UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2002
[ ] 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 April 30, 2002 - 4,725,902
BACK YARD BURGERS, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements:
Balance Sheet as of March 30, 2002 and December 29, 2001 3
Statement of Income for the Thirteen Weeks Ended
March 30, 2002 and March 31, 2001 4
Statement of Cash Flows for the Thirteen Weeks Ended
March 30, 2002 and March 31, 2001 5
Notes to Unaudited Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities and Use of Proceeds 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
2
BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
MARCH 30, DECEMBER 29,
2002 2001
---------- ------------
ASSETS
Cash and cash equivalents $ 1,961 $ 1,657
Receivables, less allowance for doubtful accounts of
$141 ($129 in 2001) 476 582
Inventories 224 229
Income taxes receivable 17 38
Current deferred tax asset 104 186
Prepaid expenses and other current assets 196 50
---------- ----------
Total current assets 2,978 2,742
Property and equipment, at depreciated cost 14,465 14,176
Intangible assets 1,751 1,751
Noncurrent deferred tax asset 388 419
Notes receivable 128 134
Other assets 243 286
---------- ----------
$ 19,953 $ 19,508
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 1,165 $ 994
Accrued expenses 1,286 1,368
Reserve for closed stores 98 100
Current installments of long-term debt 581 570
---------- ----------
Total current liabilities 3,130 3,032
Long-term debt, less current installments 5,054 5,202
Deferred franchise and area development fees 345 285
Other deferred income 369 341
Other deferred liabilities 60 57
---------- ----------
Total liabilities 8,958 8,917
---------- ----------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, $.01 par value; 2,000,000 shares authorized;
19,763 shares issued and outstanding -- --
Common stock, $.01 par value; 12,000,000 shares authorized;
4,708,811 shares issued and outstanding
(4,645,019 at December 29, 2001) 48 47
Paid-in capital 10,371 10,195
Treasury stock, at cost, 25,000 shares (28) (28)
Retained earnings 604 377
---------- ----------
Total stockholders' equity 10,995 10,591
---------- ----------
Total liabilities and stockholders' equity $ 19,953 $ 19,508
========== ==========
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
----------------------
MARCH 30, MARCH 31,
2002 2001
-------- --------
Revenues:
Restaurant sales $ 7,311 $ 6,331
Franchise and area development fees 27 99
Royalty fees 516 439
Advertising fees 130 113
Other 195 152
-------- --------
Total revenues 8,179 7,134
-------- --------
Expenses:
Cost of restaurant sales 2,291 2,017
Restaurant operating expenses 3,470 3,106
General and administrative 1,066 816
Advertising 460 455
Depreciation and amortization 325 331
-------- --------
Total expenses 7,612 6,725
-------- --------
Operating income 567 409
Interest income 4 7
Interest expense (132) (147)
Other, net (79) (21)
-------- --------
Income before income taxes 360 248
Income taxes 133 92
-------- --------
Net income $ 227 $ 156
======== ========
Income per share:
Basic $ 0.05 $ 0.03
======== ========
Diluted $ 0.04 $ 0.03
======== ========
Weighted average number of common shares and
common equivalent shares outstanding:
Basic 4,691 4,632
======== ========
Diluted 5,111 4,708
======== ========
See accompanying notes to unaudited financial statements
4
BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED
----------------------
MARCH 30, MARCH 31,
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 227 $ 156
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation of property and equipment 324 292
Deferred income taxes 113 61
Amortization of intangible assets 1 37
Provision for losses on receivables 12 47
Loss on sale of assets -- 1
Other deferred income 28 (15)
(Increase) decrease in assets:
Receivables 94 5
Inventories 5 12
Prepaid expenses and other current assets (146) (37)
Other assets 42 (7)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 89 157
Reserve for closed stores (2) (4)
Income taxes payable/receivable 21 22
Other deferred liabilities 3 (4)
Deferred franchise and area development fees 60 (85)
-------- --------
Net cash provided by operating activities 871 638
-------- --------
Cash flows from investing activities:
Additions to property and equipment (613) (417)
Proceeds from sale of property and equipment -- 13
Proceeds on notes receivable 6 --
-------- --------
Net cash used in investing activities (607) (404)
-------- --------
Cash flows from financing activities:
Issuance of stock 8 7
Principal payments on long-term debt (137) (279)
Proceeds from issuance of long-term debt -- 223
Proceeds from exercise of stock options 169 --
Treasury stock purchases -- (28)
-------- --------
Net cash provided (used) by financing activities 40 (77)
-------- --------
Net increase in cash and cash equivalents 304 157
Cash and cash equivalents:
Beginning of period 1,657 1,041
-------- --------
End of period $ 1,961 $ 1,198
======== ========
Supplemental disclosure of cash flow information:
Income taxes paid $ -- $ 9
======== ========
Interest paid $ 132 $ 147
======== ========
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 29, 2001 included in the company's 2001 Annual
Report.
