##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 or
 o
    
    Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number 1-12104
 BACK YARD BURGERS, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    64-0737163
(IRS employer
identification no.)
 1657 N. Shelby Oaks Drive, Suite 105Memphis, Tennessee
    
    38134-7401(Address of principal executive offices)
    
    (Zip code)
 (901) 367-0888
 Securities registered pursuant to Section 12(b) of the Act
 Securities registered pursuant to Section 12(g) of the Act
    Yes o
    
    No þ
  Yes o
    
    No þ
  Yes þ
    
    No o
 þ
  o o þ
  Yes o
    
    No þ
   Certain portions of Part II are incorporated by reference from the registrants annual report
to stockholders for the year ended December 31, 2005 and certain portions of Part III are
incorporated by reference from the registrants proxy statement relating to the annual meeting of
stockholders to be held on May 18, 2006.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESEX-21 SUBSIDIARIES OF THE REGISTRANTEX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLPEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO    Table of Contents   
 PART I
 
 ITEM 1. BUSINESS
 General
  Corporate History
  Operating Strategy
  
    
    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
  
    
    set our restaurants apart from fast-food competition by serving premium fast
food, enhancing the interiors of our dine-in facilities and re-imaging existing
franchise 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 two company-operated restaurants in
2006;
    
    test new and improved operational technology systems that should enable the
Company and our franchisees to increase sales, control operating costs and build
customer loyalty through innovative technology solutions including: new state of the
art biometric point-of-sale systems, self-serve kiosks, interactive customer ordering,
back office software, enterprise reporting, loyalty programs, point-of-sale hardware
and support.
    
    both of the new company-operated restaurants will have playgrounds; each
playground centerpiece is a tree house, which the company feels will further enhance
our back yard theme and increase restaurant traffic. These will be the first
company-operated locations with playgrounds.
    
    develop additional franchised restaurants, primarily within existing markets,
with a committed and experienced group of franchisees. We expect that approximately 25
franchised restaurants will open in 2006.
    
    continue to develop and improve sales of our breakfast menu with targeted
system-wide availability by 2007. Currently, breakfast is being served at 21 (eleven
of which are company-operated and ten franchised) of our 171 locations.
 
 ITEM 1A. RISK FACTORS
 An investment in our common stock involves a high degree of risk. You should carefully read
and consider the risks described below before deciding to invest in our common stock. The
occurrence of any of the following risks could materially harm our business, financial condition,
results of operations or cash flows.
 Our ability to open and operate new restaurants is subject to factors beyond our control.
  
    
    our ability to identify, and secure an adequate supply of, available and suitable restaurant sites;
    
    availability and retention of qualified operating personnel;
    
    increases in minimum wage and other operating costs cost;
    
    shortages in raw food products and volatility of commodity prices;
 3




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
    
    consumer preferences, spending patterns and demographic trends;
    
    securing required governmental approvals and permits;
    
    competition in our markets and competitive discounting;
    
    availability of capital; and
    
    the possibility of unforeseen events affecting our industry generally and in the
Southeastern region of the United States in particular.
 The locations of our Company-owned and franchised restaurants are critical to our success.
  Our business is dependent on the availability and retention of qualified operating personnel.
  Our operations are susceptible to the cost of and changes in food availability.
  Changes in consumer preferences could negatively impact our results of operations.
  Health concerns relating to the consumption of beef or chicken could negatively impact our results
of operations.
  4




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We are subject to government regulation that may adversely hinder or impact the growth of our
business.
    Our success depends on our ability to compete effectively in the quick service restaurant industry.
   If our franchisees cannot develop new restaurants, our growth and success may be impeded.
  Our expansion into new markets may present increased risks due to our unfamiliarity with the area.
  5




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The acquisition of existing restaurants from our franchisees may have an adverse impact on our
operating results or financial condition.
  Our restaurants are located primarily in the Southeast region of the United States and, as a
result, we are sensitive to economic and other trends and developments in this region.
  Our franchisees could take actions that could harm our business.
  If we are not able to transition the role of CEO to a qualified person, our business could suffer.
  Our future success depends on our ability to protect our proprietary information.
  A significant increase in litigation could have a material adverse effect on our results of
operations, financial condition and business prospects.
  6




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Restaurant Operations
 Restaurant Locations .
 Company-operated:
    
    
    
    Franchised:Number of
    
    
    
    Number ofCore Markets
    
    Restaurants
    
    Core Markets
    
    RestaurantsMemphis, TN Area
    
    28
    
    Kansas City, MO Area
    
    12Little Rock, AR Area
    
    7
    
    Atlanta, GA Area
    
    9Nashville, TN Area
    
    5
    
    Birmingham, AL Area
    
    4Gulf Coast, FL Area
    
    4
    
    Charlotte, NC Area
    
    4Jackson, MS Area
    
    4Knoxville, TN Area
    
    4Hickory, NC Area
    
    3Total
    
    44
    
    Memphis, TN  Area
    
    3Orlando, FL Area
    
    3Tulsa, OK Area
    
    3Chattanooga, TN Area
    
    2Lexington, KY Area
    
    2Little Rock, AR Area
    
    2Paducah, KY Area
    
    2State College, PA Area
    
    2Tallahassee, FL Area
    
    2Waco, TX Area
    
    2Other Markets(1)Georgia
    
    8Mississippi
    
    8Alabama
    
    7Kentucky
    
    7Missouri
    
    6North Carolina
    
    5Louisiana
    
    4South Carolina
    
    4Arkansas
    
    2Indiana
    
    2Tennessee
    
    2Florida
    
    1Illinois
    
    1Kansas
    
    1Nebraska
    
    1Ohio
    
    1Oklahoma
    
    1Pennsylvania
    
    1Texas
    
    1Virginia
    
    1Total
    
    127
 
 (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. 7




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Restaurant Openings and Closings
 Year EndedDecember 31,
    
    January 1,
    
    January 3,
    
    December 28,2005
    
    2005
    
    2004
    
    2002RestaurantsCompany-operatedOpen at beginning of period
    
    
    42
    
    
    
    42
    
    
    
    42
    
    
    
    37Opened during period
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    5Converted to Company
    
    
    4
    
    
    
    0
    
    
    
    0
    
    
    
    1Converted to Franchise
    
    
    0
    
    
    
    (1
    )
    
    
    0
    
    
    
    0Closed during period
    
    
    (3
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Open at end of period
    
    
    44
    
    
    
    42
    
    
    
    42
    
    
    
