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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 JULY 3, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ------------------
Commission file number 1-12104
BACK YARD BURGERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 64-0737163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2768 COLONY PARK DRIVE, MEMPHIS, TENNESSEE 38118
(Address of principal executive offices)
(901) 367-0888
(Registrant's telephone number)
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 August 12, 1999 - 4,612,213
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BACK YARD BURGERS, INC.
INDEX
Page No.
Part I - Financial Information
Item 1 - Unaudited Consolidated Financial Statements:
Balance Sheet as of July 3, 1999 and January 2, 1999 3
Statement of Income for the Thirteen and Twenty-Six Weeks Ended
July 3, 1999 and July 4, 1998 4
Statement of Cash Flows for the Twenty-Six Weeks Ended
July 3, 1999 and July 4, 1998 5
Notes to Unaudited Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information
Item 1 - Legal Proceedings 13
Item 2 - Changes in Securities and Use of Proceeds 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote
of Security Holders 13
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
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BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
JULY 3, JANUARY 2,
1999 1999
-------- --------
ASSETS
Cash and cash equivalents $ 1,090 $ 815
Receivables, net 238 200
Inventories 218 202
Current deferred tax asset 200 104
Prepaid expenses and other current assets 76 96
-------- --------
Total current assets 1,822 1,417
Property and equipment, at depreciated cost 14,350 13,365
Intangible assets 1,300 1,352
Noncurrent deferred tax asset 500 452
Note receivable 95 98
Other assets 269 264
-------- --------
$ 18,336 $ 16,948
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 482 $ 467
Accrued expenses 1,007 850
Income taxes payable 247 205
Current installments of long-term debt 444 361
-------- --------
Total current liabilities 2,180 1,883
Long-term debt, less current installments 5,132 5,097
Deferred franchise fees 362 254
Other deferred income 801 --
Other deferred liabilities 130 128
-------- --------
Total liabilities 8,605 7,362
-------- --------
Commitments and contingencies -- --
Stockholders' equity
Preferred stock, $.01 par value, 2,000,000 shares authorized; 23,123 shares
issued and outstanding at July 3, 1999
(23,123 at January 2, 1999) -- --
Common stock, $.01 par value, 12,000,000 shares authorized;
4,606,011 shares issued and outstanding at July 3, 1999
(4,596,471 at January 2, 1999) 46 46
Paid-in capital 10,114 10,098
Retained deficit (429) (558)
-------- --------
Total stockholders' equity 9,731 9,586
-------- --------
$ 18,336 $ 16,948
======== ========
See accompanying notes to unaudited financial statements
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BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
JULY 3, JULY 4, JULY 3, JULY 4,
1999 1998 1999 1998
------- ------- -------- --------
Revenues:
Restaurant sales $ 7,111 $ 6,598 $ 13,286 $ 12,406
Franchise and area development fees -- 1 54 50
Royalty fees 398 342 740 645
Advertising fees 136 127 279 237
Other 118 65 255 162
------- ------- -------- --------
Total revenues 7,763 7,133 14,614 13,500
------- ------- -------- --------
Expenses:
Cost of restaurant sales 2,453 2,127 4,572 3,987
Restaurant operating expenses 3,353 3,010 6,329 5,832
General and administrative 900 848 1,725 1,644
Advertising 439 382 851 729
Depreciation and amortization 322 291 647 575
------- ------- -------- --------
Total expenses 7,467 6,658 14,124 12,767
------- ------- -------- --------
Operating income 296 475 490 733
Interest income 7 6 14 14
Interest expense (144) (111) (273) (210)
Other, net (14) (4) (16) (6)
------- ------- -------- --------
Income before income taxes 145 366 215 531
Income taxes 58 -- 86 --
------- ------- -------- --------
Net income $ 87 $ 366 $ 129 $ 531
======= ======= ======== ========
Income per share:
Basic $ .02 $ .08 $ .03 $ .12
======= ======= ======== ========
Diluted $ .02 $ .08 $ .03 $ .11
======= ======= ======== ========
Weighted average number of common shares
and common equivalent shares outstanding
Basic 4,605 4,580 4,603 4,475
======= ======= ======== ========
Diluted 4,634 4,695 4,635 4,668
======= ======= ======== ========
