<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934
FOR THE FISCAL YEAR ENDED JANUARY 1, 2000
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 registrant as specified in its charter)
DELAWARE 64-0737163
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
1657 N. SHELBY OAKS DRIVE, SUITE 105
MEMPHIS, TENNESSEE 38134-7401
(Address of principal executive offices) (Zip code)
(901) 367-0888
(Registrant'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
Indicate by check mark whether the registrant (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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [X]
The aggregate market value of common stock held by non-affiliates on
March 1, 2000 was approximately $4,438,000.
The number of shares outstanding of the registrant's common stock as of
March 1, 2000 was 4,623,023.
================================================================================
CERTAIN PORTIONS OF PART II ARE INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED JANUARY 1, 2000
AND CERTAIN PORTIONS OF PART III ARE INCORPORATED BY REFERENCE FROM THE
REGISTRANT'S PROXY STATEMENT RELATING TO THE ANNUAL MEETING OF STOCKHOLDERS TO
BE HELD ON MAY 18, 2000.
================================================================================
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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 16 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 handdipped milkshakes, fresh-made lemonade and
fresh-baked cobblers. As of January 1, 2000, our operations included 35
company-operated restaurants and 51 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.
OPERATING STRATEGY
Our restaurants are designed to project a back yard theme that
emphasizes charbroiled, freshly prepared, great tasting food, including gourmet
hamburgers, chicken sandwiches and other gourmet items as customers would
prepare in their own back yard. 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 premium 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 2000, 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
serving premium fast food and enhancing dine-in facilities, so
the design and feel of the facilities will match the standards
set by the quality of the food;
- improve the work flow of existing units to improve productivity
and throughput; and
- develop additional franchised restaurants with a committed and
enthusiastic group of franchisees.
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RESTAURANT OPERATIONS
RESTAURANT LOCATIONS. The following tables set forth the number of
restaurants located in each market of the company's system at January 1, 2000.
<TABLE>
<CAPTION>
COMPANY-OPERATED: FRANCHISED:
---------------- ----------
Number of Number of
Core Markets Restaurants Core Markets Restaurants
------------ ----------- ------------ -----------
<S> <C> <C> <C>
Memphis, TN Area 21 Kansas City, MO Area 6
Little Rock, AR Area 9 Fayetteville, NC Area 3
Nashville, TN Area 5 Jackson, MS Area 3
-- Knoxville, TN Area 3
Total 35 Asheville, NC Area 2
== Marietta, GA Area 2
Other Markets(1)
----------------
Mississippi 5
Tennessee 5
Arkansas 4
North Carolina 3
Alabama 2
Florida 2
Kentucky 2
Ohio 2
Illinois 1
Kansas 1
Louisiana 1
Missouri 1
Oklahoma 1
South Carolina 1
Texas 1
--
Total 51
==
</TABLE>
- ---------------
(1) 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>
52-Week Period Ended 52-Week Period Ended
January 2, 1999 January 1, 2000 (a)
-------------------- --------------------
<S> <C> <C>
Company-operated $25,082,000 $26,480,000
Franchised 34,482,000 38,639,000
----------- -----------
System-wide $59,564,000 $65,119,000
=========== ===========
</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
----------------------------------
12/28 1/3 1/2 1/1
----- ---- ---- ----
1996 1998 1999 2000
<S> <C> <C> <C> <C>
Restaurants (a)
Company-operated
Open beginning of period 32 34 32 33
Opened during period 3 1 3 5
Converted to Franchise 0 0 0 (1)
Closed during period (1) (3) (2) (2)
--- --- --- ---
Open at end of period 34 32 33 35
--- --- --- ---
Franchised
Open beginning of period 36 47 45 48
Opened during period 12 5 8 6
Converted to Franchise 0 0 0 1
Closed during period (1) (7) (5) (4)
--- --- --- ---
Open at end of period 47 45 48 51
--- --- --- ---
Total Restaurants 81 77 81 86
=== === === ===
</TABLE>
- ---------------
(a) Subsequent to January 1, 2000, (1) one franchised restaurant
closed in Hope Mills, NC, and (2) one franchised restaurant opened in each of
Southern Pines, NC, Austin, TX and Independence, MO.
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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.
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 restaurants range in size 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 1, 2000, the number of restaurants with
indoor dining was 26 company-operated facilities and 37 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 employees, many of whom work part-time. The
management staff of a typical restaurant operated by the company consists of a
unit supervisor and two co-unit supervisors. Each company-operated restaurant
unit supervisor reports directly to a district manager. The district managers
are able to provide close, hands-on management of each company-operated
restaurant since they have responsibility for only five to eight restaurants.
Each district manager reports directly to a director of operations.
SUPERVISION AND TRAINING. The company believes that training and
personnel development is crucial to its success. 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,
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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 18 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
deems to be in the interest of improving operations and earnings of
restaurants.
Franchisees are required to participate in the seasonal promotions,
which are supported by television, radio, newspaper, banners, point-of-purchase
materials and other local store marketing activities. The company's marketing
manual outlines advertising and public relations promotions as well as new
store opening information, grand opening information, trade area surveys and
describes how to write a marketing plan and budget for the franchisee's area.
Marketing is supported by a staff consisting of a marketing director and
marketing managers who coordinate plans and implementation with a national
advertising agency. Approved suppliers are set up to facilitate such things as
uniforms and collateral materials.
RESTAURANT REPORTING. Each restaurant has a computerized point-of-sale
system monitored by the management of the restaurant. With this system,
managers are able to monitor sales, labor and food costs, customer counts and
other pertinent information every 30 minutes that the restaurant is open. This
information allows a manager to better control labor utilization, inventories
and operating costs. For company-operated restaurants, management monitors
sales, food and labor costs, product mix, inventories and customer counts on a
weekly basis and profit and loss statements and balance sheets on a monthly
basis.
FRANCHISE OPERATIONS
STRATEGY. In addition to the 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
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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
$1,000 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 1, 2000, 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 49
restaurants by the end of December 31, 2004. Of the 51 franchised restaurants
as of January 1, 2000, 29 were being operated under area development agreements
by multiple unit franchisees and 22 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 nine area development agreements, three of
which were during 1999, for lack of performance by multiple unit franchisees
with respect to their projected development schedules. Additionally, during the
past three years, two franchise agreements were terminated because of a lack of
performance by single unit franchisees with respect to certain franchise
agreement requirements. The company believes that its overall experience with
franchisees who commit to develop restaurants under franchise agreements and
area development agreements has been favorable, although there can be no
assurance that future performance by franchisees under these agreements will be
successful.
The franchise agreement and area development agreement require that
the franchisee submit information regarding proposed restaurant sites to the
company for its review. The company does not arrange or make any provisions for
financing the development of restaurants by its franchisees. Each franchisee is
required to purchase all fixtures, equipment, inventory, products, ingredients,
materials and other supplies used in the operation of its restaurants from
approved suppliers, all in accordance with the company's specifications. The
company provides a training program for management personnel of its
franchisees. Under the terms of the franchise agreement, the company has
adopted standards of quality, service and food preparation for franchised
restaurants. Each franchisee is required to comply with all of the standards
for restaurant operations as published from time to time in the company's
operations manual.
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The company may terminate a franchise agreement for several reasons,
including among others, the franchisee's bankruptcy or insolvency, default in
the payment of royalties or advertising fees to the company, failure to
maintain standards set forth in the franchise agreement or operations manual,
material violation of any law, ordinance or governmental rule or regulation or
cessation of business. In such event, the company may also elect to terminate a
multiple unit franchisee's area development agreement.
FRANCHISE FEES AND ROYALTIES. Under the current franchise agreement,
each franchisee is generally required to pay a franchise fee 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 the subsequent $22,000 franchise fees(s)) for subsequent restaurants
covered under the area development agreement. For example, for a franchisee
whose area development agreement requires the development of five restaurants,
the franchise fee will be $25,000 for the first restaurant, and $17,000
($22,000 less $5,000) for each of the next four restaurants for an aggregate
total of $113,000. Each franchisee is also generally required to pay the
company a weekly royalty of 4% of the restaurant's taxable sales and to pay 1%
of the restaurant's weekly taxable sales to the company's national advertising
fund. Each restaurant is required to spend not less than 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 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.
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TRADEMARKS AND SERVICE MARKS
The company believes its trademarks and service marks have significant
value and are important to its marketing efforts. The company has registered
certain trademarks and service marks (including the name "Great Little Burger")
with the United States Patent and Trademark Office. The company has also
registered the name "Back Yard Burgers" and the kettle and flame design as
service marks. The company's policy is to pursue registration of its marks
whenever possible and to oppose vigorously any infringement of its marks.
GOVERNMENT REGULATIONS
The company is subject to Federal Trade Commission 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
regulations have not had a material effect on the company's operations. More
stringent and varied requirements of local governmental bodies with respect to
zoning, land use and environmental factors could delay or prevent the
development of a new restaurant in a particular area.
The company is also subject to state and federal labor laws that
govern its relationship with its employees, such as minimum wage requirements,
overtime and working conditions and citizenship requirements. Significant
numbers of the company's food service and preparation personnel are paid at
rates governed by the federal minimum wage. Accordingly, further increases in
the minimum wage would increase the company's labor costs and may have an
adverse effect on the company's operating margins.
EMPLOYEES
As of March 1, 2000, the company employed approximately 1,000 persons
in its restaurant operations, 29 of whom are corporate personnel, 110 of whom
are restaurant management and supervisory personnel and the remainder of whom
are hourly restaurant personnel. Of the 29 corporate employees, 8 are in
management positions and 21 are administrative or office employees.
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<PAGE> 10
ITEM 2. PROPERTIES
Of the 35 company-operated restaurants as of January 1, 2000, the
company has entered into ground leases, as lessee, for 26 restaurants. The
company owns the real property for 8 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 15
company-operated restaurants located on leased sites is approximately $3,231
per month. For the 11 restaurants where the company leases the building as well
as the site, the average monthly cost is approximately $4,401 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 35 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 7,500
square feet of leased space at 1657 N. Shelby Oaks Drive, Suite 105, Memphis,
Tennessee 38134. The company's lease expires February 28, 2007 and provides for
a minimum annual rent of $80,025. 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 3, 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
April 3, 1999...................... $2.44 $1.50
July 3, 1999....................... $2.00 $1.56
October 2, 1999.................... $2.50 $1.75
January 1, 2000.................... $2.00 $1.44
Through March 24, 2000............. $1.59 $1.25
</TABLE>
At March 24, 2000, the common stock was held of record by
approximately 530 record stockholders. On March 24, 2000, the last sale price
for the common stock as reported by Nasdaq was $1.25 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. SELECTED FINANCIAL DATA
Incorporated herein by reference from portions of the company's annual
report to the stockholders for the year ended January 1, 2000, filed as Exhibit
13 to this Form 10-K.
ITEM 7. 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 1, 2000, filed as Exhibit 13 to
this Form 10-K.
10
<PAGE> 12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference from the company's annual report to
the stockholders for the year ended January 1, 2000, filed as Exhibit 13 to
this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference from the company's annual report to
the stockholders for the year ended January 1, 2000, filed as Exhibit 13 to
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
No items are reportable hereunder.
11
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 18, 2000, 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 56 Chairman of the Board and Chief Executive Officer
Michael W. Myers 41 Chief Operating Officer
William N. Griffith 37 Executive Vice President, Sec./Treasurer and Director
Michael G. Webb 31 Chief Financial Officer
W. Kurt Henke 41 Director
Stephen J. King 48 Director
Jim L. Peterson 64 Director
William B. Raiford, III 39 Director
Joseph L. Weiss 40 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. 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. 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. Myers has been chief operating officer since August 1999. From
1995 to 1999, he was a regional vice president for Whataburger, Inc.
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 and Mr. King continues to serve the company
as an outside consultant and director.
Mr. Peterson is currently the president and chief executive officer of
Hospitality Solutions, Inc. From 1994 to 1999, he was president and chief
executive officer of Bojangles' Restaurants, Inc. Prior to joining Bojangles,
he was president and chief executive officer for Whataburger, Inc. for 20
years.
Mr. Raiford has been a director since 1993. He has been an attorney
with Merkel & Cocke, P.A. since 1989.
Mr. Weiss is currently president of A. Weiss Company, a franchisee of
the company. He was president and chief operating officer of the company from
1993 to 1999. He has been a director since 1989.
12
<PAGE> 14
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the company's definitive proxy
statement for the annual meeting of stockholders to be held May 18, 2000, to be
filed pursuant to Regulation 14A.
ITEM 12. 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 18, 2000, to be
filed pursuant to Regulation 14A.
ITEM 13. 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 18, 2000, to be
filed pursuant to Regulation 14A.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) Consolidated Financial Statements
The following consolidated financial statements, notes related thereto
and report of independent auditors are referenced in Item 8 of this Form 10-K
and are incorporated herein by reference from the company's annual report to
the stockholders for the year ended January 1, 2000, filed as Exhibit 13 to
this Form 10-K:
- Consolidated Balance Sheets for the years ended January 1,
2000 and January 2, 1999
- Consolidated Statements of Operations for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998
- Consolidated Statements of Changes in Stockholders' Equity for
the years ended January 1, 2000, January 2, 1999 and January
3, 1998
- Consolidated Statements of Cash Flows for the years ended
January 1, 2000, January 2, 1999 and January 3, 1998
- Notes to Consolidated Financial Statements
- Report of Independent Accountants
(a)(2) Consolidated Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are not applicable and therefore have been omitted.
13
<PAGE> 15
(a)(3) 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)
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)
</TABLE>
14
<PAGE> 16
<TABLE>
<S> <C>
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)
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.(12)
10.31 Promissory Note by and between the Bank of Mississippi and Back Yard Burgers, Inc.
dated November 10, 1998.(12)
10.32 Lease agreement by and between Amplicon, Inc. and Back Yard Burgers, Inc. dated
May 6, 1999.(13)
</TABLE>
15
<PAGE> 17
<TABLE>
<S> <C>
10.33* Lease agreement by and between Belz Devco, L.P. and Back Yard Burgers, Inc. dated
November 12, 1999.
11* Statement re: Computation of Net Income per Share.
13* Registrant's annual report to stockholders for the 52-week period ended January 1, 2000.
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.(14)
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits to this report are listed in Item 14(a)(3) above.
(d) Financial Statement Schedule
Not applicable
</TABLE>
- --------------
* Filed herewith.
(1) Previously filed with the Securities and Exchange Commission (the
"Commission") as an Exhibit to the Registrant's Form SB-2 on April 20,
1993 (File No. 33-61356).
(2) Previously filed with the Commission as an Exhibit to the Registrant's
Amendment No. 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-K, 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-K, 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-K, 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-K, 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-K, dated January 3, 1998 and filed on April 3, 1998.
16
<PAGE> 18
(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) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-KSB dated January 2, 1999 and filed on April 2, 1999.
(13) Previously filed with the Commission as an Exhibit to the Registrant's
Form 10-Q dated July 3, 1999 and filed on August 17, 1999.
(14) Submitted electronically to the Securities and Exchange Commission for
information only and not filed.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act, the registrant has duly 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 30, 2000
Pursuant to the requirements of the Securities Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Lattimore M. Michael Chairman of the Board and
- ---------------------------------------- Chief Executive Officer
Lattimore M. Michael March 30, 2000
/s/ William N. Griffith Executive Vice President and Director March 30, 2000
- ----------------------------------------
William N. Griffith
/s/ Michael G. Webb Chief Financial Officer March 30, 2000
- ----------------------------------------
Michael G. Webb
- ---------------------------------------- Director March __, 2000
W. Kurt Henke
/s/ Stephen J. King Director March 30, 2000
- ----------------------------------------
Stephen J. King
- ---------------------------------------- Director March __, 2000
Jim Peterson
/s/ William B. Raiford, III Director March 30, 2000
- ---------------------------------------
William B. Raiford, III
/s/ Joseph L. Weiss Director March 30, 2000
- ---------------------------------------
Joseph L. Weiss
</TABLE>
18
<PAGE> 1
EXHIBIT 10.33
INDUSTRIAL LEASE AGREEMENT
THIS LEASE is entered into this 12th day of November, 1999, in
consideration of the covenants and undertakings of each of the parties hereto
by and BETWEEN BELZ DEVCO L.P., a TENNESSEE LIMITED PARTNERSHIP, hereinafter
referred to as "Landlord," and BACK YARD BURGERS, INC., a DELAWARE CORPORATION,
hereinafter referred to as "Tenant";
WITNESSETH:
Landlord owns, operates or controls certain real property located in
the City of MEMPHIS, County of SHELBY and State of TENNESSEE located at 1657
SHELBY OAKS DRIVE NORTH, SUITES 103 - 106, within the SHELBY OAKS INDUSTRIAL
PARK (the "Property"); and
WHEREAS, Tenant desires to lease from Landlord space within the development or
building described above, which is more particularly shown on Exhibit A hereto
and is more particularly described in Part 1 below.
