SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission file number 1-12104
BACK YARD BURGERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 64-0737163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1657 SHELBY OAKS DR. N. STE. 105, MEMPHIS, TENNESSEE 38134
(Address of principal executive offices)
(901) 367-0888
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common stock, par value $.01 per share
Outstanding at October 31, 2001 - 4,640,537
BACK YARD BURGERS, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements:
Balance Sheet as of September 29, 2001 and December 30, 2000 3
Statement of Income for the Thirteen and Thirty-Nine Weeks Ended
September 29, 2001 and September 30, 2000 4
Statement of Cash Flows for the Thirty-Nine Weeks Ended
September 29, 2001 and September 30, 2000 5
Notes to Unaudited Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 14
Part II - Other Information
Item 1 - Legal Proceedings 15
Item 2 - Changes in Securities and Use of Proceeds 15
Item 3 - Defaults Upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of Security Holders 15
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
2
BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 29, DECEMBER 30,
2001 2000
------------- -----------
ASSETS
Cash and cash equivalents $ 1,612 $ 1,041
Receivables, less allowance for doubtful accounts of 410 402
$309 ($205 in 2000)
Inventories 230 208
Current deferred tax asset 215 140
Prepaid expenses and other current assets 94 58
-------- --------
Total current assets 2,561 1,849
Property and equipment, at depreciated cost 12,591 12,569
Intangible assets 1,788 1,901
Noncurrent deferred tax asset 477 824
Note receivable 345 359
Other assets 294 277
-------- --------
$ 18,056 $ 17,779
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 650 $ 775
Accrued expenses 1,190 987
Reserve for closed stores 36 46
Income taxes payable 78 29
Current installments of long-term debt 599 747
-------- --------
Total current liabilities 2,553 2,584
Long-term debt, less current installments 4,355 4,656
Deferred franchise and area development fees 357 459
Other deferred income 389 457
Other deferred liabilities 59 68
-------- --------
Total liabilities 7,713 8,224
-------- --------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized;
19,763 shares issued and outstanding at September 29, 2001
(19,763 at December 30, 2000) -- --
Common stock, $.01 par value, 12,000,000 shares authorized;
4,638,891 shares issued and outstanding at September 29, 2001
(4,646,103 at December 30, 2000) 47 47
Paid-in capital 10,178 10,158
Treasury stock, at cost, 25,000 shares (zero shares in 2000) (28) --
Retained earnings / (deficit) 146 (650)
-------- --------
Total stockholders' equity 10,343 9,555
-------- --------
Total liabilities and stockholders' equity $ 18,056 $ 17,779
-------- --------
See accompanying notes to unaudited financial statements
3
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------------- ------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Restaurant sales $ 7,040 $ 7,009 $ 20,758 $ 19,861
Franchise and area development fees 40 45 181 160
Royalty fees 508 416 1,472 1,238
Advertising fees 129 121 377 350
Other 205 190 611 505
------- ------- -------- --------
Total revenues 7,922 7,781 23,399 22,114
------- ------- -------- --------
Expenses:
Cost of restaurant sales 2,289 2,250 6,677 6,514
Restaurant operating expenses 3,312 3,384 9,814 9,831
General and administrative 945 920 2,739 2,583
Advertising 453 503 1,411 1,323
Depreciation and amortization 346 327 1,013 983
------- ------- -------- --------
Total expenses 7,345 7,384 21,654 21,234
------- ------- -------- --------
Operating income 577 397 1,745 880
Interest income 5 12 16 30
Interest expense (130) (165) (404) (458)
Other, net (17) (18) (55) 219
------- ------- -------- --------
Income before income taxes $ 435 $ 226 $ 1,302 $ 671
Income taxes 160 81 506 240
------- ------- -------- --------
Net income $ 275 $ 145 $ 796 $ 431
------- ------- -------- --------
Income per share:
Basic $ .06 $ .03 $ .17 $ .09
------- ------- -------- --------
Diluted $ .06 $ .03 $ .17 $ .09
------- ------- -------- --------
Weighted average number of common shares
and common equivalent shares outstanding
Basic 4,636 4,636 4,633 4,628
------- ------- -------- --------
Diluted 4,771 4,656 4,744 4,649
------- ------- -------- --------
See accompanying notes to unaudited financial statements
4
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTY-NINE WEEKS ENDED
------------------------------
SEPTEMBER 29, SEPTEMBER 30,
------------- -------------
2001 2000