See accompanying notes to unaudited financial statements
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BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
TWENTY-SIX WEEKS ENDED
----------------------
JULY 3, JULY 4,
1999 1998
------- -------
Cash flows from operating activities:
Net Income $ 129 $ 531
Adjustments to reconcile net income to net cash provided
(used) in operating activities
Depreciation and amortization of property and equipment 594 504
Deferred income taxes (144) 0
Amortization of intangible assets 53 53
Amortization of preopening costs -- 18
Provision for losses on receivables 85 97
Gain on sales of assets (6) --
(Increase) decrease in assets
Receivables (123) (43)
Inventories (16) (11)
Prepaid expenses and other current assets 20 (115)
Other assets (6) (20)
Increase (decrease) in liabilities
Accounts payable and accrued expenses 172 (445)
Income taxes payable 42 --
Other deferred income 801 --
Other deferred liabilities 2 10
Deferred franchise and area development fees 108 64
------- -------
Net cash provided by operating activities 1,711 643
------- -------
Cash flows from investing activities:
Proceeds from sale of property and equipment 8 --
Additions to property and equipment (1,578) (2,831)
------- -------
Net cash used in investing activities (1,570) (2,831)
------- -------
Cash flows from financing activities:
Issuance of stock 16 14
Principal payments on long-term debt and capital leases (171) (134)
Proceeds from issuance of long-term debt 289 1,653
Proceeds from exercise of stock options -- 85
------- -------
Net cash provided by financing activities 134 1,618
------- -------
Net increase (decrease) in cash and cash equivalents 275 (570)
Cash and cash equivalents
Beginning of period 815 1,328
------- -------
End of period $ 1,090 $ 758
======= =======
Supplemental disclosure of cash flow information
Income taxes paid $ 188 $ --
======= =======
Interest paid $ 273 $ 210
======= =======
See accompanying notes to unaudited financial statements
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BACK YARD BURGERS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Back Yard Burgers, Inc. owns and operates quick-service and fast-casual
restaurants and is engaged in the sale of franchises and the collection of
royalties based upon related franchise sales. The company grants franchise
rights for the use of "Back Yard Burgers," "BYB" or "BY Burgers" trade names and
other associated trademarks, signs, emblems, logos, slogans and service marks
which have been or may be developed.
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-Q and therefore do not include all
information and notes necessary for a fair presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles. The statements do reflect all adjustments (consisting of
only normal recurring accruals) which are, in the opinion of management,
necessary to present fairly the financial position and results of operations and
cash flows in conformity with generally accepted accounting principles. The
statements should be read in conjunction with the Notes to Financial Statements
for the year ended January 2, 1999 included in the company's 1998 Annual Report.
The financial statements include the accounts of Back Yard Burgers, Inc.
and its wholly-owned subsidiaries, Little Rock Back Yard Burgers, Inc., Atlanta
Burgers BYB Corporation and BYB Properties, Inc., as well as the Back Yard
Burgers National Advertising Fund. All significant intercompany transactions
have been eliminated.
The results of operations for the thirteen and twenty-six week periods are
not necessarily indicative of the results to be expected for the full year.
The company maintains its financial records on a 52-53 week fiscal year
ending on the Saturday closest to December 31.
NOTE 2 - 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.
NOTE 3 - DEFERRED FRANCHISE 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 July 3, 1999, deferred fees include franchise and area
development rights sold during the following years:
1999 $162
1998 98
Previous Years 102
----
$362
====
NOTE 4 - OTHER DEFERRED INCOME
Amounts received from certain vendors relating to future purchases by the
company have been deferred. These funds are recorded as income in a
proportionate manner with respective future purchases. Under the terms of signed
contracts, the company is required to purchase specific volumes in future years.
