5.7 5.5
Depreciation and amortization 4.4 4.4
Operating income 3.5 5.2
Interest income .1 .1
Interest expense (1.9) (1.6)
Other, net (.1) (.1)
Income before income taxes 1.6 3.6
Income taxes (.6) --
Net income 1.0 3.6
THIRTY-NINE WEEKS ENDED
-------------------------
OCTOBER 2, OCTOBER 3,
1999 1998
----------- ----------
($000'S)
System-wide restaurant sales
Company-operated $20,209 $18,912
Franchised 28,998 25,315
------- -------
Total $49,207 $44,227
======= =======
Average annual sales per restaurant open for a
full year (2)
Company-operated $ 772 $ 788
Franchised $ 757 $ 743
System-wide $ 763 $ 763
Number of restaurants
Company-operated 37 33
Franchised 51 47
------- -------
Total 88 80
======= =======
(1) As a percentage of restaurant sales.
(2) Includes sales for restaurants open for entire trailing twelve-month
period. Restaurants are included in the calculation after the completion
of eighteen months of operation as sales during the six-month period
immediately after the opening tend to be higher due to promotions and
trial by public.
8
<PAGE> 9
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTEEN WEEKS ENDED OCTOBER 2,
1999 AND OCTOBER 3, 1998.
RESTAURANT SALES increased 6.4% to $6,923,000 during the thirteen weeks
ended October 2, 1999 compared to $6,506,000 for the same 1998 period. This
increase is primarily the result of the opening of four new company-operated
stores since the year-earlier period. This increase was partially offset by a
decrease in same-store sales of 0.9% for the thirteen weeks ended October 2,
1999. Company management believes that the decreases in same-store sales for
the thirteen week period are the result of the cannibalization of some
company-operated stores in the Memphis market.
ROYALTY FEES increased 17.0% to $393,000 during the thirteen week period
ended October 2, 1999 compared to $336,000 during the same period in 1998. The
increase is due to an increase in franchised restaurant sales upon which the
fees are based. Comparable same-store sales at franchised restaurants open for
more than one year increased 2.9%, representing an increase in royalty fees of
approximately $11,000. Six franchised restaurants were opened and two
franchised restaurants were closed since October 3, 1998. This increase in net
franchised restaurants open accounted for the remainder of the increase in
royalty fees from the prior year.
ADVERTISING FEES increased 18.7% to $146,000 for the thirteen weeks ended
October 2, 1999 compared to $123,000 during the comparable period in 1998. The
increase in advertising fees is due to the increase in franchised restaurant
sales as noted above, upon which the fees are based.
OTHER REVENUES increased 97.7% to $170,000 for the thirteen weeks ended
October 2, 1999 compared to $86,000 during the year-earlier period. The
increase is due to increases in supplier rebates as well as revenues generated
from sub-contractor vending sales that began in March of 1999.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$2,349,000 for the thirteen weeks ended October 2, 1999 and $2,126,000 during
the same period in 1998, increasing as a percentage of restaurant sales to
33.9% from 32.7%. This percentage increase is primarily the result of an
increase in coupons and discounts, an 11.5% increase in the cost of beef as
well as an increase in waste, consisting of prepared food items not sold due to
product hold time requirements of the company and spoilage. The coupon and
discount program resulted in an increase in cost of sales as a percentage of
restaurant sales of 1.0%. These increases were partially offset by minor
decreases in the cost of certain produce and dairy products.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies, utilities,
maintenance, rent and certain other unit level operating expenses, increased to
$3,278,000 for the thirteen weeks ended October 2, 1999 from $3,099,000 in the
year-earlier period. The percentage of restaurant sales for the thirteen weeks
ended October 2, 1999 was 47.4%, compared to 47.6% for the year-earlier period.
Labor costs as a percentage of sales increased by 0.3% over the year-earlier
period. This increase was offset by decreases in repairs and maintenance costs
and other miscellaneous operating costs incurred during the period.
