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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One) þ
    Annual report under Section 13 or 15(d)
of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED JANUARY 1, 2005
or o
    Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 Commission file number 1-12104 BACK YARD BURGERS, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    64-0737163
(IRS employer
identification no.)1657 N. Shelby Oaks Drive, Suite 105
Memphis, Tennessee
(Address of principal executive offices)
    
    38134-7401
(Zip code)
 (901) 367-0888
(Registrants telephone number) Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: Title of Each Class
    
    Name of Each Exchange
on Which RegisteredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: Title of Each Class
    
    Name of Each Market
on Which ListedCommon Stock, $.01 par value
    
    Nasdaq SmallCap Market
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or in information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ The aggregate market value of common stock held by non-affiliates on March 1, 2005 was
approximately $20,332,000. The number of shares outstanding of the registrants common stock as of March 1, 2005 was
4,816,677. Certain portions of Part II are incorporated by reference from the registrants annual report
to stockholders for the year ended January 1, 2005 and certain portions of Part III are
incorporated by reference from the registrants proxy statement relating to the annual meeting of
stockholders to be held on May 19, 2005.




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FORWARD-LOOKING STATEMENTS: This Form 10-K, the documents that we incorporate by reference, and
other written reports and oral statements made from time to time by us and our representatives
contain forward-looking statements within the meaning of the federal securities laws. These
statements, which are not statements of historical fact, may contain estimates, assumptions,
projections and/or expectations regarding our financial position, results of operations, growth
strategy and plans for future expansion, product development, economic conditions, and other
similar forecasts and statements of expectation. We generally indicate these statements by words
or phrases such as anticipate, estimate, plan, expect, believe, intend, foresee, and
similar words or phrases. Forward-looking statements 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. The factors that could cause our actual results to differ materially, many
of which are beyond our control, include, but are not limited to, the following: delays in opening
new stores or outlets because of weather, local permitting, and the availability and cost of land
and construction; increases in competition and competitive discounting; increases in minimum wage
and other operating costs; shortages in raw food products; volatility of commodity prices; consumer
preferences, spending patterns and demographic trends; the possibility of unforeseen events
affecting the industry generally, and other risks described from time to time in our periodic
reports filed with the Securities and Exchange Commission. Back Yard Burgers, Inc. disclaims any
obligation to update or revise any forward-looking statement based on the occurrence of future
events, the receipt of new information, or otherwise. Restatement of Financial Statements We have restated the consolidated balance sheet at January 3, 2004, and the consolidated
statements of operations, stockholders equity and cash flows for the years ended January 3, 2004
and December 28, 2002 in this Annual Report on Form 10-K (see Note 3 of the Notes to Consolidated
Financial Statements in Financial Supplement of this report). We have also restated the quarterly
financial information for fiscal 2003 and the first three quarters of fiscal 2004 (see Note 17 of
the Notes to Consolidated Financial Statements in the Financial Supplement of this report). The
impact of the restatement on periods prior to fiscal year 2002 has been reflected as an adjustment
to accumulated deficit as of December 29, 2001 in the accompanying consolidated statements of
stockholders equity. We have also restated the applicable financial information for 2003, 2002,
2001, and 2000 in the Financial Supplement of this report. The restatement corrects our historical
accounting for operating leases and leasehold improvements. The restatement adjustments had no impact on revenues, comparable
store sales or cash balances. We have not amended our previously filed Annual Reports on Form 10-K
or Quarterly Reports on Form 10-Q for the restatement, and the financial statements and related
financial information contained in those reports should no longer be relied upon. Throughout this
Form 10- K, all referenced amounts for prior periods and prior period comparisons reflect the
balances and amounts on a restated basis. PART I ITEM 1. BUSINESS General Back Yard Burgers (the Company) operates and franchises quick-service restaurants in 18
states, primarily in markets throughout the Southeast region of the United States. Our restaurants
specialize in charbroiled, freshly prepared, great tasting food. As our name implies, we strive to
offer the same high-quality ingredients and special care typified by outdoor grilling in your own
back yard. Our menu features made-to-order gourmet 100% Black Angus hamburgers and chicken
sandwiches  charbroiled over an open flame, fresh salads, chili and other special entrees as well
as hand-dipped milkshakes, fresh-made lemonade and fresh-baked cobblers. As of January 1, 2005,
our operations included 42 company-operated restaurants and 114 franchised restaurants. 2




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Corporate History The Company was incorporated in December, 1986 as Back Yard Burgers, Inc., a Mississippi
corporation, and opened its first restaurant in Cleveland, Mississippi in March 1987. The Company
was reorganized under the laws of the State of Delaware in January 1991. The Company consummated
its initial public offering on July 2, 1993 and its common stock has traded on the Nasdaq SmallCap
Market since that time. Operating Strategy Our restaurants are designed to project a back yard theme that emphasizes charbroiled, freshly
prepared, great tasting food, including gourmet 100% Black Angus hamburgers, chicken sandwiches and
other gourmet items as customers would prepare in their own back yard. Our operating strategy
includes:  
    serving premium quality, great tasting food comparable to that of the best
full-service casual dining restaurants;
    utilizing restaurant designs featuring a single drive-thru concept integrated
with an inviting indoor dining area, which projects a uniform image and creates
pleasing curb appeal;
    providing fast and friendly service with emphasis on a positive customer
experience;
    offering a diverse menu of freshly prepared food items that are competitive
with the everyday prices of the three largest hamburger chains; and
    actively training, supervising and supporting franchised and company-operated
restaurants. Growth Strategy During 2005, we will continue to focus on opening new company-operated and franchised
restaurants and increasing same-store sales. Our growth strategy is to continue to:  
    set our restaurants apart from fast-food competition by serving premium fast
food, enhancing our dine-in facilities and re-imaging existing facilities with the
Companys new logo and color schemes so that the design and feel of our restaurants
will match the standards set by the quality of the food;
    improve the work flow of existing units to improve productivity and throughput;
    develop additional company-operated restaurants in existing markets and fund such development with cash flow from
operations and additional debt or equity financing where warranted. We expect to open four company-operated restaurants in
2005;
    develop additional franchised restaurants with a committed and experienced
group of franchisees. We expect that approximately 35 franchised restaurants will open
in 2005. 3




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Restaurant Operations Restaurant Locations.The following tables set forth the number of restaurants located in
each market of the Companys system at January 1, 2005. Company-operated:
    
    
    
    
    
    Franchised:Number of
    
    
    
    Number ofCore Markets
    
    Restaurants
    
    Core Markets
    
    RestaurantsMemphis, TN Area
    
    
    30

    
    Kansas City, MO Area
    
    
    10Little Rock, AR Area
    
    
    7

    
    Ft. Wayne, IN Area
    
    
    4Nashville, TN Area
    
    
    5

    
    Knoxville, TN Area
    
    
    4Total
    
    
    42

    
    Memphis, TN Area
    
    
    4Birmingham, AL Area
    
    
    3Hickory, NC
    
    
    3Jackson, MS Area
    
    
    3Louisville, KY Area
    
    
    3Orlando, FL Area
    
    
    3St. Louis, MO Area
    
    
    3Tulsa, OK Area
    
    
    3Atlanta, GA Area
    
    
    2Asheville, NC Area
    
    
    2Charleston, SC Area
    
    
    2Charlotte, NC Area
    
    
    2Chattanooga, TN Area
    
    
    2Evansville, IN Area
    
    
    2Lexington, KY Area
    
    
    2Little Rock, AR Area
    
    
    2Paducah, KY Area
    
    
    2State College, PA Area
    
    
    2Other Markets(1)Mississippi
    
    
    8Kentucky
    
    
    6Alabama
    
    
    5Missouri
    
    
    5Georgia
    
    
    4Louisiana
    
    
    4North Carolina
    
    
    3Florida
    
    
    3Texas
    
    
    3Arkansas
    
    
    2South Carolina
    
    
    2Illinois
    
    
    1Indiana
    
    
    1Kansas
    
    
    1Ohio
    
    
    1Oklahoma
    
    
    1Virginia
    
    
    1Total
    
    
    114
 (1) The Other Markets portion of the table reflects the total number of restaurants
located in such markets by state. Other markets for the restaurants range from small towns to
large cities where franchisees have only one restaurant. 4




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Restaurant Openings and Closings. The following table presents an activity summary of the
company-operated and franchised restaurants during the periods presented. Year EndedJanuary 1,
    
    
    January 3,
    
    
    December 28,
    
    
    December 29,2005
    
    
    2004
    
    
    2002
    
    
    2001RestaurantsCompany-operatedOpen at beginning of period
    
    
    42
    
    
    
    42
    
    
    
    37
    
    
    
    35Opened during period
    
    
    2
    
    
    
    1
    
    
    
    5
    
    
    
    2Converted to Company
    
    
    0
    
    
    
    0
    
    
    
    1
    
    
    
    0Converted to Franchise
    
    
    (1
    )
    
    
    0
    
    
    
    0
    
    
    
    0Closed during period
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    0Open at end of period
    
    
    42
    
    
    
    42
    
    
    
    42
    
    
    
    37Franchised (a)Open at beginning of period
    
    
    90
    
    
    
    77
    
    
    
    67
    
    
    
    58Opened during period
    
    
    31
    
    
    
    19
    
    
    
    15
    
    
    
    13Converted to Company
    
    
    0
    
    
    
    0
    
    
    
    (1
    )
    
    
    0Converted to Franchise
    
    
    1
    
    
    
    0
    
    
    
    0
    
    
    
    0Closed during period
    
    
    (8
    )
    
    
    (6
    )
    
    
    (4
    )
    
    
    (4
    )Open at end of period
    
    
    114
    
    
    
    90
    
    
    
    77
    
    
    
    67Total Restaurants
    
    
    156
    
    
    
    132
    
    
    
    119
    
    
    
    104
   (a)
    
    As of March 1, 2005, five franchised restaurants opened since January 1,
2005, two in Tallahassee, Florida and one each in Lees Summit, Missouri, Martinez,
Georgia, and Huntsville, Alabama. Site Selection. The Company believes that the location of a restaurant is critical to its
success. Management inspects each potential restaurant site prior to final selection of the site.
In evaluating particular sites, the Company considers various criteria including traffic count,
speed of traffic, convenient access, size and configuration, demographics and density of
population, visibility and cost. The Company also reviews potential competition and the sales and
traffic counts of national and regional chain restaurants operating in the area. A majority of
both company-operated and franchised restaurants are located on leased land. Restaurant Design and Service. Restaurants with a single drive-thru and indoor dining are
built to Company-approved specifications. There are some existing double drive-thru restaurants
without indoor dining; however, the additional development of this facility type has been
discontinued. In some circumstances, restaurants may be constructed via the conversion of buildings used
previously by other concepts, including other restaurants. The restaurants range in size from 820
square feet to 4,000 square feet. The restaurants also include Company-approved interior and
exterior decor, equipment, fixtures, furnishings, signs, parking and site improvements. The
restaurants have a highly visible, distinctive and uniform look that is intended to appeal to
customers of all ages. Prior to 1994, the Company operated and franchised predominately double drive-thru restaurants
without indoor dining. Since that time, the Company has added a number of indoor dining facilities
to its operations, including the retrofitting of many existing double drive-thru restaurants to
include indoor dining. At January 1, 2005, the number of restaurants with indoor dining was 34
company-operated facilities and 104 franchised facilities. It is the Companys objective to serve customers within 60 seconds of their arrival at the
drive-thru window. Each restaurant has a computerized point-of-sale system which displays each
individual item ordered on a monitor in front of the food and drink preparers. This enables the
preparers to begin filling an order before the order is completed and totaled, and thereby
increases the speed of service to the customer and the number of sales per hour. The restaurants
are generally open from 12 to 15 hours per day, seven days a week, for lunch, dinner and late-night
snacks and meals. 5




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Supplies.The Company and its franchisees purchase their food, beverages and supplies from
Company-approved suppliers. All products must meet standards and specifications set by the
Company. Management constantly monitors the quality of the food, beverages and supplies provided
to the restaurants. The Company has been successful in negotiating price concessions from
suppliers for bulk purchases of food and paper supplies used by the restaurants. The Company
believes that these arrangements have achieved cost savings, improved food quality and consistency
and helped decrease volatility of food and supply costs for the restaurants. All essential food
and beverage products are available or, upon short notice, could be made available from alternate
qualified suppliers. Management and Employees. Each company-operated restaurant employs an average of
approximately 25 employees, many of whom work part-time. The management staff of a typical
restaurant operated by the Company consists of a general manager and two assistant managers. Each
company-operated restaurant unit supervisor reports directly to a district manager. The district
managers are able to provide close, hands-on management of each company-operated restaurant since
they have responsibility for only five to eight restaurants. Each district manager reports
directly to a director of operations. Supervision and Training. The Company believes that training and personnel development
are crucial to its success. The Companys training program is an intensive four-week program
consisting of both in-store and classroom training. The in-store training stresses food quality,
fast, friendly customer service, restaurant cleanliness, and proper management operations of a
quick service restaurant. The classroom training consists of such topics as food safety and
sanitation, employment laws and regulations, interviewing and hiring of employees, and systems to
control both food and labor costs. Prior to opening, each restaurant must have a minimum of three
trained and certified managers that have successfully completed the Company training program. Advertising and Promotion.Marketing promotions are planned by the Companys national
marketing committee made up of Company employees and selected franchisee representatives from the
Back Yard Burgers, Inc. franchisee associations board of directors. The four franchisees are
elected to two-year terms by the franchise association. These franchisees also serve as officers
of the franchise association for the two-year term as well. Production of some marketing materials
is paid for through a national advertising fund, which collects 1% of taxable sales from each
franchisee and company-operated restaurant. Of that 1%, 50% goes toward the creation of marketing
tools such as advertising copy for use on local radio and television, ad slicks, four-color art,
design and other collateral pieces and marketing expenses and 50% goes toward testing new products
and systems, market research, improvements in operating methods and techniques or for other such
purposes that the Company deems to be in the interest of improving operations and earnings of
restaurants. Restaurant Reporting.Each restaurant has a computerized point-of-sale system monitored by
the management of the restaurant. With this system, managers are able to monitor sales, labor and
food costs, customer counts and other pertinent information every 30 minutes that the restaurant is
open. This information allows a manager to better control labor utilization, inventories and
operating costs. For company-operated restaurants, management monitors sales, food and labor
costs, product mix, inventories and customer counts on a weekly basis and profit and loss
statements and balance sheets on a monthly basis. Franchise Operations Strategy.In addition to the development of company-operated restaurants, the Company will
continue to emphasize the development of additional franchised restaurants expected to be opened
pursuant to existing area development agreements and franchise agreements as well as the pursuit of
additional franchised restaurants pursuant to new area development agreements and franchise
agreements. The Company believes that it has attracted a committed and enthusiastic group of
franchisees as a result of the strength of its concepts and operating strategies. Franchisee Support Services.The Company maintains a staff of six well-trained and
experienced restaurant operations personnel whose only responsibilities are to help train and
assist franchisees in opening new restaurants and to monitor the operations of existing
restaurants. These services are provided as part of the Companys franchise program. Upon the
opening of a new franchised restaurant, the Company sends an opening team to the restaurant to
assist the franchisee during the first several days that the restaurant is open. This 6




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management
team works in the restaurant to monitor compliance with the Companys standards as to quality of
product and service. The Company employs six franchise field consultants, each of whom supervises franchised
restaurants in defined geographic areas. Presently, the Company has one franchise field consultant
for each 20 restaurants. That ratio will increase as existing franchisees develop new stores
within existing territories. Each franchise field consultant has been fully trained by the Company
to assist franchisees in implementing the operating procedures and policies of the Company once a
restaurant is open. As part of these services, the franchise service representative rates the
restaurants hospitality, food quality, speed of service and cleanliness and maintenance of
facilities. The franchisees receive a written report of the findings and, if any deficiencies are
noted, recommended procedures to be followed to correct such deficiencies. In addition, the
consultant assists in developing business and marketing plans, as well as assisting in the training
and development of the franchisees staff. The Company also provides construction support services to its franchisees. All site plans
must be approved by the Company before construction or site improvements begin. These plans
include information detailing building location, internal traffic patterns and curb cuts, location
of utilities, walkways, driveways, signs and parking lots and a complete landscape plan. The
Company also approves all plans and specifications for the restaurant building to ensure uniformity
of design of the building and the site improvements. The Companys personnel also visit the site
during construction, to meet with the franchisees and verify that all standards are met. Advertising and Promotion.Franchisees are required to participate in seasonal promotions,
which are supported by television, radio, newspaper, banners, point-of-purchase materials and other
local store marketing activities. The Companys marketing manual outlines advertising and public
relations promotions as well as new store opening information, grand opening information, trade
area surveys and describes how to write a marketing plan and budget for the franchisees area.
Marketing is supported by a staff consisting of two field marketing managers who coordinate plans
and implementation with a national advertising agency. Approved suppliers are set up to facilitate
such things as uniforms and collateral materials. Area Development and Franchise Agreements.In addition to offering single unit franchise
agreements, the Company also promotes franchisees to enter into area development agreements. The
area development agreement grants to the franchisee the exclusive right to develop and open a
specified number of restaurants within a limited period of time and in a defined geographic
territory and thereafter to operate each restaurant in accordance with the terms and conditions of
the franchise agreement. The franchise agreement grants an exclusive license at a specified
location to operate a restaurant in accordance with the Back Yard Burgers system and to utilize the
Companys trademarks, service marks and other rights of the Company relating to the sale of its
menu items. The term of a franchise agreement is 10 years, renewable for successive five year
periods, if certain conditions pertaining to such renewal are met, including the payment of a
$1,000 renewal fee. Each area development agreement establishes the number of restaurants the franchisee is to
construct and open in the territory during the term of the area development agreement after
considering many factors, including the residential, commercial and industrial characteristics of
the area, geographic factors, population of the area and the previous experience of the franchisee.
The franchisees development schedule for the restaurants is set forth in the area development
agreement. As of January 1, 2005, the Company had entered into franchise agreements and area
development agreements with certain franchisees that require them to open or have under
construction a minimum of 274 restaurants by the end of August 31, 2013. Of the 114 franchised
restaurants open as of January 1, 2005, 93 were being operated under area development agreements by
multiple unit franchisees and 21 were being operated under single franchise agreements by single
unit franchisees. The Company may revoke an area development agreement of any franchisee that is
unsuccessful in meeting its projected development schedule. During the past three years, the
Company has exercised its right to terminate ten area development agreements, which related to the
development of up to 23 stores, for lack of performance by multiple unit franchisees with respect
to their projected development schedules. None of these agreements were terminated during 2004;
however, the Company does anticipate the termination of at least two agreements, which relate to
the development of up to 49 stores, during 2005 due to lack of required development under the
agreements. The Company believes that its overall experience with franchisees who commit to
develop restaurants under franchise agreements and area development agreements has been favorable,
although there can be no assurance that future performance by franchisees under these agreements
will be successful. 7