------------- -------------
Cash flows from operating activities:
Net Income $ 796 $ 431
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation of property and equipment 894 884
Deferred income taxes 272 159
Amortization of intangible and other assets 119 99
Provision for losses on receivables 125 114
(Gain)/loss on sales of assets 1 (271)
(Increase) decrease in assets
Receivables (133) (195)
Inventories (22) (13)
Prepaid expenses and other current assets (36) 32
Other assets (23) (17)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 78 (13)
Reserve for closed stores (10) (37)
Income taxes payable 49 (64)
Other deferred income (68) (96)
Other deferred liabilities (9) (9)
Deferred franchise and area development fees (102) (22)
-------- --------
Net cash provided by operating activities 1,931 982
-------- --------
Cash flows from investing activities:
Proceeds from sales of property and equipment 13 155
Proceeds on notes receivable 14 --
Cash paid for acquisition -- (229)
Additions to property and equipment (930) (812)
-------- --------
Net cash used in investing activities (903) (886)
-------- --------
Cash flows from financing activities:
Issuance of stock 20 23
Purchase of treasury stock (28) --
Principal payments on long-term debt and capital leases (672) (622)
Proceeds from issuance of long-term debt 223 --
-------- --------
Net cash used by financing activities (457) (599)
-------- --------
Net increase (decrease) in cash and cash equivalents 571 (503)
-------- --------
Cash and cash equivalents
Beginning of period 1,041 1,697
-------- --------
End of period $ 1,612 $ 1,194
-------- --------
Supplemental disclosure of cash flow information
Income taxes paid $ 185 $ 145
-------- --------
Interest paid $ 394 $ 448
-------- --------
Noncash investing and financing activities
Property and equipment sold for a note receivable $ -- $ 119
-------- --------
Goodwill acquired with note payable $ -- $ 600
-------- --------
See accompanying notes to unaudited financial statements
5
BACK YARD BURGERS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Back Yard Burgers, Inc. owns and operates quick-service and fast-casual
restaurants and is engaged in the sale of franchises and the collection of
royalties based upon related franchise sales. The company grants franchise
rights for the use of "Back Yard Burgers," "BYB" or "BY Burgers" trade names and
other associated trademarks, signs, emblems, logos, slogans and service marks
which have been or may be developed.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and therefore do not include all
information and notes necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. The statements do reflect all adjustments (consisting of
only normal recurring adjustments) which are, in the opinion of management,
necessary to present fairly the financial position and results of operations and
cash flows in conformity with generally accepted accounting principles. The
statements should be read in conjunction with the Notes to Financial Statements
for the year ended December 30, 2000 included in the company's 2000 Annual
Report.
The financial statements include the accounts of Back Yard Burgers,
Inc. and its wholly-owned subsidiaries, Little Rock Back Yard Burgers, Inc.,
Atlanta Burgers BYB Corporation and BYB Properties, Inc., as well as the Back
Yard Burgers National Advertising Fund. All significant intercompany
transactions have been eliminated.
The results of operations for the current period are not necessarily
indicative of the results that ultimately may be achieved for the full year.
The company maintains its financial records on a 52-53 week fiscal year
ending on the Saturday closest to December 31.
NOTE 2 - RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets will remain on the balance sheet and not be amortized.
On an annual basis, and when there is reason to suspect that their values have
been diminished or impaired, these assets must be tested for impairment, and
write-downs may be necessary. The company was required to implement SFAS No. 141
on July 1, 2001 and does not expect this statement to have a material effect on
the company's consolidated financial position or results of operations.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 changes the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill and other indefinite-lived
intangible assets will cease upon adoption of this statement. The company is
required to implement SFAS No. 142 on January 1, 2002 and it has not determined
the impact that this statement will have on the company's consolidated financial
position or results of operations.