The financial statements include the accounts of Back Yard Burgers, Inc.
and its wholly-owned subsidiaries, Little Rock Back Yard Burgers, Inc., Atlanta
Burgers BYB Corporation and BYB Properties, Inc., as well as the Back Yard
Burgers National Advertising Fund. All significant intercompany transactions
have been eliminated.
The results of operations for the thirteen-week period are not necessarily
indicative of the results to be expected for the full year.
The company maintains its financial records on a 52-53 week fiscal year
ending on the Saturday closest to December 31.
NOTE 2 - 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. 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 adopted SFAS No. 141 on December 30, 2001, with no material effect on
the company's consolidated financial position or results of operations.
The company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and other Intangible Assets" (SFAS No. 142) effective January 1, 2002.
SFAS No. 142 changed the accounting for goodwill and other indefinite-lived
intangible assets from an amortization method to an impairment-only approach.
The Company ceased amortization of goodwill in 2002 under the provisions of this
statement. Expenses for the three months ended March 31, 2001 included
amortization of $38,000. If SFAS No. 142 had been in effect during 2001 and
amortization had not been recorded, net income for the first quarter of 2001
would have been approximately $24,000 (tax effected) greater than the reported
total of $156,000 and earnings per share would have been $0.04 compared to the
reported total of $0.03.
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. The company adopted SFAS 144 on December 30, 2001, with no material impact
on the company's consolidated financial position or results of operations.
6
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 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
--------------------
MARCH 30, MARCH 31,
2002 2001
-------- --------
Net Income $ 227 $ 156
======== ========
Weighted average number of common shares outstanding
during the period 4,691 4,632
======== ========
Basic income per share $ .05 $ .03
======== ========
Weighted average number of common shares outstanding
during the period 4,691 4,632
Preferred shares convertible to common shares 20 20
Stock options 400 56
-------- --------
5,111 4,708
======== ========
Diluted income per share $ .04 $ .03
======== ========
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 March 30, 2002, deferred fees include franchise and area
development rights sold during the following years:
2002 $ 82
2001 52
Previous years 211
--------
$ 345
========
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 March 30, 2002, the Back Yard Burgers system included 106
restaurants, of which 39 were company-operated and 67 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.
THIRTEEN WEEKS ENDED
----------------------
MARCH 30, MARCH 31,
2002 2001
-------- --------
Revenues
Restaurant sales 89.4% 88.7%
Franchise and area development fees .3 1.4
Royalty fees 6.3 6.2
Advertising fees 1.6 1.6
Other operating revenue 2.4 2.1
-------- --------
Total revenue 100.0% 100.0%
======== ========
8
THIRTEEN WEEKS ENDED
----------------------
MARCH 30, MARCH 31,
2002 2001
-------- --------
Costs and Expenses
Cost of restaurant sales (1) 31.3% 31.9%
Restaurant operating expenses (1) 47.5 49.1
General and administrative 13.0 11.4
Advertising 5.6 6.4
Depreciation and amortization 4.0 4.6
Operating income 6.9 5.7
Interest income .1 .1
Interest expense (1.6) (2.1)
Other, net (1.0) (.3)
Income before income taxes 4.4 3.5
Income taxes (2) (37.0) (37.1)
Net income 2.8 2.2
THIRTEEN WEEKS ENDED
----------------------
MARCH 30, MARCH 31,
2002 2001
-------- --------
($000'S)
System-wide restaurant sales
Company-operated $ 7,311 $ 6,331
Franchised 13,008 11,183
-------- --------
Total $ 20,319 $ 17,514
======== ========
Average annual sales per restaurant open
for a full year (3)
Company-operated $ 785 $ 744
Franchised $ 790 $ 770
System-wide $ 788 $ 758
Number of restaurants
Company-operated 39 35
Franchised 67 60
-------- --------
Total 106 95
======== ========
(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 MARCH 30, 2002
AND MARCH 31, 2001.