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The franchise agreement and area development agreement require that the franchisee submit
information regarding proposed restaurant sites to the Company for its review. The Company does
not arrange or make any provisions for financing the development of restaurants by its franchisees.
Each franchisee is required to purchase all
fixtures, equipment, inventory, products, ingredients, materials and other supplies used in
the operation of its restaurants from approved suppliers, all in accordance with the Companys
specifications. The Company provides a training program for management personnel of its
franchisees. Under the terms of the franchise agreement, the Company has adopted standards of
quality, service and food preparation for franchised restaurants. Each franchisee is required to
comply with all of the standards for restaurant operations as published from time to time in the
Companys operations manual. The Company may terminate a franchise agreement for several reasons, including among others,
the franchisees bankruptcy or insolvency, default in the payment of royalties or advertising fees
to the Company, failure to maintain standards set forth in the franchise agreement or operations
manual, material violation of any law, ordinance or governmental rule or regulation or cessation of
business. In such event, the Company may also elect to terminate a multiple unit franchisees area
development agreement. Franchise Fees and Royalties.Under the current franchise agreement, each franchisee is
generally required to pay a franchise fee of $25,000. If a franchisee purchases franchise
development rights in an area pursuant to an area development agreement, the franchisee must pay
$25,000 for the first restaurant and agree to pay a franchise fee of $22,000 for each additional
restaurant covered under the agreement. With respect to the area development agreement, the amount
of the fee varies depending upon the number of restaurants the Company estimates can be developed
within the territory. Upon signing the area development agreement, the franchisee will pay to the
Company a franchise fee of $25,000 for the first restaurant, plus a $5,000 (per restaurant) area
development fee (to be credited toward the subsequent $22,000 franchise fees(s)) for subsequent
restaurants covered under the area development agreement. For example, for a franchisee whose area
development agreement requires the development of five restaurants, the franchise fee will be
$25,000 for the first restaurant, and $17,000 ($22,000 less $5,000) for each of the next four
restaurants for an aggregate total of $113,000. Each franchisee is also generally required to pay
the Company a weekly royalty of 4% of the restaurants taxable sales and to pay 1% of the
restaurants weekly taxable sales to the Companys national advertising fund. Each restaurant is
required to spend not less than 2% of the restaurants taxable sales on local store marketing. Termination of Development Agreement with YUM Brands, Inc.Under the terms of a Development
Agreement entered into in January 2002 with YUM! Brands, Inc., the Company granted YUM the right to
use Back Yard Burgers trademarks in connection with the establishment and operation of up to ten
Back Yard Burgers outlets as part of multi-brand units with Taco Bell, Pizza Hut and/or KFC
operations. On May 19, 2004, the Company announced that YUM! decided to terminate future
development with the Company to focus on multi-brand development with its existing brands. Of the
114 Back Yard Burgers franchised locations, 9 of them were co-branded units under the Development
Agreement with YUM! Brands Inc. The Back Yard Burgers portions of these nine co-branded units were
closed during March 2005. The Company anticipates that these closings will not have a material
negative impact on its financial condition or its results of operations for the year ending
December 31, 2005. 8




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Competition Restaurant Operations.The restaurant industry, particularly the fast food segment, is highly
competitive with respect to price, service, food quality and location and there are numerous
well-established competitors possessing substantially greater financial, marketing, personnel and
other resources than the Company. The Company believes that its primary direct competitors consist
of McDonalds Corp., Burger King Corp. and Wendys International, Inc. In addition, there are
other national, regional and local fast food chains, many of which specialize in or offer quick
serve hamburger and chicken products. The Company can also be expected to face competition from a
broad range of other restaurants and food service establishments. Many of the Companys
competitors have achieved significant national, regional and local brand name and product
recognition and engage in extensive advertising and promotional programs, both generally and in
response to efforts by additional competitors to enter new markets or introduce new products. In
addition, the fast food industry is characterized by the frequent introduction of new products,
accompanied by substantial promotional campaigns. In recent years, numerous companies in the fast
food industry have introduced products positioned to capitalize on growing consumer preference for
food products which are, or are perceived to be, healthful, nutritious, low in calories and low in
fat content. It can be expected that the Company will be subject to competition from companies
whose products or marketing strategies address these consumer preferences. In addition, the market
for suitable restaurant locations is highly competitive in that fast food companies, major
restaurant companies and non-food companies compete for prime real estate sites. Certain Factors Affecting the Fast Food Restaurant Industry.The Company constantly responds
to various factors affecting the restaurant industry, including changes in consumer preferences,
tastes and eating habits, demographic trends and traffic patterns, increases in food and labor
costs and national, regional and local economic conditions. A number of fast food restaurant
companies have recently been experiencing flattening growth rates and declines in average sales per
restaurant, in response to which certain of such companies have adopted competitive discounting or
value pricing strategies. As the Companys principal method of competition is based on quality
and service, rather than price, such strategies could have the effect of drawing customers away
from the Company. Franchise Operations.In addition to its restaurant operations, the Company competes with
fast food chains, major restaurant chains and other franchisors for franchisees. Many franchisors,
including those in the restaurant industry, have greater market recognition and greater financial,
marketing and human resources. Trademarks and Service Marks The Company believes its trademarks and service marks have significant value and are important
to its marketing efforts. The Company has registered the name Back Yard Burgers and the kettle
and flame design as service marks with the United States Patent and Trademark Office. The
Companys policy is to pursue registration of its marks whenever possible and to oppose vigorously
any infringement of its marks. Government Regulations The Company is subject to Federal Trade Commission regulation and several state laws which
regulate the offer and sale of franchises. The Company is also subject to state laws that regulate
substantive aspects of the franchisor  franchisee relationship. The FTCs Trade Regulation Rule
on Franchising requires the Company to furnish to prospective franchisees a franchise offering
circular containing information prescribed by this rule. State laws that regulate the offer and sale of franchises and the franchisor  franchisee
relationship presently exist in a substantial number of states. Such laws generally require
registration of the franchise offering with state authorities and regulate the franchise
relationship by, for example, requiring the franchisor to deal with its franchisees in good faith,
prohibiting interference with the right of free association among franchisees, limiting the
imposition of standards of performance on a franchisee and regulating discrimination against
franchisees in charges, royalties or fees. Although such laws may restrict a franchisor in the
termination of a franchise agreement by, for example, requiring good cause to exist as a basis
for the termination, advance notice to the franchisee of the termination, an opportunity to cure a
default and a repurchase of inventory or other compensation, these provisions have not had a
significant effect on the Companys franchise operations. The Company is not aware of any pending 9




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franchise legislation which in its view is likely to affect significantly the operations of the
Company. The Company believes that its operations comply in all material respects with rules and
the applicable state franchise laws. Each company-operated and franchised restaurant is subject to licensing and regulation by a
number of governmental authorities, which may include health, sanitation, safety, fire, building
and other agencies in the state or municipality in which the restaurant is located. Difficulties
in obtaining or failure to obtain the required licenses or approvals could delay or prevent the
development of a new restaurant in a particular area. The Company is subject to federal and state
environmental regulations, but these regulations have not had a material effect on the Companys
operations. More stringent and varied requirements of local governmental bodies with respect to
zoning, land use and environmental factors could delay or prevent the development of a new
restaurant in a particular area. The Company is also subject to state and federal labor laws that govern its relationship with
its employees, such as minimum wage requirements, overtime and working conditions and citizenship
requirements. Significant numbers of the Companys food service and preparation personnel are paid
at rates governed by the federal minimum wage. Accordingly, further increases in the minimum wage
would increase the Companys labor costs and may have an adverse effect on the Companys operating
margins. Employees As of March 1, 2005, the Company employed approximately 1,000 persons in its restaurant
operations, 35 of whom are corporate personnel, 115 of whom are restaurant management and
supervisory personnel and the remainder of whom are hourly restaurant personnel. Of the 35
corporate employees, 14 are in management positions and 21 are administrative or office employees. Available Information The
Company maintains an internet website at
www.backyardburgers.com. The Company makes
available free of charge under the section Investor Relations of its website its annual reports
on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments
to any of those reports, as soon as reasonably practicable after providing such reports to the
Securities and Exchange Commission. 10




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##### 



ITEM 2. PROPERTIES Of the 42 company-operated restaurants as of January 1, 2005, the Company has entered into
ground leases, as lessee, for 34 restaurants. The Company owns the real property for 8
restaurants. The Companys leases are generally written for a term of five to 15 years with one or
more five-year renewal options. The Companys average monthly lease cost for the 13
company-operated restaurants located on leased sites is approximately $3,500 per month. For the 21
restaurants where the Company leases the building as well as the site, the average monthly cost is
approximately $5,300 per month. Most leases are operating leases. Leasehold improvements made by
the Company generally become the property of the landlord upon expiration or earlier termination of
the lease; however, in most instances, if the Company is not in default under the lease, modular
buildings remain the property of the Company and can be removed from the site upon expiration of
the ground lease. With respect to the buildings and equipment relating to the 42 company-operated
restaurants, management believes that its commercial insurance coverage is adequate. Also see
Business-Restaurant Operations. The Companys executive offices are located in approximately 7,500 square feet of leased space
at 1657 N. Shelby Oaks Drive, Suite 105, Memphis, Tennessee 38134. The Companys lease expires
February 28, 2007 and provides for a minimum annual rent of $80,040. Also, BYB Properties, Inc., a
wholly-owned subsidiary of the Company, rents nominal office space at 103 Faulk Road, Suite 200,
Wilmington, Delaware 19803. The annual rent for this space is approximately $5,000. ITEM 3. LEGAL PROCEEDINGS The Company is subject to legal proceedings, claims and liabilities, such as sexual
harassment, slip and fall cases, etc., which arise in the ordinary course of business and are
generally covered by insurance. In the opinion of management, the amount of the ultimate liability
with respect to those actions will not have a materially adverse impact on our financial position
or results of operations and cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No items are reportable hereunder. PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Companys common stock is traded and quoted on The Nasdaq SmallCap Market under the symbol
BYBI. The following table sets forth, for all periods indicated, the high and low closing bid
prices for the common stock as reported by Nasdaq. Such price information contains inter-dealer
prices, without retail mark-up, mark-down or commissions paid, and may not necessarily reflect
actual transactions. Quarter Ended
    
    High
    
    
    LowMarch 29, 2003
    
    $
    5.01
    
    
    $
    3.52June 28, 2003
    
    $
    6.40
    
    
    $
    4.53September 27, 2003
    
    $
    6.62
    
    
    $
    4.61January 3, 2004
    
    $
    7.96
    
    
    $
    6.18April 3, 2004
    
    $
    8.50
    
    
    $
    6.59July 3, 2004
    
    $
    8.45
    
    
    $
    5.13October 2, 2004
    
    $
    5.99
    
    
    $
    4.89January 1, 2005
    
    $
    7.46
    
    
    $
    4.65
 At March 1, 2005, the common stock was held of record by approximately 530 record
stockholders. On March 1, 2005, the last sale price for the common stock as reported by NASDAQ was
$6.17 per share. 11




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##### 



The Company has not paid or declared cash distributions or dividends and does not intend to
pay cash dividends on the common stock or its preferred stock in the foreseeable future. Future
cash dividends, if any, will be determined by the board of directors based on the Companys
earnings, financial condition, capital requirements and other relevant factors. The Company has a
loan agreement in place which requires the prior written consent of the lending institution for any
dividends paid by the Company, which according to the loan agreement shall not be unreasonably
withheld. ITEM 6. SELECTED FINANCIAL DATA  ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Items 6, 7, 7A and 8 is incorporated herein by reference from the
Financial Supplement.  ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE No items are reportable hereunder. ITEM 9A. CONTROLS AND PROCEDURES The Company has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934 as of the end of the period covered by the report. The evaluation was performed under the
supervision and with the participation of the Companys management, including the Chief Executive
Officer (the CEO) and Chief Financial Officer (the CFO). In performing this evaluation, our management considered all disclosure controls and
procedures and turned specific attention to our lease accounting practices in light of the
restatement of our financial statements to correct our historical accounting for leases. A
detailed discussion of the correction of the error and the impact of the restatement is included in
Notes 3 and 17 of the notes to our consolidated financial statements. Our controls over the application of accounting policies related to lease terms and the
related useful lives of leasehold improvements were ineffective to ensure that these policies
complied with accounting principles generally accepted in the United States of America.
Specifically, the deficiency in our controls over the application of our lease accounting policies
failed to identify material misstatements in our financial statements, which resulted in
restatements of our consolidated financial statements for the fiscal years ended 2003 and 2002, the
four quarters of fiscal 2003 (unaudited), and the first three quarters of fiscal 2004 (unaudited).
Accordingly, we concluded that this control deficiency constituted a material weakness in our
internal control over financial reporting as of January 1, 2005. As a result of this
determination, the Companys management, including the CEO and CFO, concluded that our disclosure
controls and procedures were not effective as of January 1, 2005. However, we have since
remediated these deficiencies in our controls and procedures by implementing additional review
procedures over the application of appropriate assumptions and factors affecting our lease
accounting. There were no changes in our internal control during the quarter ended January 1, 2005 that
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. However, we have subsequently changed our accounting policies regarding the
review, analysis and recording of new and current leases, including the selection and monitoring of
appropriate assumptions and guidelines to be applied during the review and analysis of all the
leases. ITEM 9B. OTHER INFORMATION None. 12




---



##### 



PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION  ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference
from the Companys definitive proxy statement for the annual meeting of stockholders to be held May
27, 2005, to be filed pursuant to Regulation 14A. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (a)(1)
    Consolidated Financial Statements The following consolidated financial statements, notes related thereto and report of
independent registered public accounting firm are referenced in Item 8 of this Form 10-K and are
incorporated herein by reference from the Financial Supplement:  
    Consolidated Balance Sheets as of January 1, 2005 and January 3, 2004
(restated)
    Consolidated Statements of Operations for the years ended January 1, 2005 and
January 3, 2004 (restated) and December 28, 2002 (restated)
    Consolidated Statements of Changes in Stockholders Equity for the years ended
January 1, 2005 and January 3, 2004 (restated) and December 28, 2002 (restated)
    Consolidated Statements of Cash Flows for the years ended January 1, 2005 and
January 3, 2004 (restated) and December 28, 2002 (restated)
    Notes to Consolidated Financial Statements
    Report of Independent Registered Public Accounting Firm  (a)(2)
    Consolidated Financial Statement Schedules: All schedules for which provision is made in the applicable accounting regulations of the
Securities and Exchange Commission are not required under the related instructions or are not
applicable and therefore have been omitted. 13




---



##### 



(a)(3)
    Exhibits ExhibitNumber
    
    Description3.1
    
    Restated Certificate of Incorporation.(4)3.2
    
    Amended and Restated By-Laws.(2)4.1
    
    Specimen Common Stock Certificate.(2)10.1
    
    Employment Agreement, dated April 15, 1993, between the Registrant and Lattimore M.
Michael.(1)10.2
    
    Form of Incentive Stock Option Plan of 1993.(1)10.3
    
    Lease, dated February 1, 1990, between Trezevant Properties and the Registrant.(1)10.4
    
    Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture I by and among William L.
Lester, Pattie F. Lester, Patricia B. Litow, Elizabeth B. Fox and Back Yard Burgers, Inc.,
dated November 15, 1994.(3)10.5
    
    Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture II by and among William
L. Lester, Pattie F. Lester, Patricia B. Litow, Elizabeth B. Fox, Charles B. Fox, David P. Fox
and Back Yard Burgers, Inc., dated November 15, 1994.(3)10.6
    