In October 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets effective for years beginning after
December 15, 2001. This Statement supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but
retains the fundamental provision of SFAS 121 for recognition and measurement of
the impairment of long-lived assets to be held and used and measurement of
long-lived assets to be held for sale. The statement requires that whenever
events or changes in circumstances indicate that a long-lived asset's carrying
value may not be recoverable, the asset should be tested for recoverability. The
statement also requires that a long-lived asset classified as held for sale
should be carried at the lower of its carrying value or fair value, less cost to
sell. Management has not completed its evaluation of the potential impact of
this statement on the company's consolidated financial position or results of
operations.
NOTE 3 - NET INCOME PER SHARE
The company calculates earnings per share in accordance with Statement
of Financial Accounting Standards No. 128, Earnings per Share, which requires
the presentation of basic and diluted earnings per share. Basic earnings per
share excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts
6
to issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the entity.
COMPUTATION OF INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
---------------------------- -----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
-------- -------- -------- --------
Net Income $ 275 $ 145 $ 796 $ 431
======== ======== ======== ========
Weighted average number of common
shares outstanding during the period 4,636 4,636 4,633 4,628
-------- -------- -------- --------
Basic income per share $ .06 $ .03 $ .17 $ .09
======== ======== ======== ========
Weighted average number of common
shares outstanding during the period 4,636 4,636 4,633 4,628
Preferred shares convertible to
common shares 20 20 20 20
Stock options 115 -- 91 1
-------- -------- -------- --------
4,771 4,656 4,744 4,649
-------- -------- -------- --------
Diluted income per share $ .06 $ .03 $ .17 $ .09
======== ======== ======== ========
NOTE 4 - DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES
Amounts received for certain franchise and area development rights, net
of commissions paid, have been deferred. Revenues on individual franchise fees
are recognized when substantially all of the initial services required of the
company have been performed, which generally coincides with the opening of the
franchises. Under the terms of the franchise agreements, these fees are
non-refundable, and may be recognized as income should the franchisee fail to
perform as agreed. Area development fees are recognized on a pro-rata basis as
each unit opens. At September 29, 2001, deferred fees include franchise and area
development rights sold during the following years:
2001 $ 43
2000 118
Previous years 196
-------
$ 357
=======
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The company is party to several pending legal proceedings and claims.
Although the outcome of the proceedings and claims cannot be determined with
certainty, management of the company is of the opinion that it is unlikely that
these proceedings and claims will have a material adverse effect on the
financial condition or results of operations of the company.
7
FORWARD-LOOKING INFORMATION
Certain information included herein may contain statements that are
forward-looking, such as statements related to financial items and results,
plans for future expansion and other business development activities, capital
spending or financing sources, capital structure and the effects of regulation
and competition. Forward-looking statements made by the company are based upon
estimates, projections, beliefs and assumptions of management at the time of
such statements and should not be viewed as guarantees of future performance.
Such forward-looking information involves important risks and uncertainties that
could significantly impact anticipated results in the future and, accordingly,
such results may differ materially from those expressed in any forward-looking
statements by or on behalf of the company. These risks and uncertainties
include, but are not limited to, increased competition within the industry for
customers, the availability of qualified labor and desirable locations,
increased costs for beef, chicken or other food products and the effectiveness
of promotional efforts and management decisions related to restaurant growth,
financing, franchising and new product development, as well as items described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" below. The company undertakes no obligation to publicly update or
revise any forward looking statements, whether as a result of new information,
future events or otherwise.
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
INTRODUCTION
As of September 29, 2001, the Back Yard Burgers system included 99
restaurants, of which 36 were company-operated and 63 were franchised. The
company's revenues are derived primarily from company-operated restaurant sales,
franchise and area development fees and royalty fees. Certain expenses (cost of
restaurant sales, restaurant operating expenses, depreciation and amortization
and advertising) relate directly to company-operated restaurants, while general
and administrative expenses relate to both company-operated restaurants and
franchise operations. The company's revenues and expenses are affected by the
number and timing of the opening of additional restaurants. Sales for new
restaurants in the period immediately following their opening tend to be high
because of trial by public and promotional activities. As a result, the timing
of openings can affect the average volume and other period-to-period
comparisons.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to total
revenue, unless otherwise indicated, of certain items included in the company's
historical operations and operating data for the periods indicated.
