<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 SEPTEMBER 30, 2000
[ ] 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.)
1657 SHELBY OAKS DR. N. STE. 105, MEMPHIS, TENNESSEE 38134
(Address of principal executive offices)
(901) 367-0888
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
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 October 31, 2000 - 4,638,532
<PAGE> 2
BACK YARD BURGERS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements:
Balance Sheet as of September 30, 2000 and January 1, 2000 3
Statement of Income for the Thirteen and Thirty-Nine Weeks Ended
September 30, 2000 and October 2, 1999 4
Statement of Cash Flows for the Thirty-Nine Weeks Ended
September 30, 2000 and October 2, 1999 5
Notes to Unaudited Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities and Use of Proceeds 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JANUARY 1,
2000 2000
------------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,194 $ 1,697
Receivables, net 366 284
Inventories 190 177
Current deferred tax asset 93 65
Prepaid expenses and other current assets 47 79
-------- --------
Total current assets 1,890 2,302
Property and equipment, at depreciated cost 13,047 13,211
Intangible assets 1,939 1,204
Noncurrent deferred tax asset 833 1,020
Note receivable 468 350
Other assets 264 253
-------- --------
Total assets $ 18,441 $ 18,340
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 740 $ 744
Accrued expenses 892 901
Reserve for closed stores 143 270
Income taxes payable 25 89
Current installments of long-term debt 1,170 489
-------- --------
Total current liabilities 2,970 2,493
Long-term debt, less current installments 4,986 5,689
Deferred franchise and area development fees 370 392
Other deferred income 537 633
Other deferred liabilities 66 75
-------- --------
Total liabilities 8,929 9,282
-------- --------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized;
19,763 shares issued and outstanding at September 30, 2000
(19,763 at January 1, 2000) -- --
Common stock, $.01 par value, 12,000,000 shares authorized;
4,638,532 shares issued and outstanding at September 30, 2000
(4,618,377 at January 1, 2000) 46 46
Paid-in capital 10,151 10,128
Deficit (685) (1,116)
-------- --------
Total stockholders' equity 9,512 9,058
-------- --------
Total liabilities and stockholders' equity $ 18,441 $ 18,340
======== ========
</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
------------------------------ ------------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 7,009 $ 6,923 $ 19,861 $ 20,209
Franchise and area development fees 45 43 160 97
Royalty fees 416 393 1,238 1,133
Advertising fees 121 146 350 425
Other 190 170 505 425
------- -------- -------- --------
Total revenues 7,781 7,675 22,114 22,289
------- -------- -------- --------
Expenses:
Cost of restaurant sales 2,250 2,349 6,514 6,921
Restaurant operating expenses 3,384 3,278 9,831 9,607
General and administrative 920 997 2,583 2,722
Advertising 503 420 1,323 1,271
Depreciation and amortization 327 338 983 985
------- -------- -------- --------
Total expenses 7,384 7,382 21,234 21,506
------- -------- -------- --------
Operating income 397 293 880 783
Interest income 12 7 30 21
Interest expense (165) (142) (458) (415)
Other, net (18) (8) 219 (24)
------- -------- -------- --------
Income before income taxes 226 150 671 365
Income taxes 81 47 240 133
------- -------- -------- --------
Net income $ 145 $ 103 $ 431 $ 232
======= ======== ======== ========
Income per share:
Basic $ .03 $ .02 $ .09 $ .05
======= ======== ======== ========
Diluted $ .03 $ .02 $ .09 $ .05
======= ======== ======== ========
Weighted average number of common shares
and common equivalent shares outstanding
Basic 4,636 4,612 4,628 4,606
======= ======== ======== ========
Diluted 4,656 4,663 4,649 4,645
======= ======== ======== ========
</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
-----------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 431 $ 232
Adjustments to reconcile net income to net cash provided
(used) by operating activities
Depreciation and amortization of property and equipment 884 907
Deferred income taxes 159 (121)
Amortization of intangible assets 99 78
Provision for losses on receivables 114 130
Gain on sales of assets (271) (6)
(Increase) decrease in assets
Receivables (195) (220)
Inventories (13) (16)
Prepaid expenses and other current assets 32 85
Other assets (17) (3)
Increase (decrease) in liabilities
Accounts payable and accrued expenses (13) (102)
Reserve for closed stores (37) (14)
Income taxes payable (64) 14
Other deferred income (96) 741
Other deferred liabilities (9) 4
Deferred franchise and area development fees (22) 143
------- -------
Net cash provided by operating activities 982 1,852
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment 155 8
Goodwill acquisition cost (229) --
Additions to property and equipment (812) (2,487)
------- -------
Net cash used in investing activities (886) (2,479)
------- -------
Cash flows from financing activities:
Issuance of stock 23 23
Principal payments on long-term debt and capital leases (622) (346)
Proceeds from issuance of long-term debt -- 685
------- -------
Net cash provided (used) by financing activities (599) 362
------- -------
Net decrease in cash and cash equivalents (503) (265)
Cash and cash equivalents
Beginning of period 1,697 815
------- -------
End of period $ 1,194 $ 550
======= =======
Supplemental disclosure of cash flow information
Income taxes paid $ 145 240
======= =======
Interest paid 448 415
======= =======
Noncash investing and financing activities
Property and equipment sold for a note receivable $ 119 $ --
======= =======
Goodwill acquired with note payable $ 600 $ --
======= =======
</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 adjustments) 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 1, 2000 included in the company's 1999 Form 10-K as
filed with the Securities and Exchange Commission.