    1995 Employee Stock Purchase Plan of Back Yard Burgers, Inc.(4)10.7
    
    The 1995 Incentive Award Plan of Back Yard Burgers, Inc.(4)10.8
    
    Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture III by and among Pattie
F. Lester, Patricia B. Litow, Elizabeth B. Fox, Charles B. Fox, David P. Fox, Alexandra B.
Litow, Andrew R. Litow and Back Yard Burgers, Inc., dated September 12, 1995.(4)10.9
    
    Loan commitment by and between Phoenix Leasing Incorporated and Back Yard Burgers, Inc. dated
October 4, 1996.(5)10.10
    
    Capital Contribution Agreement between Back Yard Burgers, Inc. and BYB Properties, Inc.
dated October 10, 1997.(6)10.11
    
    Trademark Assignment by Back Yard Burgers, Inc. to BYB Properties, Inc. dated October 10,
1997.(6)10.12
    
    Trademark License Agreement between BYB Properties, Inc. and Back Yard Burgers, Inc. dated
October 10, 1997.(6)10.13
    
    Revolving Loan Agreement regarding Uncommitted Line of Credit Agreement from BYB Properties,
Inc. to Back Yard Burgers, Inc. dated October 10, 1997.(6)10.14
    
    Promissory Note by and between BYB Properties, Inc. and Back Yard Burgers, Inc. dated
October 10, 1997.(6)
 14




---



##### 



ExhibitNumber
    
    Description10.15
    
    Tax Sharing Agreement between BYB Properties, Inc. and Back Yard Burgers, Inc. dated October
10, 1997.(6)10.16
    
    Form of Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture IV by and among
William L. Lester, Pattie F. Lester, Alexandra B. Litow, Andrew R. Litow and Back Yard
Burgers, Inc., dated August 28, 1998.(7)10.17
    
    Lease agreement by and between Belz Devco, L.P. and Back Yard Burgers, Inc. dated November
12, 1999. (8)10.18
    
    2002 Equity Incentive Plan of Back Yard Burgers, Inc. (9)10.19
    
    Loan agreement by and between First Tennessee Bank and Back Yard Burgers, Inc. dated
February 11, 2003.(10)10.20
    
    Lease agreement by and between Batesville Back Yard Properties, LLC and Back Yard Burgers,
Inc. dated May 1, 2002.(11)10.21
    
    Severance Agreement, dated October 11, 2004, between the Registrant and Lattimore M.
Michael. (12)10.22
    
    Amended and Restated Severance Agreement, dated October 11, 2004, between the Registrant and
Michael W. Myers. (12)10.23
    
    Amended and Restated Severance Agreement, dated October 11, 2004, between the Registrant and
Michael G. Webb. (12)10.24*
    
    Separation Agreement by and between Back Yard Burgers, Inc. and William N. Griffith dated
January 7, 2005.10.25*
    
    Consulting Services Agreement by and between Back Yard Burgers, Inc. and William N. Griffith
dated January 7, 2005.10.26*
    
    Amendment to Stock Option Plans and Agreement by and between Back Yard Burgers, Inc. and
William N. Griffith dated January 7, 2005.10.27*
    
    Franchise Agreement by and between Back Yard Burgers, Inc. and William N. Griffith dated
January 7, 2005.10.28*
    
    Area Development Agreement by and between Back Yard Burgers, Inc. and William N. Griffith
dated January 7, 2005.21*
    
    Subsidiaries of the Registrant.23.1*
    
    Consent of Independent Registered Public Accounting Firm31.1*
    
    Certification by the Chief Executive Officer.31.2*
    
    Certification by the Chief Financial Officer.32.1*
    
    Certification by the Chief Executive Officer.32.2*
    
    Certification by the Chief Financial Officer.
 15




---



##### 



*
    
    Filed herewith.(1)
    
    Previously filed with the Securities and Exchange Commission (the Commission) as an Exhibit
to the Registrants Form SB-2 on April 20, 1993 (File No. 33-61356).(2)
    
    Previously filed with the Commission as an Exhibit to the Registrants Amendment No. 2 to
Form SB-2 on June 25, 1993 (File No. 33-61356).(3)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K, dated
December 31, 1994 and filed on March 31, 1995.(4)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-QSB, dated
September 30, 1995 and filed on November 14, 1995.(5)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K, dated
December 28, 1996 and filed on March 28, 1997.(6)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K, dated
January 3, 1998 and filed on April 3, 1998.(7)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-QSB dated
October 3, 1998 and filed on November 17, 1998.(8)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K dated
January 1, 2000 and filed on March 31, 2000.(9)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K dated
December 29, 2001 and filed on March 28, 2002.(10)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-Q dated March
29, 2003 and filed on May 13, 2003.(11)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K dated
January 3, 2004 and filed on April 2, 2004.(12)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-Q dated
October 2, 2004 and filed on November 16, 2004. 16




---



##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. BACK YARD BURGERS, INC.By:
    /s/ Lattimore M. MichaelLattimore M. Michael, Chairmanand Chief Executive OfficerDate:
    April 15, 2005 Pursuant to the requirements of the Securities Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Signature
    
    Title
    
    Date/s/ Lattimore M. Michael
    
    Chairman of the Board andLattimore M. Michael
    
    Chief Executive Officer
    
    April 15, 2005/s/ Michael W. Myers
    
    President and Chief Operating Officer
    
    April 18, 2005Michael W. Myers/s/ Michael G. Webb
    
    Chief Financial Officer
    
    April 15, 2005Michael G. Webb/s/ W. Kurt Henke
    
    Director
    
    April 18, 2005W. Kurt Henke/s/ Jim Peterson
    
    Director
    
    April 18, 2005Jim Peterson/s/ William B. Raiford, III
    
    Director
    
    April 18, 2005William B. Raiford, III/s/ Joseph L. Weiss
    
    Director
    
    April 18, 2005Joseph L. Weiss
 17




---



##### 



INDEX TO FINANCIAL SUPPLEMENT
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JANUARY 1, 2005 PageSelected Consolidated Financial Data
    
    
    F-1Managements Discussion And Analysis of Financial Condition And Results Of Operations
    
    
    F-2Consolidated Balance Sheets as of January 1, 2005 and January 3, 2004 (restated)
    
    
    F-14Consolidated Statements of Operations for the years ended January 1, 2005 and January 3, 2004 (restated) and December 28, 2002 (restated)
    
    
    F-15Consolidated Statements of Changes in Stockholders Equity for the years ended January 1, 2005 and January 3, 2004 (restated) and December 28, 2002 (restated)
    
    
    F-16Consolidated Statements of Cash Flows for the years ended January 1, 2005 and January 3, 2004 (restated) and December 28, 2002 (restated)
    
    
    F-17Notes to the Consolidated Financial Statements
    
    
    F-18Report of Independent Registered Public Accounting Firm
    
    
    F-32




---



##### 



Selected Consolidated Financial Data  The selected consolidated financial data presented below for each of the years in the
five-year period ended January 3, 2004 was derived from the Companys audited Consolidated
Financial Statements. The following years, 2003 through 2000, have been restated to reflect the
correction of certain lease accounting issues described in Note 3 of the Notes to the Consolidated
Financial Statements. The correction associated with the restatement also impacted years prior to
the year ended December 30, 2000, and the related correction to retained earnings as of January 1,
2000 was a reduction of $314,000. The selected consolidated financial data should be read in
conjunction with Managements Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto included elsewhere herein. January 3,
    
    
    December 28,
    
    
    December 29,
    
    
    December 30,January 1,
    
    
    2004(1)
    
    
    2002
    
    
    2001(3)
    
    
    2000(4)2005
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)OPERATIONSRestaurant Sales
    
    $
    34,912
    
    
    $
    34,279
    
    
    $
    30,951
    
    
    $
    27,541
    
    
    $
    26,182Total revenues
    
    
    40,183
    
    
    
    38,647
    
    
    
    34,464
    
    
    
    30,919
    
    
    
    29,051Total royalties (2)
    
    
    3,108
    
    
    
    2,621
    
    
    
    2,172
    
    
    
    1,984
    
    
    
    1,658Income (loss) before income
taxes
    
    
    1,789
    
    
    
    1,772
    
    
    
    2,082
    
    
    
    1,480
    
    
    
    628Net income (loss)
    
    
    1,264
    
    
    
    1,225
    
    
    
    1,397
    
    
    
    962
    
    
    
    400FINANCIAL POSITIONTotal assets
    
    $
    24,269
    
    
    $
    24,769
    
    
    $
    22,405
    
    
    $
    19,545
    
    
    $
    17,829Property and equipment, net
    
    
    17,746
    
    
    
    18,672
    
    
    
    17,307
    
    
    
    13,977
    
    
    
    12,422Debt
    
    
    4,900
    
    
    
    5,676
    
    
    
    6,250
    
    
    
    5,772
    
    
    
    5,403Shareholders equity
    
    
    14,476
    
    
    
    13,078
    
    
    
    11,759
    
    
    
    10,156
    
    
    
    9,175PER SHARE DATANet income  basic
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.30
    
    
    $
    0.21
    
    
    $
    0.09Net income  diluted
    
    
    0.25
    
    
    
    0.24
    
    
    
    0.28
    
    
    
    0.20
    
    
    
    0.09Dividends
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Market price at year end
    
    
    7.50
    
    
    
    6.52
    
    
    
    4.00
    
    
    
    3.70
    
    
    
    0.66OTHER DATACapital expenditures
    
    
    2,178
    
    
    
    3,329
    
    
    
    4,861
    
    
    
    2,791
    
    
    
    1,063
   (1)
    
    Because the Companys fiscal year ends on the Saturday closest to December 31,
the fiscal year ended January 3, 2004 contains 53 weeks, while the fiscal years ended January
1, 2005, December 28, 2002, December 29, 2001, and December 30, 2000 contain 52 weeks.(2)
    
    Total royalties are derived from sales at franchised restaurants of $78.3 million in
2004, $66.2 million in 2003, $54.0 million in 2002, $50.2 million in 2001 and $42.3 million in
2000.(3)
    
    The impact of the restatement was a reduction of net income of $65,000 for the
year ended December 29, 2001.(4)
    
    The impact of the restatement was a reduction of net income of $66,000 for the year
ended December 30, 2000. F-1




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##### 



Managements Discussion and Analysis
of Financial Condition and Results of Operations Introduction The following discussion and analysis should be read in conjunction with the Back Yard
Burgers (the Company) consolidated financial statements and notes thereto, included elsewhere in
this annual report. Because Back Yard Burgers fiscal year ends on the Saturday closest to
December 31, fiscal 2003 contains 53 weeks versus 52 weeks for 2004 and 2002. As a result,
operating results for fiscal 2003 are not directly comparable with those of the 52-week periods. As of January 1, 2005, the Back Yard Burgers system included 156 restaurants, of which 42 were
company-operated and 114 were franchised. The Companys revenues are derived primarily from
company-operated restaurant sales, franchise and area development fees and royalty fees. Certain
expenses (cost of restaurant sales, restaurant operating expenses, depreciation, amortization and
advertising) relate directly to company-operated restaurants, while general and administrative
expenses relate to both company-operated restaurants and franchise operations. The Companys
revenues and expenses are affected by the number and timing of the opening of additional
restaurants. Sales for new restaurants in the period immediately following their opening tend to
be high because of trial by public and promotional activities. As a result, the timing of openings
can affect the average volume and other period-to-period comparisons. Restatement of Financial Statements The
Company has conducted a review of its accounting policies applicable
to leases and leasehold
improvements. This review was prompted
in part by a February 7, 2005 letter from the Office of the Chief Accountant of the Securities and
Exchange Commission (SEC) to the American Institute of Certified Public Accountants regarding
proper accounting for certain operating lease matters under generally accepted accounting
principles (GAAP). The restatement adjustments are non-cash and had no impact on revenues or
cash and cash equivalents. Lease Term Historically, when accounting for leases with renewal options, the Company recorded rent
expense on a straight-line basis over the initial non-cancelable lease term without regard for
renewal options or any periods during which the Company had use of the property but was not charged
rent by a landlord (rent holiday). The Company has concluded that its calculation of straight
line rent expense should be based on the lease term as defined in SFAS No. 13, Accounting for
Leases,as amended, which in most cases exceeds the initial term of the lease. As a result, the
Company has restated its financial statements to recognize rent expense on the straight-line basis
over the lease term, including rent holidays and option periods for which failure to renew the
lease imposes an economic penalty on the Company of such an amount that a renewal appears, at the
inception of the lease, to be reasonably assured. For purposes of calculating straight-line rents,
the lease term commences on the date the lessee obtains control over the property, which is
generally when the lessors property is substantially complete and is ready for tenant
improvements. As a result, the Companys deferred rent liability, included in other deferred
liabilities in the accompanying financial statements, has increased on a restated basis. Depreciation Historically, the Company depreciated its buildings, leasehold improvements and other
long-lived assets on leased properties over a period that included both the initial non-cancelable
term of the lease and all option periods provided for in the lease (or the useful life of the
assets if shorter). The Company has concluded that these assets should be amortized over the
shorter of the lease term or the useful life of the assets. As a result, it has restated its
financial statements to recognize depreciation on leasehold improvements over the shorter of the
lease term or the useful life of the assets. F-2




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##### 



Sale Leaseback Transactions The Company has also restated for the impact of a land lease that was previously
accounted for as an operating lease. It was determined that the lease did not qualify for sale
leaseback treatment under SFAS 98, and should have been accounted for as financing. Restatement The Company restated its consolidated balance sheet at January 3, 2004, and the consolidated
statements of operations, cash flows and stockholders equity for the years ended 2003 and 2002.
The impact of the restatement was a reduction of net income of $84,000 in 2003 and $80,000 in 2002.
Additionally, the restatement has been reflected as a cumulative
effect to accumulated deficit as of December 29, 2001 in
the accompanying consolidated statements of stockholders equity for the effects of the errors
prior to December 29, 2001. The Company also restated the quarterly financial information for
fiscal 2003 and the first three quarters of 2004 (see Note 17 of Notes to Consolidated Financial
Statements). We have not amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on
Form 10-Q for the restatement nor do we plan to amend those filings; consequently, the financial
statements and related financial information contained in such reports should no longer be relied
upon. The following discussion of our financial condition and results of operations gives effect to
the restatement and should be read in conjunction with the consolidated financial statements and
related notes. Results of Operations The following table sets forth the percentage relationship to total revenues, unless otherwise
indicated, of certain items included in the Companys historical operations and operating data for
the periods indicated. For the Years EndedJanuary 3,
    
    
    December 28,January 1,
    
    
    2004
    
    
    20022005
    
    
    (restated)
    
    
    (restated)RevenuesRestaurant sales
    
    
    86.9
    %
    
    
    88.7
    %
    
    
    89.8
    %Franchise and area development fees
    
    
    1.5
    
    
    
    1.0
    
    
    
    0.7Royalty fees
    
    
    7.7
    
    
    
    6.8
    
    
    
    6.3Advertising fees
    
    
    2.2
    
    
    
    1.7
    
    
    
    1.6Other operating revenue
    
    
    1.7
    
    
    
    1.8
    
    
    
    1.6Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and ExpensesCost of restaurant sales (a)
    
    
    31.7
    %
    
    
    31.9
    %
    
    
    30.2
    %Restaurant operating expenses (a)
    
    
    47.9
    
    
    
    48.1
    
    
    
    47.1General and administrative
    
    
    13.3
    
    
    
    11.7
    
    
    
    12.9Advertising
    
    
    6.6
    
    
    
    6.1
    
    
    
    5.8Depreciation and amortization
    
    
    5.2
    
    
    
    5.0
    
    
    
    4.2Operating income
    
    
    5.7
    
    
    
    6.2
    
    
    
    7.8Interest income
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Interest expense
    
    
    (1.2
    )
    
    
    (1.4
    )
    
    
    (1.6
    )Other, net
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.3
    )Income before taxes
    
    
    4.5
    
    
    
    4.6
    
    
    
    6.0Income tax expense (b)
    
    
    29.3
    
    
    
    30.9
    
    
    
    32.9Net Income
    
    
    3.1
    
    
    
    3.2
    
    
    
    4.1
   (a)
    
    As a percentage of restaurant sales.(b)
    
    As a percentage of income before taxes. F-3




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##### 



For the Years EndedJanuary 1,
    
    
    January 3,
    
    
    December 28,2005
    
    
    2004
    
    
    2002Average annual sales per restaurant open for a full year(1)Company-operated
    
    $
    828,000
    
    
    $
    826,000
    
    
    $
    778,000Franchised
    
    
    808,000
    
    
    
    782,000
    
    
    
    810,000Combined
    
    
    815,000
    
    
    
    799,000
    
    
    
    797,000Number of restaurants(2)Company-operated
    
    
    42
    
    
    
    42
    
    
    
    42Franchised
    
    
    114
    
    
    
    90
    
    
    
    77Total
    
    
    156
    
    
    
    132
    
    
    
    119
   (1)
    
    Includes sales for restaurants open for entire trailing twelve-month period.
Restaurants are included in the calculation after the completion of six months of operations,
as sales during the period immediately after opening tend to be higher due to promotions and
trial by public.(2)
    
    As of March 1, 2005, five franchised restaurants have opened since January 1, 2005,
two in Tallahassee, Florida and one each in Lees Summit, Missouri, Martinez, Georgia, and
Huntsville, Alabama. F-4




