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UNITED STATES SECURITIES AND EXCHANGE COMMISSION  FORM 10-K (Mark One) [X]
    Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED JANUARY 3, 2004
or [   ]
    Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 Commission file number 1-12104 BACK YARD BURGERS, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    64-0737163
(IRS employer
identification no.)1657 N. Shelby Oaks Drive, Suite 105Memphis, 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: Name of Each ExchangeTitle of Each Class
    
    on Which RegisteredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: Name of Each MarketTitle of Each Class
    
    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
[ü] No [  ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or in information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ü] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X] The aggregate market value of common stock held by non-affiliates on March
16, 2004 was approximately $24,970,000. The number of shares outstanding of the registrants common stock as of
March 16, 2004 was 4,766,881.  Certain portions of Part II are incorporated by reference from the
registrants annual report to stockholders for the year ended January 3, 2004
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 20, 2004.




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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. PART I ITEM 1. BUSINESS General Back Yard Burgers operates and franchises quick-service restaurants in 17
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 3, 2004, our operations included 42
company-operated restaurants and 90 franchised restaurants. Corporate History The company was incorporated in December, 1986 as Back Yard Burgers, Inc.,
a Mississippi corporation, and opened its first restaurant in Cleveland,
Mississippi in March 1987. The company was reorganized under the laws of the
State of Delaware in January 1991. The company consummated its initial public
offering on July 2, 1993 and its common stock has traded on the Nasdaq SmallCap
Market since that time. Operating Strategy Our restaurants are designed to project a back yard theme that emphasizes
charbroiled, freshly prepared, great tasting food, including gourmet 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; 2




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
    
    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 2004, 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 approximately three company-operated
restaurants in 2004;  
    
    develop additional franchised restaurants with a committed
and experienced group of franchisees. We expect that approximately
30 franchised restaurants will open in 2004; and  
    
    develop additional franchised restaurants by seeking to expand our
relationship with YUM! Brands, Inc. 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 3, 2004. Company-operated:
    
    Franchised:Number of
    
    
    
    Number ofCore Markets
    
    Restaurants
    
    Core Markets
    
    RestaurantsMemphis, TN Area
    
    
    29
    
    
    Kansas City, MO Area
    
    
    9Little Rock, AR Area
    
    
    7
    
    
    Birmingham, AL Area
    
    
    5Nashville, TN Area
    
    
    5
    
    
    Jackson, MS Area
    
    
    4Kansas City, MO Area
    
    
    1
    
    
    Knoxville, TN Area
    
    
    4Ft. Wayne, IN Area
    
    
    342
    
    
    Hickory, NC
    
    
    3Louisville, KY Area
    
    
    3Orlando, FL Area
    
    
    3St. Louis, MO Area
    
    
    3Tulsa, OK Area
    
    
    3Atlanta, GA Area
    
    
    2Asheville, NC Area
    
    
    2Charleston, SC Area
    
    
    2Evansville, IN Area
    
    
    2Fayetteville, NC Area
    
    
    2Greenville, SC Area
    
    
    2Hot Springs, AR Area
    
    
    2Lexington, KY Area
    
    
    2Little Rock, AR Area
    
    
    2Memphis, TN Area
    
    
    2Paducah, KY Area
    
    
    2Other Markets(1)Kentucky
    
    
    5Mississippi
    
    
    5Georgia
    
    
    3Missouri
    
    
    2Louisiana
    
    
    2North Carolina
    
    
    2Texas
    
    
    2Alabama
    
    
    1Arkansas
    
    
    1Illinois
    
    
    1Indiana
    
    
    1Kansas
    
    
    1Pennsylvania
    
    
    1Tennessee
    
    
    1Total
    
    
    90
 (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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The following table sets forth information as to the sales of both
company-operated and franchised restaurants in operation for the periods
indicated (in thousands). 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 year ended December 28, 2002 contains 52 weeks. Year Ended
    
    Year EndedRestaurant Sales
    
    January 3, 2004
    
    December 28, 2002Company-operated
    
    $
    34,279
    
    
    $
    30,951Franchised
    
    
    66,245
    
    
    
    54,000System-wide
    
    $
    100,524
    
    
    $
    84,951
 Restaurant Openings and Closings. The following table presents an
activity summary of the company-operated and franchised restaurants during the
periods presented. Year EndedJanuary 3,
    
    December 28,
    
    December 29,
    
    December 30,2004
    
    2002
    
    2001
    
    2000RestaurantsCompany-operatedOpen at beginning of period
    
    
    42
    
    
    
    37
    
    
    
    35
    
    
    
    35Opened during period
    
    
    1
    
    
    
    5
    
    
    
    2
    
    
    
    0Converted to Company
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    3Converted to Franchise
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    (1
    )Closed during period
    
    
    (1
    )
    
    
    (1
    )
    
    
    0
    
    
    
    (2
    )Open at end of period
    
    
    42
    
    
    
    42
    
    
    
    37
    
    
    
    35Franchised (a)Open at beginning of period
    
    
    77
    
    
    
    67
    
    
    
    58
    
    
    
    51Opened during period
    
    
    19
    
    
    
    15
    
    
    
    13
    
    
    
    10Converted to Company
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    (3
    )Converted to Franchise
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1Closed during period
    
    
    (6
    )
    
    
    (4
    )
    
    
    (4
    )
    
    
    (1
    )Open at end of period
    
    
    90
    
    
    
    77
    
    
    
    67
    
    
    
    58Total Restaurants
    
    
    132
    
    
    
    119
    
    
    
    104
    
    
    
    93
  (a)
    
    As of March 16, 2004, four franchised restaurants opened
since January 3, 2004, one each in Alabama, Florida, Indiana and
Oklahoma and two franchised restaurants closed, one each in
Mississippi and Texas. 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. 5




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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 3, 2004, the number of restaurants with indoor dining was
33 company-operated facilities and 80 franchised facilities. It is the companys objective to serve customers within 60 seconds of
their arrival at the drive-thru window. Each restaurant has a computerized
point-of-sale system which displays each individual item ordered on a monitor
in front of the food and drink preparers. This enables the preparers to begin
filling an order before the order is completed and totaled, and thereby
increases the speed of service to the customer and the number of sales per
hour. The restaurants are generally open from 12 to 15 hours per day, seven
days a week, for lunch, dinner and late-night snacks and meals. Supplies.The company and its franchisees purchase their food, beverages
and supplies from company-approved suppliers. All products must meet standards
and specifications set by the company. Management constantly monitors the
quality of the food, beverages and supplies provided to the restaurants. The
company has been successful in negotiating price concessions from suppliers for
bulk purchases of food and paper supplies used by the restaurants. The company
believes that these arrangements have achieved cost savings, improved food
quality and consistency and helped decrease volatility of food and supply costs
for the restaurants. All essential food and beverage products are available
or, upon short notice, could be made available from alternate qualified
suppliers. Management and Employees. Each company-operated restaurant employs an
average of approximately 25 employees, many of whom work part-time. The
management staff of a typical restaurant operated by the company consists of a
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, 6




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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 four
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 management team works in the restaurant to monitor
compliance with the companys standards as to quality of product and service. The company employs four franchise field consultants, each of whom
supervises franchised restaurants in defined geographic areas. Presently, the
company has one franchise field consultant for each 23 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 7




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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 3, 2004, 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 208 restaurants by the end of August 31, 2013. Of the 90 franchised
restaurants open as of January 3, 2004, 71 were being operated under area
development agreements by multiple unit franchisees and 19 were being operated
under single franchise agreements by single unit franchisees. The company may
revoke an area development agreement of any franchisee who is unsuccessful in
meeting its projected development schedule. During the past three years, the
company has exercised its right to terminate eleven area development
agreements, which related to the development of up to 28 stores, for lack of
performance by multiple unit franchisees with respect to their projected
development schedules. Eight of these agreements were terminated during 2003,
which related to the development of up to 19 stores. Additionally, during the
past three years, two franchise agreements were terminated because of a lack of
performance by single unit franchisees with respect to certain franchise
agreement requirements, both of which were during 2001. The company believes
that its overall experience with franchisees who commit to develop restaurants
under franchise agreements and area development agreements has been favorable,
although there can be no assurance that future performance by franchisees under
these agreements will be successful. The franchise agreement and area development agreement require that the
franchisee submit information regarding proposed restaurant sites to the
company for its review. The company does not arrange or make any provisions
for financing the development of restaurants by its franchisees. Each
franchisee is required to purchase all fixtures, equipment, inventory,
products, ingredients, materials and other supplies used in the operation of
its restaurants from approved suppliers, all in accordance with the companys
specifications. The company provides a training program for management
personnel of its franchisees. Under the terms of the franchise agreement, the
company has adopted standards of quality, service and food preparation for
franchised restaurants. Each franchisee is required to comply with all of the
standards for restaurant operations as published from time to time in the
companys operations manual. 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. 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. The Development Agreement also granted YUM! an option to co-brand
up to 500 additional Back Yard Burgers restaurants within certain geographic
areas if certain conditions were satisfied. YUM did not exercise its option,
but has entered into a non-binding term sheet which contemplates that the
Development Agreement would be amended to provide YUM with the right to license
and sublicense the Back Yard Burgers concept and trademarks in connection with
the establishment and operation of 8




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up to 500 stand alone and multi-brand outlets. While no binding agreement
has been reached with YUM to amend the terms of the Development Agreement to
provide for the operation of more than ten co-branded stores, the company is
currently holding discussions with YUM! with respect to the terms and
conditions under which such a license and sublicense would be granted. Such
terms and conditions may be different from the provisions described above. 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 9