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 current period are not necessarily
indicative of the results that ultimately may be achieved for the full year.
The company maintains its financial records on a 52-53 week fiscal year
ending on the Saturday closest to December 31.
NOTE 2 - NET INCOME PER SHARE
The company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share, which requires the
presentation of basic and diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
COMPUTATION OF INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30, OCTOBER 2,
2000 1999 2000 1999
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Net Income $ 145 $ 103 $ 431 $ 232
====== ====== ====== ======
Weighted average number of common
shares outstanding during the period 4,636 4,612 4,628 4,606
====== ====== ====== ======
Basic income per share $ .03 $ .02 $ .09 $ .05
====== ====== ====== ======
Weighted average number of common
shares outstanding during the period 4,636 4,612 4,628 4,606
Preferred shares convertible to
common shares 20 20 20 22
Stock options -- 31 1 17
------ ------ ------ ------
4,656 4,663 4,649 4,645
====== ====== ====== ======
Diluted income per share $ .03 $ .02 $ .09 $ .05
====== ====== ====== ======
</TABLE>
6
<PAGE> 7
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 September 30, 2000, deferred fees include franchise and area
development rights sold during the following years:
<TABLE>
<S> <C>
2000 $125
1999 143
Previous years 102
----
$370
====
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The company is party to several pending legal proceedings and claims. Although
the outcome of the proceedings and claims cannot be determined with certainty,
management of the company is of the opinion that it is unlikely that these
proceedings and claims will have a material adverse effect on the financial
condition or results of operations of the company.
As of September 30, 2000, the company had a loan of approximately $637,000
for which it was in default of a financial covenant. However, acceleration of
the obligation and compliance with the covenant has been waived through November
30, 2001 by the financial institution holding the note.
7
<PAGE> 8
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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below. We caution you not to place undue reliance on any
such forward-looking statements. We assume no obligation to update any
forward-looking statements as a result of new information, subsequent events or
any other circumstances. Such statements speak only as of the date that they are
made.
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
As of September 30, 2000, the Back Yard Burgers system included 91
restaurants, of which 36 were company-operated and 55 were franchised. The
company's revenues are derived primarily from company-operated restaurant sales,
franchise and area development fees and royalty fees. Certain expenses (cost of
restaurant sales, restaurant operating expenses, depreciation and amortization
and advertising) relate directly to company-operated restaurants, while general
and administrative expenses relate to both company-operated restaurants and
franchise operations. The company's revenues and expenses are affected by the
number and timing of the opening of additional restaurants. Sales for new
restaurants in the period immediately following their opening tend to be high
because of trial by public and promotional activities. As a result, the timing
of openings can affect the average volume and other period-to-period
comparisons.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total revenue,
unless otherwise indicated, of certain items included in the company's
historical operations and operating data for the periods indicated.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
---------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
Revenues
Restaurant sales 89.8% 90.7%
Franchise and area development fees .7 .4
Royalty fees 5.6 5.1
Advertising fees 1.6 1.9
Other operating revenue 2.3 1.9
----- -----
Total revenue 100.0% 100.0%
===== =====
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
<S> <C> <C>
Costs and Expenses
Cost of restaurant sales(1) 32.8% 34.3%
Restaurant operating expenses(1) 49.5 47.5
General and administrative 11.7 12.2
Advertising 6.0 5.7
Depreciation and amortization 4.4 4.4
Operating income 4.0 3.5
Interest income .1 .1
Interest expense (2.1) (1.9)
Other, net 1.0 (.1)
Income before income taxes 3.0 1.6
Income taxes(2) (35.8) (36.4)
Net income 1.9 1.0
</TABLE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
---------------------------------
SEPTEMBER 30, OCTOBER 2,
2000 1999
------------- ----------
($000'S)
<S> <C> <C>
System-wide restaurant sales
Company-operated $19,861 $20,209
Franchised 31,531 28,998
------- -------
Total $51,392 $49,207
======= =======
Average annual sales per restaurant open for a full year(3)
Company-operated $ 747 $ 772
Franchised $ 768 $ 757
System-wide $ 759 $ 763
Number of restaurants
Company-operated 36 37
Franchised 55 51
------- -------
Total 91 88
======= =======
</TABLE>
(1) As a percentage of restaurant sales.