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##### 



COMPARISON OF FISCAL YEAR 2004 TO FISCAL YEAR 2003 Back Yard Burgers fiscal year ends on the Saturday closest to December 31. As a result,
fiscal 2003 contains 53 weeks versus 52 weeks for the current year. Therefore, all references to
fiscal 2003 are for the 53-week period ended January 3, 2004 and all references to fiscal 2004 are
for the 52-week period ended January 1, 2005. Restaurant salesat company-operated restaurants increased 1.8% to $34,912,000 during 2004
from $34,279,000 during 2003. The increase is partially the result of a 2.8% increase in
same-store sales at company-operated restaurants open for more than one year. Franchise and area development feeswere $620,000 during 2004, an increase of 64.0% from
$378,000 in 2003. Thirty-one new franchised restaurants were opened in 2004, compared with
nineteen new franchised units opened in 2003. The Company recorded $86,000 in fees for the
cancellation of franchise and area development agreements in 2003 compared with zero in 2004, which
partially offsets the increase in fees due to increased openings. Royalty feesincreased 18.6% to $3,108,000 during 2004 from $2,621,000 during 2003. The
increase is the result of an increase in franchised sales upon which the fees are based. The
increase in franchised restaurant sales was due to a net unit growth of twenty-four franchised
stores. The increase is partially offset by a decrease of 0.7% in same-store sales for franchised
units during 2004. Advertising feesincreased 31.0% to $866,000 for 2004 from $661,000 during 2003. The increase
is primarily due to the increase in franchised restaurant sales, upon which a portion of the fees
is based. Otherrevenues remained relatively flat at $677,000 for 2004 and $708,000 for 2003. The
decrease in other revenues is due to a decrease in other miscellaneous revenues. Cost of restaurant sales, consisting of food, beverage and paper costs, totaled $11,066,000
during 2004 compared to $10,935,000 during 2003, decreasing to 31.7% as a percentage of restaurant
sales during 2004 from 31.9% for 2003. The decrease is primarily due to two price increases of
approximately 2% each implemented by the Company during 2004. These price increases were partially
offset by an 11% increase in the cost of beef over the prior year as well as other miscellaneous
cost increases driven primarily by higher fuel costs over the year-earlier period. Restaurant operating expenses,consisting of labor, supplies, utilities, rent, insurance and
certain other unit level operating expenses, increased to $16,726,000 for 2004 from $16,494,000
during 2003. These expenses in total remained relatively flat as a percentage of restaurant sales
at 47.9% in 2004 compared with 48.1% in 2003. Labor costs as a percentage of restaurant sales
decreased by 0.4% but this savings was offset by higher spending for utilities and property taxes. General and administrativecosts increased $816,000, or 17.8%, to $5,349,000 during 2004 from
$4,533,000 in 2003, increasing as a percentage of total revenue to 13.3% from 11.7% during 2003.
Corporate personnel related costs, including benefit costs, increased by approximately $444,000
over the prior year. The Company also incurred an additional $214,000 in professional & consulting
fees compared with the prior year as well as an additional $73,000 in travel expenses compared with
the prior year for franchisee support and openings. The remainder of the increase is due to
increases in other miscellaneous general and administrative costs incurred by the Company during
fiscal year 2004. Advertisingexpense, which increased to $2,652,000 for 2004 from $2,349,000 during 2003,
increased as a percentage of total revenues to 6.6% in 2004 compared with 6.1% in 2003. The
Company spent approximately 5% of net restaurant sales at company-operated stores on local store
advertising, including media and print advertising in the three markets in which the
company-operated restaurants are located during both FY 2004 and FY 2003. In addition, all stores
(both company and franchised stores) contribute 1% of each stores net restaurant sales as
advertising fees to the Companys National Advertising Fund (see Note 13). Of these advertising
fees, the Company spends at least 50% of these funds on the creation of marketing tools; however,
in some years, the Company spends more than 50% of these fees on advertising related costs.
Fluctuations in the advertising spending as a percentage of F-5




---



##### 



total revenues is related to the timing of promotions and exact percentage of the advertising fees
earned by the Companys National Advertising Fund that is spent on the creation of marketing tools. Depreciationexpense was $2,096,000 during 2004 compared with $1,945,000 during 2003. This
increase was primarily related to $2.2 million in fixed asset additions during 2004 as well as $3.3
million in fixed asset additions in 2003, primarily related to the re-imaging of company-operated
restaurants and the construction of new company-operated restaurants. Interest expensedecreased 11.1% to $479,000 for the year ended January 1, 2005 from $539,000
in the prior year. This decrease primarily results from lower average debt outstanding during
2004. Debt outstanding as of January 1, 2005 was $4,900,000, a decrease of $776,000 or 13.7% from
the year-earlier period. Other, netexpense was $31,000 in 2004 compared with $86,000 in expense for 2003. The Company
recorded a net $69,000 gain on the sale and disposal of assets during 2004 compared with a net
$18,000 loss during 2003. This decrease in net expense was partially offset by an increase in
franchise tax expense of $22,000 for the fifty-two weeks ended January 1, 2005, over the
year-earlier period. Also included in this category is other miscellaneous income and expenses and
these income and expense categories were relatively consistent between the two years. Income tax expense, which decreased by $22,000 to $525,000 from $547,000 in 2003, decreased as
a percentage of pre-tax income to 29.3% in 2004 from 30.9% in 2003. The decrease in income tax
expense as a percentage of pre-tax income is primarily a result of a $100,000 work opportunity tax
credit earned by the Company during 2004 compared with a $62,000 credit earned in 2003. COMPARISON OF FISCAL YEAR 2003 TO FISCAL YEAR 2002 Back Yard Burgers fiscal year ends on the Saturday closest to December 31. As a result,
fiscal 2003 contains 53 weeks versus 52 weeks for the prior year. Therefore, all references to
fiscal 2003 are for the 53-week period ended January 3, 2004 and all references to fiscal 2002 are
for the 52-week period ended December 28, 2002. Restaurant salesat company-operated restaurants increased 10.8% to $34,279,000 during 2003
from $30,951,000 during 2002. In addition to the fact that fiscal year 2003 contained 53 weeks
compared with 52 weeks in fiscal year 2002, the increase is partially the result of a 2.6% increase
in same-store sales at restaurants open for more than one year. While the Company ended 2002 with
42 restaurants, two of those restaurants opened in late 2002, which also contributed to the
increase in restaurant sales. Franchise and area development feeswere $378,000 during 2003, an increase of 66.5% from
$227,000 in 2002. Nineteen new franchised restaurants were opened in 2003, compared to fifteen new
franchised units opened in 2002. A portion of the increase in fees is also attributable to the
Company recording $86,000 in fees for the cancellation of franchise and area development agreements
in 2003 compared with $18,000 in 2002. Royalty feesincreased 20.7% to $2,621,000 during 2003 from $2,172,000 during 2002. The
increase is the result of an increase in franchised sales upon which the fees are based. In
addition to the fact that fiscal year 2003 contained 53 weeks compared with 52 weeks in fiscal year
2002, the increase in franchised restaurant sales was due to a net unit growth of thirteen
franchised stores. The increase is partially offset by a decrease of 4.2% in same-store sales for
franchised units during 2003. Advertising feesincreased 20.6% to $661,000 for 2003 from $548,000 during 2002. The increase
is primarily due to the increase in franchised restaurant sales, upon which the fees are based. Otherrevenues increased 25.1% to $708,000 for 2003 from $566,000 during 2002. The increase
in other revenues is due to an increase in income earned by the Company from vendors based on
franchisee purchases which have no specific incremental impact to costs of the Company, sales of
proprietary spices and other miscellaneous revenues. F-6




---



##### 



Cost of restaurant sales, consisting of food, beverage and paper costs, totaled $10,935,000
during 2003 compared to $9,335,000 during 2002, increasing to 31.9% as a percentage of restaurant
sales during 2003 from 30.2% for 2002. The increase is primarily due to an 11% increase in the
cost of beef over the prior year, as well as additional costs associated with implementing new menu
items and promotions offering certain sandwich items at a discounted price in efforts to increase
guest traffic and sales at company-operated restaurants. Restaurant operating expenses,consisting of labor, supplies, utilities, rent, insurance
and certain other unit level operating expenses, increased to $16,494,000 for 2003 from $14,570,000
during 2002, increasing as a percentage of restaurant sales to 48.1% from 47.1% in 2002. Labor
costs as a percentage of restaurant sales increased by 0.4% primarily due to the implementation of
a late-night operations program, requiring an additional investment in labor at the stores. Labor
benefit costs have also risen due to increases in health insurance costs. The remainder of the
increase is due to higher spending for repairs and maintenance, utilities, insurance and property
taxes. General and administrativecosts increased $98,000 to $4,533,000 during 2003 from $4,435,000
in 2002, decreasing as a percentage of total revenue to 11.7% from 12.9% during 2002. Personnel
related costs, including recruiting, training and benefit costs, increased by approximately
$200,000 over the prior year. The increase is partially offset by a decrease of $88,000 in store
pre-opening costs to $63,000 in 2003 from $151,000 in 2002. Advertisingexpense, which increased to $2,349,000 for 2003 from $1,985,000 during 2002,
remained relatively flat as a percentage of total revenues at 6.1% in 2003 compared with 5.8% in
2002. The Company spent approximately 5% of net restaurant sales at company-operated stores on
local store advertising, including media and print advertising in the three markets in which the
company-operated restaurants are located during both FY 2004 and FY 2003. In addition, all stores
(both company and franchised stores) contribute 1% of each stores net restaurant sales as
advertising fees to the Companys National Advertising Fund (see Note 13). Of these advertising
fees, the Company spends at least 50% of these funds on the creation of marketing tools; however,
in some years, the Company spends more than 50% of these fees on advertising related costs.
Fluctuations in the advertising spending as a percentage of total revenues is related to the timing
of promotions and exact percentage of the advertising fees earned by the Companys National
Advertising Fund that is spent on the creation of marketing tools. Depreciationexpense was $1,945,000 during 2003 compared with $1,442,000 during 2002. This
increase was primarily related to $3.3 million in fixed asset additions during 2003 as well as $4.9
million in fixed asset additions in 2002, primarily related to the re-imaging of company-operated
restaurants and the construction of new company-operated restaurants. Interest expensewas relatively flat at $539,000 for the year ended January 3, 2004 compared
with $544,000 in the prior year. While debt outstanding as of January 3, 2004 was $5,676,000, a
decrease of $574,000 or 9.2% from the year-earlier period, the average debt outstanding was
relatively flat at approximately $6.0 million for both years. Other, netexpense was $86,000 in 2003 compared with $88,000 in expense for 2002. The Company
also wrote off $23,000 in deferred loan costs during 2002 for which there were no comparable costs
during 2003. These decreases in expense were partially offset by an increase in franchise tax
expense of $27,000 for the fifty three weeks ended January 3, 2004, over the year-earlier period.
Also included in this category are gains or losses on the sale/disposal of assets and other
miscellaneous income and expenses and these income and expense categories, which were relatively
consistent between the two years. Income tax expense, which decreased by $138,000 to $547,000 from $685,000 in 2002, decreased
as a percentage of pre-tax income at 30.9% in 2003 compared with 32.9% in 2002. The decrease in
income tax expense as a percentage of pre-tax income is primarily the result of a $62,000 work
opportunity tax credit earned by the Company during 2003 compared with no credit in 2002. Impairment of Long-Lived Assets The Company adopted Statement of Financial Accounting Standard (SFAS) No. 144, Accounting
for the Impairment and Disposal of Long-Lived Assets,at the beginning of 2002. We assess the
potential impairment of long-lived assets whenever events or changes in circumstances indicate that
the carrying value may not be F-7




---



##### 



recoverable. At each balance sheet date, the Company assesses whether there has been impairment in
the value of all long-lived assets by determining whether projected undiscounted future cash flows
from operations for each restaurant, as defined in SFAS No. 144, exceed its net book value as of
the assessment date. A new cost basis is established for impaired assets based on the fair value
of these assets as of the date the assets are determined to be impaired. No impairment charges were recorded by the Company during fiscal years 2004, 2003 or 2002;
however, management has identified three company-operated stores which are currently performing at
levels which, if improvements in cash flows are not made, may result in management revising its
projected undiscounted future cash flows for these restaurants. This, in turn, may result in an
impairment of value. Management intends to address these issues through increased local marketing
efforts for these locations and will continue to monitor their performance. The Company had $61,000 in reserves for closed properties at the end of fiscal year 2002.
Lease payments of $39,000 were incurred and charged against this additional reserve during 2003.
The Company also recorded $59,000 in additional closed store reserves during 2003 related to future
lease payments of closed stores, net of estimated sub-lease income. The company recorded these
reserves as a restaurant operating expense. As of January 3, 2004, the companys remaining accrual
for future lease obligations related to closed stores was $81,000. During 2004, lease payments of $65,000 in 2004 were incurred and charged against this
reserve, and $16,000 in lease obligations were forgiven due to the negotiation of an
early buyout of future lease obligations for one of the closed stores. The company recorded the
$16,000 in forgiven lease obligations as a reduction in restaurant operating expense. As of
January 1, 2005, the Company had no remaining accrual for future lease obligations for closed
stores. Liquidity and Capital Resources Capital expenditures totaled $2,178,000 in 2004, $3,329,000 in 2003 and $4,861,000 in 2002.
Generally, the Company constructs its restaurant buildings on leased properties for its
company-operated restaurants. The average monthly lease cost for the 13 company-operated
restaurants on leased sites at January 1, 2005 is approximately $3,500 per month. For the 21
restaurants where the Company leases the building as well as the site, the average monthly lease
cost is approximately $5,300. Cash from operations for the Company is normally primarily affected by net earnings adjusted
for deferred franchise fees and non-cash expenses which consist primarily of depreciation.
Depreciation totaled $2,096,000 in 2004, $1,945,000 in 2003 and $1,442,000 in 2002. Cash provided by operations in 2004 was $1,765,000 compared with $4,188,000 in 2003. $921,000
of this $2,423,000 decrease in cash provided by operations was related to a $1,038,000 reduction in
accounts payable and accrued expenses for the fifty-two week period ended January 1, 2005 compared
with a $117,000 decrease in accounts payable and accrued expenses in the year earlier period. An
additional $566,000 of the reduction in cash provided by operations was related to a $129,000
reduction in income taxes payable in the current year compared with a $437,000 increase in income
taxes payable in the year-earlier period. This change is primarily due to the fact that the
Company has a $12,000 income tax payable as of January 1, 2005 and had $141,000 in income taxes
payable at the end of FY 2003 and $296,000 in income taxes receivable at the end of FY 2002 due to
an overpayment of income taxes during FY 2002. $489,000 of the reduction in cash
provided by operations was due a reduction in net cash flows from deferred franchise and area
development fees. The company collects franchise and area development fees when agreements are
entered, and defers the recognition of the fees as income until the franchised locations opened.
In FY 2003, the company had positive cash flows of $696,000 from franchise and area development
fees compared with $257,000 positive cash flows in FY 2004. Another significant item contributing
to the decline in cash provided from operations was related to other deferred income (see Note 1 of
the Notes to the Consolidated Financial Statements). More funds were collected from vendors in FY
2003 than were earned and less funds were collected from vendors in FY 2004 than were earned. As a
result of the timing of these collections, net cash provided by operations was positively impacted
by $248,000 in FY 2003 compared with a negative impact of $141,000 in FY 2004, resulting in a
$389,000 swing from year to year. In recent history, cash from operations and debt have been used
for the addition of new restaurants and equipment as well as the re-imaging of existing restaurants
to reflect the Companys new logo and related color scheme. Cash provided by operations in 2003
was $4,188,000 compared with $3,839,000 in 2002. F-8




---



##### 



The Company incurred no additional long-term debt financing during the year ended January 1,
2005 and made $776,000 in principal payments on existing debt during the year ended January 1,
2005. As of January 1, 2005, the Company had total long-term debt of $4,900,000 and unused lines
of credit and loan commitments of potential additional borrowings of $2,500,000. During 2003, the Company entered a loan agreement with a financial institution in the amount
of $5,000,000. The loan agreement comprised the following three components: (1) a $2,500,000
five-year loan with a fixed rate of 5.2%. The funds from the five-year term loan were used to
refinance approximately $2.3 million of existing term loans with an average interest rate of 6.8%
and maturity dates ranging from one to two years, (2) a $2.0 million draw down line for future
expansion with a variable rate of interest equal to the one-month LIBOR rate plus a spread not to
exceed 3% that is calculated based on certain financial covenants and (3) a $500,000 revolver line
with a variable rate of interest equal to the one-month LIBOR rate plus a spread not to exceed 3%
that is calculated based on certain financial covenants. The Company net long term debt
outstanding was reduced by $574,000 from December 28, 2002 to January 3, 2004. As of January 3,
2004, the Company had total long-term debt of $5,676,000 and unused lines of credit and loan
commitments of potential additional borrowings of $2,500,000. The Company incurred $1,062,000 in additional long-term debt financing during the year ended
December 28, 2002 and made $584,000 in principal payments on existing debt during the year ended
December 28, 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
January 1, 2005, the Company had repurchased 25,000 shares of common stock under the plan. No
purchases were made during fiscal years 2003 or 2004 and no further purchases are anticipated in
the near term. The Company is budgeting capital expenditures of approximately $5.5 to $6.0 million in fiscal
year 2005, excluding potential acquisitions and share repurchases. These capital expenditures
primarily relate to the development of four additional company-operated restaurants, store
equipment upgrades, and enhancements to existing financial and operating information systems. The
Company expects to fund fiscal year 2005 capital expenditures with cash flow from operations and
borrowings under the loan agreement entered in February of 2003. The Company believes that
existing cash and funds generated from internal operations, as well as borrowings under the credit
facility will meet the Companys needs for the foreseeable future. Contractual Commitments The Company has contractual obligations and commercial commitments including long-term debt,
lease obligations and future purchase obligations. The table below presents our future contractual
obligations (in thousands): Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 yearsLong-term debt
    