RESTAURANT SALES increased 15.5% to $7,311,000 during the thirteen weeks
ended March 30, 2002, from $6,331,000 for the same 2001 period. This increase is
due to a net increase of four company-operated units, as well as a 4.4% increase
in same-store sales at restaurants open for more than one year. The same-store
sales growth is primarily attributable to a menu price increase of approximately
4.0% implemented by the company in mid-December 2001.
FRANCHISE AND AREA DEVELOPMENT FEES decreased to $27,000 for the thirteen
weeks ended March 30, 2002, from $99,000 in the year-earlier period. Two new
franchise stores opened during the thirteen weeks ended March 30, 2002 compared
with five openings in the year-earlier period.
ROYALTY FEES increased 17.5% to $516,000 during the thirteen week period
ended March 30, 2002, compared to $439,000 during the same period in 2001. The
change is due to a net increase of seven franchised stores since March 31, 2001,
as well as a 0.8% increase in same-store sales at franchised restaurants
compared with the prior year period.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$2,291,000 for the thirteen weeks ended March 30, 2002, and $2,017,000 during
the same period in 2001, decreasing as a percentage of restaurant sales to 31.3%
from 31.9%. The decrease as a percentage of sales is primarily due to the menu
price increase taken by the company in mid-December 2001, offset by cost
increases of certain ingredients over the prior year, including produce, dairy
and beef products.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies, utilities,
maintenance, rent and certain other unit level operating expenses, increased to
$3,470,000 for the thirteen weeks ended March 30, 2002, from $3,106,000 in the
same prior year period, decreasing as a percentage of restaurant sales to 47.5%,
from 49.1% for the year-earlier period. This change is primarily the result of a
decrease in labor costs of 1.5%.
GENERAL AND ADMINISTRATIVE COSTS which increased $250,000 to $1,066,000
for the thirteen weeks ended March 30, 2002 from $816,000 in the same year
earlier period, increased as a percentage of total revenue for the thirteen
weeks ended March 30, 2002, to 13.0% from 11.4% in the same period in 2001.
$82,000 of the increase was personnel related, including increased spending on
recruiting, training and benefit costs. Preopening expenses also increased by
$31,000 due to the expenditures related to the opening of two company-operated
restaurants during the thirteen-weeks ended March 30, 2002. The remainder of the
increase is related to increased spending for professional services, travel for
franchisee support and recruiting, public relations, insurance and other
miscellaneous costs.
ADVERTISING EXPENSE which increased to $460,000 for the thirteen weeks
ended March 30, 2002, from $455,000 in the same period in 2001, decreased as a
percentage of total revenues to 5.6% from 6.4%. The decrease is due to the
timing of national promotion production costs. The company's National
Advertising Fund incurred more promotional and advertising costs in the first
quarter of 2001 than in the first quarter of 2002.
INTEREST EXPENSE decreased 10.2% to $132,000 for the thirteen weeks ended
March 30, 2002, from $147,000 in the year-earlier period. Since March 31, 2001,
debt increased by $288,000, or 5.4%, to $5,635,000 as of March 30, 2002.
However, with interest rates declining, the company was able to renegotiate
interest rates downward by 1.7% to 2.4% on approximately 45.0% of its
outstanding debt during the fourth quarter of 2001 resulting in the decrease in
interest expense for the company during the first quarter of 2002.