GENERAL AND ADMINISTRATIVE COSTS which increased to $997,000 for the
thirteen weeks ended October 2, 1999 from $804,000 in the year-earlier period,
increased as a percentage of total revenue for the thirteen weeks ended October
2, 1999 to 13.0% from 11.3% in the same period in 1998. $78,000 of the increase
related to consulting expenditures for a strategic study of system operations
and facility design. Preopening expenses also represented $42,000 of the
increase. The remaining increase is primarily the result of increased spending
in the areas of recruiting and training in efforts to attract quality employees
as well as continuing efforts to enhance customer service.
ADVERTISING EXPENSE which increased to $420,000 for the thirteen weeks
ended October 2, 1999 from $397,000 in the same period in 1998, decreased as a
percentage of total revenues to 5.5% from 5.6%. This is the result of an
increase in the number of company-operated restaurants creating the need for
additional local advertising as well as an increase in advertising fees, as
described above, which are used for the development and production of marketing
campaigns and collateral material.
9
<PAGE> 10
INTEREST EXPENSE increased 14.5% to $142,000 for the thirteen weeks ended
October 2, 1999 from $124,000 in the year-earlier period. This is due to a net
increase in long-term debt of $339,000, or 6.2%, since October 3, 1998.
INCOME TAX EXPENSE was $47,000 for the thirteen weeks ended October 2,
1999 compared to zero in the year-earlier period. In recent profitable years,
the company has been able to offset net income with previous net operating loss
carryforwards. For the thirteen weeks ended October 2, 1999 the company had
income tax expense based on the calculation of alternative minimum tax.
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2,
1999 AND OCTOBER 3, 1998.
RESTAURANT SALES increased 6.9% to $20,209,000 during the thirty-nine
weeks ended October 2, 1999 compared to $18,912,000 for the same 1998 period.
The increase is due primarily to the opening of four new company-operated
stores since the year-earlier period as well as a 1.2% increase in same store
sales for the thirty-nine week period. Company management believes that the
increases in same-store sales are the result of improved customer service, the
retrofit of three double drive-thrus to dine-in facilities with single
drive-thrus, and ongoing training and attention to improved customer service.
ROYALTY FEES increased 15.5% to $1,133,000 during the thirty-nine week
period ended October 2, 1999 compared to $981,000 during the same period in
1998. The increase is due to an increase in franchised restaurant sales upon
which the fees are based. Comparable same-store sales at franchised restaurants
open for more than one year increased 2.5%, representing an increase in royalty
fees of approximately $26,000. Six franchised restaurants were opened and two
franchised restaurants were closed since October 3, 1998. This increase in net
franchised restaurants open accounted for the remainder of the increase in
royalty fees from the prior year.
ADVERTISING FEES increased 18.1% to $425,000 for the thirty-nine weeks
ended October 2, 1999 compared to $360,000 during the comparable period in
1998. The increase in advertising fees is related to the increase in franchised
restaurant sales as noted above, upon which the fees are based.
OTHER REVENUES increased 71.4% to $425,000 for the thirteen weeks ended
October 2, 1999 compared to $248,000 during the year-earlier period. The
increase is due to increases in vendor rebates as well as revenues generated
from sub-contractor vending sales which began in March of 1999.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$6,921,000 for the thirty-nine weeks ended October 2, 1999 and $6,113,000
during the same period in 1998, increasing as a percentage of restaurant sales
to 34.3% from 32.3%. This percentage increase is primarily the result of an
increase in coupons and discounts, increases in the cost of beef as well as an
increase in waste, consisting of prepared food items not sold due to product
hold time requirements of the company and spoilage. The coupon and discount
program resulted in an increase in cost of sales as a percentage of restaurant
sales of 1.6%. These increases were partially offset by minor decreases in the
cost of certain produce and dairy products.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies, utilities,
maintenance, rent and certain other unit level operating expenses, increased to
$9,607,000 for the thirty-nine weeks ended October 2, 1999 from $8,931,000 in
the year-earlier period. The percentage of restaurant sales for the thirty-nine
weeks ended October 2, 1999 was 47.5%, compared to 47.2% for the year-earlier
period. Labor costs as a percentage of sales increased by 0.2% over the
year-earlier period. The remainder of the increase was due to increases in
repairs and maintenance costs and other miscellaneous operating costs incurred
during the period.