    $
    1,812
    
    
    $
    587
    
    
    $
    1,109
    
    
    $
    116
    
    
    $
    Interest payments
    
    
    169
    
    
    
    88
    
    
    
    78
    
    
    
    3
    
    
    
    Capital leases
    
    
    5,100
    
    
    
    520
    
    
    
    951
    
    
    
    833
    
    
    
    2,796Operating leases (1)
    
    
    6,078
    
    
    
    1,345
    
    
    
    2,026
    
    
    
    1,062
    
    
    
    1,645Purchase obligations
    
    
    5,362
    
    
    
    833
    
    
    
    1,640
    
    
    
    1,459
    
    
    
    1,430Total contractual obligations
    
    $
    18,521
    
    
    $
    3,373
    
    
    $
    5,804
    
    
    $
    3,473
    
    
    $
    5,871
   (1)
    
    Represents aggregate minimum lease payments. Some of the leases also require
contingent rent in addition to the minimum rent based on a percentage of sales. F-9




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##### 



Qualitative and Quantitative Disclosure about Market Risk The Company is exposed to certain financial market risks, the most predominant being
fluctuations in the re-pricing 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. The Companys entire long-term debt portfolio is financed with fixed rate debt. Less than 10%
of the Companys debt portfolio as of January 1, 2005, 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 $1,500 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 program has
been deemed necessary for the Company at this time. Seasonality and Inflation While the Company does not believe that seasonality affects its operations in a materially
adverse manner, first quarter results will generally be lower than other quarters due to seasonal
climate conditions in the locations of many of its restaurants. Although results were negatively
impacted during 2004 due to an 11% increase in the cost of beef, management does not believe that
inflation has had a material effect on income during the fifty-two weeks ended January 1, 2005.
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 Restated Certificate of Incorporation
regarding preferred stock, as a result of the Companys having attained after-tax net income in
excess of $600,000 during 1994, each share of preferred stock is convertible into one share of
common stock, at the option of the holder. The Company has notified preferred stockholders of
their right to convert preferred stock to common stock and anticipates that all shares of preferred
stock will be converted. Such conversion began on April 5, 1995, at which time there were
1,199,979 shares of preferred stock outstanding. As of January 1, 2005, only 19,269 shares have
yet to be converted. Recent Accounting Pronouncements Note 2 of the Notes to Consolidated Financial Statements discusses new accounting policies
adopted by the Company during 2003 and the expected impact of accounting policies recently issued
or proposed but not yet required to be adopted. To the extent the adoption of new accounting
standards affects the Companys financial condition, results of operations or liquidity, the
impacts are discussed in the applicable section(s) of the Managements Discussion and Analysis and
the Notes to Consolidated Financial Statements. Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates company estimates, including those related to bad
debts, carrying value of investments in property and equipment, goodwill, income taxes,
contingencies and litigation. Management bases company estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the F-10




---



##### 



carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition: Revenue recognition at company-operated restaurants is straightforward as customers pay for
products at the time of sale. The earnings reporting process is covered by the Companys system of
internal controls and generally does not require significant management judgments and estimates.
The Company calculates royalty income each week based upon amounts reported by franchisees and
provides for estimated losses for revenues that are not likely to be collected. The Company
maintains these allowances for doubtful accounts for estimated losses resulting from the inability
of our franchisees and other borrowers to make required payments. If the financial conditions of
our customers or other borrowers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. Franchise fees are recognized as revenue when substantially all of the initial services
required of the Company have been performed, which generally coincides with the opening of the
franchises. Such services include training and assistance with site location, equipment vendors,
structural design and operating policies. Area development fees arise when franchisees are awarded
the right to develop, own and operate additional Back Yard Burgers restaurants in specific
geographical areas pursuant to the terms of an Area Development Agreement. Such fees are based on
the number of restaurants the franchisee expects to develop. These fees are included as revenue in
accordance with the franchise fee recognition policy as each additional restaurant is opened.
Under the terms of the franchise and area development agreements, the fees are non-refundable and
may be recognized as revenue should the franchisee fail to perform as agreed. Commission costs
associated with the sales of franchise and area development rights are expensed when related
revenues are recognized. The Company also earns income from certain vendors based on purchases made by our franchisees
from those vendors. The Company records this income as other revenues in its statement of
operations. Long-Lived Assets: The restaurant industry is capital intensive. The Company has approximately 73% of its total
assets invested in property and equipment. The Company capitalizes only those costs that meet the
definition of capital assets under generally accepted accounting principles. Accordingly, repairs
and maintenance costs that do not extend the useful life of the asset are expensed as incurred. The depreciation of our capital assets over their estimated useful lives, and the
determination of any salvage values, requires management to make judgments about future events.
Because the Company utilizes many of its capital assets over relatively long periods, the Company
periodically evaluates whether adjustments to our estimated lives or salvage values are necessary.
The accuracy of these estimates affects the amount of depreciation expense recognized in a period
and, ultimately, the gain or loss on the disposal of the asset. Historically, gains and losses on
the disposition of assets have not been significant. However, such amounts may differ materially
in the future based on restaurant performance, technological obsolescence, regulatory requirements
and other factors beyond our control. Due to the fact that the Company invests a significant amount in the construction or
acquisition of new restaurants, the Company has risks that these assets will not provide an
acceptable return on our investment and an impairment of these assets may occur. We assess the
potential impairment of long-lived assets whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. The accounting test for whether an asset held for use
is impaired involves first comparing the carrying value of the asset with its estimated future
undiscounted cash flows. If these cash flows do not exceed the carrying value, the asset must be
adjusted to its current fair value. The Company periodically performs this test on each of our
restaurants to evaluate whether impairment exists. Factors influencing our judgment include the
age of the restaurant (new restaurants have significant start up costs which impede a reliable
measure of cash flow), estimation of future restaurant performance and estimation of restaurant
fair value. Due to the fact that the management can specifically evaluate impairment on F-11




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##### 



a restaurant by restaurant basis, the Company has historically been able to identify impaired
restaurants and record the appropriate adjustment. The Company has approximately $1.8 million of goodwill on our balance sheet resulting from the
acquisition of businesses. Accounting standards adopted in 2002 require that we review goodwill
for impairment on an annual basis and cease all goodwill amortization. The adoption of these new
rules did not result in an impairment of our recorded goodwill. The annual evaluation of goodwill
impairment requires a two-step test in which the market value of the Company is compared to the
recorded book value. If the market value is less than the book value, goodwill impairment is
recorded. Once an impairment of goodwill has been recorded, it cannot be reversed. Deferred Income Taxes: The Company records income tax liabilities utilizing known obligations and estimates of
potential obligations. A deferred tax asset or liability is recognized whenever there are future
tax effects from existing temporary differences and operating loss and tax credit carryforwards.
The Company records a valuation allowance to reduce deferred tax assets to the balance that is more
likely than not to be realized. In evaluating the need for a valuation allowance, management must
make judgments and estimates on future taxable income, feasible tax planning strategies and
existing facts and circumstances. When management determines that deferred tax assets could be
realized in greater or less amounts than recorded, the asset balance and income statement reflect
the change in the period such determination is made. Based on managements estimates, there is
presently a $366,000 valuation allowance recorded on the Companys deferred tax assets. However,
changes in facts and circumstances that affect our judgments or estimates in determining the proper
deferred tax assets or liabilities could materially affect the recorded amounts. Leases: When determining the lease term for purposes of recording depreciation and rent or for
evaluating whether a lease is capital or operating, the Company includes option periods for which
failure to renew the lease imposes an economic penalty on the Company of such an amount that a
renewal appears, at the inception of the lease, to be reasonably assured. For operating leases, minimum lease payments, including minimum scheduled rent increases, are
recognized as rent expense on a straight line basis over the lease term as that term is defined in
SFAS No. 13, as amended, including any option periods considered in the lease term and any periods
during which the Company has use of the property but is not charged rent by a landlord (rent
holiday). Contingent rentals are generally based on either a percentage of restaurant sales or as
a percentage of restaurant sales in excess of stipulated amounts, and thus are not included in
minimum lease payments but are included in rent expense when incurred. The Company has received no
leasehold improvement incentives by a landlord. No individual lease is material to the Company. Stock-Based Compensation: SFAS No. 123, Accounting for Stock-Based Compensation, encourages but does not require a
fair value based method of accounting for employee stock options or similar equity instruments.
SFAS No. 123 allows an entity to continue to measure compensation costs under Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, but requires pro forma
disclosure of net earnings as if the fair value based method of accounting had been applied. The
Company elected to follow APB No. 25 and related interpretations in accounting for our employee
stock options. In December 2004, the FASB issued SFAS 123 (Revised), Share-Based Payment, a revision of
SFAS 123, Accounting for Stock-Based Compensation. SFAS 123R requires the fair value measurement
of all stock-based payments to employees, including grants of employee stock options, and
recognition of those expenses in the statement of operations. SFAS 123R is effective for annual
reporting periods beginning after June 15, 2005. The Company will continue to account for
stock-based compensation using the intrinsic value method until adoption of SFAS 123R on January 1,
2006. Historically, the compensation expense recognized related to stock options under this APB
No. 25 has been minimal. As a result, adoption of the provisions of SFAS 123R is expected to have
a significant impact to reported net income and earnings per share. The Company has not yet
determined the method of adoption or the effect of adopting SFAS 123R and has not determined
whether the adoption will result in amounts that are similar to the current pro forma disclosures
under SFAS 123. F-12




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##### 



Off-Balance Sheet Arrangements At January 1, 2005, the Company had a guarantee of a franchisee loan relating to the
acquisition of a parcel of land and the construction of a building that is currently being operated
as a Back Yard Burgers franchised location. The original loan balance was $655,000 and the balance
as of January 1, 2005, was approximately $477,000. Known Trends and Uncertainties During 2004, the cost of beef increased approximately 11% over the prior year while the cost
of chicken was relatively stable. In light of what appeared to be a sustained period of increased
beef costs, the Company implemented menu price increases of approximately 2% effective in June 2004
and October 2004 in order to partially offset these increased costs. It may be difficult to raise
menu prices to fully cover any future cost increases, but to the extent permitted by competition,
we may implement additional menu price increases if deemed necessary. Additional margin
improvements may have to be made through operational improvements, equipment advances and increased
volumes to help offset these cost increases, due to the competitive state of the quick-service
restaurant industry. Labor will continue to be a critical factor in the foreseeable future. In most areas where
the Company operates restaurants, there is a shortage of suitable labor. This, in itself, could
result in higher wages as the competition for employees intensifies, not only in the restaurant
industry, but in practically all retail and service industries. It is crucial for the Company to
develop and maintain programs to attract and retain quality employees. 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. We assess the potential impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Management has identified
three company-operated stores which are currently performing at levels which, if improvements in
cash flows are not made, may result in management revising its projected undiscounted future cash
flows for these restaurants. This, in turn, may result in an impairment of value. Management
intends to address these issues through increased local marketing efforts for these locations and
will continue to monitor their performance. Company-operated same-store sales increased 2.8% during 2004 and franchised same-store sales
decreased 0.7% during 2004. Average per-store annual unit sales volumes (Average Unit Volumes)
were $828,000 at company-operated stores and $808,000 at franchised stores during 2004. The
Company will continue with its marketing strategy of enhancing the companys points of
differentiation and further positioning the company as a premium fast-food provider. Management
intends to continue testing new, bold-flavored premium product offerings in order to drive positive
trends for same-store sales and average unit volumes, both of which are key performance indicators
in our industry. The Company will also continue to explore potentially extending operational hours
at both company-operated and franchised stores to accomplish these goals as well. By continuing to
improve in these areas, it will also help to offset some of the potential negative financial
impacts of the other trends and uncertainties listed above. The future success of the company will be determined, to a great extent, by the ability to
positively address these issues. F-13




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##### 



BACK YARD BURGERS, INC. 
 Consolidated Balance Sheets
  
 January 1,
    
    
    January 3,2005
    
    
    2004(restated)ASSETSCash and cash equivalents
    
    $
    2,320
    
    
    $
    2,292Receivables, less allowance for doubtful accounts of
$100 and $65
    
    
    744
    
    
    
    789Inventories
    
    
    259
    
    
    
    251Current deferred tax asset
    
    
    114
    
    
    
    143Prepaid expenses
    
    
    205
    
    
    
    58Total current assets
    
    
    3,642
    
    
    
    3,533Property and equipment, at depreciated cost
    
    
    17,746
    
    
    
    18,672Goodwill
    
    
    1,751
    
    
    
    1,751Noncurrent deferred tax asset
    
    
    491
    
    
    
    339Notes receivable
    
    
    90
    
    
    
    97Other assets
    
    
    549
    
    
    
    377Total assets
    
    $
    24,269
    
    
    $
    24,769LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    1,110
    
    
    $
    1,371Accrued expenses
    
    
    1,324
    
    
    
    2,101Reserve for closed stores
    
    
    
    
    
    
    81Current installments of long-term debt
    
    
    797
    
    
    
    940Income tax payable
    
    
    12
    
    
    
    141Total current liabilities
    
    
    3,243
    
    
    
    4,634Long-term debt, less current installments
    
    
    4,103
    
    
    
    4,736Deferred franchise and area development fees
    
    
    1,457
    
    
    
    1,200Other deferred income
    
    
    379
    
    
    
    520Other deferred liabilities
    
    
    611
    
    
    
    601Total liabilities
    
    
    9,793
    
    
    
    11,691Commitments and contingencies (Note 9 and Note 16)Stockholders equityPreferred stock, $.01 par value; 2,000,000 shares authorized;
19,269 and 19,617 shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 12,000,000 shares authorized;
4,790,474 and 4,748,948 shares issued and outstanding
    
    
    48
    
    
    
    48Paid-in capital
    
    
    10,638
    
    
    
    10,504Treasury stock, at cost, 25,000 shares
    
    
    (28
    )
    
    
    (28
    )Retained earnings
    
    
    3,818
    
    
    
    2,554Total stockholders equity
    
    
    14,476
    
    
    
    13,078Total liabilities and stockholders equity
    
    $
    24,269
    
    
    $
    24,769
 See accompanying notes to consolidated financial statements. F-14




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##### 



BACK YARD BURGERS, INC. 
 Consolidated Statements of Operations
  
 Years EndedJanuary 1,
    
    
    January 3,
    
    
    December 28,2005
    
    
    2004
    
    
    2002(restated)
    
    
    (restated)Revenues:Restaurant sales
    
    $
    34,912
    
    
    $
    34,279
    
    
    $
    30,951Franchise and area development fees
    
    
    620
    
    
    
    378
    
    
    
    227Royalty fees
    
    
    3,108
    
    
    
    2,621
    
    
    
    2,172Advertising fees
    
    
    866
    
    
    
    661
    
    
    
    548Other
    
    
    677
    
    
    
    708
    
    
    
    566Total revenues
    
    
    40,183
    
    
    
    38,647
    
    
    
    34,464Expenses:Cost of restaurant sales
    
    
    11,066
    
    
    
    10,935
    
    
    
    9,335Restaurant operating expenses
    
    
    16,726
    
    
    
    16,494
    
    
    
    14,570General and administrative
    
    
    5,349
    
    
    
    4,533
    
    
    
    4,435Advertising
    
    
    2,652
    
    
    
    2,349
    
    
    
    1,985Depreciation
    
    
    2,096
    
    
    
    1,945
    
    
    
    1,442Total expenses
    
    
    37,889
    
    
    
    36,256
    
    
    
    31,767Operating income
    
    
    2,294
    
    
    
    2,391
    
    
    
    2,697Interest income
    
    
    5
    
    
    

    6
    
    
    
    17Interest expense
    
    
    (479
    )
    
    
    (539
    )
    
    
    (544
    )Other, net
    
    
    (31
    )
    
    
    (86
    )
    
    
    (88
    )Income before income taxes
    
    
    1,789
    
    
    
    1,772
    
    
    
    2,082Income tax expense
    
    
    525
    
    
    
    547
    
    
    
    685Net income
    
    $
    1,264
    
    
    $
    1,225
    
    
    $
    1,397Income per share:Basic
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.30Diluted
    
    $
    0.25
    
    
    $
    0.24
    
    
    $
    0.28Weighted average number of common shares and
common equivalent shares outstanding:Basic
    
    
    4,774
    
    
    
    4,732
    
    
    
    4,709Diluted
    
    
    5,096
    
    
    
    5,053
    
    
    
    5,058
 See accompanying notes to consolidated financial statements. F-15




---



##### 



BACK YARD BURGERS, INC. 
 Consolidated Statements of Changes in Stockholders Equity
  
 RetainedPreferred Stock
    
    
    Common Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    Earnings/Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)
    
    
    TotalBalance at year
ended December
29, 2001 (as
previously reported)
    
    
    19,763
    
    
    