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imposition of standards of performance on a franchisee and regulating
discrimination against franchisees in charges, royalties or fees. Although
such laws may restrict a franchisor in the termination of a franchise agreement
by, for example, requiring good cause to exist as a basis for the
termination, advance notice to the franchisee of the termination, an
opportunity to cure a default and a repurchase of inventory or other
compensation, these provisions have not had a significant effect on the
companys franchise operations. The company is not aware of any pending
franchise legislation which in its view is likely to affect significantly the
operations of the company. The company believes that its operations comply in
all material respects with rules and the applicable state franchise laws. Each company-operated and franchised restaurant is subject to licensing
and regulation by a number of governmental authorities, which may include
health, sanitation, safety, fire, building and other agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failure to obtain the required licenses or approvals could delay or prevent the
development of a new restaurant in a particular area. The company is subject
to federal and state environmental regulations, but these regulations have not
had a material effect on the companys operations. More stringent and varied
requirements of local governmental bodies with respect to zoning, land use and
environmental factors could delay or prevent the development of a new
restaurant in a particular area. The company is also subject to state and federal labor laws that govern
its relationship with its employees, such as minimum wage requirements,
overtime and working conditions and citizenship requirements. Significant
numbers of the companys food service and preparation personnel are paid at
rates governed by the federal minimum wage. Accordingly, further increases in
the minimum wage would increase the companys labor costs and may have an
adverse effect on the companys operating margins. Employees As of March 16, 2004, the company employed approximately 1,000 persons in
its restaurant operations, 31 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 31 corporate employees, 13 are in
management positions and 18 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 3, 2004, the company
has entered into ground leases, as lessee, for 33 restaurants. The company
owns the real property for 9 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 14 company-operated
restaurants located on leased sites is approximately $3,300 per month. For the
19 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, leases nominal office space at 103
Faulk Road, Suite 200, Wilmington, Delaware 19803. This lease expires on
December 31, 2004, and provides for annual rent of $4,870. ITEM 3. LITIGATION The company is involved in certain litigation matters incidental to its
business, including, but not necessarily limited to, claims alleging violations
of federal and state discrimination laws. Such litigation is not presently
considered by management to be material to the financial condition of the
company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No items are reportable hereunder. 11




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##### 



PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The companys common stock is traded and quoted on The Nasdaq SmallCap
Market under the symbol BYBI. The following table sets forth, for all
periods indicated, the high and low 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 30, 2002
    
    $
    8.61
    
    
    $
    3.89June 29, 2002
    
    $
    11.25
    
    
    $
    6.40September 28, 2002
    
    $
    12.00
    
    
    $
    6.31December 28, 2002
    
    $
    6.10
    
    
    $
    3.95March 29, 2003
    
    $
    5.01
    
    
    $
    3.52June 28, 2003
    
    $
    6.40
    
    
    $
    4.53September 27, 2003
    
    $
    6.62
    
    
    $
    4.61January 3, 2004
    
    $
    7.96
    
    
    $
    6.18
 At March 16, 2004, the common stock was held of record by approximately
530 record stockholders. On March 16, 2004, the last sale price for the common
stock as reported by NASDAQ was $7.68 per share. The company has not paid or declared cash distributions or dividends and
does not intend to pay cash dividends on the common stock or its preferred
stock in the foreseeable future. Future cash dividends, if any, will be
determined by the board of directors based on the companys earnings, financial
condition, capital requirements and other relevant factors. 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 Incorporated herein by reference from the Financial Supplement. ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from the Financial Supplement. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated herein by reference from the Financial Supplement. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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. 12




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##### 



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. Based on the evaluation, 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), the companys management, including the CEO and CFO,
concluded that the Companys disclosure controls and procedures were
effective as of the end of the period covered by the report. There have been no changes in our internal control over financial
reporting during the fiscal year covered by this report that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 13




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##### 



PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding Section 16(a) compliance, the Audit Committee and
the Audit Committee financial expert, the Companys code of ethics and
background of the directors are incorporated herein by reference from the
companys definitive proxy statement for the annual meeting of stockholders to
be held May 20, 2004, to be filed pursuant to Regulation 14A. Set forth below is certain information regarding the companys directors
and executive officers. NAME
    
    AGE
    
    POSITIONLattimore M. Michael
    
    
    60
    
    
    Chairman of the Board and Chief Executive OfficerMichael W. Myers
    
    
    45
    
    
    President and Chief Operating OfficerWilliam N. Griffith
    
    
    41
    
    
    Executive Vice President, Sec./Treasurer and DirectorMichael G. Webb
    
    
    35
    
    
    Chief Financial OfficerW. Kurt Henke
    
    
    46
    
    
    DirectorJim L. Peterson
    
    
    68
    
    
    DirectorWilliam B. Raiford, III
    
    
    43
    
    
    DirectorJoseph L. Weiss
    
    
    44
    
    
    Director
 Mr. Michaelhas been chairman and chief executive officer of the company
since 1993. From 1987 to 1992, he was the companys president and chief
executive officer. He has been a director since 1987. Mr. Myershas been chief operating officer since August 1999 and was named
president in April, 2001. From 1995 to 1999, he was a regional vice president
for Whataburger, Inc. Mr. Griffithhas been executive vice president and secretary/treasurer of
the company since 1993. From 1989 to 1992, he was the companys senior vice
president of operations. He has been a director since 1989. Mr. Webbhas been chief financial officer since March 1999. From 1995 to
1999, he was the controller for Shepherd Tissue, Inc. From 1993 to 1995, he
was a senior financial analyst for The Promus Companies. Prior to 1993, Mr.
Webb was an auditor for KPMG Peat Marwick. Mr. Henkehas been a director since 1993. He has been an attorney with
Henke-Bufkin since 1992. Mr. Petersonis the chairman and CEO of J. P. Family Restaurants Holding
Company. He is also the chairman emeritus for Bojangles Restaurants, Inc.,
and past chairman of Apigent Solutions. From 1994 to 1999, he was chairman,
president and chief executive officer of Bojangles Restaurants, Inc. Prior to
joining Bojangles, he was president and chief executive officer for
Whataburger, Inc. for 20 years. Mr. Raifordhas been a director since 1993. He has been an attorney with
Merkel & Cocke, P.A. since 1989. Mr. Weissis currently president of A. Weiss Company, a franchisee of the
company. He was president and chief operating officer of the company from 1993
to 1999. He has been a director since 1989. ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the companys definitive proxy
statement for the annual meeting of stockholders to be held May 20, 2004, to be
filed pursuant to Regulation 14A. 14




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##### 



ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from the companys definitive proxy
statement for the annual meeting of stockholders to be held May 20, 2004, to be
filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the companys definitive proxy
statement for the annual meeting of stockholders to be held May 20, 2004, to be
filed pursuant to Regulation 14A. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Incorporated herein by reference from the companys definitive proxy
statement for the annual meeting of stockholders to be held May 20, 2004, to be
filed pursuant to Regulation 14A. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Consolidated Financial Statements The following consolidated financial statements, notes related thereto and
report of independent auditors are referenced in Item 8 of this Form 10-K and
are incorporated herein by reference from the Financial Supplement:  
    
    Consolidated Balance Sheets as of January 3, 2004 and
December 28, 2002  
    
    Consolidated Statements of Operations for the years ended
January 3, 2004 and December 28, 2002 and December 29, 2001  
    
    Consolidated Statements of Changes in Stockholders Equity
for the years ended January 3, 2004 and December 28, 2002 and
December 29, 2001  
    
    Consolidated Statements of Cash Flows for the years ended
January 3, 2004 and December 28, 2002 and December 29, 2001  
    
    Notes to Consolidated Financial Statements  
    
    Report of Independent Auditors (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. 15




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##### 



(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 Employment Agreement executed as of June 6, 1993, between the
Registrant and William N. Griffith. (2)10.3
    
    
    Form of Incentive Stock Option Plan of 1993. (1)10.4
    
    
    Lease, dated February 1, 1990, between Trezevant Properties and the
Registrant. (1)10.5
    
    
    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)10.6
    
    
    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)10.7
    
    
    1995 Employee Stock Purchase Plan of Back Yard Burgers, Inc. (4)10.8
    
    
    The 1995 Incentive Award Plan of Back Yard Burgers, Inc. (4)10.9
    
    
    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)10.10
    
    
    Loan commitment by and between Phoenix Leasing Incorporated and Back
Yard Burgers, Inc. dated October 4, 1996. (5)10.11
    
    
    Capital Contribution Agreement between Back Yard Burgers, Inc. and BYB
Properties, Inc. dated October 10, 1997. (6)
 16




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##### 



ExhibitNumber
    
    Description10.12
    
    
    Trademark Assignment by Back Yard Burgers, Inc. to BYB Properties, Inc.
dated October 10, 1997. (6)10.13
    
    
    Trademark License Agreement between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997. (6)10.14
    
    
    Revolving Loan Agreement regarding Uncommitted Line of Credit Agreement
from BYB Properties, Inc. to Back Yard Burgers, Inc. dated October 10,
1997. (6)10.15
    
    
    Promissory Note by and between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997. (6)10.16
    
    
    Tax Sharing Agreement between BYB Properties, Inc. and Back Yard
Burgers, Inc. dated October 10, 1997. (6)10.17
    
    
    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)10.18
    
    
    Lease agreement by and between Belz Devco, L.P. and Back Yard Burgers,
Inc. dated November 12, 1999. (8)10.19
    
    
    2002 Equity Incentive Plan of Back Yard Burgers, Inc. (9)10.20
    
    
    Loan agreement by and between First Tennessee Bank and Back Yard
Burgers, Inc. dated February 11, 2003.(10)10.21
    *
    
    Lease agreement by and between Batesville Back Yard Properties, LLC and
Back Yard Burgers, Inc. dated May 1, 2002.21
    *
    
    Subsidiaries of the Registrant.23.1
    *
    
    Consent of
Independent Accountants.31.1
    *
    
    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.
  (b)
    
    Reports on Form 8-KFourth quarter and fiscal year 2003 earnings release dated February 17,
2004.(c)
    
    ExhibitsThe exhibits to this report are listed in Item 14(a) (3) above.(d)
    
    Financial Statement ScheduleNot applicable   *
    
    Filed herewith. 17




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##### 



(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. 18




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##### 



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 1, 2004
 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
Lattimore M. Michael
    