NOW, THEREFORE, Landlord and Tenant agree as follows:
PART 1
PREMISES
In consideration of the rent and other agreements contained in the
Lease, Landlord leases to Tenant and Tenant rents from Landlord the premises
(hereinafter the "Premises") described as follows:
Located at 1657 SHELBY OAKS DRIVE NORTH, SUITES 103-106, MEMPHIS,
TENNESSEE. The Premises contain approximately 7,500 square feet of area.
The Premises are designated on Exhibit A hereto for the purpose of
setting forth the configuration and approximate dimensions of the space and
shall be improved or otherwise prepared for occupancy by Tenant in accordance
with Exhibit C which sets out any work improvements to be implemented by
Landlord and the cost, if any, to Tenant. In the absence of any specific
requirements set forth on Exhibit C, Tenant shall be deemed to have accepted the
Premises "as is."
PART 2
TERM
Subject to the terms and conditions contained herein, this Lease shall be
effective on the date of complete execution hereof by Landlord and Tenant, but
the term of this Lease and the payment of Base Rental and other assessments
shall begin on the commencement date the ("Commencement Date") which shall be
the earlier of (i) the date on which Tenants occupies the Premises or (ii)
fifteen (15) days after Landlord tenders delivery of the Premises to Tenant.
Tender of delivery shall have occurred on the date Landlord notifies Tenant
that Landlord has either (i) substantially completed any improvements to be
implemented by Landlord pursuant to Exhibit C subject to minor punchlist items,
or (ii) determined that Landlord's work pursuant to Exhibit C has progressed
sufficiently such that Tenant may commence and complete Tenant's work while
portions of Landlord's work are still being completed.
If the Commencement Dates occurs on the first day of the month, the
term shall expire without notice on the last day of the previous calendar month
SEVEN (7) YEARS hence, and if the Commencement
<PAGE> 2
Date occurs on a day other than the first day of a month, the term shall expire
without notice on the last day of the calendar month in which the Commencement
Date occurs SEVEN (7) YEARS hence.
In the event Landlord is unable to deliver the Premises to Tenant on
or prior to the Commencement Date, Tenant's sole right and remedy shall be to
delay the commencement of the term by the number of days that delivery of
possession is delayed. Tenant acknowledges that Landlord shall use diligent
efforts to deliver the Premises as provided herein however actions of parties
in possession or delays in construction may effect Landlord's ability to
deliver the Premises to Tenant.
Any access by Tenant to the Premises prior to the Commencement Date
shall be upon all of the terms, covenants and conditions of this Lease, except
only the payment of Base Rental and Additional Charges. Tenant shall pay all
utility charges related to the Premises which accrue from and after Landlord's
tender of possession.
Landlord and Tenant agree that, upon the demand of the other party,
each shall execute an amendment to this Lease, in recordable form, setting
forth the Commencement Date and the termination date of the Lease term.
PART 3
RENT, TAXES AND INSURANCE
Tenant covenants and agrees that without demand, notice or set off,
Tenant shall pay to Landlord minimum annual rental (hereinafter the "Base
Rental") in the amounts as follows:
Base Rental in the amount of EIGHTY THOUSAND AND TWENTY-FIVE AND
00/100 DOLLARS ($80,025.00) per annum, payable in equal monthly installments of
SIX THOUSAND SIX HUNDRED SIXTY-EIGHT AND 75/100 DOLLARS ($6,668.75) per month
in advance on or before the first day of each month throughout the term of this
lease.
Additionally, Tenant shall pay to Landlord its Proportionate Share (as
defined in the General Lease Provisions) of Real Estate Taxes and Assessments
(as defined in the General Lease Provisions) and Tenant shall pay to Landlord
its Proportionate Shares of Landlord's annual insurance premiums which amounts
shall be paid as provided in Article 1 of the General Lease Provisions.
All rental payments and payments of Additional Charges hereunder shall
be sent to:
Belz Devco L.P.
Attn: Accounts Receivable Department
P.O. Box 3661
Memphis, Tennessee 38173-3661
or to such other addresses as Landlord may direct in writing from time
to time.
PART 4
USE AND OPERATION
The Premises shall be opened for business, kept open for business and
used continuously only for the following use: GENERAL OFFICE USE, TEST KITCHEN
FACILITY AND DISTRIBUTION OF FAST FOOD PRODUCTS.
<PAGE> 3
PART 5
NOTICES
All notices required or provided for under this Lease shall be given
in the manner as prescribed by the notice requirements of the General Lease
Provisions, addressed to the following addresses:
<TABLE>
<CAPTION>
To Landlord: To Tenant:
<S> <C>
Belz Devco L.P. Back Yard Burgers, Inc.
c/o Belz Enterprises 1657 Shelby Oaks Drive North, Suites 103-106
100 Peabody Place, Suite 1400 Memphis, TN 38134
Memphis, Tennessee 38103 ATTENTION: Lattie Michael, CEO
ATTENTION: Ronald A. Belz
</TABLE>
or to such other addresses as Landlord or Tenant may direct in writing from
time to time.
PART 6
REAL ESTATE AGENT
This Lease was negotiated by BELZ REALTY COMPANY, L.L.C., represented
by, LARRY WOOD acting as agent for Landlord and SAIG COMPANY, represented by
EDDIE SAIG acting as agent for Tenant and BELZ REALTY, COMPANY, L.L.C., agrees
to pay said agents a commission in accordance with the agreement between BELZ
REALTY COMPANY, L.L.C. and agents.
PART 7
OPTION TO RENEW
It is agreed and understood that the Tenant, if not in default and is
open and operating, shall have the right to extend this Agreement for TWO (2)
additional period(s) of FIVE (5) YEARS each at the then Fair Market Rental
rate. If Tenant shall elect to extend, Tenant shall give to Landlord not less
than six (6) months' written notice (certified mail) prior to the expiration of
the original term of this Lease Agreement. If within thirty (30) days, the
Landlord and Tenant have not agreed upon at the Fair Market Rental rate during
the respective term, then Tenant and Landlord shall each appoint a
knowledgeable real estate broker or appraiser familiar with commercial property
of the type in the Memphis metropolitan area. The two appointees shall
designate a third real estate broker or appraiser and the majority decision of
the three shall be binding upon Tenant and Landlord, but under no circumstances
shall the rent during any extended term be less than rent paid during the
preceding term. The cost of arbitration shall be borne equally by the Landlord
and Tenant.
PART 8
FIRST RIGHT OF REFUSAL
Provided that Tenant is not in default hereunder, Tenant shall have a
right of first refusal to lease any contiguous space that may become available
during the term of this Lease, subject to the existing tenant's rights. In the
event Landlord receives a bona fide offer from a third party to lease said
space, Landlord shall notify Tenant of such offer as well as the material terms
and provisions of such offer and Tenant shall have a period of ten (10) days to
notify Landlord in writing whether it elects to exercise its right of first
refusal to lease the contiguous space. If Tenant fails to give notice to
Landlord during such ten (10) day period or elects not to lease the space,
Landlord shall have the right to lease such space to the third party offerer.
If Tenant fails to exercise the right of first refusal to lease said space,
then it shall have twenty (20) days to enter into an agreement with Landlord
which shall
<PAGE> 4
modify the Lease Agreement to incorporate the first refusal space as part of
the Premises, subject to all of the terms and conditions contained herein,
except the material terms with respect to the first refusal space shall be as
set forth in the Landlord's notice to Tenant.
PART 9
ENTIRE AGREEMENT
This lease includes the Lease Agreement, Exhibit A (drawing or
description of the Property showing the general location of the Premises),
Exhibit B (General Lease Provisions), Exhibit C (which delineates the
construction requirements of the parties, if any). The foregoing constitute all
of the agreements and conditions made between the parties hereto, and no
representations or statements claimed to have been made and not herein
contained shall vary or modify this Lease in any way.
IN TESTIMONY WHEREOF the above named Landlord and the above named
Tenant have executed this and three (3) other original instruments of identical
year and date, on the day and year set forth on page 1 of this Lease.
LANDLORD: Belz Devco L.P.
BY: BELZ INVESTCO, L.P., General Partner
BY: URCO, INC., General Partner
By: /s/ Morris I. Thomas
---------------------------------------
Morris I. Thomas, Vice President
By: /s/ Irvin S. Skopp
---------------------------------------
Irvin S. Skopp, Vice President
TENANT: Back Yard Burgers, Inc.
By: /s/Lattie Michael
---------------------------------------
Lattie Michael, CEO
Exhibits: A. Site Plan and/or Floor Plan
B. General Lease Provisions
C. Construction Exhibit (if applicable)
Lease Agreement between Belz Devco L.P. and Back Yard Burgers, Inc. for 1657
Shelby Oaks Drive North at space number 103-106.
<PAGE> 5
STATE OF TENNESSEE
COUNTY OF SHELBY
Before me, a Notary Public of the State and County aforesaid,
personally appeared MORRIS I. THOMAS AND IRVIN S. SKOPP, VICE PRESIDENTS,
respectively of URCO, INC., a Tennessee corporation, said corporation is the
general partner of BELZ INVESTCO L.P., a Tennessee limited partnership, the
general of BELZ DEVCO L.P., A Tennessee limited partnership, with whom I am
personally acquainted, and who, upon oath acknowledged that they are the VICE
PRESIDENTS, respectively, of URCO, INC., General Partner, of BELZ INVESTCO
L.P., the general partner of BELZ DECO L.P., and that they as such VICE
PRESIDENTS, respectively, executed the foregoing instrument for the purpose
therein contained by signing the name of such partnerships by such corporation,
by themselves as VICE PRESIDENTS, respectively, of such corporation.
WITNESS my hand and Notarial Seal, at office in Memphis, Tennessee,
this, the 12th day of November, 1999.
/s/ Dawnyel Barrett
-------------------------------------
Notary Public
My Commission Expires: 2/13/02
STATE OF Tennessee
COUNTY OF Shelby
Before me, a Notary Public of the State and County aforesaid,
personally appeared LATTIE MICHAEL with whom I am personally acquainted, (or
proved to me on the basis of satisfactory evidence) and who, upon oath,
acknowledge himself to be the CEO of BACK YARD BURGERS, INC., the within named
bargainor, a Delaware corporation, and that he executed the foregoing
instrument for the purposes therein contained by signing the name of such
corporation by himself as such PRESIDENT.
Witness my hand, at office, this 12th day of November, 1999.
/s/ Dixie McConnell
-------------------------------------
Notary Public
My Commission Expires: 3/14/00
<PAGE> 6
TABLE OF CONTENTS
TO
EXHIBIT B TO
INDUSTRIAL LEASE AGREEMENT
<TABLE>
<S> <C>
ARTICLE 1 RENT AND OTHER PAYMENTS...................................................................................2
Section 1. Base Rental..............................................................................................2
Section 2. Additional Charges.......................................................................................2
(i) Common Areas Charges............................................................................................2
(ii) Real Estate Taxes and Assessments..............................................................................2
(iii) Other Taxes...................................................................................................2
(iv) Insurance......................................................................................................2
(v) Tenant's Proportionate Share....................................................................................2
(vi) Payment........................................................................................................3
Section 3. Security Deposit.........................................................................................3
ARTICLE 2 USE AND OPERATION.........................................................................................3
Section 1. Permitted Use............................................................................................3
Section 2. Parking, Etc.............................................................................................3
Section 3. Lawful and Moral Use.....................................................................................4
Section 4. Additional Tenant Covenants..............................................................................4
ARTICLE 3 ASSIGNMENT AND SUBLETTING.................................................................................4
ARTICLE 4 ALTERATIONS, INSTALLATIONS AND REMOVAL OF IMPROVEMENTS BY TENANT..........................................4
ARTICLE 5 INSURANCE AND RELATED MATTERS.............................................................................5
Section 1. Loss or Damage to Tenant's Property......................................................................5
Section 3. Landlord's Insurance.....................................................................................5
Section 4. Waiver of Recovery.......................................................................................5
Section 5. Hold Harmless and Indemnification........................................................................6
Section 6. Invalidation of Insurance/Increased Premiums.............................................................6
ARTICLE 6 REPAIRS...................................................................................................6
ARTICLE 7 MECHANIC'S LIEN...........................................................................................6
ARTICLE 8 DAMAGE OR DESTRUCTION BY .................................................................................7
ARTICLE 9 RIGHT OF ENTRY, ETC.......................................................................................7
ARTICLE 10 DEFAULT..................................................................................................7
ARTICLE 11 INSOLVENCY OF TENANT.....................................................................................8
ARTICLE 12 DELIVERY AT END OF LEASE.................................................................................8
ARTICLE 13 EXTENSION; PARTIAL PAYMENT; NO ACCORD AND SATISFACTION...................................................8
ARTICLE 14 SUBORDINATION; ATTORNMENT; ESTOPPEL; LANDLORD'S COVENANT AS TO TITLE.....................................9
ARTICLE 15 GRAPHICS.................................................................................................9
ARTICLE 16 CONDEMNATION.............................................................................................9
ARTICLE 17 UTILITIES................................................................................................9
ARTICLE 18 ENVIRONMENTAL MATTERS...................................................................................10
ARTICLE 19 FIRE PROTECTION.........................................................................................10
ARTICLE 20 PERSONAL LIABILITY......................................................................................10
ARTICLE 21 NOTICES.................................................................................................11
ARTICLE 22 RULES AND REGULATIONS...................................................................................11
ARTICLE 23 REAL ESTATE AGENT.......................................................................................11
ARTICLE 24 COVENANTS RUN TO HEIRS..................................................................................12
</TABLE>
<PAGE> 7
<TABLE>
<S> <C>
ARTICLE 25 SHORT FORM LEASE........................................................................................12
ARTICLE 26 CORPORATE TENANTS.......................................................................................12
ARTICLE 27 ENTIRE AGREEMENT........................................................................................12
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<PAGE> 8
EXHIBIT B TO
INDUSTRIAL LEASE AGREEMENT
GENERAL LEASE PROVISIONS
ARTICLE 1
RENT AND OTHER PAYMENTS
SECTION 1. BASE RENTAL
Tenant shall, without demand or notice, pay to Landlord minimum annual
rental ("Base Rental") in the amount as is set forth in the Lease Agreement
which amounts shall be paid in equal monthly installments (or in the manner
prescribed by Part 3 of the Lease to which this is an Exhibit) without
deduction, abatement or setoff in advance on or before the first day of each
month throughout the term of this Lease. Base Rental for any partial calendar
month shall be prorated at a daily rate based upon the number of days in the
respective calendar year. Tenant shall not prepay any Base Rental more than one
(1) month in advance of its due date.