THIRTY-NINE WEEKS ENDED
-----------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
------------- -------------
Revenues
Restaurant sales 88.7% 89.8%
Franchise and area development fees .8 .7
Royalty fees 6.3 5.6
Advertising fees 1.6 1.6
Other operating revenue 2.6 2.3
----- -----
Total revenue 100.0% 100.0%
===== =====
8
THIRTY-NINE WEEKS ENDED
---------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
------------ ------------
Costs and Expenses
Cost of restaurant sales (1) 32.2% 32.8%
Restaurant operating expenses (1) 47.3 49.5
General and administrative 11.7 11.7
Advertising 6.0 6.0
Depreciation and amortization 4.3 4.4
Operating income 7.5 4.0
Interest income .1 .1
Interest expense (1.7) (2.1)
Other, net (.2) 1.0
Income before income taxes 5.6 3.0
Income taxes (2) (38.9) (35.8)
Net income 3.4 1.9
THIRTY-NINE WEEKS ENDED
---------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
------------ ------------
($000'S)
System-wide restaurant sales
Company-operated $ 20,758 $ 19,861
Franchised 37,300 31,531
--------- ----------
Total $ 58,058 $ 51,392
========= ==========
Average annual sales per restaurant open for a full year (3)
Company-operated $ 771 $ 747
Franchised 772 768
System-wide 771 759
Number of restaurants
Company-operated 36 36
Franchised 63 55
--------- ----------
Total 99 91
========== ==========
(1) As a percentage of restaurant sales.
(2) As a percentage of income before taxes.
(3) Includes sales for restaurants open for entire trailing twelve-month
period. Restaurants are included in the calculation after the
completion of eighteen months of operation as sales during the
six-month period immediately after the opening tend to be higher due to
promotions and trial by public.
9
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 29,
2001 AND SEPTEMBER 30, 2000.
RESTAURANT SALES were $7,040,000 during the thirteen weeks ended
September 29, 2001, compared with $7,009,000 for the year-earlier period. This
increase is primarily the result of an increase in same-store sales at
restaurants open for more than one year of 1.5% during the thirteen weeks ended
September 29, 2001.
FRANCHISE AND AREA DEVELOPMENT FEES were $40,000 for the thirteen weeks
ended September 29, 2001, compared with $45,000 in the year-earlier period. Two
franchises were opened during the thirteen weeks ended September 29, 2001, and
two opened in the year-earlier period.
ROYALTY FEES increased 22.1% to $508,000 during the thirteen-week
period ended September 29, 2001, compared with $416,000 during the same period
in 2000. This is due to an increase in franchised restaurant sales upon which
the fees are based. The company began the thirteen week period ended September
29, 2001 with 62 franchised stores, or 17.0% more than the 53 stores open at the
beginning of the thirteen week period ended September 30, 2000.
ADVERTISING FEES increased 6.6% to $129,000 for the thirteen weeks
ended September 29, 2001, compared with $121,000 during the comparable period in
2000. This is due to an increase in franchised restaurant sales, upon which a
portion of the fees are based.
OTHER REVENUES increased to $205,000 for the thirteen weeks ended
September 29, 2001 compared with $190,000 during the year-earlier period. The
increase is due primarily to an increase in vendor rebates earned in the current
year.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$2,289,000 for the thirteen weeks ended September 29, 2001, and $2,250,000
during the same period in 2000, increasing as a percentage of restaurant sales
to 32.5% from 32.1%. This increase as a percentage of sales is primarily due to
increases in product costs, primarily beef, during the thirteen weeks ended
September 29, 2001. The increase is partially offset by a decrease as a
percentage of sales due to price increases taken by the company with the
introduction of its 100% Black Angus beef hamburgers during the fourth quarter
of 2000.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, maintenance, rent and certain other unit level operating expenses,
decreased to $3,312,000 for the thirteen weeks ended September 29, 2001, from
$3,384,000 in the same prior year period, decreasing as a percentage of
restaurant sales to 47.0%, from 48.3% for the year-earlier period. A portion of
this decrease as a percentage of sales was due to the increase in same-store
sales for the quarter given the fixed or semi-variable nature of some operating
expenses as well as a decrease in labor costs as a percentage of sales of 0.8%
over the year-earlier period.