(2) As a percentage of income before taxes.
(3) 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.
9
<PAGE> 10
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 30,
2000 AND OCTOBER 2, 1999.
RESTAURANT SALES increased 1.2% to $7,009,000 during the thirteen weeks
ended September 30, 2000, compared to $6,923,000 for the same 1999 period. This
increase is primarily the result of the purchase of three higher volume
franchised restaurants in May of 2000 offset by the closing of three lower
volume restaurants and the conversion of one company-operated restaurant to a
franchised restaurant since the prior year. The increase is also the result of a
price increase implemented with the testing of the company's new 100% Black
Angus beef hamburgers in the Memphis area that began in August of 2000. These
increases are partially offset by a decrease in same-store sales of 5.0% for the
thirteen weeks ended September 30, 2000.
FRANCHISE AND AREA DEVELOPMENT FEES were $45,000 for the thirteen weeks
ended September 30, 2000, compared with $43,000 in the year-earlier period. Two
franchises were opened during the thirteen weeks ended September 30, 2000, and
two opened in the year-earlier period.
ROYALTY FEES increased 5.8% to $416,000 during the thirteen weeks ended
September 30, 2000, compared to $393,000 during the same period in 1999. The
increase is primarily due to a net increase of four franchised stores since the
prior year. This increase was partially offset by a 5.7% decrease in same-store
sales at franchised restaurants compared with the prior year period.
ADVERTISING FEES decreased 17.1% to $121,000 for the thirteen weeks
ended September 30, 2000, compared to $146,000 during the comparable period in
1999. The decrease is primarily due to a change in the number of franchisee
direct mail program participants from forty in the third quarter of 1999 to
twelve in the third quarter of 2000. Direct mail program fees represent a
portion of the overall advertising fees. The net increase of four franchised
restaurants contributing national advertising fees since the same period prior
year partially offset the decrease in advertising fees.
OTHER REVENUES increased 11.8% to $190,000 for the thirteen weeks ended
September 30, 2000 compared to $170,000 during the year-earlier period. The
increase is due primarily to an increase in vendor rebates earned in the current
period.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$2,250,000 for the thirteen weeks ended September 30, 2000, and $2,349,000
during the same period in 1999, decreasing as a percentage of restaurant sales
to 32.1% from 33.9%. This decrease as a percentage of sales is partially the
result of a decrease in coupons and discounts as well as a decrease in waste,
consisting of prepared food items not sold due to product hold time requirements
of the company and spoilage. The decrease is also attributable to the testing of
the company's new 100% Black Angus beef hamburgers in the Memphis area that
began in August of 2000, which resulted in improved margins on hamburger sales.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, maintenance, rent and certain other unit level operating expenses,
increased to $3,384,000 for the thirteen weeks ended September 30, 2000, from
$3,278,000 in the same prior year period, increasing as a percentage of
restaurant sales to 48.3%, from 47.4% for the year-earlier period. This increase
is primarily due to a 0.7% increase in labor as a percentage of sales over the
year-earlier period due to management's efforts during the quarter to increase
staffing at certain locations to improve customer service and enhance the
overall guest experience.
GENERAL AND ADMINISTRATIVE COSTS which decreased to $920,000 for the
thirteen weeks ended September 30, 2000 from $997,000 in the same year earlier
period, decreased as a percentage of total revenue for the thirteen weeks ended
September 30, 2000, to 11.8% from 13.0% in the same period in 1999. The decrease
is related to consulting fees incurred in the year-earlier period. During the
third
10
<PAGE> 11
quarter of 1999, the company incurred $78,000 in consulting expenditures for a
strategic study of system operations and facility design.
ADVERTISING EXPENSE which increased to $503,000 for the thirteen weeks
ended September 30, 2000, from $420,000 in the same period in 1999, increased as
a percentage of total revenues to 6.5% from 5.5%. This increase is primarily the
result of an increase in local store advertising spending for company-operated
stores of 1% during the second quarter of 2000.