10
<PAGE> 11
GENERAL AND ADMINISTRATIVE COSTS which increased to $2,722,000 for the
thirty-nine weeks ended October 2, 1999 from $2,448,000 in the year-earlier
period, increased as a percentage of total revenue for the thirty-nine weeks
ended October 2, 1999 to 12.2% from 11.9% in the same period in 1998. $78,000
of the increase related to consulting expenditures for a strategic study of
system operations and facility design. Preopening expenses also represented
$81,000 of the increase. The remaining increase is primarily the result of
increased spending in the areas of recruiting and training in efforts to
attract quality employees as well as continuing efforts to enhance customer
service.
ADVERTISING EXPENSE which increased to $1,271,000 for the thirty-nine
weeks ended October 2, 1999 from $1,126,000 in the same period in 1998,
increased as a percentage of total revenues to 5.7% from 5.5%. This is the
result of an increase in the number of company-operated restaurants creating
the need for additional local advertising as well as an increase in advertising
fees, as described above, which are used for the development and production of
marketing campaigns and collateral material.
INTEREST EXPENSE increased 24.3% to $415,000 for the thirty-nine weeks
ended October 2, 1999 from $334,000 in the year-earlier period. This is due to
a net increase in long-term debt of $339,000, or 6.2%, since October 3, 1998.
INCOME TAX EXPENSE was $133,000 for the thirty-nine weeks ended October 2,
1999 compared to zero in the year-earlier period. In recent profitable years,
the company has been able to offset net income with previous net operating loss
carryforwards. For the thirty-nine weeks ended October 2, 1999 the company had
income tax expense based on the calculation of alternative minimum tax.
IMPAIRMENT OF LONG-LIVED ASSETS
The company reviews the carrying value of its long-lived and intangible
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. A new cost
basis is established for impaired assets based on the fair value of these
assets as of the date the assets are determined to be impaired.
Certain of the company's restaurants have been identified as
underperforming and the company has initiated action plans to improve their
underperforming status. Should these plans prove unsuccessful, some or all of
these stores= assets may become impaired.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $2,487,000 for the thirty-nine weeks ended
October 2, 1999 and $3,704,000 for the same period of 1998. Generally, the
company constructs its restaurant buildings on leased properties for its
company-operated restaurants. The average monthly lease cost for the 18
company-operated restaurants on leased sites at October 2, 1999 is
approximately $3,150 per month. For the 10 restaurants where the company leases
the building as well as the site, the average monthly lease cost is
approximately $4,750.
Cash from operations for the company is primarily affected by net earnings
adjusted for deferred franchise fees and non-cash expenses which consist
primarily of depreciation and amortization. Depreciation and amortization
totaled $985,000 for the thirty-nine weeks ended October 2, 1999 and $913,000
for the year-earlier period. This increase is primarily the result of the
addition of four company-operated restaurants and the conversion of two double
drive-thru facilities to dine-in facilities with a single drive-thru since the
year-earlier period.
Cash provided by operations for the thirty-nine week period ended October
2, 1999 and October 3, 1998 was $1,852,000 and $1,238,000, 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 October 2, 1999, the company had total long-term debt of $5,797,000
and unused lines of credit and loan commitments of potential additional
borrowings of $1,834,000.
On October 3, 1999, the company sold one of its company-operated stores to
a shareholder at book value and this store will be operated as a franchised
restaurant going forward.
The company expects capital expenditures to be approximately $2,750,000
during 1999 and plans to fund additional expenditures through internally
generated cash flow as well as the borrowing commitments secured in 1999 or
before.
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 the thirty-nine weeks ended October 2, 1999.
Increases in food, labor or other operating costs could adversely affect the
company's operations should comparable menu price increases not be sustainable.
11
<PAGE> 12
CONVERSION OF PREFERRED STOCK
The company's preferred stockholders have the right to convert preferred
stock to common stock. Such conversion began on July 5, 1995, at which time
there were 1,199,979 shares of preferred stock outstanding. As of October 2,
1999, only 19,763 shares have yet to be converted.