GENERAL AND ADMINISTRATIVE COSTS which increased to $945,000 for the
thirteen weeks ended September 29, 2001 from $920,000 in the year earlier
period, increased as a percentage of total revenue for the thirteen weeks ended
September 29, 2001, to 12.0% from 11.8% in the year-earlier period. The increase
is due to pre-opening costs of $37,000 incurred in the thirteen weeks ended
September 29, 2001 associated with the opening of a company-operated store
compared with zero pre-opening costs incurred in the year-earlier period.
INTEREST EXPENSE decreased 21.2% to $130,000 for the thirteen weeks
ended September 29, 2001, from $165,000 in the year-earlier period. Since
September 30, 2000, debt decreased by $1,202,000, or 19.5%, to $4,954,000 as of
September 29, 2001.
10
COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER
29, 2001 AND SEPTEMBER 30, 2000.
RESTAURANT SALES increased 4.5% to $20,758,000 during the thirty-nine
weeks ended September 29, 2001 compared with $19,861,000 in the year-earlier
period. This increase is primarily the result of an increase in same-store sales
at restaurants open for more than one year of 3.3%.
FRANCHISE AND AREA DEVELOPMENT FEES increased to $181,000 for the
thirty-nine weeks ended September 29, 2001 compared with $160,000 during the
comparable period in 2000. The increase is due to the opening of nine franchised
restaurants during the thirty-nine weeks ended September 29, 2001 compared with
eight openings in the thirty-nine weeks ended September 30, 2000.
ROYALTY FEES increased 18.9% to $1,472,000 during the thirty-nine week
period ended September 29, 2001 compared with $1,238,000 during the same period
in 2000. This is due to an increase in franchised restaurant sales upon which
the fees are based. The company had 63 franchised stores open as of September
29, 2001, which is a net increase of eight stores, or 14.5%, since September 30,
2000.
ADVERTISING FEES increased 7.7% to $377,000 for the thirty-nine weeks
ended September 29, 2001 compared with $350,000 during the comparable period in
2000. This is due to an increase in franchised restaurant sales, upon which a
portion of the fees are based.
OTHER REVENUES increased 21.0% to $611,000 for the thirty-nine weeks
ended September 29, 2001 compared with $505,000 during the year-earlier period.
The increase is due to an increase in vendor rebates earned in the current year.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$6,677,000 for the thirty-nine weeks ended September 29, 2001, and $6,514,000
during the same period in 2000, decreasing as a percentage of restaurant sales
to 32.2% from 32.8%. This decrease as a percentage of sales is primarily due to
margin improvements related to price increases taken by the company with the
introduction of its 100% Black Angus beef hamburgers during the fourth quarter
of 2000.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, maintenance, rent and certain other unit level operating expenses,
decreased to $9,814,000 for the thirty-nine weeks ended September 29, 2001, from
$9,831,000 in the same prior year period, decreasing as a percentage of
restaurant sales to 47.3%, from 49.5% for the year-earlier period. A portion of
this decrease as a percentage of sales was due to the increase in same-store
sales for the quarter given the fixed or semi-variable nature of some operating
expenses. A decrease of 1.3% in labor costs as a percentage of sales as well as
comparable spending on other costs of a fixed and semi-variable nature, such as
rent and utilities accounted for the remaining .9% decrease over the prior year.
GENERAL AND ADMINISTRATIVE COSTS increased 6.0% to $2,739,000 for the
thirty-nine weeks ended September 29, 2001 from $2,583,000 in the same year
earlier period. The increase of $156,000 is due to increased spending in the
areas of marketing, operations training, information technology, franchise
recruiting and travel to existing franchise markets and to new franchise
openings, as well as $42,000 spending on pre-opening costs in 2001 compared with
no pre-opening expenses in 2000.
ADVERTISING EXPENSE, which increased to $1,411,000 for the thirty-nine
weeks ended September 29, 2001, from $1,323,000 in the same period in 2000, was
flat as a percentage of total revenues at 6.0%.
11
INTEREST EXPENSE decreased 11.9% to $404,000 for the thirty-nine weeks
ended September 29, 2001, from $458,000 in the year-earlier period. Since
September 30, 2000, debt decreased by $1,202,000, or 19.5%, to $4,954,000 as of
September 29, 2001.