If these purchase volumes are not met, the funds related to the volume shortages
will be refunded to the vendors.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The company is party to several incidental legal proceedings and claims.
Although the outcome of the proceedings and claims cannot be determined with
certainty, management of the company is of the opinion that it is unlikely that
these proceedings and claims will have a material adverse effect on the
financial condition or results of operations of the company.
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FORWARD-LOOKING INFORMATION
Certain information included herein may contain statements that are
forward-looking, such as statements related to financial items and results,
plans for future expansion and other business development activities, capital
spending or financing sources, capital structure and the effects of regulation
and competition. Forward-looking statements made by the company are based upon
estimates, projections, beliefs and assumptions of management at the time of
such statements and should not be viewed as guarantees of future performance.
Such forward-looking information involves important risks and uncertainties that
could significantly impact anticipated results in the future and, accordingly,
such results may differ materially from those expressed in any forward-looking
statements by or on behalf of the company. These risks and uncertainties
include, but are not limited to, increased competition within the industry for
customers, qualified labor and desirable locations, increased costs for beef,
chicken or other food products and management decisions related to restaurant
growth, financing, franchising and new product development, as well as items
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
As of July 3, 1999, the Back Yard Burgers system included 84
restaurants, of which 35 were company-operated and 49 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.
TWENTY-SIX WEEKS ENDED
--------------------------
JULY 3, JULY 4,
1999 1998
------ ------
Revenues
Restaurant sales 90.9% 91.9%
Franchise and area development fees .4 .4
Royalty fees 5.1 4.8
Advertising fees 1.9 1.8
Other operating revenue 1.7 1.1
----- -----
Total revenue 100.0% 100.0%
===== =====
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TWENTY-SIX WEEKS ENDED
--------------------------
JULY 3, JULY 4,
1999 1998
------ ------
Costs and Expenses
Cost of restaurant sales (1) 34.4% 32.1%
Restaurant operating expenses (1) 47.6 47.0
General and administrative 11.8 12.2
Advertising 5.8 5.4
Depreciation and amortization 4.4 4.3
Operating income 3.3 5.4
Interest income .1 .1
Interest expense (1.9) (1.6)
Other, net (.1) --
Income before income taxes 1.5 3.9
Income taxes (.6) --
Net income .9 3.9
TWENTY-SIX WEEKS ENDED
--------------------------
JULY 3, JULY 4,
1999 1998
------- -------
($000'S)
System-wide restaurant sales
Company-operated $13,286 $12,406
Franchised 18,921 17,069
------- -------
Total $32,207 $29,475
======= =======
Average annual sales per restaurant open for a
full year (2)
Company-operated $ 774 $ 809
Franchised $ 769 $ 755
System-wide $ 771 $ 776
Number of restaurants
Company-operated 35 31
Franchised 49 44
------- -------
Total 84 75
======= =======
(1) As a percentage of restaurant sales.
(2) Includes sales for restaurants open for entire trailing twelve-month
period. Restaurants are included in the calculation after the completion
of eighteen months of operation as sales during the six-month period
immediately after the opening tend to be higher due to promotions and
trial by public.
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COMPARISON OF THE COMPANY'S RESULTS FOR THE THIRTEEN WEEKS ENDED JULY 3, 1999
AND JULY 4, 1998.
RESTAURANT SALES increased 7.8% to $7,111,000 during the thirteen weeks
ended July 3, 1999 compared to $6,598,000 for the same 1998 period. This
increase is primarily the result of the opening of four new company-operated
stores since the year-earlier period. This increase was partially offset by a
decrease in same-store sales of 0.8% for the thirteen weeks ended July 3, 1999.
Company management believes that the decreases in same-store sales for the
thirteen week period are the result of the cannabilization of some
company-operated stores in the Memphis market, as well as the fact that the
year- earlier period represented record same-store sales growth for the company.