OTHER, NET expense was $79,000 for the thirteen weeks ended March 30,
2002, compared with an expense of $21,000 in the prior year. The increase is due
to a $30,000 loss on the disposal of assets relating to a store closure as well
as $23,000 in loan closing costs incurred by the company. Also included in this
category is other miscellaneous income and expenses, including franchise tax
expense and these income and expense categories were relatively consistent
during thirteen weeks ended March 30, 2002, and the year-earlier period.
10
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 thirteen
weeks ended March 30, 2002, $2,000 of lease obligation payments were incurred
for closed stores and charged against this reserve. As of March 30, 2002, the
company's remaining accrual for all future lease obligations discussed above was
$98,000 for the remaining lease payments due, net of estimated sub-lease income.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $613,000 for the thirteen weeks ended March
30, 2002 and $417,000 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 16
company-operated restaurants on leased sites at March 30, 2002 is approximately
$3,800 per month. For the 14 restaurants where the company leases the building
as well as the site, the average monthly lease cost is approximately $5,000.
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 $325,000 for the thirteen weeks ended March 30, 2002 and $331,000 for
the year-earlier period.
Cash provided by operations for the thirteen week period ended March 30,
2002, was $871,000 compared with $638,000 in the year-earlier period. In recent
history, cash from operations and debt have been used for the addition of new
restaurants and equipment.
As of March 30, 2002, the company had total long-term debt of $5,635,000
and unused lines of credit and loan commitments of potential additional
borrowings of $1,626,000. No additional debt commitments were made by the
company during the thirteen weeks ended March 30, 2002.
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 March 30, 2002, the company had repurchased
25,000 shares of common stock under the plan. Based on market conditions and
other factors, additional repurchases may be made from time to time in the open
market or through privately negotiated transactions, at the discretion of the
company.
The company has budgeted capital expenditures of approximately $3.5
million in fiscal year 2002, excluding potential acquisitions. 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 March 30, 2002, the company had spent $613,000 of these budgeted
capital expenditures. The company expects to fund these capital expenditures
through cash flow from operations and borrowings under its existing line of
credit. These capital expenditures may also require additional debt or equity
financing, which the company has not secured at this time.
SEASONALITY AND INFLATION
While the company does not believe that seasonality affects its operations
in a materially adverse manner, first quarter results are generally 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 thirteen weeks ended March 30, 2002. Increases in
food,labor or other operating costs could adversely affect the company's
operations. In the past, however, the
11
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 April 5,
1995, at which time there were 1,199,979 shares of preferred stock outstanding.
As of March 30, 2002, 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 thirteen weeks ended March 30, 2002, the cost of beef and
chicken was relatively stable; however, management of the company expects these
costs to rise at some point in the future, and that it will be difficult to
raise menu prices to fully cover these anticipated increases due to the
competitive state of the quick-service restaurant industry. 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 4.4% during the thirteen weeks
ended March 30, 2002. The same-store sales growth is primarily attributable to a
menu price increase of approximately 4.0% implemented by the company in
mid-December 2001.
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. 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 adopted SFAS No. 141 on December 30,
2001, with no material effect on the company's consolidated financial position
or results of operations.
The company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and other Intangible Assets" (SFAS No. 142) effective January 1, 2002.
SFAS No. 142 changed the accounting for goodwill and other indefinite-lived
intangible assets from an amortization method to an impairment-only approach.
The Company ceased amortization of goodwill in 2002 under the provisions of this
statement. Expenses for the three months ended March 31, 2001 included
amortization of $38,000. If SFAS No. 142 had been in effect during 2001 and
amortization had not been recorded, net income for the first quarter of 2001
would have been approximately $24,000 (tax effected) greater than the reported
total of $156,000 and earnings per share would have been $0.04 compared to the
reported total of $0.03.
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
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asset classified as held for sale should be carried at the lower of its carrying
value or fair value, less cost to sell. The company adopted SFAS 144 on December
30, 2001, with no material impact 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 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 March 30, 2002, 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.
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
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
BACK YARD BURGERS, INC.
Date: May 13, 2002 By: /s/ Lattimore M. Michael
------------ -----------------------------
Lattimore M. Michael
Chairman and Chief Executive Officer
Date: May 13, 2002 By: /s/ Michael G. Webb
------------ -----------------------------
Michael G. Webb
Chief Financial Officer
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