    42Franchised (a)Open at beginning of period
    
    
    114
    
    
    
    90
    
    
    
    77
    
    
    
    67Opened during period
    
    
    32
    
    
    
    31
    
    
    
    19
    
    
    
    15Converted to Company
    
    
    (4
    )
    
    
    0
    
    
    
    0
    
    
    
    (1
    )Converted to Franchise
    
    
    0
    
    
    
    1
    
    
    
    0
    
    
    
    0Closed during period
    
    
    (15
    )(b)
    
    
    (8
    )
    
    
    (6
    )
    
    
    (4
    )Open at end of period
    
    
    127
    
    
    
    114
    
    
    
    90
    
    
    
    77Total Restaurants
    
    
    171
    
    
    
    156
    
    
    
    132
    
    
    
    119
 
 (a)
    
    As of March 24, 2006, five franchised restaurants opened since December 31, 2005,
one each in Athens, AL, Cherokee, NC, Milledgeville, GA, Denham Springs, LA and Rogers, AR and
one franchised restaurant closed in Kingsport, TN. One Company-operated restaurant in Tupelo,
MS was sold in January 2006 and will continue to be operated as a franchised restaurant, and
one Company-operated restaurant in Memphis, TN was closed and sold in March 2006.(b)
    
    Includes the closing of all 9 co-branded restaurants with Taco Bell. Site Selection
 Restaurant Design and Service
   8




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Supplies .
 Management and Employees
 Supervision and Training
 Advertising and Promotion .
 Restaurant Reporting .
 9




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Franchise Operations
 Strategy.
 Franchisee Support Services .
   Advertising and Promotion .
 Area Development and Franchise Agreements .
 10




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Franchise Fees and Royalties .
 11




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Competition
 Restaurant Operations.
 Franchise Operations .
 Trademarks and Service Marks
  Government Regulations
    12




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Employees
  Available Information
 www.backyardburgers.com.
 13




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ITEM 2. PROPERTIES
   
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  Quarter Ended
    
    High
    
    LowApril 3, 2004
    
    $
    8.50
    
    
    $
    6.59July 3, 2004
    
    $
    8.45
    
    
    $
    5.13October 2, 2004
    
    $
    5.99
    
    
    $
    4.89January 1, 2005
    
    $
    7.46
    
    
    $
    4.65April 2, 2005
    
    $
    7.53
    
    
    $
    5.76July 2, 2005
    
    $
    6.04
    
    
    $
    5.13October 1, 2005
    
    $
    5.80
    
    
    $
    4.70December 31, 2005
    
    $
    5.55
    
    
    $
    4.75
  14




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ITEM 6. SELECTED FINANCIAL DATA
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
 OPERATIONS
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
   
 ITEM 9B. OTHER INFORMATION
  15




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PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
 ITEM 11. EXECUTIVE COMPENSATION
 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)(1) Consolidated Financial Statements
  
    
    Consolidated Balance Sheets as of December 31, 2005 and January 1, 2005
    
    Consolidated Statements of Operations for the years ended December 31, 2005 and
January 1, 2005 and January 3, 2004 (restated)
    
    Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2005 and January 1, 2005 and January 3, 2004 (restated)
    
    Consolidated Statements of Cash Flows for the years ended December 31, 2005 and
January 1, 2005 and January 3, 2004 (restated)
    
    Notes to Consolidated Financial Statements
    
    Report of Independent Registered Public Accounting Firm
 (a)(2) Consolidated Financial Statement Schedules:
  16




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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 Incentive Stock Option Plan of 1993.(1)10.3
    
    Lease, dated February 1, 1990, between Trezevant Properties and the Registrant.(1)10.4
    
    Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture I by and among William L.
Lester, Pattie F. Lester, Patricia B. Litow, Elizabeth B. Fox and Back Yard Burgers, Inc.,
dated November 15, 1994.(3)10.5
    
    Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture II by and among William
L. Lester, Pattie F. Lester, Patricia B. Litow, Elizabeth B. Fox, Charles B. Fox, David P. Fox
and Back Yard Burgers, Inc., dated November 15, 1994.(3)10.6
    
    1995 Employee Stock Purchase Plan of Back Yard Burgers, Inc.(4)10.7
    
    The 1995 Incentive Award Plan of Back Yard Burgers, Inc.(4)10.8
    
    Joint Venture Agreement of Lesters Back Yard Burgers Joint Venture III by and among Pattie
F. Lester, Patricia B. Litow, Elizabeth B. Fox, Charles B. Fox, David P. Fox, Alexandra B.
Litow, Andrew R. Litow and Back Yard Burgers, Inc., dated September 12, 1995.(4)10.9
    
    Capital Contribution Agreement between Back Yard Burgers, Inc. and BYB Properties, Inc. dated
October 10, 1997.(5)10.10
    
    Trademark Assignment by Back Yard Burgers, Inc. to BYB Properties, Inc. dated October 10,
1997.(5)10.11
    
    Trademark License Agreement between BYB Properties, Inc. and Back Yard Burgers, Inc. dated
October 10, 1997.(5)10.12
    
    Revolving Loan Agreement regarding Uncommitted Line of Credit Agreement from BYB Properties,
Inc. to Back Yard Burgers, Inc. dated October 10, 1997.(5)10.13
    
    Promissory Note by and between BYB Properties, Inc. and Back Yard Burgers, Inc. dated
October 10, 1997.(5)
 17




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ExhibitNumber
    
    Description10.14
    
    Tax Sharing Agreement between BYB Properties, Inc. and Back Yard Burgers, Inc. dated October
10, 1997.(5)10.15
    
    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.(6)10.16
    
    Lease agreement by and between Belz Devco, L.P. and Back Yard Burgers, Inc. dated November
12, 1999. (7)10.17
    
    2002 Equity Incentive Plan of Back Yard Burgers, Inc. (8)10.18
    
    Loan agreement by and between First Tennessee Bank and Back Yard Burgers, Inc. dated
February 11, 2003.(9)10.19
    
    Lease agreement by and between Batesville Back Yard Properties, LLC and Back Yard Burgers,
Inc. dated May 1, 2002. (10)10.20
    
    Severance Agreement, dated October 11, 2004, between the Registrant and Lattimore M.
Michael. (11)10.21
    
    Amended and Restated Severance Agreement, dated October 11, 2004, between the Registrant and
Michael W. Myers. (11)10.22
    
    Amended and Restated Severance Agreement, dated October 11, 2004, between the Registrant and
Michael G. Webb. (11)10.23
    