    Chairman of the Board and
Chief Executive Officer
    
    April 1, 2004/s/ Michael W. Myers
Michael W. Myers
    
    President and Chief Operating Officer
    
    April 1, 2004/s/ William N. Griffith
William N. Griffith
    
    Executive Vice President and Director
    
    April 1, 2004/s/ Michael G. Webb
Michael G. Webb
    
    Chief Financial Officer
    
    April 1, 2004/s/ W. Kurt Henke
W. Kurt Henke
    
    Director
    
    April 1, 2004/s/ Jim Peterson
Jim Peterson
    
    Director
    
    April 1, 2004/s/ William B. Raiford, III
William B. Raiford, III
    
    Director
    
    April 1, 2004/s/ Joseph L. Weiss
Joseph L. Weiss
    
    Director
    
    April 1, 2004
 19




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##### 



INDEX TO FINANCIAL SUPPLEMENT
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JANUARY 3, 2004 PageSelected Consolidated Financial Data
    
    
    F-1Managements Discussion And Analysis
of Financial Condition And Results Of Operations
    
    
    F-4Consolidated Balance Sheets
as of January 3, 2004 and December 28, 2002
    
    
    F-13Consolidated Statements of Operations
for the years ended January 3, 2004 and December 28, 2002 and December 29, 2001
    
    
    F-14Consolidated Statements of Changes in Stockholders Equity
for the years ended January 3, 2004 and December 28, 2002 and December 29, 2001
    
    
    F-15Consolidated Statements of Cash Flows
for the years ended January 3, 2004 and December 28, 2002 and December 29, 2001
    
    
    F-16Notes to the Consolidated Financial Statements
    
    
    F-17Report Of Independent Auditors
    
    
    F-28Managements Statement Of Responsibility For Financial Statements
    
    
    F-28




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##### 



Selected Consolidated Financial Data (in thousands, except per share data)
 The selected consolidated financial data presented below for each of the
years in the five-year period ended January 3, 2004 was derived from the
companys audited Consolidated Financial Statements. The selected consolidated
financial data should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements and Notes thereto included elsewhere herein. January 3,
    
    December 28,
    
    December 29,
    
    December 30,
    
    January 1,2004(3)
    
    2002
    
    2001
    
    2000
    
    2000OPERATIONSRestaurant Sales
    
    $
    34,279
    
    
    $
    30,951
    
    
    $
    27,541
    
    
    $
    26,182
    
    
    $
    26,480Total revenues
    
    
    38,829
    
    
    
    34,687
    
    
    
    31,138
    
    
    
    29,260
    
    
    
    29,295Income (loss) before
income taxes
    
    
    1,899
    (1)
    
    
    2,203
    
    
    
    1,579
    
    
    
    728
    
    
    
    (930
    ) (2)Net income (loss)
    
    
    1,309
    
    
    
    1,477
    
    
    
    1,027
    
    
    
    466
    
    
    
    (558
    )FINANCIAL POSITIONTotal assets
    
    $
    24,500
    
    
    $
    22,067
    
    
    $
    19,508
    
    
    $
    17,779
    
    
    $
    18,340Property and equipment, net
    
    
    18,717
    
    
    
    17,247
    
    
    
    14,176
    
    
    
    12,569
    
    
    
    13,211Debt
    
    
    5,350
    
    
    
    5,925
    
    
    
    5,772
    
    
    
    5,403
    
    
    
    6,178Shareholders equity
    
    
    13,687
    
    
    
    12,284
    
    
    
    10,591
    
    
    
    9,555
    
    
    
    9,058PER SHARE DATANet income (loss)  basic
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.22
    
    
    $
    0.10
    
    
    $
    (0.12
    )Net income (loss)  diluted
    
    $
    0.26
    
    
    $
    0.29
    
    
    $
    0.22
    
    
    $
    0.10
    
    
    $
    (0.12
    )Dividends
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Market price at year end
    
    
    6.52
    
    
    
    4.00
    
    
    
    3.70
    
    
    
    0.66
    
    
    
    1.50OTHER DATASystem-wide sales
    
    $
    100,524
    
    
    $
    84,951
    
    
    $
    77,706
    
    
    $
    68,439
    
    
    $
    65,119Capital expenditures
    
    
    3,329
    
    
    
    4,861
    
    
    
    2,791
    
    
    
    1,063
    
    
    
    2,679
 (1) The company incurred a non-cash charge for impairment of long-lived assets
of $78,000 during the year ended January 3, 2004. (2) The company incurred a non-cash charge for impairment of long-lived assets
of $1,362,000 during the year ended January 1, 2000. (3) 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 December 28, 2002, December 29, 2001, December 30, 2000 and January
1, 2000 contain 52 weeks. F-1




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##### 



The selected consolidated financial data presented below is a summary of the
unaudited quarterly results of operations for the year ended January 3, 2004: Year Ended January 3, 20041st
    
    2nd
    
    3rd
    
    4thQuarter
    
    Quarter
    
    Quarter
    
    QuarterIncome Statement Data:Revenues:Restaurant sales
    
    $
    7,577
    
    
    $
    8,870
    
    
    $
    8,739
    
    
    $
    9,093Franchise and area development fees
    
    
    90
    
    
    
    75
    
    
    
    20
    
    
    
    193Royalty fees
    
    
    582
    
    
    
    668
    
    
    
    664
    
    
    
    707Advertising fees
    
    
    145
    
    
    
    167
    
    
    
    162
    
    
    
    187Other
    
    
    180
    
    
    
    408
    
    
    
    230
    
    
    
    72Total Revenues
    
    
    8,574
    
    
    
    10,188
    
    
    
    9,815
    
    
    
    10,252Expenses:Cost of restaurant sales
    
    
    2,418
    
    
    
    2,939
    
    
    
    2,912
    
    
    
    2,848Restaurant operating expenses
    
    
    3,641
    
    
    
    4,190
    
    
    
    4,300
    
    
    
    4,326General and administrative
    
    
    1,095
    
    
    
    1,188
    
    
    
    1,096
    
    
    
    1,154Advertising
    
    
    477
    
    
    
    599
    
    
    
    604
    
    
    
    669Depreciation and amortization
    
    
    420
    
    
    
    465
    
    
    
    448
    
    
    
    507Impairment of long-lived assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78Total expenses
    
    
    8,051
    
    
    
    9,381
    
    
    
    9,360
    
    
    
    9,582Operating income
    
    
    523
    
    
    
    807
    
    
    
    455
    
    
    
    670Interest income
    
    
    3
    
    
    
    1
    
    
    
    1
    
    
    
    1Interest expense
    
    
    (126
    )
    
    
    (126
    )
    
    
    (124
    )
    
    
    (119
    )Other, net
    
    
    (15
    )
    
    
    (13
    )
    
    
    (21
    )
    
    
    (18
    )Income before income taxes
    
    
    385
    
    
    
    669
    
    
    
    311
    
    
    
    534Income tax expense
    
    
    135
    
    
    
    234
    
    
    
    109
    
    
    
    112Net Income
    
    $
    250
    
    
    $
    435
    
    
    $
    202
    
    
    $
    422Income per share:Basic
    
    
    0.05
    
    
    
    0.09
    
    
    
    0.04
    
    
    
    0.09Diluted
    
    
    0.05
    
    
    
    0.09
    
    
    
    0.04
    
    
    
    0.08Weighted average number of common
shares and common equivalent
shares outstanding:Basic
    
    
    4,721
    
    
    
    4,728
    
    
    
    4,736
    
    
    
    4,740Diluted
    
    
    4,979
    
    
    
    5,061
    
    
    
    5,056
    
    
    
    5,113
 F-2




---



##### 



The selected consolidated financial data presented below is a summary of the
unaudited quarterly results of operations for the year ended December 28, 2002: Year Ended December 28, 20021st
    
    2nd
    
    3rd
    
    4thQuarter
    
    Quarter
    
    Quarter
    
    QuarterIncome Statement Data:Revenues:Restaurant sales
    
    $
    7,311
    
    
    $
    8,279
    
    
    $
    7,823
    
    
    $
    7,538Franchise and area development fees
    
    
    27
    
    
    
    17
    
    
    
    81
    
    
    
    102Royalty fees
    
    
    516
    
    
    
    566
    
    
    
    541
    
    
    
    549Advertising fees
    
    
    130
    
    
    
    135
    
    
    
    142
    
    
    
    141Other
    
    
    195
    
    
    
    199
    
    
    
    189
    
    
    
    206Total Revenues
    
    
    8,179
    
    
    
    9,196
    
    
    
    8,776
    
    
    
    8,536Expenses:Cost of restaurant sales
    
    
    2,291
    
    
    
    2,588
    
    
    
    2,390
    
    
    
    2,289Restaurant operating expenses
    
    
    3,470
    
    
    
    3,746
    
    
    
    3,730
    
    
    
    3,590General and administrative
    
    
    1,066
    
    
    
    1,040
    
    
    
    1,047
    
    
    
    1,280Advertising
    
    
    460
    
    
    
    525
    
    
    
    499
    
    
    
    501Depreciation and amortization
    
    
    325
    
    
    
    345
    
    
    
    363
    
    
    
    348Total expenses
    
    
    7,612
    
    
    
    8,244
    
    
    
    8,029
    
    
    
    8,008Operating income
    
    
    567
    
    
    
    952
    
    
    
    747
    
    
    
    528Interest income
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    5Interest expense
    
    
    (132
    )
    
    
    (117
    )
    
    
    (133
    )
    
    
    (138
    )Other, net
    
    
    (79
    )
    
    
    14
    
    
    
    (15
    )
    
    
    (8
    )Income before income taxes
    
    
    360
    
    
    
    853
    
    
    
    603
    
    
    
    387Income tax expense
    
    
    133
    
    
    
    316
    
    
    
    217
    
    
    
    60Net Income
    
    $
    227
    
    
    $
    537
    
    
    $
    386
    
    
    $
    327Income per share:Basic
    
    
    0.05
    
    
    
    0.11
    
    
    
    0.08
    
    
    
    0.07Diluted
    
    
    0.04
    
    
    
    0.11
    
    
    
    0.08
    
    
    
    0.07Weighted average number of common
shares and common equivalent
shares outstanding:Basic
    
    
    4,691
    
    
    
    4,713
    
    
    
    4,717
    
    
    
    4,718Diluted
    
    
    5,111
    
    
    
    5,097
    
    
    
    5,088
    
    
    