SECTION 2. ADDITIONAL CHARGES
In addition to the Base Rental Tenant agrees, commencing on the
Commencement Date, to pay to Landlord, at the times hereinafter set forth,
without deduction, setoff or abatement, the following additional charges, as
additional rent, the nonpayment of which shall be subject to all provisions of
this Lease and of law as to default in the payment of rent or money
(hereinafter referred to as the "Additional Charges"):
(I) COMMON AREAS CHARGES. Tenant shall pay Tenant's Proportionate
Share (as hereinafter defined) of Landlord's total annual cost and expenses
("Common Areas Charges") of operating, maintaining, repairing, upgrading and
supervising the Common Areas (as hereinafter defined) which cost and expenses
shall be calculated on an accrual basis and include, but not be limited to,
cleaning, gardening and landscaping the Common Areas including the replacement
and installation of landscaping; sanitary control to and for the Common Areas;
any security or traffic control forces or equipment provided for the Common
Areas; repairs and replacements of the paving, curbs, walkways, and all other
Common Areas and facilities; line painting; attending the parking areas; any
governmental charges, surcharges, fees, or taxes on the parking areas or on
cars parking therein: costs of all utilities used or consumed in the Common
Areas including, without limitation, electricity, water and gas consumed in
parking areas and other Common Areas as well as sewer fees and sprinkler
monitoring fees, repair and/or replacement of on-site gas lines, water lines,
sanitary sewer lines, storm sewer lines, drainage facilities, light poles,
bulbs, and any other utility lines. pipes, wires, facilities and related
appurtenances serving the Common Areas or more than one tenant premises: any
changes made in the Common Areas to comply with legal requirements; inspection;
depreciation of equipment and facilities used in connection with the Common
Area; amortization of charges which Landlord elects to charge over more than
one year which Landlord could have charged in one year; cost of signs, sign
maintenance and sound systems; all personal property and similar taxes; the
cost of all Common Areas equipment, machinery, tools, supplies and other
personal property and facilities and replacements thereof; the cost of
personnel (including benefits and taxes) to implement such services; the cost
of any contracts entered into for the performance of any such services or
functions; and similar services and functions; plus fifteen percent (15%) of
all of the foregoing costs and expenses for Landlord's administration expenses.
The Common Areas shall be defined as landscaping, paving, curbs, walkways,
driveways, parking areas, and any other areas not reserved for the use of a
single tenant.
(II) REAL ESTATE TAXES AND ASSESSMENTS. Tenant shall pay to Landlord
Tenant's Proportionate Share (as hereinafter defined) of the real property
taxes and Assessments (general and special, ordinary and extraordinary foreseen
and unforeseen) levied against the land, building and improvements constituting
the Property in which the Premises are located or property of which the
Premises are a part or property included in Landlord's real property tax and
assessment bills for the building in which the Premises are located ("Real
Property Taxes Assessments").
"Real Property Taxes and Assessments" shall include all costs and fees
including consultant's and similar fees incurred by Landlord in contesting or
defending taxes and assessments or negotiating with public authorities. A copy
of Landlord's tax bill shall be conclusive evidence of the amount of Real
Property Taxes and Assessments assessed or levied.
(III) OTHER TAXES. Should any government authority having jurisdiction
impose a tax and/or assessment of any kind or nature upon, against, or with
respect to the rentals or other payments payable to Landlord or on the gross
receipts of Landlord either by way of substitution for all or any part of the
Real Property Taxes and Assessments levied or assessed against such land,
building and improvements, or in addition thereto, then such shall be deemed to
be a Real Property Tax
<PAGE> 9
and Assessment and Tenant shall be obligated to pay said tax. Tenant shall pay
said tax directly to the taxing authority or, if Landlord is obligated to pay
the taxing authority, Tenant shall pay to Landlord Tenant's Proportionate Share
thereof.
(IV) INSURANCE. Tenant shall pay to Landlord Tenant's Proportionate
Share of Landlord's annual premiums for insurance carried by Landlord in
accordance with the requirements of Article 5 of these General Lease Provisions
for "all risk" insurance coverage; commercial general liability insurance; rent
loss insurance; boiler and machinery insurance; and all other insurance and the
loss deductibles maintained by Landlord for the building and Common Areas from
time to time.
(V) TENANT'S PROPORTIONATE SHARE. In the event the Premises are a part
of a building with multiple tenants. "Tenant's Proportionate Share" shall be
defined as being a fraction, the numerator of which is the number of leasable
square feed in the Premises and the denominator of which is the leaseable
square footage of the area within the building in which the Premises are
located.
In the event the Premises are located in a Property consisting of
multiple buildings. "Tenant's Proportionate Share" shall be defined as being a
fraction, the numerator of which is the number of leasable square feet in the
Premises and the denominator of which is the leasable square footage of the
area within the building comprising the Property.
(VI) PAYMENT. The foregoing amounts, unless the amount and time for
payment are fixed, may be separately invoiced by Landlord and in such event
shall be paid by Tenant within fifteen (15) days after the date of such
invoice. Said amounts may be estimated by Landlord in which event Landlord
shall notify Tenant from time to time of Landlord's estimate. Tenant shall pay
said estimate (as said estimate may be revised) in advance on the first day of
each and every calendar month with Tenant's Base Rental without further notice.
When Landlord has calculated the exact amount actually payable by Tenant for
each item. Landlord shall notify Tenant. Any deficiency in payment by Tenant
for any item shall be paid by Tenant to Landlord upon receipt of the notice in
respect to such item. Any overpayment by Tenant shall be credited against the
next ensuing installments of Landlord's estimate of that item.
In the event of a dispute regarding payment, the burden of proof of
payment of any monthly installments of Base Rental or Additional Charges
hereunder shall be upon Tenant.
All Base Rental, Additional Charges and other amounts required to be
paid shall be paid to Landlord, at the notice address as is set forth in the
Lease Agreement or at such other place or places as Landlord may from time to
time designate in writing. If Tenant shall fail to pay any amounts required to
be paid under the terms of this Lease within seven (7) days after the same is
due. Tenant shall be obligated to pay a late payment charge equal to the
greater of One Hundred Dollars ($100.00) or ten percent (10%) of any payment
not paid when due to reimburse Landlord for its additional administrative
costs. In addition any Base Rental or Additional Charge which is not paid
within seven (7) days after the same is due shall bear interest at a rate equal
to the lessor of (i) eighteen percent (18%) per annum or (ii) the highest
contract rate allowable by the state in which the Premises are located from the
first day due until paid. Any assessments pursuant to this Section which shall
become due shall be payable, unless otherwise provided herein, with the next
installment of Base Rental. Any payment by Tenant or acceptance by Landlord of
a lessor amount than shall be due from Tenant to Landlord shall be treated as a
payment on account. The acceptance by Landlord of a check for a lesser amount
with an endorsement or statement thereon, or upon any letter accompanying such
check, that such lesser amount is payment in full shall be given no effect, and
Landlord may accept such check without prejudice to any other rights or
remedies which Landlord may have against Tenant.
SECTION 3. SECURITY DEPOSIT
On or before the Commencement Date, Tenant shall deposit with Landlord
the sum set forth as the "security deposit" in Part 3 of the Lease to which
this is an Exhibit. Said deposit shall be held by Landlord, without liability
for or payment of interest thereon, as security for the faithful performance by
Tenant of all the terms, covenants and conditions of the Lease by Tenant to be
performed. Landlord shall not be required to hold the deposit as a separate
fund, but may commingle it with other funds. If at any time during the Lease
term any rent or additional rent payable by Tenant shall be overdue, or if
Tenant fails to perform any of the other terms, covenants or conditions to be
performed by Tenant, then Landlord at its option, may appropriate and apply all
or any portion of said deposit to the payment of any such overdue rent or
additional rent and to the compensation of Landlord for loss or damage
sustained by Landlord due to a breach by Tenant as aforesaid, without prejudice
to Landlord's other remedies. Should all or any part of the security deposit be
appropriated and applied by Landlord as provided above, then Tenant shall, upon
demand of Landlord, forthwith remit to Landlord a sufficient amount in cash to
restore the same to the original sum deposited. Should Tenant comply with all
of the terms, covenants and conditions of this Lease binding on Tenant, the
said deposit shall be returned in full to Tenant at the
<PAGE> 10
expiration of the term; PROVIDED, HOWEVER, (i) Landlord may deliver the funds
deposited hereunder to the purchaser or transferee of Landlord's interest in
the Premises or building in which the Premises are located in the event that
such interest is sold or otherwise transferred, and thereupon Landlord shall be
discharged from any further liability with respect to such deposit; and (ii) in
the event of the foreclosure of any first mortgage encumbering the Premises or
building in which the Premises are located or any part thereof or a conveyance
in lieu of foreclosure, the party who succeeds to title by reason thereof shall
have no obligation for the return of the security deposit unless it was
actually received by such party.
ARTICLE 2
USE AND OPERATION
SECTION 1. PERMITTED USE
The Premises shall be opened for business, kept open for business and,
except as provided in Part 4 of the Lease Agreement, used continuously only for
a general office and for the storage and distribution of products manufactured,
warehoused or distributed by Tenant, none of which shall be Hazardous
Substances (as defined in Article 18 hereof) or otherwise create a risk which
may adversely affect Landlord's insurance or impose additional risks to the
building in which the Premises are located. Tenant agrees that it will not use
or permit or suffer the Premises or any part thereof to be used for any
business or purpose other than specifically defined and permitted by the Lease
Agreement or this paragraph.
Tenant will obtain all permits required for its occupancy other than building
permits which are required in connection with improvements which Landlord is
required to make pursuant to this Lease Agreement.
SECTION 2. PARKING, ETC.
Landlord shall provide areas during the term of this Lease for parking
and other uses, in common with others, by Tenant's customers and employees,
together with the right of ingress to and egress from the Premises over the
Common Areas, Landlord reserves the right to establish and impose from time to
time reasonable rules and regulations as to the occupancy of the Premises and
uniform operation of the building in which the Premises are located and may
require that delivery trucks or similar vehicles be parked in designated areas.
In no event will disabled vehicles be kept within the Common Areas and in no
event will the Common Areas be used for vehicle repair.
SECTION 3. LAWFUL AND MORAL USE.
The Premises shall, during the term of this Lease, be used only and
exclusively for lawful and moral purposes, and on part of the Premises or
improvements thereon shall be used in any manner whatsoever for any purposes in
violation of the ordinances and laws of any governmental authority having
jurisdiction over the Premises, and Tenant will save and hold the Landlord
harmless from any such violations.
Tenant, at Tenant's expense, shall comply with all laws, rules,
orders, ordinances, directions, regulations, and requirements of federal,
state, county and municipal authorities, now in force or which may hereafter be
in force, which shall impose any duty upon Landlord or Tenant with respect to
the use, occupation or alteration of the Premises.
SECTION 4. ADDITIONAL TENANT COVENANTS.
Tenant, at Tenant's expense, shall keep the plate glass within the
Premises clean and clear of any debris and litter; keep any garbage, trash,
rubbish or refuse in rat-proof containers within the interior of the Premises
until removed, have such garbage, trash, rubbish and refuse removed on a
regular basis; keep all mechanical apparatus free of vibration and noise which
may be transmitted beyond the Premises; keep any vestibules or entries to the
Premises and the sidewalks, driveways, parking areas, rear service areas and
loading areas and other areas adjacent to the Premises free of all trash,
refuse or other articles; not permit any accumulations of garbage, trash,
refuse, or rubbish within or outside of the Premises; remove its personal
property from the Common Areas; not cause or permit objectionable odors to
emanate from the Premises; and not distribute handbills, printed materials, or
advertising outside its Premises or within the Common Areas or solicit business
in the parking areas or other Common Areas.
ARTICLE 3
ASSIGNMENT AND SUBLETTING
This Lease shall not be assigned, encumbered or in any other manner
transferred by Tenant, voluntarily or involuntarily, by operation of law or
otherwise, nor shall the Premises or any part thereof be sublet, licensed,
granted or used or occupied by anyone other then Tenant without first obtaining
the written consent of Landlord.
<PAGE> 11
A change in the control of Tenant or any guarantor of this Lease whose
stock is not publicly held and traded shall be deemed to be an assignment for
all purposes of this Lease.
In the event that Landlord consents to said subletting or assignment,
any amounts received by or payable to Tenant (other than the reasonable value
paid to Tenant in repayment for trade fixtures and other personal property of
Tenant) above the amounts payable by Tenant to Landlord hereunder, shall be
deemed "real estate profit" and shall be paid to Landlord.
If Tenant shall at any time during the term of this Lease sublet all
or any part of said Premises or assign this Lease, Tenant shall nevertheless
remain fully liable under all of the terms, covenants, and conditions of this
Lease. If this Lease is assigned, or if the Premises or any part thereof are
subleased or occupied by anybody other then Tenant, Landlord may collect from
the assignee, sublessee or occupant any rent or other charges payable by Tenant
under this Lease and apply the amount collected to the rent and other charges
herein reserved, but such collection by Landlord shall not be deemed an
acceptance of the assignee, sublessee or occupant as a tenant nor a release of
Tenant from the performance by Tenant under this Lease.
Notwithstanding Landlord's consent to any assignment, subletting,
occupation or use by another person, any subsequent assignment, subletting,
occupation or use by another person shall require Landlord's prior written
consent.
ARTICLE 4
ALTERATIONS, INSTALLATIONS AND
REMOVAL OF IMPROVEMENTS BY TENANT
Tenant shall have no right during the continuance of this Lease to
make any interior alterations, changes and improvements to the Premises without
first obtaining the prior written consent of Landlord. In the event Landlord
consents to any interior alterations, Tenant shall in such event (i) pay all
costs and expenses thereof; (ii) make such alterations, changes and
improvements in a good and workmanlike manner; (iii) obtain all required
permits; and (iv) do all work in conformity with all legal requirements. Tenant
shall hold Landlord harmless from any penalty, damage or injury of whatever
kind arising out of failure of Tenant's work to so conform.
Landlord's approval of the plans, specifications and working drawings
for any of Tenant's alterations shall create no responsibility or liability on
the part of Landlord for their completeness, design sufficiency, or compliance
with all laws, rules and regulations of governmental authorities or agencies.
If Landlord shall send a notice to Tenant not later than thirty (30)
days after the later of (i) the expiration date of the Term or (ii) the date on
which Tenant completely vacates the Premises, Tenant within three (3) business
days thereafter shall remove any alterations, changes and improvements made to
the Premises by Tenant with or without the consent of Landlord and shall repair
and restore the Premises to its condition prior to the making of such
alterations, changes and/or improvements. Any alterations changes and
improvements which Landlord does not require to be removed shall remain the
property of Landlord without compensation by Landlord to Tenant therefor.
Except as otherwise provided, all furnishings, trade fixtures and
other equipment installed in the Premises by Tenant shall remain the property
of Tenant and shall be removed by Tenant upon the termination of this Lease.
Tenant shall repair any damage caused by the removal of such property and the
restoration of the Premises provided in the paragraph above. Notwithstanding
the foregoing, all light fixtures, all carpeting, linoleum or other floor
covering, nailed, cemented or otherwise adhesively attached to the Premises,
sinks and vanities and the complete electrical (including emergency generators,
if any), plumbing, air conditioning and heating systems, including ducts,
diffusers, grills and control systems, shall be and remain in the Premises at
all times for the benefit of Landlord unless Landlord shall direct Tenant to
remove any of the foregoing within the period set forth in the preceding
paragraph.
Tenant shall pay before delinquencies all taxes assessed against
Tenant's fixtures, equipment and leasehold improvements placed in or about the
Premises.
<PAGE> 12
ARTICLES 5
INSURANCE AND RELATED MATTERS
SECTION 1. LOSS OR DAMAGE TO TENANT'S PROPERTY.
Tenant acknowledges that Landlord does not insure Tenant's personal
property, fixtures, improvements or equipment. Accordingly, in order to
contractually allocate risk of loss relative to all of such property Tenant
agrees that it shall store its property in and shall occupy the Premises and
use all other portions of the property of which the Premises are a part, at its
own risk. Irrespective of fault, Landlord and Landlord's agents and employees
shall not be liable for, and Tenant waives all claims against them for, loss or
damage to Tenant's business or damage to person(s) or property sustained by
Tenant or any person claiming by, through or under Tenant resulting from any
accident or occurrence in or upon the Premises or the building of which they
are a part, or any part thereof. The provisions of this section shall also
apply to the period to the commencement of the Lease term where any permission
is given by Landlord to Tenant for Tenant to perform any of its work and
install any of its fixtures or otherwise prior to commencement of the Lease
term.
SECTION 2. TENANT'S REQUIRED INSURANCE.