    Separation Agreement by and between Back Yard Burgers, Inc. and William N. Griffith dated
January 7, 2005.(12)10.24
    
    Consulting Services Agreement by and between Back Yard Burgers, Inc. and William N. Griffith
dated January 7, 2005.(12)10.25
    
    Amendment to Stock Option Plans and Agreement by and between Back Yard Burgers, Inc. and
William N. Griffith dated January 7, 2005.(12)10.26
    
    Franchise Agreement by and between Back Yard Burgers, Inc. and William N. Griffith dated
January 7, 2005.(12)10.27
    
    Area Development Agreement by and between Back Yard Burgers, Inc. and William N. Griffith
dated January 7, 2005.(12)10.28
    
    Agreement for Purchase and Sale of Assets dated as of the 18 th day of
October, 2005 by and among Back Yard Burgers, Inc., Charles L. Rodgers, Tennessee, Southern
Restaurant Development, LLC, and CLR Management, LLC.(13)10.29
    
    Loan Agreement dated November 17, 2005 by and among First Tennessee Bank National
Association and Back Yard Burgers, Inc. and its subsidiaries.(14)10.30
    
    Form of Secured Promissory Note dated November 17, 2005 in the principal amount of
$6,200,000 payable by Back Yard Burgers, Inc. to First Tennessee Bank National
Association.(14)10.31
    
    Separation Agreement and General Release dated February 27, 2006 by and between Michael W.
Myers and Back Yard Burgers, Inc.(15)21*
    
    Subsidiaries of the Registrant.23.1*
    
    Consent of Independent Registered Public Accounting Firm
 18




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ExhibitNumber
    
    Description31.1*
    
    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.
 
 *
    
    Filed herewith.(1)
    
    Previously filed with the Securities and Exchange Commission (the Commission) as an Exhibit
to the Registrants Form SB-2 on April 20, 1993 (File No. 33-61356).(2)
    
    Previously filed with the Commission as an Exhibit to the Registrants Amendment No. 2 to
Form SB-2 on June 25, 1993 (File No. 33-61356).(3)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K, dated
December 31, 1994 and filed on March 31, 1995.(4)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-QSB, dated
September 30, 1995 and filed on November 14, 1995.(5)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K, dated
January 3, 1998 and filed on April 3, 1998.(6)
    
    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.(7)
    
    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.(8)
    
    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.(9)
    
    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.(10)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K dated
January 3, 2004 and filed on April 2, 2004.(11)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-Q dated
October 2, 2004 and filed on November 16, 2004.(12)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 10-K dated
January 1, 2005 and filed on April 18, 2005.(13)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 8-K filed on
October 24, 2005.(14)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 8-K filed on
November 18, 2005.(15)
    
    Previously filed with the Commission as an Exhibit to the Registrants Form 8-K filed on
February 28, 2006. 19




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SIGNATURES
  BACK YARD BURGERS, INC.By:
    
    /s/ Lattimore M. Michael

Lattimore M. Michael, Chairmanand Chief Executive OfficerDate:
    
    March 30, 2006
  Signature
    
    Title
    
    Date/s/ Lattimore M. Michael
    
    Chairman of the Board andLattimore M. Michael
    
    Chief Executive Officer
    
    March 30, 2006/s/ Joseph L. Weiss
    
    Chief Operating Officer
    
    March 30, 2006Joseph L. Weiss
    
    and Director/s/ Michael G. Webb
    
    Chief Financial Officer
    
    March 30, 2006Michael G. Webb/s/ W. Kurt Henke
    
    Director
    
    March 30, 2006W. Kurt Henke/s/ Jim Peterson
    
    Director
    
    March 30, 2006Jim Peterson/s/ William B. Raiford, III
    
    Director
    
    March 30, 2006William B. Raiford, III
 20




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INDEX TO FINANCIAL SUPPLEMENT
TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005
 PageSelected Consolidated Financial Data
    
    
    F-1Managements Discussion And Analysis
of Financial Condition And Results Of Operations
    
    
    F-4Consolidated Balance Sheets
as of December 31, 2005 and January 1, 2005
    
    
    F-15Consolidated Statements of Operations
for the years ended December 31, 2005 and January 1, 2005 and January 3, 2004 (restated)
    
    
    F-16Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2005 and January 1, 2005 and January 3, 2004 (restated)
    
    
    F-17Consolidated Statements of Cash Flows
for the years ended December 31, 2005 and January 1, 2005 and January 3, 2004 (restated)
    
    
    F-18Notes to the Consolidated Financial Statements
    
    
    F-19Report of Independent Registered Public Accounting Firm
    
    
    F-33




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Selected Consolidated Financial Data  (in thousands, except per share data)
  December 31,
    
    January 1,
    
    January 3,
    
    December 28,
    
    December 29,2005
    
    2005
    
    2004(1)
    
    2002
    
    2001(restated)
    
    (restated)
    
    (restated)OPERATIONSRestaurant Sales
    
    $
    34,479
    
    
    $
    34,912
    
    
    $
    34,279
    
    
    $
    30,951
    
    
    $
    27,541Total revenues
    
    
    41,001
    
    
    
    40,183
    
    
    
    38,647
    
    
    
    34,464
    
    
    
    30,919Total royalties (2)
    
    
    4,143
    
    
    
    3,108
    
    
    
    2,621
    
    
    
    2,172
    
    
    
    1,984(Loss)income before income taxes
    
    
    (117
    )
    
    
    1,789
    
    
    
    1,772
    
    
    
    2,082
    
    
    
    1,480Net (loss) income
    
    
    (44
    )
    
    
    1,264
    
    
    
    1,225
    
    
    
    1,397
    
    
    
    962FINANCIAL POSITIONTotal assets
    
    $
    31,641
    
    
    $
    24,269
    
    
    $
    24,769
    
    
    $
    22,405
    
    
    $
    19,545Property and equipment, net
    
    
    23,035
    
    
    
    17,746
    
    
    
    18,672
    
    
    
    17,307
    
    
    
    13,977Debt
    
    
    10,965
    
    
    
    4,900
    
    
    
    5,676
    
    
    
    6,250
    
    
    
    5,772Shareholders equity
    
    
    15,302
    
    
    
    14,476
    
    
    
    13,078
    
    
    
    11,759
    
    
    
    10,156PER SHARE DATANet (loss) income  basic
    
    $
    (0.01
    )
    