    4,990
 F-3




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Introduction The following discussion and analysis should be read in conjunction with
the companys consolidated financial statements and notes thereto, included
elsewhere in this annual report. Because Back Yard Burgers fiscal year ends
on the Saturday closest to December 31, fiscal 2003 contains 53 weeks versus 52
weeks for 2002 and 2001. As a result, operating results for fiscal 2003 are
not directly comparable with those of the prior 52-week periods. As of January 3, 2004, the Back Yard Burgers system included 132
restaurants, of which 42 were company-operated and 90 were franchised. The
companys revenues are derived primarily from company-operated restaurant
sales, franchise and area development fees and royalty fees. Certain expenses
(cost of restaurant sales, restaurant operating expenses, depreciation,
amortization and advertising) relate directly to company-operated restaurants,
while general and administrative expenses relate to both company-operated
restaurants and franchise operations. The companys revenues and expenses are
affected by the number and timing of the opening of additional restaurants.
Sales for new restaurants in the period immediately following their opening
tend to be high because of trial by public and promotional activities. As a
result, the timing of openings can affect the average volume and other
period-to-period comparisons. Results of Operations The following table sets forth the percentage relationship to total
revenues, unless otherwise indicated, of certain items included in the
companys historical operations and operating data for the periods indicated. For the Years EndedJanuary 3,
    
    December 28,
    
    December 29,2004
    
    2002
    
    2001RevenuesRestaurant sales
    
    
    88.3
    %
    
    
    89.2
    %
    
    
    88.5
    %Franchise and area development fees
    
    
    1.0
    
    
    
    0.6
    
    
    
    1.0Royalty fees
    
    
    6.7
    
    
    
    6.3
    
    
    
    6.4Advertising fees
    
    
    1.7
    
    
    
    1.6
    
    
    
    1.6Other operating revenue
    
    
    2.3
    
    
    
    2.3
    
    
    
    2.5Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and ExpensesCost of restaurant sales (1)
    
    
    32.4
    %
    
    
    30.9
    %
    
    
    31.9
    %Restaurant operating expenses (1)
    
    
    48.0
    
    
    
    47.0
    
    
    
    47.3General and administrative
    
    
    11.7
    
    
    
    12.8
    
    
    
    12.6Advertising
    
    
    6.0
    
    
    
    5.7
    
    
    
    5.9Depreciation and amortization
    
    
    4.7
    
    
    
    4.0
    
    
    
    4.4Impairment of long-lived assets
    
    
    .2
    
    
    
    
    
    
    
    Operating income
    
    
    6.3
    
    
    
    8.1
    
    
    
    7.0Interest income
    
    
    0.0
    
    
    
    0.1
    
    
    
    0.1Interest expense
    
    
    (1.3
    )
    
    
    (1.5
    )
    
    
    (1.8
    )Other, net
    
    
    (0.2
    )
    
    
    (0.3
    )
    
    
    (0.2
    )Income before taxes
    
    
    4.9
    
    
    
    6.4
    
    
    
    5.1Income tax expense (2)
    
    
    31.1
    
    
    
    33.0
    
    
    
    35.0Net Income
    
    
    3.4
    
    
    
    4.3
    
    
    
    3.3
 (1) As a percentage of restaurant sales. (2) As a percentage of income before taxes. F-4




---



##### 



For the Years EndedJanuary 3,
    
    December 28,
    
    December 29,2004
    
    2002
    
    2001Operating data (in thousands)Restaurant salesCompany-operated
    
    $
    34,279
    
    
    $
    30,951
    
    
    $
    27,541Franchised
    
    
    66,245
    
    
    
    54,000
    
    
    
    50,165Total
    
    $
    100,524
    
    
    $
    84,951
    
    
    $
    77,706Average annual sales per restaurant open
for a full year(1)Company-operated
    
    $
    826,000
    
    
    $
    778,000
    
    
    $
    777,000Franchised
    
    
    782,000
    
    
    
    810,000
    
    
    
    790,000System-wide
    
    
    799,000
    
    
    
    797,000
    
    
    
    784,000Number of restaurants(2)Company-operated
    
    
    42
    
    
    
    42
    
    
    
    37Franchised
    
    
    90
    
    
    
    77
    
    
    
    67Total
    
    
    132
    
    
    
    119
    
    
    
    104
 (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 16, 2004, four franchised restaurants have opened and two
franchised restaurants have closed since January 3, 2004. 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. F-5




---



##### 



Otherrevenues increased 12.8% to $890,000 for 2003 from $789,000 during
2002. The increase in other revenues is due to higher volume rebates from
vendors, sales of proprietary spices and other miscellaneous revenues. Cost of restaurant sales, consisting of food, beverage and paper costs,
totaled $11,117,000 during 2003 compared to $9,558,000 during 2002, increasing
to 32.4% as a percentage of restaurant sales during 2003 from 30.9% 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
$16,457,000 for 2003 from $14,536,000 during 2002, increasing as a percentage
of restaurant sales to 48.0% from 47.0% 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 12.8% 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
preopening 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 6.0% in 2003 compared with 5.7% in 2002. Depreciationexpense was $1,840,000 during 2003 compared with $1,379,000
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 restaurant growth. Interest expensedecreased 4.8% to $495,000 for the year ended January 3,
2004 from $520,000 in the prior year. This decrease primarily results from
lower average debt outstanding during 2003. Debt outstanding as of January 3,
2004 was $5,350,000, a decrease of $575,000 or 9.7% from the year-earlier
period. Other, netexpense was $67,000 in 2003 compared with $88,000 in expense
for 2002. The company recorded a $19,000 loss on the disposal of assets during
2002 compared with a $1,000 gain during 2003. 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 the
fact that franchise tax expense increased by $27,000 for the fifty three weeks
ended January 3, 2004, 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 $136,000 to $590,000 from $726,000
in 2002, decreased as a percentage of pre-tax income at 31.1% in 2003 compared
with 33.0% in 2002. The decrease in income tax expense as a percentage of
pre-tax income is primarily a result of a $62,000 work opportunity tax credit
earned by the company during 2003. COMPARISON OF FISCAL YEAR 2002
TO FISCAL YEAR 2001 Restaurant salesat company-operated restaurants increased 12.4% to
$30,951,000 during 2002 from $27,541,000 during 2001. This increase is
primarily the result of a net increase in company-operated restaurants of five
stores since December 29, 2001, and a 4% price increase taken by the company in
December 2001, offset by the impact of competitive discounting occurring in the
last half of 2002. Franchise and area development feeswere $227,000 during 2002, a decrease
of 29.1% from $320,000 in 2001. Fifteen new franchised restaurants were opened
in 2002, compared to thirteen new franchised units opened in 2001. A portion
of the decline in fees is attributable to the company recording $65,000 in fees
for the cancellation F-6




---



##### 



of franchise and area development agreements in 2001 compared with $18,000
in 2002. The remaining decline is due to the fact that five of the openings in
2002 were co-branded franchised stores under the companys Multi-Brand
Development Agreement with YUM! Brands, Inc., and the fees for these units are
lower than traditional stand-alone franchised restaurants. Royalty feesincreased 9.5% to $2,172,000 during 2002 compared with
$1,984,000 during 2001. 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 ten franchised stores. The
increase is partially offset by a decrease of 1.8% in same-store sales for
franchised units during 2002. Advertising feesincreased 9.2% to $548,000 for 2002 compared with
$502,000 during 2001. The increase is primarily due to the increase in
franchised restaurant sales, upon which the fees are based. Cost of restaurant sales, consisting of food, beverage and paper costs,
totaled $9,558,000 during 2002 compared to $8,797,000 during 2001, decreasing
to 30.9% as a percentage of restaurant sales during 2002 from 31.9% for 2001.
Product costs remained relatively flat throughout 2002. The decrease in cost
of restaurant sales as a percentage of sales is attributable to a 4% menu price
increase taken by the company in December of 2001. Restaurant operating expenses,consisting of labor, supplies, utilities,
rent, insurance and certain other unit level operating expenses, increased to
$14,536,000 for 2002 from $13,027,000 during 2001, decreasing as a percentage
of restaurant sales to 47.0% from 47.3% in 2001. Labor costs as a percentage
of restaurant sales decreased by 0.8%; however this decrease was partially
offset by increased spending for insurance, utilities and property taxes. General and administrativecosts increased $498,000 to $4,435,000 during
2002 from $3,935,000 in 2001, increasing as a percentage of total revenue to
12.8% from 12.6% during 2001. Approximately $187,000 of the increase was
personnel related, including increased spending on recruiting, training and
benefit costs. Preopening expenses also increased by $62,000 due to the
expenditures related to the opening of five company-operated restaurants during
2002. The remaining cost increases were related to general increases in
spending in the areas of marketing, operations training, information technology
and franchisee recruiting during 2002. Advertisingexpense, which increased to $1,985,000 for 2002 from
$1,824,000 during 2001, remained relatively flat as a percentage of total
revenues at 5.7% in 2002 compared with 5.9% in 2001. Depreciationexpense was $1,379,000 during 2002 compared with $1,383,000
during 2001. The company recorded $158,000 in goodwill amortization in 2001
compared with zero amortization in 2002 due to the adoption of the Statement of
Financial Accounting Standards No. 142, Goodwill and other Intangible Assets
effective January 1, 2002. This decrease in amortization expense was offset by
additional depreciation expense recorded during 2002 for the purchase of
additional property and equipment since the prior year. Interest expensedecreased 7.8% to $520,000 for the year ended December
28, 2002 from $564,000 in the year-earlier period. While debt outstanding as
of December 28, 2002 was $5,925,000, an increase of $153,000 on the balance
outstanding as of December 29, 2001, the company was able to renegotiate
interest rates downward by 1.7% to 2.4% on approximately 45% of its outstanding
debt during the fourth quarter of 2001 resulting in the decrease in interest
expense for the company in 2002. Other, netexpense was $88,000 in 2002 compared with $49,000 in expense
for the year ended December 29, 2001. The increase is due to a write-off of
$23,000 of deferred loan costs incurred by the company as well as a net loss on
the disposal of assets of $19,000 compared with a net loss of $1,000 recognized
in the year-earlier period. Also included in this category is other
miscellaneous income and expenses, including franchise tax expense and these
income and expense categories were relatively consistent during fiscal year
2002 and 2001. Income tax expense, which increased by $174,000 to $726,000 from $552,000
in 2001, decreased as a percentage of pre-tax income at 33.0% in 2002 compared
with 35.0% in 2001. The decrease in income tax expense as a percentage of
pre-tax income is primarily a result of the decrease in taxable income. F-7