Tenant shall, during the term, at its sole expense obtain and keep in
force, (i) commercial general liability insurance coverage, personal injury,
bodily injury, broad form property damage, operations hazard, owner's
protective coverage, contractual liability and products and completed
operations liability in limits not less than $1,000,000.00 inclusive (the
aggregate limits of such insurance to apply specifically to the Premises and
not to multiple locations) with Landlord and, if required by Landlord,
mortgagees of Landlord, each named as an additional insured as their respective
interest may appear; and (ii) "All Risk" Physical Damage Insurance for Tenant's
property (personal property, fixtures and leasehold improvements in excess of
building standard) in or on the Premises for the full insurable value thereof,
including an endorsement providing for "loss of income" coverage. Tenant shall
furnish evidence satisfactory to Landlord of the existence of and date on which
such policy is required to be renewed. Tenant shall obtain a written obligation
on the part of each insurance company to notify Landlord at least thirty (30)
days prior to the cancellation of such insurance. Tenant shall also obtain
worker's compensation insurance covering all persons employed, directly or
indirectly, in connection with any finish work performed by Tenant or any
repair or alteration authorized by the Lease or consented to by Landlord, as
required by the law of the state where the Premises are located.
Landlord reserves the right to require that Tenant increase the limits
of such insurance required pursuant to the paragraph above in such amounts as
landlord determines prudent within generally accepted business practices for
comparable businesses. All policies required to be maintained by Tenant
pursuant to this Article shall be issued in a form acceptable to Landlord by
insurance companies having and maintaining at least an A-X rating in the most
currently available "Best's Rating Guide," and qualified to do business in the
state in which the Premises are located. In no event shall such policy or
policies provide for a deductible amount for any type of coverage in excess of
$1,000.00.
SECTION 3. LANDLORD'S INSURANCE.
Landlord shall, during the term, obtain and keep in force commercial
general liability insurance coverage and "All Risk" Property Damage Insurance
covering the building of which the Premises are a part (including exterior
walls, downspouts, gutters and roof) excluding all improvements and fixtures
required to be insured by Tenant pursuant to Article 5, Section 2, in such
amounts and with such deductible amounts as Landlord determines prudent in
Landlord's sole discretion. Landlord may also insure such other risks as
Landlord may from time to time determine and with any such deductibles as
Landlord may from time to time determine. Landlord's insurance cost for
maintaining the insurance coverage referred to in this Article shall be subject
to reimbursement by Tenant to the extent provided elsewhere in this Lease.
SECTION 4. WAIVER OF RECOVERY.
Anything in this Lease to the contrary notwithstanding, Landlord and Tenant
each hereby waives any and all rights of recovery, claim, action or cause of
action, against the other, its agents, officers or employees, for any loss or
damage that may occur to the Premises, or any improvements thereto, or the
building in which the Premises are located, or any personal property of such
party therein, by reason of fire, the elements, or any other cause which is
insured against or is required to be insured against under the terms of the
"All Risk" Property Damage Insurance coverage referred to in Section 2 and 3
above, regardless of cause or origin, including negligence of the other party
hereto, its agents, officers or employees. Landlord's and Tenant's insurance
policies shall each contain a waiver of subrogation. --4.
<PAGE> 13
SECTION 5. HOLD HARMLESS AND INDEMNIFICATION.
Irrespective of the adequacy of said insurance, Tenant shall indemnify
and save Landlord free and harmless from all liability for injury or damage to
any person(s), firm(s), corporation(s) or property occurring on or about the
Premises, or arising out of any accident or any other occurrence on the
Premises or due directly or indirectly to the use of said Premises or any part
thereof by Tenant, its agents, subtenants or assignees (including all cost,
expenses, court reporters fees, expert fees and attorney fees incurred by
Landlord in defense of any such claims).
SECTION 6. INVALIDATION OF INSURANCE/INCREASED PREMIUMS.
Tenant shall not do anything or engage in any activity or permit any
condition to exist on or about the Premises which will cause the cancellation
of or invalidate any insurance which Landlord may now or hereafter have on the
building in which the Premises are located or the Premises. Further, Tenant
shall not permit any condition or activity which may result in increased
premiums payable by Landlord.
ARTICLE 6
REPAIRS
Except as otherwise provided in this Lease, within a reasonable time
after Landlord receives written notice from Tenant of the necessity thereof,
Landlord will repair the roof, structural portions and exterior of the Premises
(exclusive of doors, plate glass or entrances which shall be maintained and
repaired by Tenant); provided, however, that Tenant, not Landlord, shall at
Tenant's sole cost and expense make all repairs and replacements necessitated
by reason of (a) the neglect, fault or default of Tenant or Tenant's agents,
employees, contractors, invitees, or customers and (b) the structural and
exterior work done or installed by Tenant. Further, and notwithstanding
anything in this Lease to the contrary, Tenant shall make all repairs and
replacements to the property which Landlord's is required to maintain which are
required as the result of repairs, alterations, other improvements or
installations made by Tenant or any occupant of the Premises or the agents of
any of them.
All maintenance, repairs and replacements to the Premises not
specifically the obligation of Landlord under this Lease shall be made by
Tenant. Tenant, at Tenant's expense, shall make all repairs and replacements to
keep and maintain the interior of the Premises in good condition and repair,
including, but not limited to, the heating, electrical, air conditioning
(whether located within or without the Premises), sprinkler and other
mechanical installations serving the Premises, the plumbing and sewer systems
serving the Premises, the exterior and interior portions of all doors including
door checks and hardware, and all windows, frames and glass; and Tenant shall
promptly replace all broken and cracked glass. Any replacements Tenant is
required to make under this Lease shall be of equal or better quality, type and
style as the item being replaced. Tenant shall be responsible for all painting
and decorating of the Premises. Tenant will maintain and keep in good condition
and repair all structural and exterior work done or installed by Tenant. Tenant
shall not permit any waste, damage or injury to the Premises and shall, at its
sole cost and expense, abate any nuisance upon, or emanating from, the
Premises, keep the Premises neat, clean and in orderly and sanitary condition
free of offensive odors, vermin, rodents, bugs insects and other pests. Tenant
shall keep in full force and effect a maintenance contract with a reputable
heating contractor providing for at least quarterly inspection and maintenance
of the heating and air conditioning systesm serving the Premises. Upon request
Tenant shall provide or require its contractor to provide copies of all
maintenance and service records to Landlord. Tenant shall obtain approval from
Landlord of its heating and air conditioning contractor and, additionally,
shall obtain approval of any other contractor which may require access to the
roof for the purpose of implementation of any repairs or improvements. Tenant
shall in no event perforate or do any work on or affecting the roof of the
Premises without Landlord's prior written consent and if consented to, shall
only use contractors approved by Landlord.
ARTICLE 7
MECHANIC'S LIEN
Tenant shall have no authority to create or place any lien or
encumbrances of any kind or nature whatsoever upon, or in any manner to bind,
the interest of Landlord in the Premises or to charge the rentals payable
hereunder for any claim in favor of any person or entity dealing with Tenant,
including those who may furnish materials or perform labor for any construction
or repairs, and each such claim shall affect and each such lien shall attach
to, if at all, only the leasehold interest granted to Tenant by this
instrument. If Tenant shall make repairs or improvements to the Premises,
Tenant shall, in making such repairs or improvements, act solely for its own
benefit and not as an agent of Landlord, and Landlord's interest in the
Premises, and the building or the overall development of which the Premises are
a part, shall not be subject to any mechanic's, furnisher's or materialmen's
liens.
<PAGE> 14
Tenant covenants and agrees that it will pay or cause to be paid all
sums due and payable by it on account of any labor performed or materials
furnished in connection with any work performed on the Premises on which any
lien is or can be validly and legally asserted against its leasehold interest
in the Premises or the improvements thereon. Tenant will save and hold Landlord
harmless from any and all loss, cost or expense, including attorneys' fees,
based on or arising out of asserted claims or liens against the leasehold
estate or against the rights, title and interest of the Landlord in the
Premises or under the terms of this Lease. Tenant shall discharge by payment or
satisfactory bond pursuant to statutory procedures any lien arising out of work
performed or materials furnished on the Premises by, through or under Tenant
within thirty (30) days after the filing of same.
ARTICLE 8
DAMAGE OR DESTRUCTION BY FIRE
In the event the Premises shall be damaged or destroyed either (i) by
an insured casualty within Landlord's standard all-risk insurance policies to
such extent that Landlord cannot make necessary repairs or rebuild within
ninety (90) days from the date of such damage or destruction; or (ii) by an
uninsured casualty, or (iii) by an insured casualty with respect to which
Landlord's mortgage requests that the insurance proceeds be applied to the
indebtedness, then at Landlord's option, this Lease Agreement may be terminated
in which event Tenant shall be allowed an abatement of rent from the date of
such damage or destruction.
If the Premises shall be damaged or destroyed by fire or other causes
and Landlord elects to repair the Premises and continue this Lease, then this
Lease Agreement shall not terminate, the Premises shall be repaired or rebuilt
by Landlord at its own expense, the Base Rental and Additional Charges shall
abate proportionately until the repairs or rebuilding are completed and
possession thereof given to Tenant, and the term of this Lease Agreement shall
be extended for a period equal to such period of rent abatement but not
otherwise effected. Tenant shall in all events restore or repair its additions
and improvements to the Premises. Tenant shall, in case of damage or
destruction, give immediate notice in writing to Landlord.
Should fifty percent (50%) or more of the total leaseable area of the
building in which the Premises are located at any time be damaged or destroyed
by fire or any other cause, Landlord may elect not to rebuild any may forthwith
terminate this Lease Agreement by written notice to Tenant of Landlord's
election to so terminate.
In the event of a casualty loss or damage which arises out of or in
connection with the use, misuse, or occupancy of the Premises by Tenant, or
results from the acts or omissions of Tenant, its employees, or agents, Tenant
shall indemnify Landlord for any claims, loss or damage not covered under
Landlords standard insurance coverage, including the deductible portion of such
insurance.
ARTICLE 9
RIGHT OF ENTRY, ETC.
Landlord reserves the right during the term of this Lease to enter the
Premises at reasonable hours for the purpose of inspecting and showing the
Premises and to make such repairs as Landlord may deem necessary for their
protection and preservation, and additionally may enter at any time in the
event of an emergency, provided that these rights shall not be construed as
expanding Landlord's repair obligation beyond that as stated herein.
ARTICLE 10
DEFAULT
Tenant shall be in default hereunder if Tenant shall (i) fail to pay
rent or any other sums of money required to be paid by Tenant and such failure
shall continue for five (5) days after Landlords gives Tenant written notice
thereof; or (ii) fail to perform or comply with any other covenant, condition,
term or provision of this Lease and such failure shall continue for ten (10)
days after Landlord gives Tenant written notice thereof. In the event of any
such default, in addition to all other remedies given to Landlord in law or in
equity, Landlord may by written notice to Tenant terminate this Lease or
without terminating this Lease and without notice re-enter the Premises by
summary proceedings or otherwise and in any event may dispossess Tenant.
<PAGE> 15
Tenant, notwithstanding such termination, shall be and remain liable
for all rent and other charges and sums due hereunder for the remainder of the
term, which liability shall survive the termination of this Lease, the re-entry
by Landlord and the commencement of any action to secure possession of the
Premises. Landlord shall have the right to maintain successive actions against
Tenant for recovery of all damages, including, without limitation, amounts
equal to the rents and other charges and sums payable hereunder as and when
said rents and other charges and sums are payable hereunder and Landlord shall
not be required to wait to begin such actions or legal proceedings until the
date this Lease would have expired.
In the event of such re-entry, Landlord may enter as agent for Tenant
or in its own name, without being obligated to do so, and re-let the whole or
any portion of said Premises (with or without any improvements made by Tenant
thereon), or the whole or any portion thereof with additional space, for any
period equal to, greater or less than the remainder of the term of this Lease,
for any sum (including any rental concessions and rent-free occupancy) which it
may deem reasonable, to any tenant which it may deem suitable and satisfactory,
and for any use and purpose which it may deem appropriate. Landlord's damages
shall include, without limitation, attorney's fees incurred by reason of
Tenant's default, commissions and the cost of repair or alteration of the
Premises ("Cost of Re-letting") and, in the event of any reletting, Landlord
may apply the rent therefrom first to the payment of Landlord's expenses,
including Cost of Re-letting, and then to the payment of rent and all other
sums due from Tenant hereunder, Tenant remaining liable for any deficiency.
All remedies available to Landlord in this Lease, in law or equity are
declared to be cumulative and concurrent. No termination of this Lease nor any
taking or recovering of possession of the Premises shall deprive Landlord of
any of its rights, remedies or actions against Tenant including, without
limitation, the right to receive all past due rents and damages equal to future
rents and other charges accruing under this Lease, which rights shall survive
the termination of this Lease or taking of possession of the Premises.
If this Lease be terminated for any reason whatsoever or if Landlord
should re-enter the Premises as a result of any breach of Tenant hereunder
without terminated the Lease, Tenant covenants any other covenant herein to the
contrary notwithstanding (except where this Lease is terminating following
eminent domain proceedings) that the Premises shall then be in the condition
prescribed for delivery at the expiration of the term of this Lease.
In the event Tenant violates any of the provisions, covenants,
conditions or promises set forth in this Lease Agreement, and further in the
event Landlord determines in its exercise of its sole discretion that such
default is susceptible of a cure by Landlord, then in addition to any and all
other remedies provided for in this Lease, Landlord shall have the right (but
shall not be obligated) to cure such default and implement such corrective
measures as Landlord deems reasonably necessary to correct such default. In the
event Landlord exercises the right of "self help" as set forth in the preceding
sentence, then Tenant covenants and agrees that it shall within five (5) days
after notice from Landlord pay to Landlord one hundred twenty five percent
(125%) of the cost incurred by Landlord in connection with implementation of
such corrective measures, it being the intent to permit Landlord to recover a
reasonable administrative fee in addition to the actual cost incurred.
Further, in the event Tenant is not conducting a going business within
the Premises or vacates or abandons the Premises (the cessation of operation of
a business within the Premises for a period in excess of seven (7) days to be
conclusive evidence of Tenant's intent to abandon or vacate the Premises) then
Landlord shall have the right (but shall not be obligated) to enter the
Premises after providing notice to Tenant for the purpose of inspection and
implementation of such repairs, maintenance or other improvements to the
Premises which may be required, in Landlord's opinion, to preserve the overall
appearance of the Premises or to mitigate the adverse impact of the appearance
of the Premises upon the Property. Landlord shall additionally have the right
to change the exterior locks, then Tenant shall, upon request, be provided with
a key to the Premises. In no event shall any of the foregoing actions by
Landlord be considered an eviction, constructive or otherwise, of Tenant, it
being the intent of the parties to permit Landlord a reasonable right of access
to the Premises for the purposes set forth herein and to minimize any adverse
impact resulting from an abandonment of the Premises or cessation of operation
by Tenant. Entry by Landlord pursuant to this paragraph shall in no event be
construed, interpreted or otherwise determined to be an eviction of Tenant or a
termination of this Lease absent notification to the contrary by Landlord.
Landlord and Tenant shall and do hereby waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matters not relating to personal injury or property
damage but otherwise arising out of or in any way connected with this Lease,
the relationship of Landlord and Tenant, Tenant's use or occupancy of the
Premises and any emergency statutory or any other statutory remedy. In the
event an attorney is employed by either party in order to initiate litigation
to secure compliance by other party with the provisions of this Lease,
non-prevailing party shall pay to the prevailing party the reasonable
attorneys' fees and cost of collection of enforcement of the provisions of this
Lease incurred by the prevailing party, including filing fees and court costs.
<PAGE> 16
ARTICLE 11
INSOLVENCY OF TENANT
In the event of the insolvency of Tenant, or the filing of a
proceeding by or against Tenant or any partner of Tenant or guarantor of this
Lease under the Bankruptcy Code or if relief is sought by Tenant under any
similar debtor relief laws or proceedings including an offer in or out of court
for the compromise of Tenant's debts, or any substantial part thereof, Landlord
in addition to any rights available to it at law or equity shall have the right
and privilege to immediately terminate this Lease. Landlord shall have the
right to immediately re-enter into possession of the Premises for the purpose
of leasing same.
ARTICLE 12
DELIVERY AT END OF LEASE
Tenant agrees that on the last day of the term it shall without notice
or demand deliver the Premises, including all improvements and fixtures
permanently attached, and replacements thereto (except those which Tenant may
within thirty (30) days after the expiration date of the term be directed to
remove) to Landlord, or Landlord's agent or assignee, in good order and
condition. Tenant shall have repaired all damage to the Premises, ordinary wear
and tear excepted.