    $
    0.26
    
    
    $
    0.26
    
    
    $
    0.30
    
    
    $
    0.21Net (loss) income  diluted
    
    
    (0.01
    )
    
    
    0.25
    
    
    
    0.24
    
    
    
    0.28
    
    
    
    0.20Dividends
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.00Market price at year end
    
    
    4.97
    
    
    
    7.50
    
    
    
    6.52
    
    
    
    4.00
    
    
    
    3.70OTHER DATACapital expenditures
    
    
    8,614
    (3)
    
    
    2,178
    
    
    
    2,702
    (3)
    
    
    4,861
    
    
    
    2,791
 
 (1)
    
    Because the Companys fiscal year ends on the Saturday closest to December 31,
the fiscal year ended January 3, 2004 contains 53 weeks, while the fiscal years ended December
31, 2005, January 1, 2005, December 28, 2002 and December 29, 2001 contain 52 weeks.(2)
    
    Total royalties are derived from sales at franchised restaurants of $104.3 million
in 2005, $78.3 million in 2004, $66.2 million in 2003, $54.0 million in 2002, and $50.2
million in 2001.(3)
    
    Expenditures exclude non-cash transactions of $646,000 in 2005 and $627,000 in 2003. F-1




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##### Table of Contents



Year Ended December 31, 2005First
    
    
    
    
    
    
    
    
    FourthQuarter
    
    
    Second
    
    
    Third
    
    
    Quarter(a)
    
    
    Quarter
    
    
    Quarter
    
    
    (b)Income Statement
Data:Revenues:Restaurant sales
    
    $
    8,208
    
    
    $
    9,072
    
    
    $
    8,450
    
    
    $
    8,749Franchise and
area development
fees
    
    
    165
    
    
    
    146
    
    
    
    209
    
    
    
    109Royalty fees
    
    
    931
    
    
    
    1,038
    
    
    
    1,059
    
    
    
    1,115Advertising fees
    
    
    244
    
    
    
    271
    
    
    
    267
    
    
    
    279Other
    
    
    129
    
    
    
    210
    
    
    
    144
    
    
    
    206Total Revenues
    
    
    9,677
    
    
    
    10,737
    
    
    
    10,129
    
    
    
    10,458Expenses:Cost of
restaurant sales
    
    
    2,639
    
    
    
    2,951
    
    
    
    2,749
    
    
    
    2,786Restaurant
operating
expenses
    
    
    3,995
    
    
    
    4,275
    
    
    
    4,089
    
    
    
    4,539General and
administrative
    
    
    2,054
    
    
    
    1,579
    
    
    
    1,531
    
    
    
    1,654Advertising
    
    
    554
    
    
    
    713
    
    
    
    598
    
    
    
    682Depreciation
    
    
    563
    
    
    
    515
    
    
    
    523
    
    
    
    605Impairment of
long-lived assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    986Total expenses
    
    
    9,805
    
    
    
    10,033
    
    
    
    9,490
    
    
    
    11,252Operating
(loss) income
    
    
    (128
    )
    
    
    704
    
    
    
    639
    
    
    
    (794
    )Interest income
    
    
    6
    
    
    
    7
    
    
    
    7
    
    
    
    7Interest expense
    
    
    (108
    )
    
    
    (104
    )
    
    
    (100
    )
    
    
    (140
    )Other, net
    
    
    (21
    )
    
    
    (23
    )
    
    
    (26
    )
    
    
    (43
    )(Loss) income
before income
taxes
    
    
    (251
    )
    
    
    584
    
    
    
    520
    
    
    
    (970
    )Income tax
(benefit) expense
    
    
    (88
    )
    
    
    180
    
    
    
    166
    
    
    
    (331
    )Net (loss) income
    
    $
    (163
    )
    
    $
    404
    
    
    $
    354
    
    
    $
    (639
    )(Loss) income
per share:Basic
    
    $
    (0.03
    )
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    (0.13
    )Diluted
    
    $
    (0.03
    )
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    (0.13
    )Weighted average
number of common
shares and
common
equivalent
shares outstanding:Basic
    
    
    4,791
    
    
    
    4,806
    
    
    
    4,834
    
    
    
    4,900Diluted
    
    
    4,791
    
    
    
    5,107
    
    
    
    5,072
    
    
    
    4,900
 
 (a)
    
    The Company recorded a non-cash charge of approximately $358,000 (net of a tax benefit of
$153,000) relating to the extension of the exercise date of certain stock options upon the
resignation of an officer/director on January 7, 2005 during the first quarter of 2005.(b)
    
    The Company recorded a non-cash impairment charge of $600,000 (net of a tax benefit of
$386,000) under FAS No. 144 relating to three Company-operated stores during the fourth
quarter of 2005. F-2




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##### Table of Contents



Year Ended January 1, 2005First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter(restated)
    
    
    (restated)
    
    
    (restated)Income Statement Data:Revenues:Restaurant sales
    
    $
    8,434
    
    
    $
    9,323
    
    
    $
    8,908
    
    
    $
    8,247Franchise and
area development
fees
    
    
    88
    
    
    
    121
    
    
    
    226
    
    
    
    185Royalty fees
    
    
    659
    
    
    
    793
    
    
    
    830
    
    
    
    826Advertising fees
    
    
    165
    
    
    
    205
    
    
    
    248
    
    
    
    248Other
    
    
    137
    
    
    
    217
    
    
    
    180
    
    
    
    143Total Revenues
    
    
    9,483
    
    
    
    10,659
    
    
    
    10,392
    
    
    
    9,649Expenses:Cost of
restaurant sales
    
    
    2,634
    
    
    
    2,932
    
    
    
    2,927
    
    
    
    2,573Restaurant
operating
expenses
    
    
    4,076
    
    
    
    4,342
    
    
    
    4,338
    
    
    
    3,970General and
administrative
    
    
    1,199
    
    
    
    1,307
    
    
    
    1,380
    
    
    
    1,394Advertising
    
    
    514
    
    
    
    720
    
    
    
    692
    
    
    
    726Depreciation
    
    
    524
    
    
    
    526
    
    
    
    531
    
    
    
    515Total expenses
    
    
    8,947
    
    
    
    9,827
    
    
    
    9,868
    
    
    
    9,178Operating income
    
    
    536
    
    
    
    832
    
    
    
    524
    
    
    
    471Interest income
    
    
    1
    
    
    
    2
    
    
    
    1
    
    
    
    1Interest expense
    
    
    (126
    )
    
    
    (120
    )
    