---



##### 



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. 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. The company incurred non-cash impairment charges of $78,000 in the 53
weeks ended January 3, 2004, for the effect of company-operated restaurant
closings and impaired assets at company-operated restaurants, of which $59,000
was related to future lease payments of closed stores, net of estimated
sub-lease income and $19,000 was related to impairments of property and
equipment at closed stores. The company had $61,000 in reserves for closed properties at the end of
fiscal year 2002 of which $22,000 was charged against the reserve for lease
payments. Lease payments of $39,000 in 2003 were incurred and charged against
this additional reserve. As of January 3, 2004, the companys remaining
accrual for all future lease obligations discussed above was $81,000, which is
net of estimated sub-lease income. Liquidity and Capital Resources Capital expenditures totaled $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
14 company-operated restaurants on leased sites at January 3, 2004 is
approximately $3,300 per month. For the 19 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 primarily affected by net earnings
adjusted for deferred franchise fees and non-cash expenses which consist
primarily of depreciation and amortization. Depreciation and amortization
totaled $1,840,000 in 2003 and $1,379,000 in 2002. Cash provided by operations in 2003 was $4,816,000 compared with
$3,842,000 in 2002. 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. As of January 3, 2004, the company had total long-term debt of $5,350,000
and unused lines of credit and loan commitments of potential additional
borrowings of $3,376,000. 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 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. This revolver line replaced the $750,000 line of credit that was in
place as of December 28, 2002. No additional long-term debt commitments were
made by the company during the fifty-three weeks ended January 3, 2004. 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 3, 2004, the company had
repurchased 25,000 shares of common stock under the plan. No further purchases
are anticipated in the near term. F-8




---



##### 



The company is budgeting capital expenditures of approximately $4.0
million in fiscal year 2004, excluding potential acquisitions and share
repurchases. These capital expenditures primarily relate to the development of
additional company-operated restaurants, the re-imaging of existing restaurants
to reflect the companys new logo and related color scheme, store equipment
upgrades, and enhancements to existing financial and operating information
systems. The company expects to fund fiscal year 2004 capital expenditures with
cash flow from operations and borrowings under the new 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 new credit
facility will meet the companys needs for the foreseeable future. The company has contractual obligations and commercial commitments
including long-term debt, land lease obligations for company-operated
restaurants and office space for corporate operations. 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
    
    $
    2,539
    
    
    $
    729
    
    
    $
    1,126
    
    
    $
    673
    
    
    $
    11Capital leases
    
    
    2,811
    
    
    
    211
    
    
    
    390
    
    
    
    319
    
    
    
    1,891Operating leases
    
    
    7,790
    
    
    
    1,460
    
    
    
    2,524
    
    
    
    1,477
    
    
    
    2,329Purchase obligations
    
    
    5,410
    
    
    
    662
    
    
    
    1,198
    
    
    
    1,333
    
    
    
    2,217Total contractual
obligations
    
    $
    18,550
    
    
    $
    3,062
    
    
    $
    5,238
    
    
    $
    3,802
    
    
    $
    6,448
 Qualitative and Quantitative Disclosure about Market Risk The company is exposed to certain financial market risks, the most
predominant being fluctuations in interest rates on variable rate debt and the
repricing of fixed rate debt at maturity. Management monitors interest rate
fluctuations as an integral part of the companys overall risk management
program, which recognizes the unpredictability of financial markets and seeks
to reduce the potential adverse effect 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. Approximately 10% of the companys debt portfolio as of January 3, 2004,
had variable rates or had maturity dates of less than two years. With every 25
basis point increase in interest rates, the company could be subject to
additional interest expense of approximately $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 2003 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-three weeks
ended January 3, 2004. 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 F-9




---



##### 



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 3, 2004, only
19,617 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 on-going 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 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 has also collected 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 income in a proportionate manner
with respective future purchases. Under the terms of signed contracts, the
company is required to purchase specific volumes in future years. If these
purchase volumes are not met, the funds related to the volume shortages will be
refunded to the vendors. Long-Lived Assets: The restaurant industry is capital intensive. The company has
approximately 76% of its total assets invested in property and equipment. The
company capitalizes only those costs that meet the definition of capital F-10




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##### 



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. 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 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. New 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 $394,000 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. Off-Balance Sheet Arrangements At January 3, 2004, 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
3, 2004, was approximately $500,000. Known Trends and Uncertainties Labor will continue to be a critical factor in the foreseeable future. In
most areas where the company operates restaurants, there is a shortage of
suitable labor. This, in itself, could result in higher wages as the
competition for employees intensifies, not only in the restaurant industry, but
in practically all retail and service industries. It is crucial for the
company to develop and maintain programs to attract and retain quality
employees. F-11




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##### 



During 2003, 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 October 12, 2003
in order to partially offset these increased costs. It may be difficult to
raise menu prices to fully cover any future cost increases. Additional margin
improvements will have to be made through operational improvements, equipment
advances and increased volumes to help offset these increases, due to the
competitive state of the quick-service restaurant industry. Due to the competitive nature of the restaurant industry, site selection
continues to be challenging as the number of businesses vying for locations
with similar characteristics increases. This will likely result in higher
occupancy costs for prime locations. Company-operated same-store sales increased 2.6% during 2003 compared with
a 0.1% increase in 2002. Franchised same-store sales decreased 4.2% during
2003 compared with a 1.8% decrease in 2002. Management attributes the decline
in same-store sales for franchised locations to competitive discounting. The
impact of competitive discounting on company-operated same-store sales was
offset by certain initiatives undertaken by management during 2003, including
the re-imaging of existing company-operated restaurants to reflect the
companys new logo and related color scheme, promotional incentives intended to
increase traffic and sales and the testing of a late-night operations program
at company-operated restaurants. Management intends to continue with its marketing strategy of enhancing
the companys points of differentiation and further positioning the company as
a premium fast-food provider. The future success of the company will be determined, to a great extent,
by the ability to positively address these issues. F-12




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##### 



BACK YARD BURGERS, INC. Consolidated Balance Sheets  (in thousands, except for share and per share amounts)
 January 3,
    
    December 28,2004
    
    2002ASSETSCash and cash equivalents
    
    $
    2,292
    
    
    $
    1,406Receivables, less allowance for doubtful accounts of
$65 and $80
    
    
    789
    
    
    
    495Inventories
    
    
    251
    
    
    
    276Income taxes receivable
    
    
    
    
    
    
    296Current deferred tax asset
    
    
    143
    
    
    
    170Prepaid expenses
    
    
    58
    
    
    
    53Total current assets
    
    
    3,533
    
    
    
    2,696Property and equipment, at depreciated cost
    
    
    18,717
    
    
    
    17,247Goodwill
    
    
    1,751
    
    
    
    1,751Noncurrent deferred tax asset
    
    
    25
    
    
    
    12Notes receivable
    
    
    97
    
    
    
    110Other assets
    
    
    377
    
    
    
    251Total assets
    
    $
    24,500
    
    
    $
    22,067LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    1,371
    
    
    $
    1,479Accrued expenses
    
    
    2,101
    
    
    
    1,483Reserve for closed stores
    
    
    81
    
    
    
    61Current installments of long-term debt
    
    
    940
    
    
    
    825Income tax payable
    
    
    141
    
    
    
    Total current liabilities
    
    
    4,634
    
    
    
    3,848Long-term debt, less current installments
    
    
    4,410
    
    
    
    5,100Deferred franchise and area development fees
    
    
    1,200
    
    
    
    504Other deferred income
    
    
    520
    
    
    
    272Other deferred liabilities
    
    
    49
    
    
    
    59Total liabilities
    
    
    10,813
    
    
    
    9,783Commitments and contingencies (Note 16)Stockholders equityPreferred stock, $.01 par value; 2,000,000 shares authorized;
19,617 shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 12,000,000 shares authorized;
4,748,948 and 4,720,739 shares issued and outstanding
    
    
    48
    
    
    
    48Paid-in capital
    
    
    10,504
    
    
    
    10,410Treasury stock, at cost, 25,000 shares
    
    
    (28
    )
    
    
    (28
    )Retained earnings
    
    
    3,163
    
    
    
    1,854Total stockholders equity
    
    
    13,687
    
    
    
    12,284Total liabilities and stockholders equity
    
    $
    24,500
    
    
    $
    22,067
 See accompanying notes to consolidated financial statements. F-13




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##### 



BACK YARD BURGERS, INC. Consolidated Statements of Operations
(in thousands, except per share amounts)
 Years EndedJanuary 3,
    
    December 28,
    
    December 29,2004
    
    2002
    
    2001Revenues:Restaurant sales
    
    $
    34,279
    
    
    $
    30,951
    
    
    $
    27,541Franchise and area development fees
    
    
    378
    
    
    
    227
    
    
    
    320Royalty fees
    
    
    2,621
    
    
    
    2,172
    
    
    
    1,984Advertising fees
    
    
    661
    
    
    
    548
    
    
    
    502Other
    
    
    890
    
    
    
    789
    
    
    
    791Total revenues
    
    
    38,829
    
    
    
    34,687
    
    
    
    31,138Expenses:Cost of restaurant sales
    
    
    11,117
    
    
    
    9,558
    
    
    
    8,797Restaurant operating expenses
    
    
    16,457
    
    
    
    14,536
    
    
    
    13,027General and administrative
    
    
    4,533
    
    
    
    4,435
    
    
    
    3,935Advertising
    
    
    2,349
    
    
    
    1,985
    
    
    
    1,824Depreciation
    
    
    1,840
    
    
    
    1,379
    
    
    
    1,383Impairment of long-lived assets
    
    
    78
    
    
    
    
    
    
    