    
    
    
    
    4,645,019
    
    
    
    47
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,195
    
    
    
    377
    
    
    
    10,591Cumulative effect of
restatement on prior
years (see Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (445
    )
    
    
    (445
    )Balance at year ended
December 29, 2001
(as restated)
    
    
    19,763
    
    
    
    
    
    
    
    4,645,019
    
    
    
    47
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,195
    
    
    
    (68
    )
    
    
    10,146Conversion of
preferred stock
    
    
    (146
    )
    
    
    
    
    
    
    146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    6,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    29Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    69,016
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    187Net income (restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,397
    
    
    
    1,397Balance at
year ended
December 28,
2002
    
    
    19,617
    
    
    
    
    
    
    
    4,720,739
    
    
    
    48
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,410
    
    
    
    1,329
    
    
    
    11,759Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    6,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    30Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    21,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    64Net income (restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,225
    
    
    
    1,225Balance at
year ended
January 3,
2004
    
    
    19,617
    
    
    
    
    
    
    
    4,748,948
    
    
    
    48
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,504
    
    
    
    2,554
    
    
    
    13,078Conversion of
preferred stock
    
    
    (348
    )
    
    
    
    
    
    
    348
    
    
    
    Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    6,038
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    31Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    35,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,264
    
    
    
    1,264Balance at
year ended
January 1, 2005
    
    
    19,269
    
    
    $
    
    
    
    
    4,790,474
    
    
    $
    48
    
    
    
    25,000
    
    
    $
    (28
    )
    
    
    10,638
    
    
    
    3,818
    
    
    
    14,476
 See accompanying notes to consolidated financial statements. F-16




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##### 



BACK YARD BURGERS, INC. 
 Consolidated Statements of Cash Flows
  
 Years EndedJanuary 1,
    
    
    January 3,
    
    
    December 28,2005
    
    
    2004
    
    
    2002(restated)
    
    
    (restated)Cash flows from operating activities:Net income
    
    $
    1,264
    
    
    $
    1,225
    
    
    $
    1,397Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property and equipment
    
    
    2,096
    
    
    
    1,945
    
    
    
    1,442Deferred income taxes
    
    
    (123
    )
    
    
    (29
    )
    
    
    382Provision for losses on receivables
    
    
    35
    
    
    
    
    
    
    
    (49
    )(Gain)/loss on sale of assets
    
    
    (68
    )
    
    
    18
    
    
    
    19Changes in assets and liabilities:Receivables
    
    
    10
    
    
    
    (294
    )
    
    
    136Inventories
    
    
    (8
    )
    
    
    25
    
    
    
    (47
    )Prepaid expenses and other current assets
    
    
    (147
    )
    
    
    (5
    )
    
    
    (3
    )Other assets
    
    
    (172
    )
    
    
    8
    
    
    
    35Accounts payable and accrued expenses
    
    
    (1,038
    )
    
    
    (117
    )
    
    
    600Reserve for closed stores
    
    
    (81
    )
    
    
    20
    
    
    
    (22
    )Income taxes payable/receivable
    
    
    (129
    )
    
    
    437
    
    
    
    (258
    )Other deferred income
    
    
    (141
    )
    
    
    248
    
    
    
    (69
    )Other deferred liabilities
    
    
    10
    
    
    
    11
    
    
    
    57Deferred franchise and area development fees
    
    
    257
    
    
    
    696
    
    
    
    219Net cash provided by operating activities
    
    
    1,765
    
    
    
    4,188
    
    
    
    3,839Cash flows from investing activities:Additions to property and equipment
    
    
    (2,178
    )
    
    
    (2,702
    )
    
    
    (4,861
    )Proceeds from sale of property and equipment
    
    
    1,076
    
    
    
    1
    
    
    
    53Investment in joint ventures
    
    
    
    
    
    
    (108
    )
    
    
    Proceeds on notes receivable
    
    
    7
    
    
    
    13
    
    
    
    24Net cash used in investing activities
    
    
    (1,095
    )
    
    
    (2,796
    )
    
    
    (4,784
    )Cash flows from financing activities:Issuance of stock
    
    
    134
    
    
    
    94
    
    
    
    216Principal payments on short-term debt
    
    
    
    
    
    
    (300
    )
    
    
    Proceeds from issuance of short-term debt
    
    
    
    
    
    
    300
    
    
    
    Principal payments on long-term debt
    
    
    (776
    )
    
    
    (3,074
    )
    
    
    (584
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    2,500
    
    
    
    1,062Loan fees paid
    
    
    
    
    
    
    (26
    )
    
    
    Net cash (used) provided by financing activities
    
    
    (642
    )
    
    
    (506
    )
    
    
    694Net increase (decrease) in cash and cash equivalents
    
    
    28
    
    
    
    886
    
    
    
    (251
    )Cash and cash equivalents:Beginning of year
    
    
    2,292
    
    
    
    1,406
    
    
    
    1,657End of year
    
    $
    2,320
    
    
    $
    2,292
    
    
    $
    1,406Supplemental disclosure of cash flow information:Income taxes paid
    
    $
    777
    
    
    $
    139
    
    
    $
    561Interest paid
    
    $
    515
    
    
    $
    544
    
    
    $
    548Noncash operating and investing activitiesAccrued property and equipment additions
    
    $
    
    
    
    $
    627
    
    
    $
    
 See accompanying notes to consolidated financial statements. F-17




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##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activity.Back Yard Burgers, Inc. (the Company) owns and operates quick-service and
fast-casual restaurants and is engaged in the sale of franchises in Back Yard Burgers and the
collection of royalties based upon related franchise sales. The Company grants franchise rights
for the use of the Back Yard Burgers trade name and other associated trademarks, signs, emblems,
logos, slogans and service marks which have been or may be developed. At January 1, 2005, the
Company operated 42 restaurants in three states (Mississippi, Arkansas and Tennessee) and
franchised 114 restaurants in 18 states. Consolidation Policy.The financial statements include the accounts of Back Yard Burgers, Inc. and
its wholly owned subsidiaries, Little Rock Back Yard Burgers, Inc., BYB Properties, Inc. and
Atlanta Burgers BYB Corporation, as well as Back Yard Burgers National Advertising Fund. All
intercompany transactions have been eliminated. Fiscal Year.The Company maintains its financial records on a 52-53 week fiscal year ending on the
Saturday closest to December 31. The year ended January 3, 2004 was a 53 week year and the years
ended December 28, 2002 and January 1, 2005 were 52 week years. Use of Estimates.The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents.The Company considers cash on hand, deposits in banks and short-term
investments with an original maturity of less than three months when purchased as cash and cash
equivalents. Inventories.Inventories primarily consist of food and beverage products and are valued at the
lower of cost or market; cost is determined by the first-in, first-out (FIFO) method. Property and Equipment.Property and equipment is stated at cost, net of accumulated depreciation.
At the time property and equipment are retired, or otherwise disposed of, the asset and
accumulated depreciation are removed from the accounts and any resulting gain or loss is included
in earnings. Improvements to leased properties are depreciated over the shorter of their useful
life or the lease term, which includes renewal option periods where failure to exercise such
options would result in an economic penalty of an amount that such renewal options are reasonably
assured at the inception of the lease. Depreciation is computed on the straight-line method over
the following estimated useful lives: buildings and building improvements  15 to 25 years;
leasehold improvements  7 to 20 years (coincides with the initial lease term); furniture, fixtures
and equipment  5 to 7 years; and transportation vehicles  5 years. Goodwill.As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards
(SFAS) 142, Goodwill and Other Intangible Assets. Under SFAS 142, goodwill is no longer amortized
but is tested for impairment using a fair value approach, at the reporting unit level. A
reporting unit is the operating segment, or a business one level below that operating segment (the
component level) if discrete financial information is prepared and regularly reviewed by
management at the component level. The Company has determined that it operates as one segment and
one reporting unit because the operations of the restaurants are homogeneous and discrete financial
information of different segments or reporting units is not prepared and regularly reviewed by
management. SFAS 142 requires a two-step process for testing impairment. First, the fair value the
Company is compared to its carrying value to determine whether an indication of impairment exists.
Market capitalization is used to determine the fair value of the Company. If an impairment is
indicated, then the fair value of the goodwill is determined by allocation of the Companys fair
value to its assets and liabilities (including any unrecognized intangible assets) as if the
Company had been acquired in a business combination. The amount of impairment for goodwill and
other intangible assets is measured as the excess of its carrying value over its fair value. As
required by SFAS No. 142, the Company completed a transitional impairment test for goodwill as of
January 1, 2002, and also an impairment test as of December 29, 2002, and January 3, 2004, and
January 1, 2005. Based on the results of these tests, the Company did not record any impairment of
our goodwill. Other Deferred Income.The Company adopted EITF 02-16 Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendoreffective December 29, 2002. EITF 02-16
concluded that cash consideration received by a customer from a vendor is presumed to be a
reduction of the prices of the vendors products or services and should, therefore, be
characterized as a reduction of cost of sales when recognized in the customers income statement.
The Company previously recorded volume-based incentives as other revenues, but has reclassified
prior years amounts from F-18




---



##### 



other revenues to cost of restaurant sales to conform with EITF 02-16 for comparative purposes.
The Company has recorded volume-based incentives related to company-operated stores as a reduction
of cost of restaurant sales for all contracts or agreements entered into after December 28, 2002. During 2003 and 2004, the Company received funds from certain vendors relating to future
purchases by the Company. The Company deferred this amount as other deferred income. These funds
are recorded as a reduction in cost of sales 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. The Company recognized approximately $282,000, $261,000
and $223,000 as a reduction in cost of sales in 2004, 2003 and 2002, respectively pursuant to these
arrangements. Income Taxes.Deferred income taxes are provided for the tax effects of temporary differences
between the financial reporting basis and the income tax basis of the Companys assets and
liabilities. Franchise and Area Development Fee Income.Franchise fees are recognized as revenue when
substantially all of the initial services required of the Company have been performed, which
generally coincides with the opening of the franchises. Such services include training and
assistance with site location, equipment vendors, structural design and operating policies. Area
development fees arise when franchisees are awarded the right to develop, own and operate
additional Back Yard Burgers restaurants in specific geographical areas pursuant to the terms of an
Area Development Agreement. Such fees are based on the number of restaurants the franchisee
expects to develop. These fees are included as revenue in accordance with the franchise fee
recognition policy as each additional restaurant is opened. Under the terms of the franchise and area development agreements, the fees are non-refundable
and may be recognized as revenue should the franchisee fail to perform as agreed. Commission costs
associated with the sales of franchise and area development rights are expensed when related
revenues are recognized. Restaurant Sales.Revenue recognition at company-operated restaurants is straightforward as
customers pay for products at the time of sale. The earnings reporting process is covered by the
Companys system of internal controls and generally does not require significant management
judgments and estimates. Royalty and Advertising Fee Income.As part of its franchise agreements, the Company receives a
percentage of each units gross sales (generally 4%). The franchise agreements also provide that
franchisees are required to pay an additional 1% of gross sales to the National Advertising Fund
(see Note 13). These fees are recorded as earned by the Company. Allowance for Doubtful Accounts.The Company calculates royalty income each week based upon
amounts reported by franchisees and provides for estimated losses for revenues that are not likely
to be collected. The Company maintains these allowances for doubtful accounts for estimated losses
resulting from the inability of our franchisees and other borrowers to make required payments. If
the financial conditions of our customers or other borrowers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. Other Revenue.Other revenue is primarily comprised of sales of proprietary food products to
franchisees and payments by certain vendors of the Company primarily as contributions to the
National Advertising Fund based upon purchasing volumes of the our franchisees. These purchases by
franchisees from vendors have no specific incremental impact to costs of the Company. Revenue from
sales of proprietary food products is recognized when the products are shipped. Volume based
revenue and contributions from our vendors are recognized throughout the accounting period based on
the purchase volumes by our franchisees from these vendors. Restaurant Operating Expenses.Restaurant operating expenses include all costs associated with the
operation of the restaurant except corporate overhead, advertising, depreciation and amortization. Preopening costs.The Company expenses preopening costs as incurred. Preopening costs expensed
for fiscal years 2004, 2003 and 2002 were approximately $85,000, $63,000 and $151,000,
respectively. Preopening costs are included in the general and administrative expenses of the
Companys statements of operations. Advertising Costs.Advertising costs, including production costs, are charged to expense as
incurred on the first date of the advertising period. Impairment of Long-Lived Assets.The Company adopted Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets,at the beginning
of 2002. We assess the potential F-19




---



##### 



impairment of long-lived assets whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. At each balance sheet date, the Company assesses whether
there has been impairment in the value of all long-lived assets by determining whether projected
undiscounted future cash flows from operations for each restaurant, as defined in SFAS No. 144,
exceed its net book value as of the assessment date. A new cost basis is established for impaired
assets based on the fair value of these assets as of the date the assets are determined to be
impaired. No impairment charges were recorded by the Company during fiscal years 2004, 2003 or 2002;
however, management has identified three company-operated stores which are currently performing at
levels which, if improvements in cash flows are not made, may result in management revising its
projected undiscounted future cash flows for these restaurants. This, in turn, may result in an
impairment of value. Management intends to address these issues through increased local marketing
efforts for these locations and will continue to monitor their performance. In 2003, the Company recorded $78,000 in impairment charges in its statement of operations;
however, $59,000 of this amount was a lease payment reserve for closed stores described below and
$19,000 was a loss on the disposal of assets. The Company has reclassified the $59,000 to
restaurant operating expenses and has reclassified the $19,000 to other, net expenses to
appropriately present these amounts in the Companys statement of operations for the year ended
January 3, 2004. The Company had $61,000 in reserves for closed properties at the end of fiscal year 2002.
Lease payments of $39,000 were incurred and charged against this additional reserve during 2003.
The Company also recorded $59,000 in additional closed store reserves during 2003 related to future
lease payments of closed stores, net of estimated sub-lease income. As of January 3, 2004, the
companys remaining accrual for future lease obligations related to closed stores was $81,000. During 2004, lease payments of $65,000 in 2004 were incurred and charged against this
reserve, and $16,000 in lease obligations were forgiven due to the negotiation of an
early buyout of future lease obligations for one of the closed stores. The company recorded the
$16,000 in forgiven lease obligations as a reduction in restaurant operating expenses. As of
January 1, 2005, the Company had no remaining accrual for future lease obligations for closed
stores. Leases.When determining the lease term for purposes of recording depreciation and rent or for
evaluating whether a lease is capital or operating, the Company includes option periods for which
failure to renew the lease imposes an economic penalty on the Company of such an amount that a
renewal appears, at the inception of the lease, to be reasonably assured. For operating leases, minimum lease payments, including minimum scheduled rent increases, are
recognized as rent expense on a straight line basis over the lease term as that term is defined in
SFAS No. 13, as amended, including any option periods considered in the lease term and any periods
during which the Company has use of the property but is not charged rent by a landlord (rent
holiday). Contingent rentals are generally based on either a percentage of restaurant sales or as
a percentage of restaurant sales in excess of stipulated amounts, and thus are not included in
minimum lease payments but are included in rent expense when incurred. The Company has received no
leasehold improvement incentives by a landlord. No individual lease is material to the Company. Preferred Stock.In accordance with the provisions of the Companys Restated Certificate of
Incorporation regarding preferred stock, each share of preferred stock is convertible into one
share of common stock, at the option of the holder. As of January 1, 2005, all but 19,269 shares
of preferred stock had been converted to common stock. Earnings Per Share.The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings per Share, which requires the presentation of
basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the earnings of the
entity using the treasury stock method for stock options (Note 15). Stock-Based Employee Compensation.The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees,and related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for its stock-based compensation. Had
compensation cost for the Companys stock option plan been determined based on the fair value at
the grant date for awards in 2004, 2003 and 2002 under the plan consistent with the fair value
method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation,the Companys F-20




---



##### 



operating results for 2004, 2003 and 2002 would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data): 2004
    
    
    2003
    
    
    2002(restated)
    
    
    (restated)Net income:As reported
    
    $
    1,264
    
    
    $
    1,225
    
    
    $
    1,397Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all rewards,
net of related taxes
    
    
    (263
    )
    
    
    (181
    )
    
    
    (252
    )Pro forma
    
    
    1,001
    
    
    
    1,044
    
    
    
    1,145Basic earnings per share:As reported
    
    
    0.26
    
    
    
    0.26
    
    
    
    0.30Pro forma
    
    
    0.21
    
    
    
    0.22
    
    
    
    0.24Diluted earnings per share:As reported
    
    
    0.25
    
    
    
    0.24
    
    
    
    0.28Pro forma
    
    
    0.20
    
    
    
    0.21
    
    
    
    0.23
 The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions using grants in 2004, 2003 and
2002, respectively: 2004
    
    
    2003
    
    
    2001Average expected life (years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Average expected volatility
    