ROYALTY FEES increased 16.4% to $398,000 during the thirteen week period
ended July 3, 1999 compared to $342,000 during the same period in 1998. The
increase is due to an increase in franchised restaurant sales upon which the
fees are based. Comparable same-store sales at franchised restaurants open for
more than one year increased 1.8%, representing an increase in royalty fees of
approximately $6,000. Seven franchised restaurants were opened and two
franchised restaurants were closed since July 4, 1998. This increase in net
franchised restaurants open accounted for the remainder of the increase in
royalty fees from the prior year.
ADVERTISING FEES increased 7.1% to $136,000 for the thirteen weeks ended
July 3, 1999 compared to $127,000 during the comparable period in 1998. The
increase in advertising fees is due to the increase in franchised restaurant
sales as noted above, upon which the fees are based.
OTHER REVENUES increased 81.5% to $118,000 for the thirteen weeks ended
July 3, 1999 compared to $65,000 during the year-earlier period. The increase is
due to revenues generated from sub-contractor vending sales at the Memphis Zoo,
where operations began in March of 1999.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$2,453,000 for the thirteen weeks ended July 3, 1999 and $2,127,000 during the
same period in 1998, increasing as a percentage of restaurant sales to 34.5%
from 32.2%. This percentage increase is primarily the result of an increase in
coupons and discounts, increases in the cost of beef as well as an increase in
waste, consisting of prepared food items not sold due to product hold time
requirements of the company and spoilage. The coupon and discount program
resulted in an increase in cost of sales as a percentage of restaurant sales of
1.7%. These increases were offset by minor decreases in the cost of certain
produce and dairy products.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies, utilities,
maintenance, rent and certain other unit level operating expenses, increased to
$3,353,000 for the thirteen weeks ended July 3, 1999 from $3,010,000 in the
year-earlier period. The percentage of restaurant sales for the thirteen weeks
ended July 3, 1999 was 47.1%, compared to 45.8% for the year-earlier period.
Labor costs as a percentage of sales increased by 0.1% over the year-earlier
period. The remainder of the increase was due to increases in repairs and
maintenance costs and other miscellaneous operating costs incurred during the
period.
GENERAL AND ADMINISTRATIVE COSTS which increased to $900,000 for the
thirteen weeks ended July 3, 1999 from $848,000 in the year-earlier period,
decreased as a percentage of total revenue for the thirteen weeks ended July 3,
1999 to 11.6% from 11.9% in the same period in 1998. The increase of $52,000 is
primarily the result of increased spending in the areas of recruiting and
training in efforts to attract quality employees as well as continuing to
enhance customer service.
ADVERTISING EXPENSE which increased to $439,000 for the thirteen weeks
ended July 3, 1999 from $382,000 in the same period in 1998, increased as a
percentage of total revenues to 5.7% from 5.4%. 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.
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INTEREST EXPENSE increased 29.7% to $144,000 for the thirteen weeks ended
July 3, 1999 from $111,000 in the year-earlier period. This is due to a net
increase in long-term debt of $976,000, or 21.2%, since July 4, 1998.
INCOME TAX EXPENSE was $58,000 for the thirteen weeks ended July 3, 1999
compared to zero in the year-earlier period. In recent profitable years, the
company has been able to offset net income with previous net operating loss
carryforwards. For the thirteen weeks ended July 3, 1999 the company had income
tax expense based on the calculation of alternative minimum tax.
COMPARISON OF THE COMPANY'S RESULTS FOR THE TWENTY-SIX WEEKS ENDED JULY 3, 1999
AND JULY 4, 1998.
RESTAURANT SALES increased 7.1% to $13,286,000 during the twenty-six weeks
ended July 3, 1999 compared to $12,406,000 for the same 1998 period. The
increase is due primarily to the opening of four new company-operated stores
since the year-earlier period as well as a 2.0% increase in same store sales for
the twenty-six week period. 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, and
ongoing training and attention to improved customer service.