If Tenant remains in possession of the Premises after the expiration
of the tenancy created hereunder and without the execution of a new lease or
other written agreement, Tenant shall be deemed to be occupying the Premises as
a tenant from month to month and subject to all of the rents and provisions of
this Lease in effect on the day before the expiration of the tenancy, except
those relating to term and except that the Base Rental shall be increased to
the amount which is the greater of (i) double the amount payable during the
last month of the Lease or (ii) one hundred fifty percent (150%) of the fair
rental value of the Premises as of the expiration of the term, without
prejudice to any claim for damages or otherwise which Landlord may have against
Tenant for failure of Tenant to vacate the Premises at expiration of the term.
For the purpose of this provision "fair rental value" shall be defined as being
the amount which Landlord is then receiving for comparable space in the
building or project in which the Premises are located or in comparable
properties in the same city.
ARTICLE 13
EXTENSION; PARTIAL PAYMENT;
NO ACCORD AND SATISFACTION
It is agreed that, should Landlord, at its option, either extend the
time of payment or accept partial payment on one or more of the Base Rental
installments or other monetary obligations hereunder, such shall not be
construed as altering the terms of payment of any subsequent installments or
obligations. After the service of any notice or commencement of any suit, or
final judgement therein, Landlord may receive and collect any rent due and such
collection or receipt shall not operate as a waiver of nor affect such notice,
suit or judgment.
No payment by Tenant or receipt by Landlord of a lessor amount shall
be other than on account of the earliest stipulated rent, nor shall any
endorsement or statement on any check or any letter accompanying any check or
payment as rent be deemed in accord and satisfaction. Landlord may accept such
check or payment without prejudice to Landlord's right to recover the balance
of such rent or pursue any other remedy provided for in this Lease or available
at law or in equity.
In the event that any of Tenant's checks payable to Landlord or
Landlord's agent shall be returned for insufficient funds. Landlord shall have
the right to demand from Tenant that all future rent payments be made by
certified check or money order, Tenant shall pay to Landlord a returned check
fee of $20.00 and Landlord shall not be required to accept any check from
Tenant which does not so conform.
ARTICLE 14
SUBORDINATION; ATTORNMENT; ESTOPPEL;
LANDLORD'S COVENANT AS TO TITLE
Upon payment by Tenant of the rent and other charges herein provided,
and upon the observance and performance of all the covenants, terms and
conditions of Tenant's part to be observed and performed, Tenant shall
peaceably and quietly hold and enjoy the Premises for the term hereof without
hindrance or interruption by Landlord or others legally claiming title thereto
by, through or under Landlord, subject, nevertheless, to the terms and
conditions of this Lease.
Tenant's leasehold estate shall always be subordinate to any mortgage
loan, deed of trust or underlying or ground lease, including, without
limitation, any refinancing, replacement, renewal, modification, extension or
consolidation thereof
<PAGE> 17
which is placed upon the Premises from time to time by Landlord. This provision
shall be self operative and no further instrument of subordination shall be
required.
Tenant agrees that it will attorn to and recognize the purchaser at
any foreclosure sale or at any sale under a power of sale contained in any
mortgage or deed of trust upon the property in which the Premises are located
and the grantee of any conveyance made in lieu of foreclosure of power of sale
as landlord under this Lease. Tenant agrees, further, that in the event any
proceedings are brought for the termination of any ground or underlying lease
affecting the Premises, upon such termination, if the lessor thereunder elects
or is obligated to recognized Tenant, Tenant shall attorn to such lessor and
recognize such lessor as Landlord under this Lease.
Tenant covenants and agrees that within five (5) days after receipt of
notice Tenant shall execute in recordable form and deliver upon demand of
Landlord whatever instruments may be required to acknowledge and further
evidence the subordinations, agreements to attorn and priorities, referred to
in this Section. Tenant shall additionally, within five (5) days after receipt
of notice, execute an "Estoppel" certificate confirming that the Lease is in
full force and effect, that there are no Landlord defaults (or delineating with
specificity the nature of such Landlord's defaults, if any), the rental and
other amounts required to be paid by Tenant, and such other information as is
reasonably requested by a prospective purchaser or mortgagee.
ARTICLE 15
GRAPHICS
Tenant shall not place or permit to be placed on the exterior of the
Premises, upon the roof, on any exterior door or wall, or on the exterior or
interior window, any sign, advertising matter, decoration, lettering or other
thing of that kind without the written consent of Landlord first had and
obtained. In no event shall temporary or portable signs or banners be utilized,
installed or displayed at or about the Premises. All signs and directories
shall conform to the specifications which Landlord requires in the exercise of
its sole discretion.
ARTICLE 16
CONDEMNATION
The parties hereby agree that should the Premises, or such portion
thereof as will make the Premises unusable for the purposes herein leased, be
taken or condemned for public or quasi-public use, then this Lease shall
terminate from the date when possession of the part so taken shall be required.
If the Lease continues after a partial taking, the Base Rental and Additional
Charges shall abate proportionately as to the part taken. All compensation
awarded for such taking of the Premises, or any part thereof, the fee and the
leasehold shall belong to and be the property of landlord provided, however,
that Landlord shall not be entitled to any portion of any award made to Tenant
for the value of Tenant's trade fixtures. Tenant shall not be entitled to any
damages for the unexpired portion of the term of this Lease, or injury to its
leashold interest.
ARTICLE 17
UTILITIES
Tenant is to obtain and pay for all utilities, including electricity,
gas, other fuel, water garbage fee, sewer fee, sprinkler monitoring fees and
other special fees on or for the Premises during the term of this Lease. If
there is a master meter source provided by or through the Landlord, Tenant will
pay Landlord for said utility usage as additional rent promptly upon
presentation of statements for said usage, based upon Landlord's determination
from time to time of Tenant's consumption. Said amounts may be estimated by
Landlord in which event Tenant shall pay said estimate, as may be revised from
time to time, in advance on the first day of each and every month with Tenant's
Base Rental without further notice. Landlord will have the right in its
discretion to adjust utility costs among tenants on other than a pro rata basis
upon it determination of tenants' usage.
ARTICLE 18
ENVIRONMENTAL MATTERS
Tenant shall not caused or permit any Hazardous Substances to be used,
stored, generated, disposed of or released on or in the Premises or the
Property or the land on which the Property is located or the underlying
acquirer on which the Property is located. Further, Tenant shall not cause or
permit any materials or substances which are commonly deemed to be explosive or
flammable to be used, stored, generated, released or disposed of on or in the
Premises or
<PAGE> 18
the Property in which the Premises are located by Tenant, Tenant's agents,
employees, contractors, or invites without first obtaining Landlord's written
consent. If Hazardous Substances are used, stored, generated, or disposed of on
or in the Premises or the Property except as permitted above, or if the
Premises or the Property become contaminated in any manner for which Tenant is
legally liable, Tenant shall indemnify and hold harmless Landlord from any and
all claims, damages, fines judgements, assessments, penalties, costs,
liabilities, or losses (including, without limitation, a decrease in value of
the Premises or the Property, damages caused by loss or restriction of rentable
or unusable space, or any damages caused by adverse impact on marketing of the
space, and any and all sums paid foe settlement of claims, attorney's fees,
consultant's fees, and expert's fees) arising during or after the Lease term
and arising as a result of that contamination by Tenant. This indemnification
includes, without limitation any and all cost incurred because of any
investigation of the site or any cleanup, removal, or restoration mandated by a
federal, state, or local agency or political subdivision. Without limitation of
the foregoing, if Tenant causes or permits the presence of any Hazardous
Substance on the Premises or the Property and that results in contamination,
Tenant shall promptly, at its sole expense, take any and all necessary actions
to return the Premises or the Property to the condition existing prior to the
presence of any such Hazardous Substance on the Premises or the Property.
Tenant shall notify Landlord if any governmental regulatory agent cites or
notifies it of a violation of environmental laws, rules or regulations and
shall keep Landlord informed of all acts or actions taken by Tenant with
respect thereto. Tenant shall first obtain Landlord's approval for any such
remedial action.
As used herein, "Hazardous Substance" means any substance that is
toxic, ignitable, reactive, or corrosive and that is regulated by any local
government, the state in which the Property is located, or the United States
Government. "Hazardous Substance" includes any and all material or substances
that are defined as "hazardous waste," "extremely hazardous waste," or a
"hazardous substance" pursuant to state, federal, or local governmental law.
"Hazardous Substance" includes, but is not restricted to, asbestos,
poloychlorobiphenyls ("PCBs"), and petroleum.
At lease forty-five (45) days prior to the expiration of the term
hereof, Tenant shall furnish an environmental audit report prepared by an
environmental engineering firm reasonably to Landlord which shall certify the
absence of any Hazardous Substance on, under, at, or within the Premises or the
Property.
The provisions of this Article 18 shall survive any assignment,
transfer, amendment or termination of this Lease Agreement.
The provision of Article 18 shall apply to Tenant, its agents,
employees, contractors, invitees or others who obtain access to the Premises
during the term hereof.
ARTICLE 19
FIRE PROTECTION
Tenant has examined the Premises and fire protection/sprinkler system
in the Premises, if any. Tenant acknowledges that Landlord shall have no
responsibility for implementation of any modifications whatsoever to any fire
protection/sprinkler system in the Premises which Tenant has examined and with
which Tenant is satisfied. In the event that the Fire Marshal, Building
Department or other municipal authority requires any modifications to the
existing fire protection/sprinkler system, implementation of such modifications
and all costs thereof shall be the responsibility of Tenant. Further, in the
event such modifications are requested or requested or required as a
restriction of Tenant's use or method of storage materials within the Premises,
Tenant shall either implement the required modifications to the fire
protection/sprinkler system or ventilation and/or Tenant shall modify its
method of storage or use of the Premises so as to comply with the permitted
uses under the existing fire protection/sprinkler system or ventilation
configuration. The Premises shall in no event be used for storage of
"high-piled combustible stock" as defined in the Building Code adopted from
time to time by the governmental authority having jurisdiction over the
Premises, unless fire protection for such use has been installed and is
maintained in accordance with all applicable ordinances, laws, rules and
regulations. Tenant agrees that it shall pay for sprinkler monitoring fees
through Common Area Charges as set forth in Article 1, Section 2, Subsection
(i), provided however, if the Premises consist of a building of which Tenant is
the sole occupant, Tenant may be billed for and shall pay sprinkler monitoring
fees directly.
ARTICLE 20
PERSONAL LIABILITY
The liability of Landlord (and any partner, stockholder or officer of
Landlord) to Tenant for any default by Landlord under the terms of this Lease
shall be limited to the interest of Landlord in the Property and Landlord (and
any partner, stockholder or officer of Landlord) shall not be personally liable
for any deficiency nor shall Landlord (or any partner, stockholder or officer
of Landlord) ever be liable under the terms of this Lease for consequential or
special damages. This paragraph shall not be deemed to limited or deny any
remedies which Tenant may have in the event of default by Landlord hereunder
which do not involve the personal liability of Landlord.
<PAGE> 19
In the event of sale of the Property, Tenant agrees that Landlord
shall thereupon be released from any obligations or liabilities accruing under
this Lease from and after the effective date of such conveyance.
ARTICLE 21
NOTICES
All notices required or provided for under this Lease shall be given in writing
either by (i) CERTIFIED, return receipt requested: (ii) hand delivery by a
reputable courier service requiring receipt on delivery; or (iii) delivery by a
national or regional overnight courier service. All notices shall be addressed
to Landlord or Tenant at the addresses set forth in the Lease Agreement or to
such other addresses as Landlord or Tenant may direct in writing from time to
time.
Notices shall be effective upon the earlier of actual receipt or forty-eight
(48) hours after deposit in the U.S. Mail or permitted courier. Notices of any
default by Landlord shall be given by Tenant to any mortgage of whom tenant has
been notified in writing, and said mortgagee shall have the right to cure said
default.
ARTICLE 22
RULES AND REGULATIONS
Tenant and Tenant's agents, employees, invitees and visitors shall
comply full with the requirements of the following rules and regulations. Such
rules and regulations may be changed or amended by Landlord at any time.
(i) All garbage and refuse shall be kept in approved type containers
and shall be placed at a location adjoining the Premises or the location
designated by Landlord, for collection at regular intervals (not less than
weekly); Tenant to pay the cost of removal of garbage and refuse.
(ii) The Tenant agrees that if the Premises are used for other than
the use contemplated by the Lease Agreement, or if the Fire Marshal requires,
Tenant, at its cost, shall provide the required additional automatic sprinkler
heads and/or other required modifications necessary to comply with the
insurance and fire department regulations; in all events Tenant shall provide
for its usage the necessary quantity and approved type and class fire
extinguishers within the Premises.
(iii) No radio, television, satellite, microwave dish or tower, or
other similar aerials or appurtenances (inside or outside) shall be installed
without first obtaining in each instance Landlord's consent in writing, and if
such consent is given, no such device shall be used in a manner as to be heard
or seen outside of the Premises. Tenant shall be responsible for any damage to
Landlord's roof occasioned by such installation.
(iv) Tenant shall keep the Premises at a temperature sufficiently high
to prevent freezing of water in pipes and/or fixtures or equipment.
(v) Tenant shall during the lease term of any extension hereof, at
Tenant's cost, be reasonable for pest extermination (including, but not limited
to, rodents and insects) at such intervals as are necessary to keep the
Premises free and clear of infestation.
(vi) Tenant shall not place, suffer or permit display or storage on
the outside of the Premises or upon any of the Common Areas of the building of
which the Premises are a part nor shall Tenant install, maintain or permit any
vending machines, pay phones, or other property upon the Common Areas.
(vii) Tenant agrees at all times to comply with any governmental
energy conservation regulations and at all times to maintain temperatures in
the Premises consistent with the temperature as specified and set forth in any
governmental regulations.
(viii) The outside areas immediately adjoining the Premises shall be
kept clean and free from its rubbish by Tenant, and Tenant shall not place,
suffer or permit any obstructions or merchandise in such areas.
(ix) Tenant and its employees shall park their cars only in the
parking area designated for that purpose by Landlord; if Tenant or its
employees park in a manner that obstructs any fire lane or shall interfere with
any of the rights of Landlord or other tenant within the building(s) and their
rights to free and uninterrupted egress and ingress and loading, Tenant hereby
authorizes Landlord (at its option) to tow away such vehicles and Tenant shall
be responsible for all costs incurred in connection with such towing.
(x) Tenant shall not burn trash or garbage in or about the Premises.
<PAGE> 20
(xi) Tenant shall not conduct or permit to be conducted in the
Premises any auction, fire, bankruptcy or other distress sales without the
prior written consent of Landlord.
ARTICLE 23
REAL ESTATE AGENT
Landlord and Tenant each represent and warrant to the other that no agents were
involved in the negotiation of this Lease except as is disclosed in the Lease
Agreement to which this is an exhibit. Each party agrees to indemnify the other
against claims for commission by individuals, entities or agents claiming
entitlement to commission by virtue of its representation of the indemnifying
party.
ARTICLE 24
COVENANTS RUN TO HEIRS
It is hereby covenanted and agreed between the parties hereto that all
covenants, conditions, agreements and undertakings in this Lease contained
shall extend to and be binding on, and insure to the benefit of (except as
limited by the terms hereof), the respective heirs, administrators, executors,
successors and permitted assigns of the respective parties hereto the same as
if they were in every case named and expressed also that the term Landlord and
Tenant shall be construed in the singular or plural number according as they
respectively represent one or more than one person.
ARTICLE 25
SHORT FORM LEASE
The parties have entered into a Short Form of this Lease Agreement
which may, at Landlord's option, be recorded. In no event shall this Lease
Agreement be recorded.
ARTICLE 26
CORPORATE TENANTS
In the event Tenant is a corporation, the persons executing this Lease
on behalf of Tenant hereby covenant and warrant that: Tenant is a duly
constituted corporation qualified to do business in the State in which the
Premises is located; all Tenant's franchise and corporate taxes have been paid
to date; all future forms, reports, fees and other documents necessary for
Tenant to comply with applicable laws will be filed by Tenant when due; and
such persons are duly authorized by the board of directors of such corporation
to execute and deliver this Lease on behalf of the corporation.