    
    63.4
    %
    
    
    74.9
    %
    
    
    74.7
    %Risk-free interest rates
    
    
    3.7
    %
    
    
    3.4
    %
    
    
    4.6
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 The pro forma results reported above will not be representative of the effect on operating
results for future years because we may make greater or less use of stock-based compensation in
future periods. Fair Value of Financial Instruments.At January 1, 2005, the Company did not have outstanding any
financial derivative instruments. The carrying amounts of cash and receivables approximate fair
value because of the short maturity of those instruments. The fair value of the Companys
long-term debt is estimated based on the current borrowing rates available to the Company for bank
loans with similar terms and average maturities. The fair value was approximately $5.1 million and
6.2 million as of January 1, 2005 and January 3, 2004, respectively. NOTE 2  RECENTLY ISSUED ACCOUNTING STANDARDS In November 2004, the FASB issued SFAS No. 151, Inventory Costs, which clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material. SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 151 will have
a material impact on its financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary Assets, which
eliminates the exception for non-monetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of non-monetary assets that do not have commercial
substance. SFAS No. 153 will be effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153
will have a material impact on its financial statements. In December 2004, the FASB issued SFAS 123 (Revised), Share-Based Payment, a revision of
SFAS 123, Accounting for Stock-Based Compensation. SFAS 123R requires the fair value measurement
of all stock-based payments to employees, including grants of employee stock options, and
recognition of those expenses in the statement of operations. SFAS 123R is effective for annual
reporting periods beginning after June 15, 2005. The Company will continue to account for
stock-based compensation using the intrinsic value method until adoption of F-21




---



##### 



SFAS 123R on January 1, 2006. Historically, the compensation expense recognized related to
stock options under its current method of accounting for stock issued to employees, Accounting
Principles Board Option (APB) No. 25, has been minimal. As a result, adoption of the provisions
of SFAS 123R are expected to have a significant impact to reported net income and earnings per
share. The Company has not yet determined the method of adoption or the effect of adopting SFAS
123R and has not determined whether the adoption will result in amounts that are similar to the
current pro forma disclosures under SFAS 123. NOTE 3  RESTATEMENT OF FINANCIAL STATEMENTS The Company has conducted a review of its accounting policies applicable to leases, leasehold
improvements, rent commencement, deferred rent, and related tax effect. This review was prompted
in part by a February 7, 2005 letter from the Office of the Chief Accountant of the Securities and
Exchange Commission (SEC) to the American Institute of Certified Public Accountants regarding
proper accounting for certain operating lease matters under generally accepted accounting
principles (GAAP). Lease Term Historically, when accounting for leases with renewal options, the Company recorded rent
expense on a straight-line basis over the initial non-cancelable lease term without regard for
renewal options or any periods during which the Company had use of the property but was not charged
rent by a landlord (rent holiday). The Company has concluded that its calculation of straight
line rent expense should be based on the lease term as defined in SFAS No. 13, Accounting for
Leases,as amended, which in most cases exceeds the initial term of the lease. As a result, the
Company has restated its financial statements to recognize rent expense on the straight-line basis
over the lease term, including rent holidays and option periods for which failure to renew the
lease imposes an economic penalty on the Company of such an amount that a renewal appears, at the
inception of the lease, to be reasonably assured. For purposes of calculating straight-line rents,
the lease term commences on the date the lessee obtains control over the property, which is
generally when the lessors property is substantially complete and is ready for tenant
improvements. As a result, the Companys deferred rent liability, included in other deferred
liabilities in the accompanying financial statements, have increased on a restated basis. Depreciation Historically, the Company depreciated its buildings, leasehold improvements and other
long-lived assets on leased properties over a period that included both the initial non-cancelable
term of the lease and all option periods provided for in the lease (or the useful life of the
assets if shorter). The Company has concluded that these assets should be amortized over the
shorter of the lease term or the useful life of the assets. As a result, it has restated its
financial statements to recognize depreciation on leasehold improvements over the shorter of the
lease term or the useful life of the assets. Sale Leaseback Transactions The Company has also restated for the impact of a land lease that was previously
accounted for as an operating lease. It was determined that the lease did not qualify for sale
leaseback treatment under SFAS 98, and should have been accounted for as financing. Restatement The Company restated its consolidated balance sheet at January 3, 2004, and the consolidated
statements of operations, cash flows and stockholders equity for the years ended January 3, 2003
and December 28, 2002. The impact of the restatement was a reduction of net income of $84,000 in
2003 and $80,000 in 2002. Additionally, the restatement has been reflected as a cumulative effect
to accumulated deficit as of December 29, 2001 in the accompanying consolidated statements of
stockholders equity for the effects of the errors prior to December 29, 2001. The Company also
restated the quarterly financial information for fiscal 2003 and the first three quarters of 2004
(see Note 17 of Notes to Consolidated Financial Statements). F-22




---



##### 



Following is a summary of the effects of these corrections on the Companys consolidated
balance sheets as of January 3, 2004, as well as the effects of these corrections on the Companys
consolidated statements of operations and cash flows for fiscal years 2003 and 2002. Consolidated Balance SheetAs previouslyJanuary 3, 2004
    
    reported
    
    
    Adjustments
    
    
    As restatedProperty and equipment, at depreciated cost
    
    $
    18,717
    
    
    
    (45
    )
    
    
    18,672Noncurrent deferred tax asset
    
    
    25
    
    
    
    314
    
    
    
    339Total assets
    
    
    24,500
    
    
    
    269
    
    
    
    24,769Long-term debt, less current installments
    
    
    4,410
    
    
    
    326
    
    
    
    4,736Other deferred liabilities
    
    
    49
    
    
    
    552
    
    
    
    601Total liabilities
    
    
    10,813
    
    
    
    878
    
    
    
    11,691Retained earnings
    
    
    3,163
    
    
    
    (609
    )
    
    
    2,554Total shareholders equity
    
    
    13,687
    
    
    
    (609
    )
    
    
    13,078Total liabilities and shareholders equity
    
    
    24,500
    
    
    
    269
    
    
    
    24,769
 Consolidated Statements of OperationsAs previouslyFiscal year ended January 3, 2004
    
    reported
    
    
    Adjustments
    
    
    As restatedRestaurant operating expenses (1)
    
    
    16,516
    
    
    
    (22
    )
    
    
    16,494Depreciation and amortization
    
    
    1,840
    
    
    
    105
    
    
    
    1,945Operating income (1)
    
    
    2,474
    
    
    
    (83
    )
    
    
    2,391Interest expense
    
    
    (495
    )
    
    
    (44
    )
    
    
    (539
    )Income before income taxes
    
    
    1,899
    
    
    
    (127
    )
    
    
    1,772Income tax expense
    
    
    590
    
    
    
    (43
    )
    
    
    547Net income
    
    
    1,309
    
    
    
    (84
    )
    
    
    1,225Net income per common shares  basic
    
    
    0.28
    
    
    
    (0.02
    )
    
    
    0.26Net income per common shares  diluted
    
    
    0.26
    
    
    
    (0.02
    )
    
    
    0.24Fiscal year ended December 28, 2002Restaurant operating expenses
    
    
    14,536
    
    
    
    34
    
    
    
    14,570Depreciation and amortization
    
    
    1,379
    
    
    
    63
    
    
    
    1,442Operating income
    
    
    2,794
    
    
    
    (97
    )
    
    
    2,697Interest expense
    
    
    (520
    )
    
    
    (24
    )
    
    
    (544
    )Income before income taxes
    
    
    2,203
    
    
    
    (121
    )
    
    
    2,082Income tax expense
    
    
    726
    
    
    
    (41
    )
    
    
    685Net income
    
    
    1,477
    
    
    
    (80
    )
    
    
    1,397Net income per common shares  basic
    
    
    0.31
    
    
    
    (0.01
    )
    
    
    0.30Net income per common shares  diluted
    
    
    0.29
    
    
    
    (0.01
    )
    
    
    0.28
 Consolidated Statements of Cash FlowsAs previouslyFiscal year ended January 3, 2004
    
    reported
    
    
    Adjustments
    
    
    As restatedNet cash provided by operating activities
    
    
    4,189
    
    
    
    (1
    )
    
    
    4,188Net cash used by financing activities
    
    
    (507
    )
    
    
    1
    
    
    
    (506
    )Fiscal year ended December 28, 2002Net cash provided by operating activities
    
    
    3,842
    
    
    
    (3
    )
    
    
    3,839Net cash used by investing activities
    
    
    (4,462
    )
    
    
    (322
    )
    
    
    (4,784
    )Net cash provided by financing activities
    
    
    369
    
    
    
    325
    
    
    
    694
 (1) As described in Note 1, the Company reclassified $59,000 in closed store reserves as
restaurant operating expenses and $19,000 in a loss on the disposal of assets as other, net
expenses. These costs were previously reported as $78,000 in impairment charges in the Companys
statement of operations for the year ended January 3, 2004. This reclassification impacted the
previously reported figures for these line items. F-23




---



##### 



NOTE 4  ACCOUNTS RECEIVABLE Corporate receivables and National Advertising Fund receivables represent amounts due from
franchisees for contractual obligations and for product purchases. A summary of accounts
receivable follows (in thousands): January 1,
    
    
    January 3,2005
    
    
    2004Corporate receivables
    
    $
    336
    
    
    $
    221National Advertising Fund receivables
    
    
    192
    
    
    
    74Credit card receivables
    
    
    94
    
    
    
    74Rebate receivables
    
    
    55
    
    
    
    165Insurance claim receivables
    
    
    2
    
    
    
    198Other
    
    
    165
    
    
    
    122844
    
    
    
    854Allowance for doubtful accounts
    
    
    (100
    )
    
    
    (65
    )$
    744
    
    
    $
    789
 NOTE 5  PROPERTY AND EQUIPMENT Summaries of property and equipment follow (in thousands): January 1,
    
    
    January 3,2005
    
    
    2004(restated)Land
    
    $
    3,774
    
    
    $
    4,178Buildings
    
    
    11,563
    
    
    
    11,341Building and site improvements
    
    
    3,076
    
    
    
    3,174Fixtures and equipment
    
    
    12,030
    
    
    
    10,779Transportation vehicles
    
    
    277
    
    
    
    38330,720
    
    
    
    29,855Accumulated depreciation and amortization
    
    
    (12,974
    )
    
    
    (11,183
    )$
    17,746
    
    
    $
    18,672
 Approximately $4.9 million and $4.9 million of the total fixed assets above relate to assets,
primarily buildings, under capital leases and held by the Company as of
January 1, 2005 and January 3, 2004, respectively. Related accumulated depreciation for these
assets was approximately $1.4 million and $1.2 million for fiscal years 2004 and 2003,
respectively. NOTE 6  INVESTMENT IN JOINT VENTURES As of December 28, 2002, the Company had invested a total of $200,000 for 23%-25% interests
in four joint ventures for the purpose of operating Back Yard Burgers restaurants. The Company
invested an additional $108,000 in one of the joint ventures during the 53 weeks ended January 3,
2004, for the purpose of paying down the debt of the joint venture. Two of the joint ventures
purchased a building and land from the Company. No gain or loss was recorded by the Company in
connection with these sales. Two joint ventures purchased land from a third party and built a
building. The Company then entered into a long-term lease with each joint venture. Three of the
leases are classified as capital leases and the fixed assets are recorded on the
Companys balance sheet along with an obligation for the present
value of the future lease payments. The
remaining lease is classified as an operating lease. F-24




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##### 



NOTE 7  ACCRUED EXPENSES Summaries of accrued expenses follow (in thousands): January 1,
    
    
    January 3,2005
    
    
    2004Payroll related
    
    $
    600
    
    
    $
    776Equipment
    
    
    
    
    
    
    627Sales taxes
    
    
    229
    
    
    
    302Property taxes
    
    
    128
    
    
    
    125Advertising
    
    
    69
    
    
    
    Interest
    
    
    37
    
    
    
    39Utilities
    
    
    32
    
    
    
    19Other miscellaneous accruals
    
    
    229
    
    
    
    213$
    1,324
    
    
    $
    2,101
 NOTE 8  DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES In addition to offering single unit franchise agreements, the Company also promotes
franchisees to enter into area development agreements. The area development agreement grants to
the franchisee the exclusive right to develop and open a specified number of restaurants within a
limited period of time and in a defined geographic territory and thereafter to operate each
restaurant in accordance with the terms and conditions of the franchise agreement. The franchise
agreement grants an exclusive license at a specified location to operate a restaurant in
accordance with the Back Yard Burgers system and to utilize the Companys trademarks, service
marks and other rights of the Company relating to the sale of its menu items. At January 1, 2005
deferred fees received for certain franchise and area development rights, net of commissions
paid, include amounts sold during the following years (in thousands): 2004
    
    $
    5982003
    
    
    700Previous years
    
    
    159$
    1,457
 NOTE 9  INDEBTEDNESS Long-term debt is collateralized by property and equipment with a net book value
aggregating $8,298,000. The balances consist of the following (in thousands): January 1,
    
    
    January 3,2005
    
    
    2004(restated)Notes payable, payable in monthly installments ranging from $2 to $47,
including interest ranging from 5.2% to 9.6%
    
    $
    1,737
    
    
    $
    2,220Capital lease obligations for leased buildings, payable in monthly
installments of approximately $5, and effective interest rates ranging
from 8.7% to 8.9%
    
    
    2,908
    
    
    
    3,124Equipment-related capital lease obligations, payable in monthly
installments of approximately $5, and effective interest rates ranging
from 7.9% to 9.4%
    
    
    204
    
    
    
    320Capital lease obligations to Lesters Back Yard Burgers Joint Venture I,
II and IV (See Note 6), payable in monthly installments ranging
from $4 to $7 and effective interest rates ranging from 12.0% to
12.5%
    
    
    1,987
    
    
    
    2,035Notes payable to a leasing company, payable in monthly installments
ranging from $1 to $6, including interest of 14.1%
    
    
    75
    
    
    
    3196,911
    
    
    
    8,018Less interest payments for capital leases
    
    
    (2,011
    )
    
    
    (2,342
    )Less current installments
    
    
    (797
    )
    
    
    (940
    )Total
    
    $
    4,103
    
    
    $
    4,736
 F-25




---



##### 



The principal maturities of all long-term debt outstanding as of January 1, 2005, are as
follows: $797,000 in 2005, $732,000 in 2006, $765,000 in 2007, $274,000 in 2008, $192,000 in 2009
and $2,140,000 thereafter. Scheduled interest payments on capital leases as of January 1, 2005 are
as follows: $310,000 in 2005, $292,000 in 2006, $272,000 in 2007, $254,000 in 2008, $229,000 in
2009 and $654,000 thereafter. On February 11, 2003, the Company entered a loan agreement with a financial institution in the
amount of $5,000,000. The loan agreement comprised the following three components: (1) a
$2,500,000 five-year loan with a fixed rate of 5.2%. The funds from the five-year term loan were
used to refinance approximately $2.3 million of existing notes payable to financial institutions
with an average interest rate of 6.8% and maturity dates ranging from one to two years, (2) a $2.0
million draw down line for future expansion with a variable rate of interest equal to the one month
LIBOR rate plus a spread not to exceed 3% that is calculated based on certain financial covenants
and (3) a $500,000 revolver line with a variable rate of interest equal to the one month LIBOR rate
plus a spread not to exceed 3% that is calculated based on certain financial covenants, the most
restrictive requiring the Company to maintain a debt coverage ratio of at least 1.5 to 1.0. As of
January 1, 2005, the Companys debt coverage ratio was 2.7 to 1.0. The revolver line replaced the
$750,000 line of credit that was in place as of December 28, 2002. The Company has three capital lease obligations relating to three buildings in which the
Company operates restaurants. Two of these obligations were entered during fiscal year 2001 and
the third entered during fiscal year 2002. All three of these leases have an initial term of 15
years with a minimum of four 5-year renewal options at the discretion of the Company. The Company also has two capital lease obligations relating to the acquisition of certain
restaurant equipment. One of these leases was entered in September of 2000 and the other in
October of 2002, both having lease terms of 60 months. On October 4, 1996, the Company received a commitment (the Commitment) from a leasing
company for a loan transaction. The Commitment provides the Company with up to $2,000,000 and
bears interest of approximately 14.1%. The Commitment is collateralized by certain real and
personal property to be constructed and/or acquired with the commitment proceeds. As of January 1,
2004, borrowings outstanding under the Commitment are $75,000, and no additional borrowings are
planned under the Commitment. At January 1, 2005, the Company had a guarantee of a franchisee loan relating to the
acquisition of a parcel of land and the construction of a building that is currently being operated
as a Back Yard Burgers franchised location. The original loan balance was $655,000 and the balance
as of January 1, 2005, was approximately $477,000. NOTE 10  OPERATING LEASES Operating leases relate to leased land sites for company-operated restaurants and office space
for corporate operations. All leases contain renewal options. The future minimum rental payments
under operating lease agreements as of January 1, 2005 are as follows (in thousands): 2005
    
    $
    1,3452006
    
    
    1,1942007
    
    
    8322008
    
    
    6272009
    
    
    435Thereafter
    
    
    1,645$
    6,078
 Rent expense was $1,475,000, $1,443,000 and $1,392,000 in 2004, 2003 and 2002, respectively. F-26




---



##### 



NOTE 11  RELATED PARTY TRANSACTIONS In July of 2002, the Company entered into a financing transaction for a new restaurant site
and building with certain officers and directors of the Company. The total value of the
transaction was $812,500. The Company recorded $490,000 as a capital lease for the construction
of the building and $322,500 as financing for the land on which the building is located.
Fair market values were used as the basis for assigning these respective values to the building
and land. The effective interest rate of the transaction was approximately 10.7%. The
transaction was reviewed and approved by the Companys Board of Directors. NOTE 12  INCOME TAXES Income tax expense for the following tax years is comprised of (in thousands): 2004
    