OTHER, NET expense was $55,000 for the thirty-nine weeks ended
September 29, 2001, compared with $219,000 income in the prior year. This change
is primarily due to the recognition of $271,000 in net gains on the sale of
assets during fiscal year 2000.
IMPAIRMENT OF LONG-LIVED ASSETS
The company reviews the carrying value of its long-lived and intangible
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. A new cost
basis is established for impaired assets based on the fair value of these assets
as of the date the assets are determined to be impaired.
In the past, the company incurred non-cash charges for the effect of
company-operated restaurant closings and impaired assets at company-operated
restaurants. Also, related accruals for future lease payments of closed stores,
net of estimated sub-lease income, were previously recorded. During the
thirty-nine weeks ended September 29, 2001, $9,500 of lease obligation payments
were incurred for closed stores and charged against this reserve. As of
September 29, 2001, the company's remaining accrual for all future lease
obligations discussed above was $36,000 for the remaining lease payments due,
net of estimated sub-lease income.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $930,000 for the thirty-nine weeks ended
September 29, 2001 and $812,000 for the year-earlier period. Generally, the
company constructs its restaurant buildings on leased properties for its
company-operated restaurants. The average monthly lease cost for the 14
company-operated restaurants on leased sites at September 29, 2001 is
approximately $3,500 per month. For the 13 restaurants where the company leases
the building as well as the site, the average monthly lease cost is
approximately $5,400.
Cash from operations for the company is primarily affected by net
earnings adjusted for deferred franchise fees and non-cash expenses which
consist primarily of depreciation and amortization. Depreciation and
amortization totaled $1,013,000 for the thirty-nine weeks ended September 29,
2001 and $983,000 for the year-earlier period.
Cash provided by operations for the thirty-nine week period ended
September 29, 2001, was $1,931,000 compared with $982,000 in the year-earlier
period. In recent history, cash from operations and debt have been used for the
addition of dining rooms to certain existing double drive-thru restaurants, new
restaurants and equipment.
As of September 29, 2001, the company had total long-term debt of
$4,954,000 and unused lines of credit and loan commitments of potential
additional borrowings of $1,476,000. During the first quarter of 2001, the
company secured capital lease agreements with effective interest rates of
approximately 9.4% to finance the acquisition of $223,000 of restaurant
equipment. The company made no additional debt commitments during the
thirty-nine weeks ended September 29, 2001.
On January 2, 2001, the company's board of directors adopted a stock
repurchase plan that allows the company to repurchase up to 500,000 shares of
its outstanding common stock. As of September 29, 2001, the company had
repurchased 25,000 shares of common stock under the plan. The company expects to
finance the cost to repurchase shares under the stock buyback program with
existing cash on hand as well as internally generated funds.
The company budgeted capital expenditures of approximately $2 million
in fiscal year 2001, excluding potential acquisitions and share repurchases.
These capital expenditures primarily relate to the development of additional
company-operated restaurants, store equipment upgrades, and enhancements to
existing financial and operating information systems, including enhancements to
our point-of-sale system. As of September 29, 2001, the company had spent
$930,000 of these budgeted capital
12
expenditures. The company expects to fund these capital expenditures through
borrowings under its existing line of credit and cash flow from operations. The
company believes that existing cash and funds generated from internal
operations, as well as borrowings under the line of credit, will meet the
company's needs for the foreseeable future.
SEASONALITY AND INFLATION
While the company does not believe that seasonality affects its
operations in a materially adverse manner, first quarter results will generally
be lower than other quarters due to seasonal climate conditions in the locations
of many of its restaurants. Management does not believe that inflation has had a
material effect on income during the thirty-nine weeks ended September 29, 2001.
Increases in food, labor or other operating costs could adversely affect the
company's operations. In the past, however, the company generally has been able
to increase menu prices or modify its operating procedures to substantially
offset increases in its operating costs.
CONVERSION OF PREFERRED STOCK
In accordance with the provisions of the company's Certificate of
Incorporation regarding preferred stock, as a result of the company's having
attained after tax net income in excess of $600,000 during 1994, each share of
preferred stock is convertible into one share of common stock, at the option of
the holder. The company notified preferred stockholders of their right to
convert preferred stock to common stock, and anticipates that all shares of
preferred stock will eventually be converted. Such conversion began on July 5,
1995, at which time there were 1,199,979 shares of preferred stock outstanding.