INTEREST EXPENSE increased 16.2% to $165,000 for the thirteen weeks
ended September 30, 2000, from $142,000 in the year-earlier period. Since
October 2, 1999, debt increased by $359,000, or 6.2%, to $6,156,000 as of
September 30, 2000.
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER
30, 2000 AND OCTOBER 2, 1999.
RESTAURANT SALES decreased 1.7% to $19,861,000 during the thirty-nine
weeks ended September 30, 2000 compared to $20,209,000 for the same 1999 period.
This decrease is primarily the result of a decrease in same-store sales at
restaurants open for more than one year of 7.1%. This decrease is offset by the
purchase of three higher volume franchised restaurants in May of 2000 offset by
the closing of three lower volume restaurants and the conversion of one
company-operated restaurant to a franchised restaurant since the prior year, as
well as a price increase implemented with the testing of the company's new 100%
Black Angus beef hamburgers in the Memphis area that began in August of 2000.
FRANCHISE AND AREA DEVELOPMENT FEES increased to $160,000 for the
thirty-nine weeks ended September 30, 2000 compared to $96,000 during the
comparable period in 1999. The increase is due to the opening of eight new
restaurants in the first three quarters of 2000, compared with four openings in
the first three quarters of 1999.
ROYALTY FEES increased 9.3% to $1,238,000 during the thirty-nine week
period ended September 30, 2000 compared to $1,133,000 during the same period in
1999. This is due to an increase in franchised restaurant sales upon which the
fees are based, resulting from the net opening of four stores since October 2,
1999. This increase is offset by a year-to-date same franchised store same-store
sales decline of 4.4%.
ADVERTISING FEES decreased 17.6% to $350,000 for the thirty-nine weeks
ended September 30, 2000 compared to $425,000 during the comparable period in
1999. The decrease is primarily due to a change in the number of franchisee
direct mail program participants from forty in the third quarter of 1999 to
twelve in the third quarter of 2000. Direct mail program fees represent a
portion of the overall advertising fees. The net increase in franchised
restaurants since the same period prior year partially offset the decrease in
advertising fees.
OTHER REVENUES increased 18.8% to $505,000 for the thirty-nine weeks
ended September 30, 2000 compared to $425,000 during the year-earlier period.
The increase is due primarily to an increase in vendor rebates earned in the
current year.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$6,514,000 for the thirty-nine weeks ended September 30, 2000, and $6,921,000
during the same period in 1999, decreasing as a percentage of restaurant sales
to 32.8% from 34.3%. This decrease as a percentage of sales is partially the
result of a decrease in coupons and discounts as well as a decrease in waste,
consisting of prepared food items not sold due to product hold time requirements
of the company and spoilage. The decrease is
11
<PAGE> 12
also attributable to the testing of the company's new 100% Black Angus beef
hamburgers in the Memphis area that began in August of 2000, which resulted in
improved margins on hamburger sales.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, maintenance, rent and certain other unit level operating expenses,
increased to $9,831,000 for the thirty-nine weeks ended September 30, 2000, from
$9,607,000 in the same prior year period, increasing as a percentage of
restaurant sales to 49.5%, from 47.5% for the year-earlier period. This increase
is primarily due to a 1.8% increase in labor as a percentage of sales over the
year-earlier period due to management's efforts to increase staffing at certain
locations to improve customer service and enhance the overall guest experience.
GENERAL AND ADMINISTRATIVE COSTS, which decreased to $2,583,000 for the
thirty-nine weeks ended September 30, 2000 from $2,722,000 in the same year
earlier period, decreased as a percentage of total revenue for the thirty-nine
weeks ended September 30, 2000, to 11.7% from 12.2% in the same period in 1999.
The decrease is the result of $78,000 in consulting expenditures incurred during
the third quarter of 1999 combined with reduced travel spending, a reduction in
corporate personnel costs due to the elimination of certain corporate positions,
and the recognition of certain pre-opening costs in 1999 that were not incurred
in 2000.
ADVERTISING EXPENSE, which increased to $1,323,000 for the thirty-nine
weeks, ended September 30, 2000, from $1,271,000 in the same period in 1999,
increased as a percentage of total revenues to 6.0% from 5.7%. This is the
result of a second quarter 2000 increase in company-operated local store
advertising of 1.0% since the same period prior year. This increase is partially
off-set by a decrease in same-store sales of 7.1% for the thirty-nine weeks
ended September 30, 2000.
INTEREST EXPENSE increased 10.4% to $458,000 for the thirty-nine weeks
ended September 30, 2000, from $415,000 in the year-earlier period. Since
October 2, 1999, debt increased by $359,000, or 6.2%, to $6,156,000 as of
September 30, 2000.