    
    2003
    
    
    2002(restated)
    
    
    (restated)Federal, current
    
    $
    638
    
    
    $
    569
    
    
    $
    303State, current
    
    
    10
    
    
    
    7
    
    
    
    Federal, deferred
    
    
    (131
    )
    
    
    (29
    )
    
    
    382State, deferred
    
    
    8
    
    
    
    
    
    
    
    $
    525
    
    
    $
    547

    
    
    $
    685
 Deferred income taxes are provided in recognition of the future tax consequences attributable
to the differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The deferred tax assets (liabilities) comprise the following (in thousands): January 1,
    
    
    January 3,2005
    
    
    2004(restated)CurrentCurrent deferred tax assets:Allowance for doubtful receivable
    
    $
    39
    
    
    $
    22Accrued expenses
    
    
    73
    
    
    
    82Trademark amortization
    
    
    2
    
    
    
    Other
    
    
    
    
    
    
    39114
    
    
    
    143Current deferred tax liabilities
    
    
    
    
    
    
    Net current deferred tax asset
    
    $
    114
    
    
    $
    143NoncurrentNoncurrent deferred tax assets:Franchise and area development fees
    
    $
    566
    
    
    $
    408Net operating loss carryforwards
    
    
    374
    
    
    
    394Alternative minimum tax credit carryforwards
    
    
    
    
    
    
    Trademark amortization
    
    
    24
    
    
    
    Goodwill amortization
    
    
    (31
    )
    
    
    54Accrued expenses
    
    
    186
    
    
    
    184Other deferred income
    
    
    168
    
    
    
    43Other
    
    
    55
    
    
    
    42Gross noncurrent deferred tax assets
    
    
    1,342
    
    
    
    1,125Noncurrent deferred tax liabilities:Depreciation
    
    
    (485
    )
    
    
    (392
    )Gross noncurrent deferred tax liabilities
    
    
    (485
    )
    
    
    (392
    )Net noncurrent deferred tax assets
    
    
    857
    
    
    
    733Deferred tax asset valuation allowance
    
    
    (366
    )
    
    
    (394
    )$
    491
    
    
    $
    339
 F-27




---



##### 



The ultimate realization of these assets is dependent upon the generation of future taxable
income sufficient to offset the related deductions and loss carryforwards within the applicable
carryforward period. The Company evaluates the need for a valuation allowance and, based on the
weight of available evidence, has determined that it is more likely than not that certain deferred
tax assets will eventually be realized. The valuation allowance reflected above is based on
managements conclusion that it is more likely than not that certain state tax carryforward items
will expire unused. A reconciliation of the statutory Federal and State income tax rates to the income tax
provision is as follows: 2004
    
    
    2003
    
    
    2002(restated)
    
    
    (restated)Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Computed tax at 35%
statutory rate
    
    $
    626
    
    
    
    35.0
    
    
    $
    620
    
    
    
    35.0
    
    
    $
    729
    
    
    
    35.0State income taxes, net of
federal benefit
    
    
    7
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Work opportunity tax credit
    
    
    (100
    )
    
    
    (5.6
    )
    
    
    (62
    )
    
    
    (3.5
    )
    
    
    
    
    
    
    0.0Valuation allowance releases
    
    
    (28
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    20
    
    
    
    1.1
    
    
    
    (11
    )
    
    
    (0.6
    )
    
    
    (44
    )
    
    
    (2.1
    )$
    525
    
    
    
    29.3
    
    
    $
    547
    
    
    
    30.9
    
    
    $
    685
    
    
    
    32.9
 As of January 1, 2005, the Company has net operating loss carryforwards available for state
income tax reporting purposes on a consolidated basis of approximately $9.5 million. These net
operating loss carryforwards expire between 2005 and 2019. NOTE 13  NATIONAL ADVERTISING FUND As part of the standard franchise agreement, each operating unit contributes 1% of its sales
to a National Advertising Fund. Under the terms of the agreement, at least 50% of these funds must
be spent on the creation of marketing tools, such as advertising copy for use on local radio and
television and other collateral material for the operating units. As a general rule, the funds are
not used for the purchase and placement of media advertising. The remaining funds are available
for use by the Company on such items as testing and development of new products, investigating
improvements in operating methods, or other purposes that the Company shall deem to be in the
interest of improving operations and earnings of the Company and its franchisees. NOTE 14  STOCK OPTION AND BENEFIT PLANS In 1992, the Board of Directors of the Company and the shareholders authorized the adoption of
an Incentive Stock Option Plan (ISOP) for the Companys employees. As amended in 1993, an
aggregate of 176,969 shares of common stock may be granted under the ISOP. Options granted under
the ISOP may not be granted at a price less than the fair market value of the common stock on the
date of grant (or 110% of fair market value in the case of persons holding 10% or more of the
voting stock of the Company). The aggregate fair market value of shares for which options are
granted to any employee during any calendar year may not exceed $100,000. The options expire ten
years from the date of grant. No future grants will be made from this plan. In May 1995, the Board of Directors of the Company and the shareholders authorized the
adoption of an Incentive Award Plan (IAP) for the Companys employees. An aggregate of 450,000
shares of common stock may be granted under the IAP, as amended in May 1997. Options granted under
the IAP may be designated by the Compensation Committee of the Board of Directors as Incentive
Stock Options or Non-Qualified Stock Options. Non-Qualified Stock Options granted under the IAP
may not be granted at a price less than par value of the common stock. Incentive Stock Options
granted under the IAP may not be granted at a price less than the fair market value of the common
stock on the date of grant (or 110% of fair market value in the case of persons holding 10% or more
of the voting stock of the Company). The aggregate fair market value of shares for which options
are granted to any employee during any calendar year may not exceed $100,000. The term of the
options shall be set by the F-28




---



##### 



Compensation Committee of the Board of Directors and no term shall exceed a reasonable time period.
In the case of Incentive Stock Options, the term shall not be more than ten years from the date of
grant. No future grants will be made from this plan. Under the IAP, the Compensation Committee of the Board of Directors may award Restricted Stock
and/or a Performance Award to selected employees. A Performance Award shall mean cash bonus, stock
bonus or other performance or incentive award that is paid in cash, stock or a combination of both.
The Company has not issued any Restricted Stock or Performance Awards. In May 2002, the Board of Directors of the Company and the shareholders authorized the
adoption of an Equity Incentive Plan (EIP) for the Companys employees and directors. An
aggregate of 225,000 shares of common stock may be granted under the EIP. In 2004, the plan was
amended with shareholder approval to (i) increase the number of shares of common stock that may be
issued under the Plan by 400,000 shares from 225,000 shares to 625,000 shares, and (ii) provide
that the Board may not materially amend the Plan without the approval of the Companys
stockholders. Options granted under the EIP may be designated by the Compensation Committee of
the Board of Directors as Incentive Stock Options or Non-Qualified Stock Options. Non-Qualified
Stock Options granted under the EIP may be granted at a price less than fair market value of the
common stock on the grant date. Incentive Stock Options granted under the EIP may not be granted
at a price less than the fair market value of the common stock on the date of grant (or 110% of
fair market value in the case of persons holding 10% or more of the voting stock of the Company).
The aggregate number of shares for which Awards are granted to any employee during any calendar
year may not exceed 35,000. The term of the options shall be set by the Compensation Committee of
the Board of Directors and shall not be more than ten years from the date of grant. Additionally, under the EIP, the Compensation Committee of the Board of Directors may award
Restricted Stock and/or stock appreciation rights (SARs) to selected employees. The Company has
not issued any Restricted Stock or SARs. A summary of activity in the above option plans for the years ended January 1, 2005, January
1, 2004, and December 28, 2002 follows: 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    

    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at
beginning of year
    
    
    659,051
    
    
    $
    3.24
    
    
    
    498,961
    
    
    $
    2.58
    
    
    
    440,967
    
    
    $
    1.86Granted
    
    
    7,000
    
    
    
    7.90
    
    
    
    223,000
    
    
    
    4.93
    
    
    
    131,000
    
    
    
    5.03Exercised
    
    
    (35,140
    )
    
    
    2.93
    
    
    
    (21,342
    )
    
    
    3.03
    
    
    
    (69,016
    )
    
    
    2.59Canceled
    
    
    (1,335
    )
    
    
    3.07
    
    
    
    (41,568
    )
    
    
    4.63
    
    
    
    (3,990
    )
    
    
    2.52Outstanding at end of year
    
    
    629,576
    
    
    
    3.29
    
    
    
    659,051
    
    
    
    3.24
    
    
    
    498,961
    
    
    
    2.58Exercisable at end of year
    
    
    599,216
    
    
    
    3.13
    
    
    
    535,741
    
    
    
    2.65
    
    
    
    383,461
    
    
    
    2.50
 A summary of information about the Companys stock options outstanding at January 1, 2005
follows: Weighted
    
    
    
    
    
    
    
    
    
    
    Weightedaverage
    
    
    Weighted
    
    
    
    
    
    
    Average
    
    
    WeightedRange of
    
    
    
    
    
    remaining
    
    
    average
    
    
    
    
    
    
    remaining
    
    
    Averageexercise
    
    Options
    
    
    contractual
    
    
    exercise
    
    
    Options
    
    
    contractual
    
    
    Exerciseprices
    
    Outstanding
    
    
    life
    
    
    price
    
    
    exercisable
    
    
    Life
    
    
    Price$0.50 - $1.00
    
    
    115,000
    
    
    
    6.0
    
    
    $
    0.67
    
    
    
    115,000
    
    
    
    6.0
    
    
    $
    0.67$1.00 - $2.00
    
    
    165,786
    
    
    
    4.7
    
    
    
    1.53
    
    
    
    165,786
    
    
    
    4.7
    
    
    
    1.53$2.00 - $3.00
    
    
    9,790
    
    
    
    3.1
    
    
    
    2.25
    
    
    
    9,790
    
    
    
    3.1
    
    
    
    2.25$3.00 - $4.00
    
    
    214,000
    
    
    
    7.5
    
    
    
    3.94
    
    
    
    214,000
    
    
    
    7.5
    
    
    
    3.94$6.00 - $7.00
    
    
    98,000
    
    
    
    9.0
    
    
    
    6.24
    
    
    
    72,260
    
    
    
    9.0
    
    
    
    6.24$7.00 - $9.00
    
    
    7,000
    
    
    
    9.3
    
    
    
    7.90
    
    
    
    2,380
    
    
    
    9.3
    
    
    
    7.90$10.00 -$12.00
    
    
    20,000
    
    
    
    7.4
    
    
    
    10.38
    
    
    
    20,000
    
    
    
    7.4
    
    
    
    10.38$0.50 -$12.00
    
    
    629,576
    
    
    
    6.7
    
    
    $
    3.29
    
    
    
    599,216
    
    
    
    6.6
    
    
    $
    3.13
 F-29




---



##### 



In May 1995, the Board of Directors of the Company and the shareholders authorized the
adoption of an Employee Stock Purchase Plan (ESPP) for the Companys employees. An aggregate of
225,000 shares of common stock may be issued under the ESPP. Shares purchased under the ESPP shall
be sold to participants at 85% of the reported price and the maximum number of shares that can be
purchased by a participant is 1,000 shares per quarter. The ESPP shall continue in effect through
May 31, 2005. During 2004, 2003 and 2002, 6,038, 6,867 and 6,558 shares were purchased,
respectively, under the ESPP. As of January 1, 2005, a total of 126,808 shares have been purchased
under the ESPP since its inception in May 1995. NOTE 15- EARNINGS PER SHARE A reconciliation of basic earnings per share to diluted earnings per share follows (in
thousands, except per share data): 2004
    
    
    2003
    
    
    2002(restated)
    
    
    (restated)Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-ShareIncome
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Shares
    
    
    AmountBasic EPSIncome available to
common stockholders
    
    $
    1,264
    
    
    
    4,774
    
    
    $
    0.26
    
    
    $
    1,225
    
    
    
    4,732
    
    
    $
    0.26
    
    
    $
    1,397
    
    
    
    4,709
    
    
    $
    0.30Effect of Dilutive
SecuritiesConvertible preferred
stock
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Stock options
    
    
    
    
    
    
    302
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    329Diluted EPSIncome available to
common stockholders
plus assumed
conversions
    
    $
    1,264
    
    
    
    5,096
    
    
    $
    0.25
    
    
    $
    1,225
    
    
    
    5,053
    
    
    $
    0.24
    
    
    $
    1,397
    
    
    
    5,058
    
    
    $
    0.28
 Approximately 74,000, 49,000 and 15,000 options to purchase the Companys common stock
were not included in the above calculation for the years 2004, 2003 and 2002, respectively, because
the inclusion of these options would have been anti-dilutive. Income available to common
stockholders for each year presented above has not been affected by preferred dividends because the
Company has not declared any dividends on its preferred shares. NOTE 16- COMMITMENTS AND CONTINGENCIES Concentration of Risk.Financial instruments which could subject the Company to concentration
of credit risk are primarily cash and cash equivalents and receivables. The Company places its
cash and cash equivalents in insured depository institutions. At January 1, 2005, the Companys
uninsured cash balance totaled $2,162,000. The Company performs ongoing credit evaluations of its
franchisees and when necessary maintains reserves for potential credit losses on receivables, which
are not collateralized. Legal Proceedings.The Company is subject to legal proceedings, claims and liabilities, such
as sexual harassment, slip and fall cases, etc., which arise in the ordinary course of business and
are generally covered by insurance. In the opinion of management, the amount of the ultimate
liability with respect to those actions will not have a materially adverse impact on our financial
position or results of operations and cash flows. F-30




---



##### 



NOTE 17  QUARTERLY FINANCIAL DATA (Unaudited) The following tables present selected quarterly financial data for the periods ending as
indicated and restated as discussed in Note 3 in the notes to the consolidated financial statements
(in thousands, except net income per share): As Reported
    
    
    Adjustments
    
    
    Restated(a)Quarter Ended:
    
    3/29/03
    
    
    6/28/03
    
    
    9/27/03
    
    
    1/3/04
    
    
    3/29/03
    
    
    9/28/03
    
    
    9/27/03
    
    
    1/3/04
    
    
    3/29/03
    
    
    9/28/03
    
    
    9/27/03
    
    
    1/3/04Total revenue(b)
    
    
    8,522
    
    
    
    10,138
    
    
    
    9,750
    
    
    
    10,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,522
    
    
    
    10,138
    
    
    
    9,750
    
    
    
    10,237Operating income
    
    
    523
    
    
    
    807
    
    
    
    455
    
    
    
    689
    
    
    
    (18
    )
    
    
    (18
    )
    
    
    (22
    )
    
    
    (25
    )
    
    
    505
    
    
    
    789
    
    
    
    433
    
    
    
    664Net Income
    
    
    250
    
    
    
    435
    
    
    
    202
    
    
    
    422
    
    
    
    (19
    )
    
    
    (19
    )
    
    
    (22
    )
    
    
    (24
    )
    
    
    231
    
    
    
    416
    
    
    
    180
    
    
    
    398Diluted net income
per share
    
    
    0.05
    
    
    
    0.09
    
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.00
    
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.05
    
    
    
    0.08
    
    
    
    0.04
    
    
    
    0.08
 As Reported
    
    
    Adjustments
    
    
    Restated(a)Quarter Ended:
    
    4/3/04
    
    
    7/3/04
    
    
    10/2/04
    
    
    1/1/05
    
    
    4/3/04
    
    
    7/3/04
    
    
    10/2/04
    
    
    1/1/05
    
    
    4/3/04
    
    
    7/3/04
    
    
    10/2/04
    
    
    1/1/05Total revenue
    
    
    9,483
    
    
    
    10,659
    
    
    
    10,392
    
    
    
    9,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,483
    
    
    
    10,659
    
    
    
    10,392
    
    
    
    9,649Operating income
    
    
    565
    
    
    
    868
    
    
    
    499
    
    
    
    460
    
    
    
    (29
    )
    
    
    (36
    )
    
    
    (33
    )
    
    
    
    
    
    
    536
    
    
    
    832
    
    
    
    466
    
    
    
    460Net Income
    
    
    292
    
    
    
    502
    
    
    
    289
    
    
    
    261
    
    
    
    (25
    )
    
    
    (28
    )
    
    
    (27
    )
    
    
    
    
    
    
    267
    
    
    
    474
    
    
    
    262
    
    
    
    261Diluted net income
per share
    
    
    0.06
    
    
    
    0.10
    
    
    
    0.06
    
    
    
    0.05
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.05
    
    
    
    0.09
    
    
    
    0.05
    
    
    
    0.05
  (a)
    As described in Note 3, the Company restated the consolidated income statement related to certain lease accounting issues.(b)
    As described in Note 1, the Company reclassified certain amounts from other revenues to cost of sales to conform with EITF
02-16 for comparative purposes. F-31




---



##### 



Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Back Yard Burgers, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, of changes in stockholders equity and of cash flows present fairly, in
all material respects, the financial position of Back Yard Burgers, Inc. and its subsidiaries at
January 1, 2005, and January 3, 2004, and the results of their operations and their cash flows for
each of the three years in the period ended January 1, 2005, in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States), which require
that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. As described in Note 3 to the consolidated Financial Statements, the Company has restated its
2003 and 2002 financial statements. (-s- SIGNATURE)
Memphis, Tennessee
April 16, 2005 F-32