    
    (120
    )
    
    
    (113
    )Other, net
    
    
    (22
    )
    
    
    (24
    )
    
    
    (23
    )
    
    
    (31
    )Income before
income taxes
    
    
    389
    
    
    
    690
    
    
    
    382
    
    
    
    328Income tax expense
    
    
    122
    
    
    
    216
    
    
    
    120
    
    
    
    67Net Income
    
    $
    267
    
    
    $
    474
    
    
    $
    262
    
    
    $
    261Income per share:Basic
    
    $
    0.06
    
    
    $
    0.10
    
    
    $
    0.05
    
    
    $
    0.05Diluted
    
    $
    0.05
    
    
    $
    0.09
    
    
    $
    0.05
    
    
    $
    0.05Weighted average
number of common
shares and common
equivalent shares
outstanding:Basic
    
    
    4,762
    
    
    
    4,775
    
    
    
    4,779
    
    
    
    4,781Diluted
    
    
    5,157
    
    
    
    5,142
    
    
    
    5,029
    
    
    
    5,028
 F-3




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##### Table of Contents



Managements Discussion and Analysis  of Financial Condition and Results of Operations
 Introduction
   Results of Operations
  For the Years EndedDecember 31,
    
    January 1,
    
    January 3,2005
    
    2005
    
    2004(restated)RevenuesRestaurant sales
    
    
    84.1
    %
    
    
    86.9
    %
    
    
    88.7
    %Franchise and area development fees
    
    
    1.5
    
    
    
    1.5
    
    
    
    1.0Royalty fees
    
    
    10.1
    
    
    
    7.7
    
    
    
    6.8Advertising fees
    
    
    2.6
    
    
    
    2.2
    
    
    
    1.7Other operating revenue
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.8Total revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and ExpensesCost of restaurant sales (1)
    
    
    32.3
    %
    
    
    31.7
    %
    
    
    31.9
    %Restaurant operating expenses (1)
    
    
    49.0
    
    
    
    47.9
    
    
    
    48.1General and administrative
    
    
    16.6
    
    
    
    13.1
    
    
    
    11.8Advertising
    
    
    6.2
    
    
    
    6.6
    
    
    
    6.1Depreciation and amortization
    
    
    5.4
    
    
    
    5.2
    
    
    
    5.0Operating income
    
    
    1.0
    
    
    
    5.9
    
    
    
    6.1Interest income
    
    
    0.1
    
    
    
    0.0
    
    
    
    0.0Interest expense
    
    
    (1.1
    )
    
    
    (1.2
    )
    
    
    (1.4
    )Other, net
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    (0.2
    )(Loss) income before taxes
    
    
    (0.3
    )
    
    
    4.5
    
    
    
    4.6Income tax (benefit) expense (2)
    
    
    62.4
    
    
    
    29.3
    
    
    
    30.9Net (loss) income
    
    
    (0.1
    )
    
    
    3.1
    
    
    
    3.2
 
 (1)
    
    As a percentage of restaurant sales.(2)
    
    As a percentage of (loss) income before taxes. F-4




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##### Table of Contents



For the Years EndedDecember 31,
    
    
    January 1,
    
    
    January 3,2005
    
    
    2005
    
    
    2004Average annual sales per restaurant open for a full year(1)Company-operated
    
    $
    835,000
    
    
    $
    828,000
    
    
    $
    826,000Franchised
    
    
    823,000
    
    
    
    808,000
    
    
    
    782,000Combined
    
    
    827,000
    
    
    
    815,000
    
    
    
    799,000Number of restaurants(2)Company-operated
    
    
    44
    
    
    
    42
    
    
    
    42Franchised
    
    
    127
    
    
    
    114
    
    
    
    90Total
    
    
    171
    
    
    
    156
    
    
    
    132
 
 (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 24, 2006, five franchised restaurants have opened since December 31,
2005, one each in Athens, AL, Cherokee, NC, Milledgeville, GA, Denham Springs, LA and Rogers,
AR and one franchised restaurant closed in Kingsport, TN. One Company-operated restaurant in
Tupelo, MS was sold in January 2006 and will continue to be operated as a franchised
restaurant, and one Company-operated restaurant in Memphis, TN was closed and sold in March
2006. COMPARISON OF FISCAL YEAR 2005 TO FISCAL YEAR 2004
 Restaurant sales
 Franchise and area development fees
 Royalty fees
 Advertising fees
 Other
 Cost of restaurant sales
 F-5




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##### Table of Contents



Restaurant operating expenses,
 General and administrative
 Advertising
 Depreciation
 Impairment of Long-Lived Assets
 Interest expense
 Other, net
 Income tax benefit
 F-6




---



##### Table of Contents



COMPARISON OF FISCAL YEAR 2004 TO FISCAL YEAR 2003
 Back Yard Burgers fiscal year ends on the Saturday closest to December 31. As a result,
fiscal 2003 contains 53 weeks versus 52 weeks for the current year. Therefore, all references to
fiscal 2003 are for the 53-week period ended January 3, 2004 and all references to fiscal 2004 are for the 52-week period ended January 1, 2005.
 Restaurant sales
 Franchise and area development fees
 Royalty fees
 Advertising fees
 Other
 Cost of restaurant sales
 Restaurant operating expenses,
 General and administrative
 F-7




---



##### Table of Contents



Advertising
 Depreciation
 Interest expense
 Other, net
 Income tax expense
 Impairment of Long-Lived Assets
 Accounting
for the Impairment and Disposal of Long-Lived Assets,
    F-8




---



##### Table of Contents



Liquidity and Capital Resources
      F-9




---



##### Table of Contents



Contractual Commitments
  Less than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 yearsLong-term debt
    
    $
    7,364
    
    
    $
    756
    
    
    $
    1,168
    
    
    $
    608
    
    
    $
    4,832Interest payments
    
    
    2,422
    
    
    
    442
    
    
    
    753
    
    
    
    655
    
    
    
    572Capital leases
    
    
    5,305
    
    
    
    502
    
    
    
    1,580
    
    
    
    702
    
    
    
    2,521Operating leases (1)
    
    
    4,263
    
    
    
    1,141
    
    
    
    1,397
    
    
    
    727
    
    
    
    998Purchase obligations
    
    
    3,369
    
    
    
    788
    
    
    
    1,297
    
    
    
    895
    
    
    
    389Total contractual obligations
    
    $
    22,723
    
    
    $
    3,629
    
    
    $
    6,195
    
    
    $
    3,587
    
    
    $
    9,312
 
 (1)
    