    Total expenses
    
    
    36,374
    
    
    
    31,893
    
    
    
    28,966Operating income
    
    
    2,455
    
    
    
    2,794
    
    
    
    2,172Interest income
    
    
    6
    
    
    
    17
    
    
    
    20Interest expense
    
    
    (495
    )
    
    
    (520
    )
    
    
    (564
    )Other, net
    
    
    (67
    )
    
    
    (88
    )
    
    
    (49
    )Income before income taxes
    
    
    1,899
    
    
    
    2,203
    
    
    
    1,579Income tax expense
    
    
    590
    
    
    
    726
    
    
    
    552Net income
    
    $
    1,309
    
    
    $
    1,477
    
    
    $
    1,027Income per share:Basic
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.22Diluted
    
    $
    0.26
    
    
    $
    0.29
    
    
    $
    0.22Weighted average number of common shares and
common equivalent shares outstanding:Basic
    
    
    4,732
    
    
    
    4,709
    
    
    
    4,635Diluted
    
    
    5,053
    
    
    
    5,058
    
    
    
    4,757
 See accompanying notes to consolidated financial statements. F-14




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##### 



BACK YARD BURGERS, INC. Consolidated Statements of Changes in Stockholders Equity
(in thousands, except for number of shares)
 Preferred Stock
    
    Common Stock
    
    Treasury Stock
    
    Paid-in
    
    Retained Earnings/Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    (Deficit)
    
    TotalBalance at year ended
December 30, 2000
    
    
    19,763
    
    
    
    
    
    
    
    4,646,103
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    10,158
    
    
    
    (650
    )
    
    
    9,555Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    17,776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    26Treasury stock
purchases
    
    
    
    
    
    
    
    
    
    
    (25,000
    )
    
    
    
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (28
    )Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    6,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,027
    
    
    
    1,027Balance at year ended
December 29, 2001
    
    
    19,763
    
    
    
    
    
    
    
    4,645,019
    
    
    
    47
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,195
    
    
    
    377
    
    
    
    10,591Conversion of
preferred stock
    
    
    (146
    )
    
    
    
    
    
    
    146Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    6,558
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    29Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    69,016
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    187Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,477
    
    
    
    1,477Balance at year ended
December 28, 2002
    
    
    19,617
    
    
    
    
    
    
    
    4,720,739
    
    
    
    48
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,410
    
    
    
    1,854
    
    
    
    12,284Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    6,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    30Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    21,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    64Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,309
    
    
    
    1,309Balance at year ended
January 3, 2004
    
    
    19,617
    
    
    $
    
    
    
    
    4,748,948
    
    
    $
    48
    
    
    
    25,000
    
    
    $
    (28
    )
    
    
    10,504
    
    
    
    3,163
    
    
    
    13,687
 See accompanying notes to consolidated financial statements. F-15




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##### 



BACK YARD BURGERS, INC. Consolidated Statements of Cash Flows
(in thousands)
 Years EndedJanuary 3,
    
    December 28,
    
    December 29,2004
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    1,309
    
    
    $
    1,477
    
    
    $
    1,027Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property and equipment
    
    
    1,840
    
    
    
    1,379
    
    
    
    1,225Impairment of long-lived assets
    
    
    78
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    14
    
    
    
    423
    
    
    
    359Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    158Provision for losses on receivables
    
    
    
    
    
    
    (49
    )
    
    
    291(Gain)/loss on sale of assets
    
    
    (1
    )
    
    
    19
    
    
    
    1Other deferred income
    
    
    248
    
    
    
    (69
    )
    
    
    (116
    )Changes in assets and liabilities:Receivables
    
    
    (294
    )
    
    
    136
    
    
    
    (321
    )Inventories
    
    
    25
    
    
    
    (47
    )
    
    
    (21
    )Prepaid expenses and other current assets
    
    
    (5
    )
    
    
    (3
    )
    
    
    8Other assets
    
    
    8
    
    
    
    35
    
    
    
    (17
    )Accounts payable and accrued expenses
    
    
    510
    
    
    
    600
    
    
    
    600Reserve for closed stores
    
    
    (39
    )
    
    
    (22
    )
    
    
    54Income taxes payable/receivable
    
    
    437
    
    
    
    (258
    )
    
    
    (67
    )Other deferred liabilities
    
    
    (10
    )
    
    
    2
    
    
    
    (11
    )Deferred franchise and area development fees
    
    
    696
    
    
    
    219
    
    
    
    (174
    )Net cash provided by operating activities
    
    
    4,816
    
    
    
    3,842
    
    
    
    2,996Cash flows from investing activities:Additions to property and equipment
    
    
    (3,329
    )
    
    
    (4,861
    )
    
    
    (2,791
    )Proceeds from sale of property and equipment
    
    
    1
    
    
    
    375
    
    
    
    13Investment in joint ventures
    
    
    (108
    )
    
    
    
    
    
    
    Proceeds on notes receivable
    
    
    13
    
    
    
    24
    
    
    
    20Net cash used in investing activities
    
    
    (3,423
    )
    
    
    (4,462
    )
    
    
    (2,758
    )Cash flows from financing activities:Issuance of stock
    
    
    94
    
    
    
    216
    
    
    
    37Principal payments on short-term debt
    
    
    (300
    )Proceeds from issuance of short-term debt
    
    
    300Principal payments on long-term debt
    
    
    (3,075
    )
    
    
    (587
    )
    
    
    (803
    )Proceeds from issuance of long-term debt
    
    
    2,500
    
    
    
    740
    
    
    
    1,172Treasury stock purchases
    
    
    
    
    
    
    
    
    
    
    (28
    )Loan fees paid
    
    
    (26
    )
    
    
    
    
    
    
    Net cash (used) provided by financing activities
    
    
    (507
    )
    
    
    369
    
    
    
    378Net increase (decrease) in cash and cash equivalents
    
    
    886
    
    
    
    (251
    )
    
    
    616Cash and cash equivalents:Beginning of year
    
    
    1,406
    
    
    
    1,657
    
    
    
    1,041End of year
    
    $
    2,292
    
    
    $
    1,406
    
    
    $
    1,657Supplemental disclosure of cash flow information:Income taxes paid
    
    $
    139
    
    
    $
    561
    
    
    $
    260Interest paid
    
    $
    500
    
    
    $
    531
    
    
    $
    560Noncash investing and financing activities:Assumption of collateral underlying note receivable
    
    $
    
    
    
    $
    
    
    
    $
    55
 See accompanying notes to consolidated financial statements. F-16




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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 3, 2004, the company operated 42 restaurants in four states
(Missouri, Mississippi, Arkansas and Tennessee) and franchised 90 restaurants
in 17 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
December 29, 2001 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. Income Taxes.Deferred income taxes are provided for the tax effects of
temporary differences between the financial reporting basis and the income tax
basis of the companys assets and liabilities. Other Deferred Income.The Company adopted EITF 02-16 Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor
effective 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. The Company will record 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, 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 income in a proportionate manner with
respective future purchases. Under the terms of signed contracts, the company
is required to purchase specific volumes in future years. If these purchase
volumes are not met, the funds related to the volume shortages will be refunded
to the vendors. The company recognized approximately $79,000 in 2003 as a
reduction of cost of restaurant sales pursuant to this arrangement. The company recognized approximately $321,000, $282,000 and $309,000 as other
revenue in 2003, 2002 and 2001, respectively, pursuant to similar arrangements. 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. F-17




---



##### 



Under the terms of the franchise and area development agreements, the fees are
non-refundable and may be recognized as revenue should the franchisee fail to
perform as agreed. Commission costs associated with the sales of franchise and
area development rights are expensed when related revenues are recognized. Royalty and Advertising Fee Income.As part of its franchise agreements, the
company receives a percentage of each units gross sales (generally 4%). The
franchise agreements also provide that franchisees are required to pay an
additional 1% of gross sales to the National Advertising Fund (see Note 13).
These fees are recorded on the accrual basis of accounting. Other Revenue.Other revenue is primarily comprised of sales of proprietary
food products to franchisees, volume based incentive receipts under long-term
contracts with vendors entered into before December 29, 2002 and contributions
to the National Advertising Fund by certain of our vendors based upon
purchasing volumes of the Company and our franchisees. Revenue from sales of
proprietary food products is recognized when the products are shipped. Volume
based revenue and contributions from our vendors are recognized systematically
throughout the accounting period based on the estimated annual volume to be
achieved under the agreements. Restaurant Operating Expenses.Restaurant operating expenses include all costs
associated with the operation of the restaurant except corporate overhead,
advertising, depreciation and amortization. Property and Equipment.Property and equipment is recorded at cost.
Depreciation is computed using the straight-line
method over the estimated useful lives of the respective assets. Leasehold
costs and improvements are
amortized over the lesser of their estimated useful lives or the remaining
lease term. The average depreciable lives are as follows: buildings and
building and site improvements - 15 to 25 years; fixtures and
equipment - 3 to
7 years; and transportation vehicles - 3 to 5 years. Preopening costs.The company expenses preopening costs as incurred.
Preopening costs expensed for fiscal years 2003, 2002 and 2001 were
approximately $63,000, $151,000 and $89,000, respectively. Advertising Costs.Advertising costs, including production costs, are charged
to expense as incurred on the first date of the advertising period. Intangible assets.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.
Based on the results of these tests, the company did not record any impairment
of our goodwill. The company has no intangible assets other than goodwill. Before January 1, 2002, the company amortized goodwill over its estimated
period of benefit on a straight-line basis not to exceed 40 years. When an
intangible assets carrying value exceeded associated expected operating cash
flows, we considered it to be impaired and wrote it down to fair value, which
we determined based on either discounted future cash flows or appraised values.
In accordance with SFAS 142, The company ceased amortization F-18