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.
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 completed a network and accounting software upgrade, which
included 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 installed upon upgrading the network is year 2000
compliant. The total cost of the software and hardware enhancements and
upgrades necessary to become year 2000 compliant were 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 relates to year 2000 compliance by key third parties,
including food product suppliers, energy providers and others. These parties
are crucial to the continuing operations of the company. There is a certain
amount of uncontrollable risk associated with third party year 2000 readiness.
The company has attempted to gain assurance from key third parties, including
all franchisees and suppliers, as to their year 2000 compliance efforts via
written confirmation, and is currently unaware of any material problems with
respect to their year 2000 readiness. However, 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.
The company believes it has achieved internal year 2000 readiness with
respect to all material operations. The company will appropriately address any
material concerns over third party readiness with qualified alternate suppliers
as determined by the confirmation process, and will 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 for the company in the
foreseeable future. In most areas where the company operates restaurants, there
is a shortage of suitable labor. This, in itself, could result in higher wages
as the competition for employees intensifies, not only in the restaurant
industry, but in practically all retail and service industries. It will be
crucial for the company to develop and maintain programs to attract and retain
quality employees.
12
<PAGE> 13
During the thirty-nine weeks ended October 2, 1999, there were increases
in the cost of beef. Management of the company expects the costs of beef and
chicken to continue to rise 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 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 1.2% during the first thirty-nine week period
of 1999. 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 its ability to positively address these issues.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The company is involved in litigation incidental to its business,
including, but not necessarily limited to, claims alleging violations of the
Civil Rights Act of 1964 and/or discrimination. Aside from the cost of defense,
such litigation is not presently considered by management to be material to the
financial condition or results of operations of the company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
Exhibits
11 - Calculation of Income Per Share
27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission
for information only and not filed.
Reports on Form 8-K
None
13
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BACK YARD BURGERS, INC.
Date: November 15, 1999 By:/s/ Lattimore M. Michael
- ----------------------- -----------------------------
Lattimore M. Michael Chairman and Chief Executive Officer
Date: November 15, 1999 By:/s/ Michael G. Webb
- ----------------------- -----------------------------
Michael G. Webb
Chief Financial Officer
14
<PAGE> 1
EXHIBIT 11
BACK YARD BURGERS, INC.
COMPUTATION OF INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
---------------------------- ----------------------------
OCTOBER 2, OCTOBER 3, OCTOBER 2, OCTOBER 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Income $ 103 $ 210 $ 232 $ 741
----- ----- ----- -----
Weighted average number
of common shares outstanding
during the period 4,612 4,590 4,606 4,513
===== ===== ===== =====
Basic income per share $ .02 $ .05 $ .05 $ .16
===== ===== ===== =====
Weighted average number
of common shares outstanding
during the period 4,612 4,590 4,606 4,513
Preferred shares convertible
to common shares 20 23 22 85
Stock options 31 47 17 62
----- ----- ----- -----
4,663 4,660 4,645 4,660
===== ===== ===== =====
Diluted income per share $ .02 $ .05 $ .05 $ .16
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<CASH> 550
<SECURITIES> 0
<RECEIVABLES> 289<F1>
<ALLOWANCES> 0
<INVENTORY> 218
<CURRENT-ASSETS> 1,288
<PP&E> 14,950<F1>
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 10,328
<CURRENT-LIABILITIES> 1,865
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 9,795
<TOTAL-LIABILITY-AND-EQUITY> 18,328
<SALES> 20,209
<TOTAL-REVENUES> 22,289
<CGS> 6,921
<TOTAL-COSTS> 10,898
<OTHER-EXPENSES> 2,242
<LOSS-PROVISION> 130
<INTEREST-EXPENSE> 415
<INCOME-PRETAX> 365
<INCOME-TAX> 133
<INCOME-CONTINUING> 232
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 232
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
<FN>
<F1>Asset value represents net amount.
</FN>
</TABLE>