FRANCHISE AND AREA DEVELOPMENT FEES increased 8.0% to $54,000 for the
twenty-six weeks ended July 3, 1999 compared to $50,000 during the comparable
period in 1998. There was an increase in fees recognized from area development
agreements which expired over the year-earlier period of $10,000. However, this
increase in fees was partially offset by lower franchise fees derived from new
stores opened by existing franchisees.
ROYALTY FEES increased 14.7% to $740,000 during the twenty-six week period
ended July 3, 1999 compared to $645,000 during the same period in 1998. The
increase is due to an increase in franchised restaurant sales upon which the
fees are based. Comparable same-store sales at franchised restaurants open for
more than one year increased 2.1%, representing an increase in royalty fees of
approximately $15,000. Seven franchised restaurants were opened and two
franchised restaurants were closed since July 4, 1998. This increase in net
franchised restaurants open accounted for the remainder of the increase in
royalty fees from the prior year.
ADVERTISING FEES increased 17.7% to $279,000 for the twenty-six weeks ended
July 3, 1999 compared to $237,000 during the comparable period in 1998. The
increase in advertising fees is related to the increase in franchised restaurant
sales as noted above, upon which the fees are based.
OTHER REVENUES increased 57.4% to $255,000 for the thirteen weeks ended
July 3, 1999 compared to $162,000 during the year-earlier period. The increase
is due to revenues generated from sub-contractor vending sales at the Memphis
Zoo, where operations began in March of 1999.
COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$4,572,000 for the twenty-six weeks ended July 3, 1999 and $3,987,000 during the
same period in 1998, increasing as a percentage of restaurant sales to 34.4%
from 32.1%. This percentage increase is primarily the result of an increase in
coupons and discounts, increases in the cost of beef as well as an increase in
waste, consisting of prepared food items not sold due to product hold time
requirements of the company and spoilage. The coupon and discount program
resulted in an increase in cost of sales as a percentage of restaurant sales of
1.6%. These increases were offset by minor decreases in the cost of certain
produce and dairy products.
RESTAURANT OPERATING EXPENSES, consisting of labor, supplies, utilities,
maintenance, rent and certain other unit level operating expenses, increased to
$6,329,000 for the twenty-six weeks ended July 3, 1999 from $5,832,000 in the
year-earlier period. The percentage of restaurant sales for the twenty-six weeks
ended July 3, 1999 was 47.6%, compared to 47.0% for the year-earlier period.
Labor costs as a percentage of sales increased by 0.2% over the year-earlier
period. The remainder of the increase was due to increases in repairs and
maintenance costs and other miscellaneous operating costs incurred during the
period.
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GENERAL AND ADMINISTRATIVE COSTS which increased to $1,725,000 for the
twenty-six weeks ended July 3, 1999 from $1,644,000 in the year-earlier period,
decreased as a percentage of total revenue for the twenty-six weeks ended July
3, 1999 to 11.8% from 12.2% in the same period in 1998. The increase of $81,000
is primarily the result of increased spending in the areas of recruiting and
training in efforts to attract quality employees as well as continuing to
enhance customer service.
ADVERTISING EXPENSE which increased to $851,000 for the twenty-six weeks
ended July 3, 1999 from $729,000 in the same period in 1998, increased as a
percentage of total revenues to 5.8% from 5.4%. 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 30.0% to $273,000 for the twenty-six weeks ended
July 3, 1999 from $210,000 in the year-earlier period. This is due to a net
increase in long-term debt of $976,000, or 21.2%, since July 4, 1998.
INCOME TAX EXPENSE was $86,000 for the twenty-six weeks ended July 3, 1999
compared to zero in the year-earlier period. In recent profitable years, the
company has been able to offset net income with previous net operating loss
carryforwards. For the twenty-six weeks ended July 3, 1999 the company had
income tax expense based on the calculation of alternative minimum tax.