    Represents aggregate minimum lease payments. Some of the leases also require
contingent rent in addition to the minimum rent based on a percentage of sales. Qualitative and Quantitative Disclosure about Market Risk
   F-10




---



##### Table of Contents



Seasonality and Inflation
  Conversion of Preferred Stock
  Recent Accounting Pronouncements
  Critical Accounting Policies and Estimates
    F-11




---



##### Table of Contents



Revenue Recognition
    Long-Lived Assets
     F-12




---



##### Table of Contents



Deferred Income Taxes
  Leases
   Stock-Based Compensation
   Off-Balance Sheet Arrangements
  F-13




---



##### Table of Contents



Known Trends and Uncertainties
       F-14




---



##### Table of Contents



BACK YARD BURGERS, INC.  Consolidated Balance Sheets
 December 31,
    
    
    January 1,2005
    
    
    2005ASSETSCash and cash equivalents
    
    $
    3,602
    
    
    $
    2,320Receivables, less allowance for doubtful accounts of
$153 and $100
    
    
    786
    
    
    
    744Inventories
    
    
    281
    
    
    
    259Income taxes receivable
    
    
    268
    
    
    
    Current deferred tax asset
    
    
    193
    
    
    
    114Prepaid expenses
    
    
    186
    
    
    
    205Total current assets
    
    
    5,316
    
    
    
    3,642Property and equipment, at depreciated cost
    
    
    23,035
    
    
    
    17,746Goodwill
    
    
    1,751
    
    
    
    1,751Noncurrent deferred tax asset
    
    
    871
    
    
    
    491Notes receivable, less allowance of $17 and $0
    
    
    73
    
    
    
    90Other assets
    
    
    595
    
    
    
    549Total assets
    
    $
    31,641
    
    
    $
    24,269LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    1,295
    
    
    $
    1,110Accrued expenses
    
    
    1,734
    
    
    
    1,324Reserve for closed stores
    
    
    15
    
    
    
    Current installments of long-term debt
    
    
    966
    
    
    
    797Income tax payable
    
    
    
    
    
    
    12Total current liabilities
    
    
    4,010
    
    
    
    3,243Long-term debt, less current installments
    
    
    9,999
    
    
    
    4,103Deferred franchise and area development fees
    
    
    1,441
    
    
    
    1,457Other deferred income
    
    
    276
    
    
    
    379Other deferred liabilities
    
    
    613
    
    
    
    611Total liabilities
    
    
    16,339
    
    
    
    9,793Commitments and contingencies (Note 8 and Note 16)Stockholders equityPreferred stock, $.01 par value; 2,000,000 shares authorized;
19,269 shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 12,000,000 shares authorized;
4,940,151 and 4,790,474 shares issued and outstanding
    
    
    49
    
    
    
    48Paid-in capital
    
    
    11,507
    
    
    
    10,638Treasury stock, at cost, 25,000 shares
    
    
    (28
    )
    
    
    (28
    )Retained earnings
    
    
    3,774
    
    
    
    3,818Total stockholders equity
    
    
    15,302
    
    
    
    14,476Total liabilities and stockholders equity
    
    $
    31,641
    
    
    $
    24,269
  F-15




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##### Table of Contents



BACK YARD BURGERS, INC.  Consolidated Statements of Operations
 Years EndedDecember 31,
    
    
    January 1,
    
    
    January 3,2005
    
    
    2005
    
    
    2004(restated)Revenues:Restaurant sales
    
    $
    34,479
    
    
    $
    34,912
    
    
    $
    34,279Franchise and area development fees
    
    
    629
    
    
    
    620
    
    
    
    378Royalty fees
    
    
    4,143
    
    
    
    3,108
    
    
    
    2,621Advertising fees
    
    
    1,061
    
    
    
    866
    
    
    
    661Other
    
    
    689
    
    
    
    677
    
    
    
    708Total revenues
    
    
    41,001
    
    
    
    40,183
    
    
    
    38,647Expenses:Cost of restaurant sales
    
    
    11,125
    
    
    
    11,066
    
    
    
    10,935Restaurant operating expenses
    
    
    16,898
    
    
    
    16,726
    
    
    
    16,494General and administrative
    
    
    6,818
    
    
    
    5,280
    
    
    
    4,551Advertising
    
    
    2,547
    
    
    
    2,652
    
    
    
    2,349Depreciation
    
    
    2,206
    
    
    
    2,096
    
    
    
    1,945Impairment of Long-Lived Assets
    
    
    986
    
    
    
    
    
    
    
    Total expenses
    
    
    40,580
    
    
    
    37,820
    
    
    
    36,274Operating income
    
    
    421
    
    
    
    2,363
    
    
    
    2,373Interest income
    
    
    27
    
    
    
    5
    
    
    
    6Interest expense
    
    
    (452
    )
    
    
    (479
    )
    
    
    (539
    )Other, net
    
    
    (113
    )
    
    
    (100
    )
    
    
    (68
    )(Loss) income before income taxes
    
    
    (117
    )
    
    
    1,789
    
    
    
    1,772Income tax (benefit) expense
    
    
    (73
    )
    
    
    525
    
    
    
    547Net (loss) income
    
    $
    (44
    )
    
    $
    1,264
    
    
    $
    1,225(Loss) income per share:Basic
    
    $
    (0.01
    )
    
    $
    0.26
    
    
    $
    0.26Diluted
    
    $
    (0.01
    )
    
    $
    0.25
    
    
    $
    0.24Weighted average number of common shares and
common equivalent shares outstanding:Basic
    
    
    4,833
    
    
    
    4,774
    
    
    
    4,732Diluted
    
    
    4,833
    
    
    
    5,096
    
    
    
    5,053
  F-16




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##### Table of Contents



BACK YARD BURGERS, INC.  Consolidated Statements of Changes in Stockholders Equity
 Preferred Stock
    
    
    Common Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    RetainedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    TotalBalance at year
ended December 28,
2002
    
    
    19,617
    
    
    
    
    
    
    
    4,720,739
    
    
    
    48
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,410
    
    
    
    1,329
    
    
    
    11,759Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    6,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    30Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    21,342
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    64Net income (restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,225
    
    
    
    1,225Balance at year
ended January 3,
2004
    
    
    19,617
    
    
    
    
    
    
    
    4,748,948
    
    
    
    48
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,504
    
    
    
    2,554
    
    
    