ARTICLE 27
ENTIRE AGREEMENT
This Lease includes the Lease Agreement, Exhibit A (drawing or
description of the Property showing the general location of the Premises), this
Exhibit B (General Lease Provisions) and Exhibit C (which delineates the
construction requirements of the parties if any). The foregoing constitute all
of the agreements and conditions made between the parties hereto, and no
representations or statements or statements claimed to have been made and not
herein contained shall modify this Lease in any way.
Landlord: Belz Devco, L.P.
By: Belz Investco, L.P. (general partner) Tenant: Back Yard Burgers, Inc.
By: Urco, Inc. (general partner)
By: /s/ Morris I. Thomas By: /s/ Lattie Michael
-------------------------------------- --------------------------------
Morris I. Thomas, Vice President Lattie Michael, CEO
By: /s/ Irvin S. Skopp
--------------------------------------
Irvin S. Skopp, Vice President
<PAGE> 21
RIDER TO EXHIBIT B
GENERAL LEASE PROVISIONS
BETWEEN BACK YARD BURGERS, INC., AS TENANT AND
BELZ DEVCO, L.P., AS LANDLORD
1. ..."During the first calendar year of the Lease term, Tenant shall pay
its actual proportionate share of the Common Area Maintenance and
Operation Costs. Commencing with the second calendar year during the
Lease term, Tenant's Proportionate Share of the Common Area
Maintenance and Operation Costs (excluding the costs of waste removal,
security and utilities) shall not increase by more then 5% calculated
cumulatively over the prior year's share as prorated for any partial
calendar year.
Landlord and Tenant acknowledge and agree that during the first full
calendar year of any renewal term that may be exercised by Tenant,
Tenant shall pay it actual Proportionate Share of the Common Area
Maintenance and Operation Costs and that, thereafter, during the
respective renewal term, the Common Area Maintenance and Operation
Costs (excluding the costs of waste removal, security and utilities)
shall not increase more than 5% calculated cumulatively over the
amount of the Common Area Maintenance and Operation Costs for the
prior calendar year as prorated for any partial calendar year.
Within one hundred eighty days (180) days after the end of each
calendar year, Landlord shall provide Tenant with a written statement
(i) itemizing the Common Area Maintenance and Operation Costs for the
calendar year just ended and (ii) Tenant's prorata share of such
Common Area Maintenance and Operation Costs." ....
2. ...."Tenant shall have the right to place one (1) standard commercial
dumpster and concrete pad, if required for said dumpster, on the
exterior of the Premises in the location shown on Exhibit A at
Tenant's expense. Tenant shall install and maintain the aforesaid
dumpster and any concrete pad, if required for said dumpster. Tenant
at Tenant's expense, shall remove the aforementioned dumpster and
concrete pad, if any, from the exterior of the Premises upon the
termination of this Lease and shall return such exterior of the
Premises to its condition as it existed prior to the installation of
such dumpster and concrete pad, if any." ....
3. ....", such consent shall not be unreasonable withheld." ....
4. ...."Landlord and Tenant shall name each other as an additional
insured, respectively, under their respective insurance policies as
required to be maintained herein." ....
5. ...."(except for the one (1) standard commercial dumpster referred to
above)" ....
6. Unless caused by negligence of Landlord.
<PAGE> 22
E X H I B I T "C" - W O R K T O B E D O N E
BELZ DEVCO L.P. - LANDLORD
BACK YARD BURGERS, INC. - TENANT
The Tenant leases Premises in an "AS IS" condition and agrees to make all
improvements at its expense, including compliance with any ADA and handicap
requirements except that Landlord shall make those improvements as shown on the
attached Exhibit C, Plans and Specifications at a cost not the exceed
$192,163.00.
LANDLORD: BELZ DEVCO L.P.
BY: BELZ INVESTCO L.P. (General Partner)
BY: URCO, Inc. (General Partner)
By: /s/ Morris I. Thomas
----------------------------------------
Morris I. Thomas, Vice President
By: /s/ Irvin S. Skopp
----------------------------------------
Irvin S. Skopp, Vice President
TENANT: BACK YARD BURGERS, INC.
By: /s/ Lattie Michael
----------------------------------------
Lattie Michael, CEO
<PAGE> 23
MEMORANDUM OF LEASE
THIS LEASE, made and entered into as of the 12th day of November, 1999 by
and between BELZ DEVCO L.P., a Tennessee limited partnership, hereinafter
referred to as "Landlord", and BACK YARD BURGERS, INC., a Delaware corporation,
hereinafter referred to as "Tenant":
WITNESSETH:
For and in consideration of One Dollar ($1.00) and other valuable
consideration paid and to be paid by the Tenant to the Landlord, the Landlord
does demise and let unto Tenant and the Tenant does lease and take from the
Landlord, upon the terms and conditions and subject to the limitations more
particularly set forth in a certain agreement between the Landlord and Tenant,
bearing even date herewith, to which Agreement reference is hereby made for all
of the terms and provisions thereof, which terms and provisions are made a part
hereof as fully and particularly as if set out verbatim herein, the premises
situated in the City of Memphis, County of Shelby, State of Tennessee,
consisting of land, together with improvements placed and/or to be place
thereon, and more particularly described as follows:
An industrial space containing approximately 7,500 square feet located
within the Shelby Oaks Industrial Park and further municipally described as
1661 Shelby Oaks Drive North, Suites 103-106, Memphis, Shelby Co., Tennessee.
TO HAVE AND TO HOLD the above demised premises unto the Tenant for the
period of ten (10) years, commencing on the first day of ___________ and ending
on the last day of the previous month ten (10) years thereafter.
A first lien is hereby expressly reserved by the Landlord and granted by
the Tenant upon the terms and conditions of this Lease and upon all interest of
the Tenant in this leasehold for the payment of rent and also for the
satisfaction of any cause of action which may accrue to the Landlord by the
provisions of this instrument. A first lien is also reserved by the Landlord
and granted by the Tenant upon all building and other physical improvements,
fixtures and equipment, erected or put in place or that may be erected or put
in place upon the premises by or through the Tenant or other occupants for the
payment of rent and also for the satisfaction of any cause of action which may
accrue to the Landlord by the provisions of this instrument.
It is agreed and understood that if the Tenant shall make certain
improvements to the demised premises, Tenant shall, in making such
improvements, act solely for its own benefit and not as an agent of Landlord
and that Landlord's interest in the demised premises the building of which the
demised premises are a part, and the overall development of which the demised
premises are a part, shall not be subject to any mechanical, furnishers or
materialmen's liens. Landlord does not consent to any contract for labor or
materials within the context of Section 66-11-108 et seq., Tennessee Code
Annotated out of which any such liens might arise. No contract for labor or
material will be contracted for by Tenant except with the express stipulation
that any lien arising therefrom shall not attach to Landlord's fee except with
the express stipulation that any lien arising therefrom shall not attached to
Landlord's fee interest, but only to Tenant's leasehold interest in the demised
premises, building, or in the overall development of which the demised premises
is a part. Tenant shall defend and save harmless Landlord from any and all
loss, cost or expense, including attorney's fees, based on or arising out of
asserted claims or liens against the leasehold estate or against the right,
title and interest of Landlord in the demised premises or under the terms of
the Lease. Tenant shall discharge by payment or furnish to Landlord a
satisfactory bond pursuant to statutory procedures any lien arising out of work
performed or materials furnished on the demised premises by, through or under
Tenant within thirty (30) days after the filing of same.
<PAGE> 24
IN WITNESS WHEREOF, the parties through their duly authorized officers,
have executed this instrument, this the day and year first above written.
LANDLORD: BELZ DEVCO L.P. TENANT: BACK YARD BURGERS, INC.
BY: Belz Investco L.P.
BY: Urco Inc.
By: /s/ Morris I. Thomas By: /s/ Lattie Michael
------------------------------------ -----------------------------------
Morris I. Thomas, Vice President Lattie Michael, CEO
By: /s/ Irvin S. Skopp
------------------------------------
Irvin S. Skopp, Vice President
<PAGE> 25
STATE OF TENNESSEE
COUNTY OF SHELBY
Before me, a Notary Public of the State of County aforesaid, personally
appeared MORRIS I. THOMAS AND IRVIN S. SKOPP, VICE PRESIDENTS, respectively of
URCO, INC., a Tennessee corporation, said corporation is the general partner of
BELZ INVESTCO L.P., a Tennessee limited partnership, the general of BELZ DEVCO
L.P., a Tennessee limited partnership, with whom I am personally acquainted,
and who, upon oath acknowledged that they are the VICE PRESIDENTS,
respectively, executed the foregoing instrument for the purpose therein
contained by signing the name of such partnerships by such corporation, by
themselves as VICE PRESIDENTS, respectively, of such corporation.
WITNESS my hand and Notarial Seal, at office in Memphis, Tennessee,
this, the 12th day of November, 1999.
/s/ Dawnyel Barrett
---------------------------------
Notary Public
My Commission Expires: 2/13/02
STATE OF Tennessee
COUNTY OF Shelby
Before me, a Notary Public of the State and County aforesaid, personally
appeared LATTIE MICHAEL with whom I am personally acquainted, (or proved to me
on the basis of satisfactory evidence) and who, upon oath, acknowledge himself
to be the CEO of BACK YARD BURGERS, INC., the within named bargainor, a
Delaware corporation, and that he executed the foregoing instrument for the
purposes therein contained by signing the name of such corporation by himself
as such PRESIDENT.
Witness my hand, at office, this 12th day of November, 1999.
/s/ Dixie McConnell
---------------------------------
Notary Public
My Commission Expires: 3/14/00
<PAGE> 1
EXHIBIT 11
BACK YARD BURGERS, INC.
COMPUTATION OF NET INCOME/(LOSS) PER SHARE
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998 (a)
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) ........................... $ (558) $1,171 $ 162
======= ====== ======
Weighted average number of common
shares outstanding during the period ...... 4,609 4,533 4,261
------- ------ ------
Basic income (loss) per share ............... $ (0.12) $ 0.26 $ 0.04
Basic weighted average number of common ======= ====== ======
shares outstanding during the period ...... 4,609 4,533 4,261
Preferred shares convertible to common shares 0 69 298
Stock options ............................... 0 52 28
------- ------ ------
4,609 4,654 4,587
------- ------ ------
Diluted income (loss) per share ............. $ (0.12) $ 0.25 $ 0.04
======= ====== ======
</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 1999. As a result, sales for fiscal 1997 are not directly
comparable to those in fiscal 1998 and 1999.
<PAGE> 1
ABOUT THE COMPANY EXHIBIT 13
Back Yard Burgers operates and franchises quick-service restaurants
that specialize in charbroiled, freshly prepared, great-tasting food. As our
name implies, Back Yard Burgers strives to offer the same high-quality
ingredients and special care typified by outdoor grilling in the 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.
Our goal for 2000 is to continue to position Back Yard Burgers as a
favored regional premium fast-food 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.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS *
(in thousands, except per share amounts and units)
January 1, January 2, January 3,
FOR THE YEAR ENDED: 2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Restaurant sales $ 26,480 $ 25,082 $ 24,150
Total revenues 29,295 27,364 26,034
Net income (loss) (558) 1,171 162
Net income (loss) per share:
Basic (.12) .26 .04
Diluted (.12) .25 .04
Weighted average shares outstanding:
Basic 4,609 4,533 4,261
Diluted 4,609 4,654 4,587
System-wide sales $ 65,119 $ 59,564 $ 55,798
Units in operation:
Company-owned 35 33 32
Franchised 51 48 45
---------- ---------- ----------
Total 86 81 77
========== ========== ==========
</TABLE>
{BAR GRAPHS]
* The years ended January 1, 2000, and January 2, 1999, contained 52 weeks
while the year ended January 3, 1998, contained 53 weeks.
** Excludes non-cash charge for impairment of long-lived assets of $1,362,000
in fiscal year 1999 and $377,000 in fiscal year 1997.
*** Depicts percentage increase or decrease over previous year's same-store
sales.
<PAGE> 2
To Our Shareholders:
Welcome to our Back Yard! Quite frankly, 1999 was a year filled with
mixed results. We solidified our position as a leading regional "premium" fast
food provider. We hired Michael Myers, a former regional vice president with
Whataburger, as our new chief operating officer. His leadership and enthusiasm
are in place. He has created a stronger team of supervisors and unit level
managers, a more disciplined approach to accomplish our goals, and a relentless
approach to building sales. Our study to enhance our throughput and make our
restaurants more efficient is nearing completion. Our entire team of senior
management is refocused and totally committed to building sales and profits.
However, we saw a decline in sales during the latter part of 1999. Non-food
promotions targeted at children, as well as heavy discounting by some of our
competitors had a negative impact on our sales. Even though the marketplace is
crowded, we believe we can compete successfully by serving our great tasting
Back Yard products. Our mission to make the "best burger" better has resulted
in the addition of Eric Arthur as director of purchasing and research and
development. Eric brings a wealth of knowledge and experience to our
organization.
Late last year we implemented a strategic plan to position ourselves
as the leader of "premium" fast food. This positioning should allow us to
exploit what makes Back Yard Burgers better than the rest - BETTER GREAT
TASTING PRODUCTS, HIGHER QUALITY INGREDIENTS, CHARBROIL COOKING and SERVICE
WITH A CARING ATTITUDE.
We have been pleased that the Memphis Zoo continues to be a tremendous
venue to market our concept and serve our products to a wide variety of guests.
We signed a ten year contract to assure us of a long-term presence. This "world
class" facility has enormous upside potential with the addition of White Tigers
on display in 2000, the "real" probability of a pair of Pandas coming in 2001
for ten years, and the completion of the Northwest Passage in 2002.
Our strategies for success are as follows:
- - FRANCHISING - We will continue to actively promote expansion by awarding
more franchise territories. We believe our strongest growth vehicle is
through adding franchised locations. Many of our current dedicated
franchise owners will be adding restaurants in 2000.
- - RESTAURANT OPERATIONS - We have virtually completed the conversion of our
double drive-thru restaurants to traditional single drive-thru's with
dine-in facilities. Our future model will include the single drive-thru,
dining room; and a focus on delivering a "hassle free" dining experience.
- - PRODUCTS - We will focus on making our great tasting products even better.
We are the leader in TASTE and QUALITY in the quick service restaurant
industry. We WILL NOT sacrifice quality for price.
- - MARKETING - Our award winning marketing programs will continue to
creatively promote our points of differentiation and what makes us better
than the rest. We believe our price/value relationship is extremely
competitive. We are increasing our media budget 1% for the last 3 quarters
of 2000 to help drive sales.
I am very proud of our achievements, but I also realize we have to
successfully implement our strategies in order to take advantage of our
tremendous growth opportunities. Our team is committed, experienced, and
passionately working to build a successful restaurant company. The demographic
trends are in our favor with the desire for more flavorful, higher quality
dining options. Our points of differentiation deliver a positive opportunity for
our company, our guests, and our shareholders. ENJOY!
Sincerely,
Lattimore M. Michael
Founder, Chairman and Chief Executive Officer
<PAGE> 3
FORWARD-LOOKING INFORMATION
Certain information included herein may contain statements that are
forward-looking, such as statements related to financial items and results,
plans for future expansion and other business development activities, capital
spending or financing sources, capital structure and the effects of regulation
and competition. Forward-looking statements made by the company are based upon
estimates, projections, beliefs and assumptions of management at the time of
such statements and should not be viewed as guarantees of future performance.