IMPAIRMENT OF LONG-LIVED ASSETS
The company reviews the carrying value of its long-lived and intangible
assets for possible impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. A new cost
basis is established for impaired assets based on the fair value of these assets
as of the date the assets are determined to be impaired.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $1,578,000 for the twenty-six weeks ended July
3, 1999 and $2,831,000 for the same period of 1998. Generally, the company
constructs its restaurant buildings on leased properties for its
company-operated restaurants. The average monthly lease cost for the 18 company-
operated restaurants on leased sites at July 3, 1999 is approximately $3,148 per
month. For the 10 restaurants where the company leases the building as well as
the site, the average monthly lease cost is approximately $4,741.
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 $647,000 for the twenty-six weeks ended July 3, 1999 and $575,000 for
the year-earlier period. This increase is primarily the result of the addition
of four company-operated restaurants and the conversion of three double
drive-thru facilities to dine-in facilities with a single drive-thru since the
year-earlier period.
Cash provided by operations for the twenty-six week period ended July 3,
1999 and July 4, 1998 was $1,711,000 and $643,000, respectively. Since January
1, 1996, cash from operations and debt have been used for the addition of dining
rooms to certain existing double drive-thru restaurants, new restaurants and
equipment.
As of July 3, 1999, the company had total long-term debt of $5,576,000 and
unused lines of credit and loan commitments of potential additional borrowings
of $2,230,000.
The company is planning to spend approximately $3,000,000 on capital
expenditures during 1999 and plans to fund these expenditures through internally
generated cash flow as well as the borrowing commitments secured in 1999 or
before.
SEASONALITY AND INFLATION
While the company does not believe that seasonality affects its operations
in a materially adverse manner, first quarter results will generally be lower
than other quarters due to seasonal climate conditions in the locations of many
of its restaurants. Management does not believe that inflation has had a
material effect on income during the twenty-six weeks ended July 3, 1999.
Increases in food, labor or other
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operating costs could adversely affect the company's operations should
comparable menu price increases not be sustainable.
CONVERSION OF PREFERRED STOCK
The company's preferred stockholders have the right to convert preferred
stock to common stock, and the company 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
July 3, 1999, only 23,123 shares have yet to be converted.
YEAR 2000
The fact that many computers and other systems with embedded microchip
processors were programmed to record only the last two digits of the year for
all dates encountered gives rise to the year 2000 issue. On January 1, 2000,
many date-sensitive calculations could potentially go awry, creating substantial
negative ramifications throughout the business world.
The company has reviewed its computer systems and software and has
identified four major areas that are critical to the company with respect to the
year 2000 issue: (1) communications hardware and software, (2) network
hardware/software and accounting software, (3) point-of-sale terminals, and (4)
key third parties.
While the company has taken certain actions to address the year 2000 issue,
it has not completed its analysis of the issue. During 1998, the company
upgraded its phone system with a system represented by the outside vendor to be
year 2000 compliant. The company also has communication software in place with
certain financial institutions and is in the process of confirming that such
software is in fact year 2000 compliant. The company has completed a network and
accounting software upgrade, which included the replacement of the existing
network server as well as the replacement and enhancement of certain personal
computers. The company's accounting software is supplied by an outside vendor,
and the vendor has confirmed that the software installed upon upgrading the
network is year 2000 compliant. The company is also in the process of
determining whether certain of its spreadsheet and database software will need
to be upgraded during 1999. The company estimates the total cost of the software
and hardware enhancements and upgrades necessary to become year 2000 compliant
to be approximately $30,000.
All existing point-of-sale terminals used by the company and its
franchisees have been represented by outside suppliers to be year 2000 compliant
and all terminals currently being installed are also in compliance.
One of the greatest risks of year 2000 exists within the supply chain of
most businesses, and relates to year 2000 compliance by key third parties,
including food product suppliers, energy providers and others. These parties are
crucial to the continuing operations of the company. There is a certain amount
of uncontrollable risk associated with third party year 2000 readiness; however,
the company plans to gain assurance from key third parties, including all
franchisees and their suppliers, as to their year 2000 compliance efforts via
written confirmation by September 30, 1999.