    13,078Conversion of
preferred stock
    
    
    (348
    )
    
    
    
    
    
    
    348
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    6,038
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    31Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    35,140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,264
    
    
    
    1,264Balance at year
ended January 1,
2005
    
    
    19,269
    
    
    
    
    
    
    
    4,790,474
    
    
    
    48
    
    
    
    25,000
    
    
    
    (28
    )
    
    
    10,638
    
    
    
    3,818
    
    
    
    14,476Employee stock
purchases
    
    
    
    
    
    
    
    
    
    
    4,877
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    24Exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    144,800
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    334
    
    
    
    
    
    
    
    335Stock option
Modification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    358
    
    
    
    
    
    
    
    358Tax benefit
from Stock option Modification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    153Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (44
    )
    
    
    (44
    )Balance at year
ended December 31,
2005
    
    
    19,269
    
    
    $
    
    
    
    
    4,940,151
    
    
    $
    49
    
    
    
    25,000
    
    
    $
    (28
    )
    
    
    11,507
    
    
    
    3,774
    
    
    
    15,302
  F-17




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##### Table of Contents



BACK YARD BURGERS, INC.  Consolidated Statements of Cash Flows
 Years EndedDecember 31,
    
    
    January 1,
    
    
    January 3,2005
    
    
    2005
    
    
    2004(restated)Cash flows from operating activities:Net (loss) income
    
    $
    (44
    )
    
    $
    1,264
    
    
    $
    1,225Adjustments to reconcile net (loss) income to net cash
provided by operating activities:Depreciation of property and equipment
    
    
    2,206
    
    
    
    2,096
    
    
    
    1,945Impairment of long-lived assets
    
    
    986
    
    
    
    
    
    
    
    Tax benefit of impairment of long-lived assets
    
    
    (386
    )
    
    
    
    
    
    
    Deferred income taxes
    
    
    80
    
    
    
    (123
    )
    
    
    (29
    )Modification of stock plan
    
    
    511
    
    
    
    
    
    
    
    Tax benefit of modification of stock plan
    
    
    (153
    )
    
    
    
    
    
    
    Provision for losses on receivables
    
    
    93
    
    
    
    35
    
    
    
    (Gain)/loss on sale of assets
    
    
    (5
    )
    
    
    (68
    )
    
    
    18Changes in assets and liabilities:Receivables
    
    
    (118
    )
    
    
    10
    
    
    
    (294
    )Inventories
    
    
    (22
    )
    
    
    (8
    )
    
    
    25Prepaid expenses and other current assets
    
    
    19
    
    
    
    (147
    )
    
    
    (5
    )Other assets
    
    
    (46
    )
    
    
    (172
    )
    
    
    8Accounts payable and accrued expenses
    
    
    595
    
    
    
    (1,038
    )
    
    
    (117
    )Reserve for closed stores
    
    
    15
    
    
    
    (81
    )
    
    
    20Income taxes payable/receivable
    
    
    (280
    )
    
    
    (129
    )
    
    
    437Other deferred income
    
    
    (103
    )
    
    
    (141
    )
    
    
    248Other deferred liabilities
    
    
    2
    
    
    
    10
    
    
    
    11Deferred franchise and area development fees
    
    
    (16
    )
    
    
    257
    
    
    
    696Net cash provided by operating activities
    
    
    3,334
    
    
    
    1,765
    
    
    
    4,188Cash flows from investing activities:Additions to property and equipment
    
    
    (8,614
    )
    
    
    (2,178
    )
    
    
    (2,702
    )Proceeds from sale of property and equipment
    
    
    784
    
    
    
    1,076Investment in joint ventures
    
    
    
    
    
    
    
    
    
    
    (108
    )Proceeds on notes receivable
    
    
    
    
    
    
    7
    
    
    
    13Net cash used in investing activities
    
    
    (7,830
    )
    
    
    (1,095
    )
    
    
    (2,796
    )Cash flows from financing activities:Issuance of stock
    
    
    359
    
    
    
    134
    
    
    
    94Principal payments on short-term debt
    
    
    (1,950
    )
    
    
    
    
    
    
    (300
    )Proceeds from issuance of short-term debt
    
    
    1,950
    
    
    
    
    
    
    
    300Principal payments on long-term debt
    
    
    (781
    )
    
    
    (776
    )
    
    
    (3,074
    )Proceeds from issuance of long-term debt
    
    
    6,200
    
    
    
    
    
    
    
    2,500Loan fees paid
    
    
    
    
    
    
    
    
    
    
    (26
    )Net cash provided by (used in) financing activities
    
    
    5,778
    
    
    
    (642
    )
    
    
    (506
    )Net increase in cash and cash equivalents
    
    
    1,282
    
    
    
    28
    
    
    
    886Cash and cash equivalents:Beginning of year
    
    
    2,320
    
    
    
    2,292
    
    
    
    1,406End of year
    
    $
    3,602
    
    
    $
    2,320
    
    
    $
    2,292Noncash operating and investing activitiesAccrued property and equipment additions
    
    $
    
    
    
    $
    
    
    
    $
    627Property acquired with a capital lease
    
    $
    646
    
    
    $
    
    
    
    $
    Stock option
plan (Note 1)
    
    $
    358
    
    
    $
    
    
    
    $
    Supplemental disclosure of cash flow information:Income taxes paid
    
    $
    666
    
    
    $
    777
    
    
    $
    139Interest paid
    
    $
    444
    
    
    $
    481
    
    
    $
    544
  F-18




---



##### Table of Contents



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Business Activity.
 Consolidation Policy.
 Fiscal Year.
 Use of Estimates.
 Cash and Cash Equivalents.
 Inventories.
 Property and Equipment.
 Goodwill. Goodwill and Other Intangible Assets
    F-19




---



##### Table of Contents



Other Deferred Income. Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a Vendor
  Income Taxes.
 Franchise and Area Development Fee Income.
  Restaurant Sales.
 Royalty and Advertising Fee Income.
 Allowance for Doubtful Accounts.
 Other Revenue.
 Restaurant Operating Expenses.
 Preopening costs.
 Advertising Costs. F-20
    Table of Contents   Impairment of Long-Lived Assets. Accounting for the Impairment
and Disposal of Long-Lived Asset
     Leases.
  Preferred Stock.
 Treasury Stock.
 Earnings Per Share. Earnings per Share
 F-21




---



##### Table of Contents



Stock-Based Employee Compensation. Accounting for Stock Issued to Employees,
  Accounting for Stock-Based Compensation,
 20032005
    