---



##### 



of goodwill in 2002. Accumulated amortization of goodwill totaled $908,000
prior to the cessation of goodwill amortization. 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. 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. The company incurred non-cash impairment charges of $78,000 in the 53 weeks
ended January 3, 2004, for the effect of company-operated restaurant closings
and impaired assets at company-operated restaurants, of which $59,000 was
related to future lease payments of closed stores, net of estimated sub-lease
income and $19,000 was related to impairments of property and equipment at
closed stores. The company had $61,000 in reserves for closed properties at the end of fiscal
year 2002 of which $22,000 was charged against the reserve for lease payments.
Lease payments of $39,000 in 2003 were incurred and charged against this
additional reserve. As of January 3, 2004, the companys remaining accrual
for all future lease obligations discussed above was $81,000, which is net of
estimated sub-lease income. 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 3, 2004, all but 19,617 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 (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 2002, 2001 and 2000 under the plan
consistent with the fair value method prescribed by SFAS No. 123, Accounting
for Stock-Based Compensation,the companys operating results for 2003, 2002
and 2001 would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data): 2003
    
    2002
    
    2001Net income:As reported
    
    $
    1,309
    
    
    $
    1,477
    
    
    $
    1,027Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all rewards,
net of related taxes
    
    
    (181
    )
    
    
    (252
    )
    
    
    (73
    )Pro forma
    
    
    1,128
    
    
    
    1,225
    
    
    
    954Basic earnings per share:As reported
    
    
    0.28
    
    
    
    0.31
    
    
    
    0.22Pro forma
    
    
    0.24
    
    
    
    0.26
    
    
    
    0.21Diluted earnings per share:As reported
    
    
    0.26
    
    
    
    0.29
    
    
    
    0.22Pro forma
    
    
    0.22
    
    
    
    0.24
    
    
    
    0.20
 F-19




---



##### 



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 2003, 2002 and 2001, respectively: 2003
    
    2002
    
    2001Average expected life (years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Average expected volatility
    
    
    74.9
    %
    
    
    74.7
    %
    
    
    62.2
    %Risk-free interest rates
    
    
    3.4
    %
    
    
    4.6
    %
    
    
    5.0
    %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 it does not take into
consideration pro forma compensation expense related to grants made prior to
1995. Fair Value of Financial Instruments.At January 3, 2004, the company did not
have outstanding any financial derivative instruments. The carrying amounts of
cash and receivables approximate fair value because of the short maturity of
those instruments. The fair value of the companys long-term debt is estimated
based on the current borrowing rates available to the company for bank loans
with similar terms and average maturities. At January 3, 2004, the fair value
was approximately $6.0 million. NOTE 2  RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities
(VIEs),an interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to improve financial reporting of special
purpose and other entities. In accordance with the interpretation, business
enterprises that represent the primary beneficiary of another entity by
retaining a controlling financial interest in that entitys assets,
liabilities, and results of operating activities must consolidate the entity in
their financial statements. Prior to the issuance of FIN 46, consolidation
generally occurred when an enterprise controlled another entity through voting
interests. Certain VIEs that are qualifying special purpose entities (QSPEs)
subject to the reporting requirements of SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities,will not be
required to be consolidated under the provisions of FIN 46. The consolidation
provisions of FIN 46 apply to VIEs created or entered into after January 31,
2003, and for pre-existing VIEs in the first reporting period ending after
December 15, 2003. If applicable, transition rules allow the restatement of
financial statements or prospective application with a cumulative effect
adjustment. In addition, FIN 46 expands the disclosure requirements for the
beneficiary of a significant or a majority of the variable interests to provide
information regarding the nature, purpose and financial characteristics of the
entities. As of January 3, 2004, the Company has evaluated the impact of FIN
46 and does not believe that implementation of this interpretation will have a
material effect on its financial statements. NOTE 3 - 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 3,
    
    December 28,2004
    
    2002Corporate receivables
    
    $
    221
    
    
    $
    204National Advertising Fund receivables
    
    
    74
    
    
    
    66Credit card receivables
    
    
    74
    
    
    
    30Rebate receivables
    
    
    165
    
    
    
    201Insurance claim receivables
    
    
    198
    
    
    
    Other
    
    
    122
    
    
    
    74854
    
    
    
    575Allowance for doubtful receivables
    
    
    (65
    )
    
    
    (80
    )$
    789
    
    
    $
    495
 F-20




---



##### 



NOTE 4 - PROPERTY AND EQUIPMENT Summaries of property and equipment follow (in thousands): January 3,
    
    December 28,2004
    
    2002Land
    
    $
    3,856
    
    
    $
    3,856Buildings
    
    
    11,341
    
    
    
    9,712Building and site improvements
    
    
    3,174
    
    
    
    3,135Fixtures and equipment
    
    
    10,779
    
    
    
    9,234Transportation Vehicles
    
    
    383
    
    
    
    30329,533
    
    
    
    26,240Accumulated depreciation and amortization
    
    
    (10,816
    )
    
    
    (8,993
    )$
    18,717
    
    
    $
    17,247
 Approximately $4.5 million and $4.4 million of the total fixed assets above
relate to assets, primarily buildings, previously acquired with capital
leases and held by the company for fiscal years 2003 and 2002, respectively.
Related accumulated depreciation for these assets was approximately $1.1
million and $0.8 million for fiscal years 2003 and 2002, respectively. NOTE 5 - INVESTMENT IN JOINT VENTURES As of December 28, 2003, 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 the building and land from the company. No gain or loss
was recorded by the company in connection with these sales. Two joint
ventures purchased land from a third party and built a building. The company
then entered into a long-term lease with each joint venture. Three of the
leases are accounted for as capital lease obligations and the fixed assets
are recorded on the companys balance sheet along with the present value of
the future lease commitments. The remaining lease is accounted for as an
operating lease. The company has guaranteed 23%-25% of the long-term debt
obtained by the joint ventures to finance the construction of the
restaurants. At January 3, 2004, approximately $104,000 of such debt is
guaranteed by the company. Each of the above investments is recorded at cost as there is no material
difference between the cost and equity method of accounting for any of these
investments. NOTE 6  ACCRUED EXPENSES Summaries of accrued expenses follow (in thousands): January 3,
    
    December 28,2004
    
    2002Payroll related
    
    $
    776
    
    
    $
    895Equipment
    
    
    627
    
    
    
    3Sales taxes
    
    
    302
    
    
    
    240Property taxes
    
    
    125
    
    
    
    146Interest
    
    
    39
    
    
    
    44Utilities
    
    
    19
    
    
    
    40Other miscellaneous accruals
    
    
    213
    
    
    
    115$
    2,101
    
    
    $
    1,483
 F-21




---



##### 



NOTE 7- DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES At January 3, 2004 deferred fees received for certain franchise and area
development rights, net of commissions paid, include amounts sold during the
following years (in thousands): 2003
    
    $
    982Previous years
    
    
    218$
    1,200
 NOTE 8 INDEBTEDNESS Long-term debt is collateralized by property and equipment with a net book
value aggregating $8,890,000 and a portion is guaranteed by the personal
endorsements of certain stockholders. The balances consist of the following
(in thousands): January 3,
    
    December 28,2004
    
    2002Notes payable to financial institutions, payable in monthly installments
Ranging from $1,942 to $47,486, including interest ranging from 5.2%
to 9.6%
    
    $
    2,220
    
    
    $
    2,412Capital lease obligations, payable in monthly installments ranging from
$4,650 to $4,850, and effective interest rates ranging from 8.7% to
8.9%
    
    
    1,331
    
    
    
    1,383Equipment-related capital lease obligations, payable in monthly
installments ranging from $4,645 to $5,049, and effective interest
rates ranging from 7.9% to 9.4%
    
    
    282
    
    
    
    370Capital lease obligations to Lesters Back Yard Burgers Joint Venture
I, II and IV (See Note 5), payable in monthly installments
Ranging from $3,883 to $7,009 and effective interest rates ranging from
12.0% to 12.5%
    
    
    1,198
    
    
    
    1,257Notes payable to a leasing company, payable in monthly installments
Ranging from $1,122 to $5,643 including interest of 14.1%
    
    
    319
    
    
    
    5035,350
    
    
    
    5,925Less current installments
    
    
    (940
    )
    
    
    (825
    )Total
    
    $
    4,410
    
    
    $
    5,100
 The principal maturities of all long-term debt outstanding as of January 3,
2004, are as follows: $940,000 in 2004, $794,000 in 2005, $722,000 in 2006,
$748,000 in 2007, $246,000 in 2008 and $1,900,000 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 3, 2004, the
companys debt coverage ratio was 2.9 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. F-22




---



##### 



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 secured by certain real and personal property to be constructed
and/or acquired with the commitment proceeds. As of January 3, 2004,
borrowings outstanding under the commitment are $319,000, and $876,000 is
available under the commitment. NOTE 9- 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 3, 2004 are as follows (in thousands): 2004
    
    $
    1,4602005
    
    
    1,3412006
    
    
    1,1832007
    
    
    8272008
    
    
    650Thereafter
    
    
    2,329$
    7,790
 Rent expense was $1,465,000, $1,358,000 and $1,255,000 in 2003, 2002 and 2001,
respectively. NOTE 10- 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 $840,000. The company
recorded $490,000 as a capital lease for the construction of the building and
$350,000 as an operating lease for the land on which the building is located.
The effective interest rate of the transaction was approximately 8.7%. The
transaction was reviewed and approved by the companys board of directors. NOTE 11- GOODWILL There was no change in the carrying amount of goodwill during the year ended
January 3, 2004. The following schedule adjusts reported net income to exclude amortization
expense (net of income taxes) related to goodwill (in thousands): Years EndedJanuary 3,
    
    December 28,
    
    December 29,2004
    
    2002
    
    2001Net incomeReported net income
    
    $
    1,309
    
    
    $
    1,477
    
    
    $
    1,027Add back: Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    103Adjusted net income
    
    $
    1,309
    
    
    $
    1,477
    
    
    $
    1,130Basic earnings per share:Reported net income
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.22Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.02Adjusted net income
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.24Diluted earnings per share:Reported net income
    
    $
    0.26
    
    
    $
    0.29
    
    
    $
    0.22Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.02Adjusted net income
    
    $
    0.26
    
    
    $
    0.29
    
    
    $
    0.24
 F-23




---



##### 



NOTE 12- INCOME TAXES Income tax expense for the following tax years is comprised of (in thousands): 2003
    
    2002
    
    2001Federal, current
    
    $
    569
    
    
    $
    303
    
    
    $
    193State, current
    
    
    7
    
    
    