The failure by the company to properly address its internal year 2000
issues or the inability of outside parties to supply goods and services
necessary to produce and sell the company's products could have a material
adverse impact on the results of operations, liquidity and the financial
condition of the company. These problems could ultimately result in the
cessation of material operations for an unknown period of time.
Although no formal contingency plan is currently in place, the company's
goals are to: (1) achieve internal year 2000 readiness with respect to all
material operations prior to October 31, 1999, (2) appropriately address any
material concerns over third party readiness with qualified alternate suppliers
as necessary, also prior to October 31, 1999, and (3) continue to monitor the
year 2000 issue and take all appropriate actions through early 2000.
KNOWN TRENDS AND UNCERTAINTIES
Labor will continue to be a critical factor for the company in the
foreseeable future. In most areas where the company operates restaurants, there
is a shortage of suitable labor. This, in itself, could result in higher wages
as the competition for employees intensifies, not only in the restaurant
industry, but in
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practically all retail and service industries. It will be crucial for the
company to develop and maintain programs to attract and retain quality
employees.
During the twenty-six weeks ended July 3, 1999, there were increases in the
cost of beef; however, management of the company expects the costs of beef and
chicken to continue to rise in the future, and that it will be difficult to
raise menu prices to fully cover these anticipated increases due to the
competitive state of the quick-service restaurant industry. Additional margin
improvements would have to be made through operational improvements, equipment
advances and increased volumes to help offset these potential increases.
Due to the competitive nature of the restaurant industry, site selection
will become more difficult as an increasing number of businesses will be vying
for locations with similar characteristics. This could result in higher
occupancy costs for prime locations.
Same-store sales increased 2.0% during the first twenty-six week period of
1999. The company implemented a balanced marketing strategy focused on
increasing guest awareness and increasing the frequency of guest visits. The
company will continue this strategy in 1999, however, there are no assurances
that the increases in same-store sales will continue.
The future success of the company will be determined, to a great extent, by
its ability to positively address these issues.
PART I (CONTINUED)
Item 3 Quantitative and Qualitative Disclosures About Market Risk
None
PART II OTHER INFORMATION
Item 1 Legal Proceedings
The company is involved in litigation incidental to its business,
including, but not necessarily limited to, claims alleging violations of the
Civil Rights Act of 1964 and/or discrimination. Aside from the cost of defense,
such litigation is not presently considered by management to be material to the
financial condition or results of operations of the company.
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
On May 20, 1999, the Company held its Annual Meeting of
Stockholders in Memphis, Tennessee, for the purpose of: (1)
electing two Class II members to the Board of Directors; (2)
ratifying the appointment of PricewaterhouseCoopers LLP as
independent public accountants for 1999, and (3) to transact
such other business as may have properly come before the
meeting or an adjournment thereof.
The following table sets forth the Class II directors elected
at such meeting and the number of votes cast by the Company's
stockholders for, against and withheld for each director:
Directors For Against Withheld
--------- --- ------- --------
William B. Raiford III 4,229,983 3,450 43,285
Stephen J. King 4,229,983 3,450 43,285
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The appointment of PricewaterhouseCoopers LLP as independent
public accountants was ratified at the meeting as follows:
For 4,229,983
Against 3,450
Abstentions 43,285
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
Exhibits
10.32 - Lease agreement by and between Amplicon, Inc.
and Back Yard Burgers, Inc. dated May 6, 1999.
11 - Calculation of Income Per Share
27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed.
Reports on Form 8-K
None
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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 17, 1999 By: /s/Lattimore M. Michael
- ------------------ -------------------------------
Lattimore M. Michael
Chairman and Chief Executive
Officer
Date: May 17, 1999 By: /s/Michael G. Webb
- ------------------ -------------------------------
Michael G. Webb
Chief Financial Officer
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