OTHER, NET income was $219,000 for the thirty-nine weeks ended
September 30, 2000, compared with a net $24,000 expense in the prior year. This
change is primarily due to the recognition of $271,000 in net gains on the sale
of assets during fiscal year 2000.
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.
In the past, the company incurred non-cash charges for the effect of
company-operated restaurant closings and impaired assets at company-operated
restaurants. Also, related accruals for future lease payments of closed stores,
net of estimated sub-lease income, were previously recorded. During the
Thirty-Nine weeks ended September 30, 2000, $37,000 of lease obligation payments
were incurred for closed stores and charged against this reserve. Also, $90,000
of the reserve was reversed as a result of the sale of one of the properties for
which the reserve was established. As of September 30, 2000, the company's
remaining accrual for all future lease obligations discussed above was $143,000
for the remaining lease payments due, net of estimated sub-lease income.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $812,000 for the thirty-nine weeks ended
September 30, 2000 and $2,487,000 for the year-earlier period. Generally, the
company constructs its restaurant buildings on leased properties for its
company-operated restaurants. The average monthly lease cost for the 15
company-operated restaurants on leased sites at September 30, 2000 is
approximately $3,300 per month.
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For the 12 restaurants where the company leases the building as well as the
site, the average monthly lease cost is approximately $5,300.
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 $983,000 for the thirty-nine weeks ended September 30, 2000
and $985,000 for the year-earlier period.
Cash provided by operations for the thirty-nine week period ended
September 30, 2000, was $982,000 compared with $1,852,000 in the year-earlier
period. In recent history, 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 September 30, 2000, the company had total long-term debt of
$6,156,000 and unused lines of credit and loan commitments of potential
additional borrowings of $876,000. During the first quarter, the company
repurchased equipment sold in 1999 under a sale-leaseback transaction of
approximately $165,000, and the additional $435,000 borrowing commitment under
the lease agreement was cancelled as well. During the second quarter, the
company issued $600,000 in short-term notes payable as partial financing for the
purchase of three franchised stores on May 7, 2000, of which $450,000 remains
payable as of September 30, 2000. In the third quarter, the company also
cancelled a $150,000 line of credit.
The company is planning approximately $1,500,000 in capital
expenditures during 2000 and plans to fund these expenditures through existing
cash on hand, internally generated cash flow as well as the borrowing
commitments secured in 1998 or before. These capital expenditures may require
additional debt or equity financing, which the company has not secured at this
time.
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 September 30, 2000.
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 notified preferred stockholders of their right to
convert preferred stock to common stock, and anticipates that all shares of
preferred stock will eventually be converted. Such conversion began on July 5,
1995, at which time there were 1,199,979 shares of preferred stock outstanding.
As of September 30, 2000, only 19,763 shares have yet to be converted.
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 is crucial
for the company to develop and maintain programs to attract and retain quality
employees.
During the thirty-nine weeks ended September 30, 2000, the cost of beef
increased approximately 2.5% and the cost of chicken decreased approximately
1.0%. Management of the company expects these costs 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.
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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 continues to increase in difficulty as the number of businesses vying
for locations with similar characteristics increases. This will likely result in
higher occupancy costs for prime locations.
System-wide same-store sales decreased 5.4% during the third quarter of
2000. The company has implemented a targeted local store marketing plan combined
with a broader media campaign, and has begun testing 100% Black Angus beef
hamburgers in the Memphis area, to aid in the reversal of this negative trend.
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
The company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates on variable rate debt and the
repricing of fixed rate debt at maturity. Management monitors interest rate
fluctuations as an integral part of the company's overall risk management
program, which recognizes the unpredictability of financial markets and seeks to
reduce the potential adverse effect of our results. The effect of interest rate
fluctuations historically has been small relative to other factors affecting
operating results, such as food, labor and occupancy costs.
Less than 25% of the company's debt portfolio as of September 30, 2000,
had variable rates or had maturity dates of less than two years. With every 25
basis point increase in interest rates, the company could be subject to
additional interest expense of approximately $4,000 annually, depending on the
timing of the rate changes and debt maturities.
The company has considered the use of hedging instruments to minimize
interest rate fluctuation risk, but based on the debt portfolio structure
described above, no hedging tool has been deemed necessary for the company at
this time.
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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
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
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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 13, 2000 By: /s/ Lattimore M. Michael
--------------------------
Lattimore M. Michael
Chairman and Chief Executive
Officer
Date: November 13, 2000 By: /s/ Michael G. Webb
--------------------------
Michael G. Webb
Chief Financial Officer
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