Such forward-looking information involves important risks and uncertainties
that could significantly impact anticipated results in the future and,
accordingly, such results may differ materially from those expressed in any
forward-looking statements by or on behalf of the company. These risks and
uncertainties include, but are not limited to, increased competition within the
industry for customers, qualified labor and desirable locations, increased
costs for beef, chicken or other food products and management decisions
relating to 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.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data presented below for each of
the years in the five-year period ended January 1, 2000 was derived from the
company's audited Consolidated Financial Statements. The selected consolidated
financial data should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3, DECEMBER 28, DECEMBER 30,
2000 1999 1998 1996 1995
---------- ---------- ---------- ------------ ------------
OPERATIONS
<S> <C> <C> <C> <C> <C>
Restaurant sales $ 26,480 $ 25,082 $ 24,150 $ 22,281 $ 21,196
Total revenues 29,295 27,364 26,034 24,041 22,743
Income (loss) before income taxes (930) 820 162 357 (3,060)
Net income (loss) (558) 1,171 162 357 (2,953)
FINANCIAL POSITION
Total assets $ 18,340 $ 16,948 $ 13,155 $ 11,572 $ 11,149
Property and equipment, net 13,211 13,365 9,451 8,131 8,128
Long-term obligations 6,178 5,458 3,081 2,159 2,298
Shareholders' equity 9,058 9,586 8,298 8,110 7,728
OTHER DATA
Systemwide sales $ 65,119 $ 59,564 $ 55,798 $ 49,515 $ 43,665
Capital expenditures 2,679 4,983 2,758 863 1,980
PER SHARE DATA
Net income (loss) - basic $ (0.12) $ 0.26 $ 0.04 $ 0.08 $ (0.65)
Net income (loss) - diluted (0.12) 0.25 0.04 0.08 (0.65)
Dividends 0.00 0.00 0.00 0.00 0.00
Market price at year end 1.50 1.94 3.00 2.06 1.50
</TABLE>
2
<PAGE> 4
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 1999 and 1998 contain 52 weeks
versus 53 weeks for 1997. As a result, operating results for fiscal 1999 are
not directly comparable with those of the prior 53-week period.
The Back Yard Burgers system included 86 restaurants, of which 35 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, 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 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Restaurant sales 90.4% 91.7% 92.8%
Franchise and area development fees .5 .5 .3
Royalty fees 5.1 4.8 4.5
Advertising fees 1.9 1.7 1.2
Other operating revenue 2.1 1.3 1.2
---------- ---------- ----------
Total revenue 100.0% 100.0% 100.0%
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
COSTS AND EXPENSES
Cost of restaurant sales (1) 33.8% 32.7% 32.8%
Restaurant operating expenses (1) 48.0 47.2 48.3
General and administrative 12.4 11.9 12.3
Advertising 5.8 5.5 5.1
Depreciation and amortization 4.6 4.6 4.4
Impairment of long-lived assets 4.6 -- 1.4
Operating income (1.3) 4.7 1.5
Interest income 0.1 0.1 0.1
Interest expense (1.9) (1.8) (0.9)
Other, net -- -- --
Income before taxes (3.2) 3.0 0.6
Income tax benefit (2) (40.0) 42.8 --
Net income (1.9) 4.3 0.6
</TABLE>
(1) As a percentage of restaurant sales.
(2) As a percentage of income before taxes.
3
<PAGE> 5
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------------------------------
JANUARY 1, JANUARY 2, JANUARY 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING DATA
Restaurant sales (000's)
Company-operated $ 26,480 $ 25,082 $ 24,150
Franchised 38,639 34,482 31,648
---------- ---------- ----------
Total $ 65,119 $ 59,564 $ 55,798
========== ========== ==========
AVERAGE ANNUAL SALES PER RESTAURANT OPEN
FOR A FULL YEAR (1)
Company-operated $ 769,000 $ 797,000 $ 731,000
Franchised $ 779,000 $ 759,000 $ 703,000
System-wide $ 775,000 $ 774,000 $ 716,000
NUMBER OF RESTAURANTS (2)
Company-operated 35 33 32
Franchised 51 48 45
---------- ---------- ----------
Total 86 81 77
========== ========== ==========
</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 1, 2000, three franchised restaurants were opened
and one franchised restaurant was closed.
COMPARISON OF FISCAL YEAR 1999
TO FISCAL YEAR 1998
RESTAURANT SALES increased 5.6% to $26,480,000 during 1999 compared to
$25,082,000 during 1998. This increase is primarily the result of an increase
in same-store sales at restaurants open for more than one year of 0.4%. The
increase in same-store sales, coupled with new stores not included in the
same-store sales calculation, accounted for approximately $2,024,000 in
additional sales. This increase was partially offset by the loss of sales from
two restaurants which were closed and one restaurant which was converted to a
franchised restaurant. Company management believes that the increases in
same-store sales are the results of improved customer service and the retrofit
of three double drive-thrus to dine-in facilities with single drive-thrus
during 1999.
FRANCHISE AND AREA DEVELOPMENT FEES were $132,000 during 1999, a decrease
of 7.0% from $142,000 in 1998. Six new franchised restaurants were opened in
1999, as compared to seven new franchised units opened in 1998.
ROYALTY FEES increased 14.9% to $1,508,000 during 1999 compared to
$1,313,000 during 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 2.0%, representing
an increase in royalty fees of approximately $26,000. The remaining increase is
due to the opening of six franchised restaurants, the conversion of one
company-operated restaurant to a franchised unit, offset by the closing of four
franchised restaurants during 1999.
ADVERTISING FEES increased 18.8% to $568,000 for 1999 compared to $478,000
during 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 73.9% to $607,000 for 1999 compared to $349,000
during 1998. 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
$8,943,000 during 1999 compared to $8,206,000 during 1998, increasing to 33.8%
as a percentage of restaurant sales during 1999 from 32.7% for 1998. This
4
<PAGE> 6
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,
rent and certain other unit level operating expenses, increased to $12,709,000
for 1999 from $11,839,000 during 1998. The increase of $870,000 is due
primarily to operating expenses from a net increase of two new company
operated-restaurants since the prior year. As a percentage of restaurant sales,
restaurant operating expenses increased to 48.0% from 47.2% for 1998. Labor
costs as a percentage of sales increased by 0.4% over the year-earlier period.
The remainder of the increase was due to increases in repairs and maintenance
costs, increases in property taxes in the Memphis area, and other miscellaneous
operating costs incurred during the period.
GENERAL AND ADMINISTRATIVE COSTS increased $358,000 to $3,619,000 during
1999 from $3,261,000 in 1998. This represents an increase as a percentage of
total revenue to 12.4% from 11.9% for 1998. $165,000 of the increase related to
consulting expenditures for a strategic study of system operations and facility
design. Preopening expenses also represented $82,000 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 $1,701,000 for 1999 from
$1,513,000 during 1998, increased as a percentage of total revenues to 5.8%
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 16.7% to $566,000 for 1999 from $485,000 in
1998. This is due to a net increase in long-term debt of $720,000, or 13.2%,
during 1999. The borrowings from this increase in long-term debt were used to
add new restaurants and retrofit existing restaurants to include dine-in
facilities.
Income tax benefit was $372,000 in 1999 compared with $351,000 in 1998.
The 1999 benefit was related to the company's pre-tax loss of $930,000 after
impairment charges of $1,362,000 taken during the year. During 1998, the
company released a valuation allowance of $351,000 established for deferred
income tax benefits established during 1995. The release of this valuation
allowance was based on management's conclusion that sufficient positive
evidence, as defined by SFAS 109, existed regarding the realization of certain
tax carryforward items.
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. Seven 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
5
<PAGE> 7
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.
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.
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.
During the fourth quarter of 1999, the company incurred a non-cash charge
for the effect of three company-operated restaurant closings and impaired
assets at three underperforming company-operated restaurants. While some of the
fixed assets at the closed locations were utilized by other stores, certain
assets were fixed to the site and were unrecoverable. Based on these facts and
an analysis of projected undiscounted cash flows for the underperforming
locations, the company determined in 1999 that the carrying value of certain
long-lived assets necessitated a write-down of $1,114,000. Also, a related
accrual for future lease payments, net of estimated sub-lease income, of
$248,000 was recorded.
Two additional stores were previously assessed by company management as
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 these
facts and an analysis of projected undiscounted cash flows for these locations,
the company determined in 1997 that the carrying value of certain long-
6
<PAGE> 8
lived assets necessitated a write-down of $275,000. Also, a related accrual for
future lease payments of $102,000 was recorded. In 1999, $29,000 of lease
payments were incurred for these closed stores and charged against this reserve.
As of January 1, 2000, the company's remaining accrual for all future
lease obligations discussed above was $270,000 for the remaining lease payments
due, net of estimated sub-lease income.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $2,679,000 for 1999, $4,983,000 for 1998 and
$2,758,000 for 1997. 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 is
approximately $3,230 per month. For the 11 restaurants where the company leases
the building as well as the site, the average monthly cost is approximately
$4,400 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 1999 and 1997, a charge for
impaired assets. Depreciation and amortization totaled $1,355,000 for 1999,
$1,271,000 for 1998 and $1,143,000 for 1997. Year to year increases relate to
the addition of buildings, equipment and other depreciable items. The increases
from 1998 to 1999 resulted from the addition of five company-operated
restaurants and one dining room addition to an existing company-operated
restaurant during the year. 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.
Cash from operations totaled $2,537,000, $1,978,000 and $2,003,000 for
1999, 1998 and 1997, 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 1, 2000, the company had total long-term debt of $6,178,000
and unused lines of credit and loan commitments of potential additional
borrowings of $1,461,000. 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 1, 2000, borrowings under the commitment were $931,000. 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 9% for which the company
completed borrowings under the commitment during 1999. 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 9% for
which the company completed borrowings under the commitment during 1999. Each of
the above agreements are secured by real and personal property 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
$2,500,000 during 2000. These resources include the borrowing commitments
described above in addition to the company's internally generated cash flow.
Additional growth in 2000 may require the company to obtain additional debt or
equity financing.
QUALITATIVE AND QUANTITATIVE DISCLOSURE 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 January 1, 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.
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 1999. 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.
7
<PAGE> 9
CONVERSION OF PREFERRED STOCK
In accordance with the provisions of the company's Certificate of Incorporation
regarding preferred stock, as a result of the company's having attained
after-tax net income in excess of $600,000 during 1994, each share of preferred
stock is convertible into one share of common stock, at the option of the
holder. The company has notified preferred stockholders of their right to
convert preferred stock to common stock and anticipates that all shares of
preferred stock will be converted. Such conversion began on April 5, 1995, at
which time there were 1,199,979 shares of preferred stock outstanding. As of
January 1, 2000, only 19,763 shares have yet to be converted.
YEAR 2000
The company has substantially completed its year 2000 plan as scheduled.
As of March 24, 2000, the company's cash register, computer and other systems
with imbedded microchips have operated without year 2000 related problems and
appear to be year 2000 compliant. The company is not aware that any of its
software and hardware vendors, financial institutions or product vendors with
which the company interacts have experienced material year 2000 related
problems.
While the company believes all of its critical systems are year 2000
compliant, there can be no guarantee the company has detected all possible
failure points related to its own systems, non-ready third parties whose system
failures could impact the company, or other uncertainties.
The company's aggregate expenses incurred with respect to becoming year
2000 ready were approximately $30,000, all of which were recorded by January 1,
2000. The company does not project any additional material costs relating to
the year 2000 issue.
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 1999, the price of beef, the largest single component of the cost
of restaurant sales, increased approximately 10% from January to July before
returning to beginning of the year pricing levels by the end of the year.
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
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.
Same-store sales increased 0.4% during 1999 compared with a 6.3% increase
in 1998. The company directed a balanced marketing strategy focused on
increasing guest awareness and increasing the frequency of guest visits. The
company will continue this strategy in 2000, 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.
8
<PAGE> 10
BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
January 1, January 2,
ASSETS 2000 1999
---------- ----------
<S> <C> <C>
Cash and cash equivalents $ 1,697 $ 815
Receivables, less allowance for doubtful accounts of
$103 ($121 in 1998) 284 200
Inventories 177 202
Current deferred tax asset 65 104
Prepaid expenses and other current assets 79 96
---------- ----------
Total current assets 2,302 1,417
Property and equipment, at depreciated cost 13,211 13,365
Intangible assets 1,204 1,352
Noncurrent deferred tax asset 1,020 452
Notes receivable 350 98
Other assets 253 264
---------- ----------
$ 18,340 $ 16,948
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 744 $ 467
Accrued expenses 901 799
Reserve for closed stores 270 51
Income taxes payable 89 205
Current installments of long-term debt 489 361
---------- ----------
Total current liabilities 2,493 1,883
Long-term debt, less current installments 5,689 5,097
Deferred franchise and area development fees 392 254
Other deferred income 633
Other deferred liabilities 75 128
---------- ----------
Total liabilities 9,282 7,362
---------- ----------
Commitments and contingencies (Note 13)
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized;
19,763 shares issued and outstanding (23,123 in 1998) -- --
Common stock, $.01 par value; 12,000,000 shares authorized;
4,618,377 shares issued and outstanding (4,596,471 in 1998) 46 46
Paid-in capital 10,128 10,098
Deficit (1,116) (558)
---------- ----------
Total stockholders' equity 9,058 9,586
---------- ----------
Total liabilities and stockholders' equity $ 18,340 $ 16,948
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 11
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------
January 1, January 2, January 3,
2000 1999 1998
---------- ---------- ----------
Revenues:
<S> <C> <C> <C>
Restaurant sales $ 26,480 $ 25,082 $ 24,150
Franchise and area development fees 132 142 95
Royalty fees 1,508 1,313 1,178
Advertising fees 568 478 307
Other 607 349 304
---------- ---------- ----------
Total revenues 29,295 27,364 26,034
---------- ---------- ----------
Expenses:
Cost of restaurant sales 8,943 8,206 7,923
Restaurant operating expenses 12,709 11,839 11,672
General and administrative 3,619 3,261 3,202
Advertising 1,701 1,513 1,323
Depreciation and amortization 1,355 1,271 1,143
Impairment of long-lived assets 1,362 -- 377
---------- ---------- ----------
Total expenses 29,689 26,090 25,640
---------- ---------- ----------
Operating income (394) 1,274 394
Interest income 30 24 14
Interest expense (566) (485) (242)
Other, net -- 7 (4)
---------- ---------- ----------
Income before income taxes (930) 820 162
Income tax benefit 372 351 --
---------- ---------- ----------
Net income (loss) $ (558) $ 1,171 $ 162
========== ========== ==========
Income per share:
Basic $ (.12) $ .26 $ .04
========== ========== ==========
Diluted $ (.12) $ .25 $ .04
========== ========== ==========
Weighted average number of common shares and common equivalent shares
outstanding:
Basic 4,609 4,533 4,261
========== ========== ==========
Diluted 4,609 4,654 4,587
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 12
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
Shares Amount Shares Amount Capital Deficit Total
-------- --------- --------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Conversion of preferred stock (3,360) -- 3,360
Employee stock purchases 18,546 30 30
Net loss (558) (558)
-------- --------- --------- --------- --------- -------- -------
Balance at January 1, 2000 19,763 $ -- 4,618,377 $ 46 $ 10,128 $ (1,116) $ 9,058
======== ========= ========= ========= ========= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE> 13
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended
------------------------------------------------------
January 1, January 2, January 3,
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (558) $ 1,171 $ 162
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of property and equipment 1,251 1,063 1,022
Impairment of long-lived assets 1,362 -- 377
Deferred income taxes (529) (556) --
Amortization of intangible assets 104 112 104
Amortization/write off of preopening costs -- 95 17
Provision for losses on receivables 154 216 163
Gain on sale of assets (2) (42) --
(Increase) decrease in assets:
Receivables (199) (62) (184)
Inventories 16 (26) (26)
Prepaid expenses and other current assets 17 (118) (59)
Other assets (3) (3) 56
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 250 (71) 266
Reserve for closed stores (29) (51) --
Income taxes payable (116) 205 --
Other deferred income 633 -- --
Other deferred liabilities 14 6 12
Deferred franchise and area development fees 138 39 93
---------- ---------- ----------
Net cash provided by operating activities 2,503 1,978 2,003
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (2,679) (4,983) (2,758)
Proceeds from sale of property and equipment 274 48 34
Proceeds on notes receivable 34 -- --
Investment in joint ventures -- (50) --
---------- ---------- ----------
Net cash used in investing activities (2,371) (4,985) (2,724)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of stock 30 28 26
Principal payments on long-term debt (498) (543) (353)
Proceeds from issuance of long-term debt 1,218 2,920 1,275
Proceeds from exercise of stock options -- 89 --
---------- ---------- ----------
Net cash provided by financing activities 750 2,494 948
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 882 (513) 227
Cash and cash equivalents:
Beginning of year 815 1,328 1,101
========== ========== ==========
End of year $ 1,697 $ 815 $ 1,328
========== ========== ==========
Supplemental disclosure of cash flow information:
Income taxes paid $ 273 $ -- $--
========== ========== ==========
Interest paid $ 566 $ 462 $ 232
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE> 14
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 1, 2000, the Company operated 35 restaurants in
three states (Mississippi, Arkansas and Tennessee) and franchised 51
restaurants in 16 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. All 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 1,
2000 contains 52 weeks while the years ended January 2, 1999 and January 3,
1998 contained 52 and 53 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 when purchased as cash and cash equivalents.