As of September 29, 2001, only 19,763 shares have yet to be converted.
KNOWN TRENDS AND UNCERTAINTIES
Labor will continue to be a critical factor for the company in the
foreseeable future. In most areas where the company operates restaurants, there
is a shortage of suitable labor. This, in itself, could result in higher wages
as the competition for employees intensifies, not only in the restaurant
industry, but in practically all retail and service industries. It is crucial
for the company to develop and maintain programs to attract and retain quality
employees.
During the thirty-nine weeks ended September 29, 2001, the cost of beef
increased approximately 10% and the cost of chicken was relatively stable.
Management of the company expects these costs to continue to rise in the future,
and that it will be difficult to raise menu prices to fully cover these
anticipated increases due to the competitive state of the quick-service
restaurant industry. Additional margin improvements would have to be made
through operational improvements, equipment advances and increased volumes to
help offset these potential increases.
Due to the competitive nature of the restaurant industry, site
selection continues to be challenging as the number of businesses vying for
locations with similar characteristics increases. This will likely result in
higher occupancy costs for prime locations.
Company-operated same-store sales increased 3.3% during the thirty-nine
weeks ended September 29, 2001. In an effort to enhance product quality, the
company introduced 100% Black Angus beef products in all of its company-operated
stores during the fourth quarter of 2000, which has had a positive impact on
same-store sales.
The future success of the company will be determined, to a great
extent, by its ability to positively address these issues.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets will remain on the balance sheet and not be amortized.
On an annual basis, and when there is reason to suspect that their values have
been diminished or impaired, these assets must be tested for
13
impairment, and write-downs may be necessary. The company was required to
implement SFAS No. 141 on July 1, 2001 and does not expect this statement to
have a material effect on the company's consolidated financial position or
results of operations.
In July 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 changes the accounting for goodwill and other
indefinite-lived intangible assets from an amortization method to an
impairment-only approach. Amortization of goodwill and other indefinite-lived
intangible assets will cease upon adoption of this statement. The company is
required to implement SFAS No. 142 on January 1, 2002 and it has not determined
the impact that this statement will have on the company's consolidated financial
position or results of operations.
In October 2001, the FASB issued SFAS 144, Accounting for the
Impairment or Disposal of Long-Lived Assets effective for years beginning after
December 15, 2001. This Statement supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, but
retains the fundamental provision of SFAS 121 for recognition and measurement of
the impairment of long-lived assets to be held and used and measurement of
long-lived assets to be held for sale. The statement requires that whenever
events or changes in circumstances indicate that a long-lived asset's carrying
value may not be recoverable, the asset should be tested for recoverability. The
statement also requires that a long-lived asset classified as held for sale
should be carried at the lower of its carrying value or fair value, less cost to
sell. Management has not completed its evaluation of the potential impact of
this statement on the company's consolidated financial position or results of
operations.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates on variable rate debt and the
repricing of fixed rate debt at maturity. Management monitors interest rate
fluctuations as an integral part of the company's overall risk management
program, which recognizes the unpredictability of financial markets and seeks to
reduce the potential adverse effect on our results. The effect of interest rate
fluctuations historically has been small relative to other factors affecting
operating results, such as food, labor and occupancy costs.
Less than 25% of the company's debt portfolio as of September 29, 2001,
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.
14
PART II OTHER INFORMATION
Item 1 Legal Proceedings
The company is involved in litigation incidental to its business,
including, but not necessarily limited to, claims alleging violations of the
Civil Rights Act of 1964 and/or discrimination. Aside from the cost of defense,
such litigation is not presently considered by management to be material to the
financial condition or results of operations of the company.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
Exhibits
None
Reports on Form 8-K
None
15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BACK YARD BURGERS, INC.
Date: November 12, 2001 By: /s/ Lattimore M. Michael
- ------------------------ ------------------------------
Lattimore M. Michael
Chairman and Chief Executive
Officer
Date: November 12, 2001 By:/s/ Michael G. Webb
- ------------------------ -----------------------------
Michael G. Webb
Chief Financial Officer
16