    
    
    
    
    Federal, deferred
    
    
    14
    
    
    
    423
    
    
    
    359$
    590
    
    
    $
    726
    
    
    $
    552
 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 3,
    
    December 28,2004
    
    2002CurrentCurrent deferred tax assets:Allowance for doubtful receivable
    
    $
    22
    
    
    $
    27Accrued expenses
    
    
    82
    
    
    
    128Other
    
    
    39
    
    
    
    15143
    
    
    
    170Current deferred tax liabilities
    
    
    
    
    
    
    Net current deferred tax asset
    
    $
    143
    
    
    $
    170NoncurrentNoncurrent deferred tax assets:Franchise fees
    
    $
    129
    
    
    $
    71Net operating loss carryforwards
    
    
    394
    
    
    
    432Alternative minimum tax credit carryforwards
    
    
    
    
    
    
    Goodwill amortization
    
    
    54
    
    
    
    111Other deferred income
    
    
    43
    
    
    
    93Other
    
    
    321
    
    
    
    129Gross noncurrent deferred tax assets
    
    
    941
    
    
    
    836Noncurrent deferred tax liabilities:Depreciation
    
    
    (522
    )
    
    
    (392
    )Gross noncurrent deferred tax liabilities
    
    
    (522
    )
    
    
    (392
    )Net noncurrent deferred tax assets
    
    
    419
    
    
    
    444Deferred tax asset valuation allowance
    
    
    (394
    )
    
    
    (432
    )$
    25
    
    
    $
    12
 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. F-24




---



##### 



A reconciliation of the statutory Federal and State income tax rates to the
income tax provision is as follows: 2003
    
    2002
    
    2001Amount
    
    %
    
    Amount
    
    %
    
    Amount
    
    %Computed expected tax
    
    $
    673
    
    
    
    35.4
    
    
    $
    771
    
    
    
    35.0
    
    
    $
    552
    
    
    
    35.0Goodwill amortization
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    15
    
    
    
    1.0Work opportunity tax credit
    
    
    (62
    )
    
    
    (3.2
    )
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Other
    
    
    (21
    )
    
    
    (1.1
    )
    
    
    (45
    )
    
    
    (2.0
    )
    
    
    (15
    )
    
    
    (1.0
    )$
    590
    
    
    
    31.1
    
    
    $
    726
    
    
    
    33.0
    
    
    $
    552
    
    
    
    35.0
 As of January 3, 2004, the company has net operating loss carryforwards
available for state income tax reporting purposes on a consolidated basis of
approximately $9.8 million. These net operating loss carryforwards expire
between 2004 and 2018. 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. In May 1995, the Board of Directors of the company and the shareholders
authorized the adoption of an Incentive Award Plan (IAP) for the companys
employees. An aggregate of 450,000 shares of common stock may be granted under
the IAP, as amended in May 1997. Options granted under the IAP may be
designated by the Compensation Committee of the Board of Directors as Incentive
Stock Options or Non-Qualified Stock Options. Non-Qualified Stock Options
granted under the IAP may not be granted at a price less than par value of the
common stock. Incentive Stock Options granted under the IAP may not be granted
at a price less than the fair market value of the common stock on the date of
grant (or 110% of fair market value in the case of persons holding 10% or more
of the voting stock of the company). The aggregate fair market value of shares
for which options are granted to any employee during any calendar year may not
exceed $100,000. The term of the options shall be set by the Compensation
Committee of the 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. 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. 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 F-25




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##### 



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 3,
2004, December 28, 2002, and December 29, 2001 follows: 2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    Price
    
    Options
    
    PriceOutstanding at beginning
of year
    
    
    498,961
    
    
    $
    2.58
    
    
    
    440,967
    
    
    $
    1.86
    
    
    
    346,635
    
    
    $
    2.32Granted
    
    
    223,000
    
    
    
    4.93
    
    
    
    131,000
    
    
    
    5.03
    
    
    
    146,000
    
    
    
    0.86Exercised
    
    
    (21,342
    )
    
    
    3.03
    
    
    
    (69,016
    )
    
    
    2.59
    
    
    
    (6,140
    )
    
    
    1.78Canceled
    
    
    (41,568
    )
    
    
    4.63
    
    
    
    (3,990
    )
    
    
    2.52
    
    
    
    (45,528
    )
    
    
    2.19Outstanding at end of year
    
    
    659,051
    
    
    
    3.24
    
    
    
    498,961
    
    
    
    2.58
    
    
    
    440,967
    
    
    
    1.86Exercisable at end of year
    
    
    535,741
    
    
    
    2.65
    
    
    
    383,461
    
    
    
    2.50
    
    
    
    313,844
    
    
    
    2.22
 A summary of information about the companys stock options outstanding at
January 3, 2004 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
    
    
    
    7.0
    
    
    $
    0.67
    
    
    
    115,000
    
    
    
    7.0
    
    
    $
    0.67$
    1.00-$2.00

    
    
    175,341
    
    
    
    5.7
    
    
    
    1.53
    
    
    
    175,341
    
    
    
    5.7
    
    
    
    1.53$
    2.00-$3.00

    
    
    12,610
    
    
    
    4.1
    
    
    
    2.25
    
    
    
    12,610
    
    
    
    4.1
    
    
    
    2.25$
    3.00-$4.00

    
    
    211,100
    
    
    
    8.2
    
    
    
    3.89
    
    
    
    187,110
    
    
    
    8.1
    
    
    
    3.89$
    4.00-$5.00

    
    
    27,000
    
    
    
    8.1
    
    
    
    4.38
    
    
    
    25,680
    
    
    
    8.0
    
    
    
    4.38$
    6.00-$7.00

    
    
    98,000
    
    
    
    10.0
    
    
    
    6.24
    
    
    
    0
    
    
    
    10.0
    
    
    
    6.24$
    10.00-$12.00

    
    
    20,000
    
    
    
    8.4
    
    
    
    10.38
    
    
    
    20,000
    
    
    
    8.4
    
    
    
    10.38$
    0.50-$12.00

    
    
    659,051
    
    
    
    7.5
    
    
    $
    3.24
    
    
    
    535,741
    
    
    
    7.0
    
    
    $
    2.65
 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 2003, 2002 and 2001, 6,867,
6,558 and 17,776 shares were purchased, respectively, under the ESPP. As of
January 3, 2004, a total of 120,770 shares have been purchased under the ESPP
since its inception in May 1995. F-26




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##### 



NOTE 15- EARNINGS PER SHARE A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data): 2003
    
    2002
    
    2001Per-Share
    
    
    
    
    
    
    
    
    
    Per-Share
    
    
    
    
    
    
    
    
    
    Per-ShareIncome
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    AmountBasic EPSIncome available to
common stockholders
    
    $
    1,309
    
    
    
    4,732
    
    
    $
    0.28
    
    
    $
    1,477
    
    
    
    4,709
    
    
    $
    0.31
    
    
    $
    1,027
    
    
    
    4,635
    
    
    $
    0.22Effect of Dilutive
SecuritiesConvertible preferred
stock
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Stock options
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    329
    
    
    
    
    
    
    
    
    
    
    
    102Diluted EPSIncome available to
common stockholders
plus assumed
Conversions
    
    $
    1,309
    
    
    
    5,053
    
    
    $
    0.26
    
    
    $
    1,477
    
    
    
    5,058
    
    
    $
    0.29
    
    
    $
    1,027
    
    
    
    4,757
    
    
    $
    0.22
 Options to purchase shares of the companys common stock in addition to the
stock options reflected in the calculation above were outstanding during the
years 2003, 2002 and 2001, but were not included in the computation of diluted
EPS because the exercise price was greater than the average market price of
common shares. The options were still outstanding as of January 3, 2004.
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 3, 2004, the companys uninsured cash
balance totaled $2,490,000. The company performs ongoing credit evaluations of
its franchisees and when necessary maintains reserves for potential credit
losses on receivables, which are not collateralized. Litigation.The company is party to certain pending legal proceedings and
claims in the normal course of business. Although the outcome of the
proceedings and claims cannot be determined with certainty, management of the
company is of the opinion that it is unlikely that these proceedings and claims
will have a material effect on the results of operations or the financial
condition of the company. F-27




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##### 



(PRICEWATERHOUSECOOPERS LOGO) Report of Independent Auditors 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 3, 2004, and
December 28, 2002, and the results of their operations and their cash flows for
each of the three years in the period ended January 3, 2004, 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
auditing standards generally accepted in the United States of America, 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 discussed in Note 1 to the consolidated Financial Statements, Back Yard
Burgers adopted Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, during 2002. PricewaterhouseCoopers, LLP
Memphis, Tennessee
March 11, 2004 Managements Statement of Responsibility for Financial Statements The management of Back Yard Burgers, Inc. has the primary responsibility
for the preparation and integrity of the consolidated financial statements and
other financial information contained in the Annual Report. The consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles consistently applied in all material respects and reflect
estimates and judgments by management where necessary. Financial information
included throughout this annual report is consistent with the consolidated
financial statements. The company maintains a system of internal accounting control that is
adequate to provide reasonable assurance that assets are safeguarded and
transactions are executed and recorded in accordance with managements
authorization. The adequacy of the companys internal accounting controls are
under the general oversight of the audit committee of the board of directors,
consisting of three outside directors. The committee reviews with the
independent auditors the scope and results of the annual audit. The 2003 consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent auditors, in accordance with generally
accepted auditing standards. PricewaterhouseCoopers LLP was recommended by the
audit committee of the board of directors, selected by the board of directors
and ratified by the companys stockholders. The independent auditors develop
and maintain an understanding of the companys systems and procedures and
perform such tests and other procedures, including tests of the internal
accounting controls, as they deem necessary to enable them to express an
opinion on the fairness of the consolidated financial statements. Such
opinion, based upon their audits of the consolidated financial statements, is
contained in this Annual Report. /s/ Lattimore M. Michael
    
    /s/ Michael G. WebbLattimore M. Michael
    
    Michael G. WebbFounder, Chairman and Chief Executive Officer
    
    Chief Financial Officer
 F-28