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.
OTHER DEFERRED INCOME. During 1999 the Company received $800,750 from certain
vendors relating to future purchases by the Company. The Company deferred this
amount as other deferred income. 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.
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.
13
<PAGE> 15
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.
PROPERTY AND EQUIPMENT. Property and equipment is recorded at cost.
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: buildings and
building and site 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 $809,000 at January 1, 2000 and
$710,000 at January 2, 1999.
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.
During the fourth quarter of 1999, the company incurred a non-cash charge for
the effect of three company-operated restaurant closings and impaired assets at
three underperforming company-operated restaurants. 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 1999 that
the carrying value of certain long-lived assets necessitated a write-down. The
company recorded a charge to write these assets down to their value in the
amount of $1,114,000 and a related accrual for future lease payments net of
estimated sub-lease income of $248,000 was recorded.
Two stores were assessed by company management as 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. The
company recorded a charge to write these assets down to their value in the
amount of $275,000 and a related accrual for future lease payments of $102,000
was recorded.
In 1999, $29,000 of lease payments were incurred for these closed stores and
charged against this reserve. As of January 1, 2000, the company's remaining
accrual for future lease obligations was $270,000 for the remaining lease
payments due net of estimated sub-lese 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 1, 2000, all but 19,763 shares of preferred stock had been converted to
common stock.
14
<PAGE> 16
BACK YARD BURGERS, INC.
Notes to Consolidated Financial Statements
EARNINGS PER SHARE. The Company calculates earnings per share in accordance
with Statement of Financial Accounting Standards No. 128, Earnings per Share,
which requires the presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity (Note
12).
FAIR VALUE OF FINANCIAL INSTRUMENTS. At January 1, 2000, 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 1, 2000, the fair value
was approximately $6,092,000 versus a fair value of $5,369,000 at January 2,
1999.
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 1, January 2,
2000 1999
---------- ----------
(in thousands)
<S> <C> <C>
Corporate receivables $ 171 $ 170
National Advertising Fund receivables 91 68
Other 125 83
---------- ----------
387 321
Allowance for doubtful receivables (103) (121)
---------- ----------
$ 284 $ 200
========== ==========
</TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
Summaries of property and equipment follow:
<TABLE>
<CAPTION>
January 1, January 2,
2000 1999
---------- ----------
(in thousands)
<S> <C> <C>
Land $ 3,452 $ 3,417
Buildings 6,626 6,263
Building and site improvements 2,954 3,351
Fixtures and equipment 5,620 5,234
Transportation vehicles 244 240
---------- ----------
18,896 18,505
Accumulated depreciation and amortization (5,685) (5,140)
---------- ----------
$ 13,211 $ 13,365
========== ==========
</TABLE>
15
<PAGE> 17
BACK YARD BURGERS, INC.
Notes to Consolidated Financial Statements
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 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 1, 2000,
$305,000 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 1, 2000, 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>
1999 $ 219
Previous years 173
---------
$ 392
---------
</TABLE>
NOTE 6 - INDEBTEDNESS
Long-term debt is collateralized by property and equipment with a net book
value aggregating $8,142,000 and a portion guaranteed by the personal
endorsements of certain stockholders. The balances consist of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
January 1, January 2,
2000 1999
---------- ----------
(in thousands)
Notes payable to financial institutions, payable in monthly
installments ranging from $2,640 to $8,788, including
interest ranging from 7.0% to 9.8% $ 3,648 $ 3,083
Financing lease transactions to Lester's Back Yard Burgers
Joint Venture I, II and IV (See Note 4), payable in monthly
installments ranging from $5,450 to $7,900 and effective
interest rates ranging from 12.0% to 12.5% 1,434 1,341
Financing lease with Amplican Financial 165 --
Notes payable to a leasing company, payable in monthly
installments ranging from $1,122 to $5,643 including
interest of 14.1% 931 1,034
---------- ----------
6,178 5,458
Less current installments (489) (361)
---------- ----------
Total $ 5,689 $ 5,097
========== ==========
</TABLE>
16
<PAGE> 18
BACK YARD BURGERS, INC.
Notes to Consolidated Financial Statements
The principal maturities of all long-term debt subsequent to 1999 are as
follows: $489,000 in 2000; $722,000 in 2001, $537,000 in 2002, $573,000 in
2003, $1,404,000 in 2004 and $2,453,000 thereafter.
The Company has a line of credit with a financial institution for $150,000. The
line of credit is collateralized by a $50,000 certificate of deposit. There
were no borrowings outstanding under the agreement at January 1, 2000 and
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 1, 2000, borrowings
outstanding under the commitment are $931,000, and $876,000 is available under
the note payable.
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 1, 2000, are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 1,279
2001 1,152
2002 984
2003 818
2004 612
Thereafter 1,927
---------
$ 6,772
---------
</TABLE>
Rent expense was $1,128,000, $1,058,000 and $1,187,000 in 1999, 1998 and 1997,
respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS
On October 3, 1999, the Company sold a company-operated restaurant, along with
future development rights for a specified area contiguous to the restaurant, to
a former officer of the company and a current member of the board of directors
of the Company. The restaurant was sold at book value and will continue to be
operated as a franchised restaurant.
Also in 1999, the Company sold the net assets of an additional restaurant
for cash and a note of $315,000 to a new franchisee.
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.
17
<PAGE> 19
BACKYARD BURGERS, INC.
Notes to Consolidated Financial Statements
The deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
January 1, January 2,
2000 1999
----------- -----------
(in thousands)
<S> <C> <C>
Current
Current deferred tax assets:
Allowance for doubtful receivable $ 35 $ 41
Accrued expenses 52 59
Reserve for store closings -- 15
----------- -----------
87 115
Current deferred tax liabilities (22) (11)
----------- -----------
Net current deferred tax asset 65 104
Deferred tax asset valuation allowance -- --
----------- -----------
$ 65 $ 104
=========== ===========
Noncurrent
Noncurrent deferred tax assets:
Franchise fees $ 84 $ 47
Net operating loss carryforwards 193 531
Alternative minimum tax credit carryforwards 356 145
Goodwill amortization 263 349
Other deferred income 215 --
Other 109 30
----------- -----------
Gross noncurrent deferred tax assets 1,220 1,102
----------- -----------
Noncurrent deferred tax liabilities:
Depreciation (70) (520)
----------- -----------
Gross noncurrent deferred tax liabilities (70) (520)
----------- -----------
Net noncurrent deferred tax assets 1,150 582
Deferred tax asset valuation allowance (130) (130)
----------- -----------
$ 1,020 $ 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 1999 and 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 1999 and 1998 is based on management's conclusion that it is more
likely than not that certain state tax carryforward items will expire unused.
18
<PAGE> 20
BACKYARD 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>
1999 1998 1997
--------------------- ----------------------- -----------------------
Amount % Amount % Amount %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected" tax $ (325) (35.0)% $ 287 35.0% $ 57 35.0
State income taxes, net of federal
income tax effect -- 0.0 9 5.3
Goodwill amortization 7 1.0 15 1.8 14 8.9
Valuation allowance release (656) (79.6) (78) (48.0)
Other (54) (6.0) 3 0.0 (2) (1.2)
-------- -------- -------- -------- -------- --------
$ (372) (40.0)% $ (351) (42.8)% $ -- 0.0%
-------- -------- -------- -------- -------- --------
</TABLE>
As of January 1, 2000, the Company has net operating loss carryforwards
available for federal and state income tax reporting purposes on a consolidated
basis of approximately $184,000 and $3,157,000, 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.
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
19
<PAGE> 21
BACKYARD BURGERS, INC.
Notes to Consolidated Financial Statements
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 1999, the Company granted options for an aggregate of
100,281 shares of common stock at exercise prices to $1.72 and $1.94 per share,
which equaled fair market value at grant date.
A summary of activity in the above two option plans for the years ended January
1, 2000, January 2, 1999 and January 3, 1998 follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
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 297,127 $ 3.03 303,637 $ 3.25 226,568 $ 3.72
Granted 100,281 1.77 81,864 2.35 84,922 1.87
Exercised -- -- (40,071) 2.11 -- --
Canceled (129,050) 2.47 (48,303) 4.00 (7,853) 2.04
-------- -------- --------
Outstanding at end of year 268,358 2.82 297,127 3.03 303,637 3.25
======== ======== ========
Exercisable at end of year 227,439 3.01 271,966 3.12 269,226 3.41
======== ======== ========
</TABLE>
A summary of information about the Company's stock options outstanding at
January 1, 2000 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-$2.00 135,483 8.4 $ 1.76 97,004 8.1 $ 1.77
2.00- 2.50 44,228 8.1 2.26 41,788 8.1 2.26
3.00- 3.50 34,553 5.5 3.09 34,553 5.5 3.09
5.50- 6.00 54,094 3.7 5.78 54,094 3.7 5.78
- ----------- ----------- ----------- ----------- ----------- ----------- --------
$1.50-$6.00 268,358 7.0 $ 2.90 227,439 6.6 $ 3.01
- ----------- ----------- ----------- ----------- ----------- ----------- --------
</TABLE>
20
<PAGE> 22
BACKYARD BURGERS, INC.
Notes to Consolidated Financial Statements
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant date for awards in
1999, 1998 and 1997 under the plan consistent with the method prescribed by SFAS
No. 123, Accounting for Stock-Based Compensation, the Company's operating
results for 1999, 1998 and 1997 would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income:
As reported $ (558) $ 1,171 $ 162
Pro forma (623) 1,053 69
Basic earnings per share:
As reported (0.12) 0.26 0.04
Pro forma (0.14) 0.23 0.02
Diluted earnings per share:
As reported (0.12) 0.25 0.04
Pro forma (0.14) 0.23 0.02
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions using grants in 1999, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Average expected life (years) 7.0 7.0 7.0
Average expected volatility 63.3% 64.4% 66.5%
Risk-free interest rates 5.6% 6.1% 6.1%
Dividend yield 0.0% 0.0% 0.0%
</TABLE>
The pro forma results reported above will not be representative of the effect on
operating results for future years because it does not take into consideration
pro forma compensation expense related to grants made prior to 1995.
Additionally, under the IAP, the Compensation Committee of the Board of
Directors may award Restricted Stock and/or a Performance Award to selected
employees. A Performance Award shall mean cash bonus, stock bonus or other
performance or incentive award that is paid in cash, stock or a combination of
both. The Company has not issued any Restricted Stock or Performance Awards.
In May 1995, the Board of Directors of the Company and the shareholders
authorized the adoption of an Employee Stock Purchase Plan ("ESPP") for the
Company's employees. An aggregate of 225,000 shares of common stock may be
issued under the ESPP. Shares purchased under the ESPP shall be sold to
participants at 85% of the reported price and the maximum number of shares that
can be purchased by a participant is 1,000 shares per quarter. The ESPP shall
continue in effect through May 31, 2005. During 1999, 1998 and 1997, 18,546,
12,314 and 15,743 shares were purchased, respectively, under the ESPP.
21
<PAGE> 23
BACKYARD BURGERS, INC.
Notes to Consolidated Financial Statements
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 1, 2000 January 2, 1999 January 3, 1998
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 $ (558) 4,609 (0.12) $ 1,171 4,533 $ .26 $ 162 4,261 $ .04
EFFECT OF DILUTIVE
SECURITIES
Convertible preferred
stock -- 69 298
Stock options -- 52 28
-------- ------ ------ --------- ------ --------- ------- ----- --------
DILUTED EPS
Income available to
common stockholders
plus assumed
conversions $ (558) 4,609 (0.12) $ 1,171 4,654 $ .25 $ 162 4,587 $ .04
======== ====== ====== ========= ====== ========= ====== ===== ========
</TABLE>
Options to purchase shares of the Company's common stock were outstanding during
the years 1999, 1998 and 1997 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 1, 2000.
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. The convertible preferred stock and stock
options are anti-dilutive and thus are not considered in the calculation of
diluted earnings per share in 1999.
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 1, 2000, the Company's uninsured cash balance totaled
$1,195,000.
LITIGATION. The Company is party to certain pending legal proceedings and claims
in the normal course of business. Although the outcome of the proceedings and
claims cannot be determined with certainty, management of the Company is of the
opinion that it is unlikely that these proceedings and claims will have a
material effect on the results of operations or the financial condition of the
Company.
22
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
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 1, 2000, and January 2,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended January 1, 2000, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States, 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.
/s/ PricewaterhouseCoopers, LLP
Memphis, Tennessee
February 10, 2000
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 that 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 1999 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
William N. Griffith Michael W. Myers
Executive Vice President Chief Operating Officer
And Secretary-Treasurer
William N. Griffith
W. Kurt Henke Executive Vice President and Secretary-Treasurer
Partner
Henke & Bufkin Michael G. Webb
(attorneys-at-law) Chief Financial Officer
Stephen J. King
CPA, Consultant
Jim L. Peterson
President and Chief Executive Officer
Hospitality Solutions, Inc.
(restaurant industry technology)
William B. Raiford, III
Of Counsel
Merkel & Cocke
(attorneys-at-law)
Joseph L. Weiss
President, A. Weiss Company
(franchisee)
</TABLE>
24
<PAGE> 26
CORPORATE INFORMATION
CORPORATE OFFICES
1657 N. Shelby Oaks Dr., Suite 105
Memphis, TN 38134
901/367-0888
TRANSFER AGENT
Union Planters Bank
7650 Magna Dr.
Belleville, IL 62223
618-239-4451
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Memphis, Tennessee
GENERAL COUNSEL
Henke & Bufkin
Professional Corporation
Clarksdale, Mississippi
SECURITIES COUNSEL
Giroir, Gregory, Holmes & Hoover, PLC
Little Rock, Arkansas
ANNUAL MEETING OF STOCKHOLDERS
The company's 1999 annual meeting of stockholders will be held at 10:00 a.m.
local time on Thursday, May 18, 2000, at the Holiday Inn, 6101 N. Shelby Oaks
Drive, in Memphis, Tennessee. Stockholders of record as of March 24, 2000, are
invited to attend this meeting.
ANNUAL REPORT ON FORM 10-K
A copy of the company's Annual Report on Form 10-K for the year ended January 1,
2000, 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 24, 2000, 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 1, 2000:
<TABLE>
<CAPTION>
QUARTER ENDED: HIGH LOW
<S> <C> <C>
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
April 3, 1999 $ 2.44 $ 1.50
July 3, 1999 $ 2.00 $ 1.56
October 2, 1999 $ 2.50 $ 1.75
January 1, 2000 $ 2.00 $ 1.44
</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 OF BACK YARD BURGERS AT JANUARY 1, 2000 AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED JANUARY 1, 2000 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-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JAN-01-2000
<EXCHANGE-RATE> 1
<CASH> 1,697
<SECURITIES> 0
<RECEIVABLES> 284<F1>
<ALLOWANCES> 0
<INVENTORY> 177
<CURRENT-ASSETS> 2,302
<PP&E> 13,211<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,340<F1>
<CURRENT-LIABILITIES> 2,493
<BONDS> 0
0
0
<COMMON> 46
<OTHER-SE> 9,012
<TOTAL-LIABILITY-AND-EQUITY> 18,340
<SALES> 26,480
<TOTAL-REVENUES> 29,295
<CGS> 8,943
<TOTAL-COSTS> 14,410
<OTHER-EXPENSES> 6,152
<LOSS-PROVISION> 154
<INTEREST-EXPENSE> 566
<INCOME-PRETAX> (930)
<INCOME-TAX> (372)
<INCOME-CONTINUING> (558)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (558)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
<FN>
<F1> Asset value represents net amount.
</FN>
</TABLE>