    

2004
    
    
    (restated)Net (loss) income, as reported
    
    $
    (44
    )
    
    $
    1,264
    
    
    $
    1,225Add: Expense recognized, net of tax
    
    $
    358
    
    
    
    
    
    
    
    Deduct: Total stock-based employee
compensation expense determined under
fair value based methods for all rewards,
net of related taxes
    
    
    (101
    )
    
    
    (263
    )
    
    
    (181
    )Pro forma
    
    
    213
    
    
    
    1,001
    
    
    
    1,044Basic (loss) earnings per share:As reported
    
    
    (0.01
    )
    
    
    0.26
    
    
    
    0.26Pro forma
    
    
    0.04
    
    
    
    0.21
    
    
    
    0.22Diluted (loss) earnings per share:As reported
    
    
    (0.01
    )
    
    
    0.25
    
    
    
    0.24Pro forma
    
    
    0.04
    
    
    
    0.20
    
    
    
    0.21
  2005
    
    2004
    
    2003Average expected life (years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Average expected volatility
    
    
    53.5
    %
    
    
    63.4
    %
    
    
    74.9
    %Risk-free interest rates
    
    
    4.1
    %
    
    
    3.7
    %
    
    
    3.4
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
  Fair Value of Financial Instruments.
 F-22




---



##### Table of Contents



NOTE 2  RECENTLY ISSUED ACCOUNTING STANDARDS
     NOTE 3  ACCOUNTS RECEIVABLE
  December 31,
    
    
    January 1,2005
    
    
    2005Corporate receivables
    
    $
    442
    
    
    $
    336National Advertising Fund receivables
    
    
    113
    
    
    
    192Credit card receivables
    
    
    162
    
    
    
    94Rebate receivables
    
    
    123
    
    
    
    55Other
    
    
    99
    
    
    
    167939
    
    
    
    844Allowance for doubtful accounts
    
    
    (153
    )
    
    
    (100
    )$
    786
    
    
    $
    744
 F-23




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##### Table of Contents



NOTE 4  PROPERTY AND EQUIPMENT
  December 31,
    
    
    January 1,2005
    
    
    2005Land
    
    $
    7,560
    
    
    $
    3,774Buildings
    
    
    13,052
    
    
    
    11,563Building and site improvements
    
    
    2,965
    
    
    
    3,076Fixtures and equipment
    
    
    13,182
    
    
    
    12,030Transportation vehicles
    
    
    224
    
    
    
    27736,983
    
    
    
    30,720Accumulated depreciation and amortization
    
    
    (13,948
    )
    
    
    (12,974
    )$
    23,035
    
    
    $
    17,746
  NOTE 5  INVESTMENT IN JOINT VENTURES
  NOTE 6  ACCRUED EXPENSES
  December 31,
    
    
    January 1,2005
    
    
    2005Payroll related
    
    $
    652
    
    
    $
    600Sales taxes
    
    
    295
    
    
    
    229Property taxes
    
    
    184
    
    
    
    128Advertising
    
    
    9
    
    
    
    69Interest
    
    
    45
    
    
    
    37Utilities
    
    
    109
    
    
    
    32Other miscellaneous accruals
    
    
    440
    
    
    
    229$
    1,734
    
    
    $
    1,324
 F-24




---



##### Table of Contents



NOTE 7  DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES
  2005
    
    $
    2942004
    
    
    421Previous years
    
    
    726$
    1,441
 NOTE 8  INDEBTEDNESS
  December 31,
    
    
    January 1,2005
    
    
    2005Notes payable, payable in monthly
installments ranging from $2 to $52,
including interest ranging from 5.2% to 6.4%
    
    $
    7,364
    
    
    $
    1,659Capital lease obligations for leased
buildings, payable in monthly installments
of approximately $5, and effective interest
rates ranging from 8.7% to 10.7%
    
    
    3,353
    
    
    
    2,908Equipment-related capital lease obligations,
payable in monthly installments of
approximately $5, and effective interest
rates ranging from 7.9% to 9.4%
    
    
    106
    
    
    
    204Capital lease obligations to Lesters Back
Yard Burgers Joint Venture I, II and IV (See
Note 5), payable in monthly installments
ranging from $4 to $7 and effective interest
rates ranging from 12.0% to 12.5%
    
    
    1,846
    
    
    
    2,065Notes payable to a leasing company, payable
in monthly installments ranging from $1 to
$6, including interest of 14.1%
    
    
    
    
    
    
    7512,669
    
    
    
    6,911Less interest payments for capital leases
    
    
    (1,704
    )
    
    
    (2,011
    )Less current installments
    
    
    (966
    )
    
    
    (797
    )Total
    
    $
    9,999
    
    
    $
    4,103
    F-25




---



##### Table of Contents



F-26




---



##### Table of Contents



NOTE 9  OPERATING LEASES
  2006
    
    $
    1,1412007
    
    
    7812008
    
    
    6162009
    
    
    3822010
    
    
    345Thereafter
    
    
    998$
    4,263
  NOTE 10  RELATED PARTY TRANSACTIONS
  F-27




---



##### Table of Contents



NOTE 11  INCOME TAXES
  20032005
    
    

2004
    
    
    (restated)Federal, current
    
    $
    395
    
    
    $
    638
    
    
    $
    569State, current
    
    
    (9
    )
    
    
    10
    
    
    
    7Federal, deferred
    
    
    (504
    )
    
    
    (131
    )
    
    
    (29
    )State, deferred
    
    
    45
    
    
    
    8
    
    
    
    $
    (73
    )
    
    $
    525
    
    
    $
    547
   December 31,
    
    
    January 1,2005
    
    
    2005CurrentCurrent deferred tax assets:Allowance for doubtful receivable
    
    $
    60
    
    
    $
    39Accrued expenses
    
    
    133
    
    
    
    73Trademark amortization
    
    
    
    
    
    
    2193
    
    
    
    114Current deferred tax liabilities
    
    
    
    
    
    
    Net current deferred tax asset
    
    $
    193
    
    
    $
    114NoncurrentNoncurrent deferred tax assets:Franchise and area development fees
    
    $
    563
    
    
    $
    566Net operating loss carryforwards
    
    
    547
    
    
    
    374Trademark amortization
    
    
    24
    
    
    
    24Goodwill amortization
    
    
    (105
    )
    
    
    (31
    )Accrued expenses
    
    
    
    
    
    
    186Other deferred income
    
    
    335
    
    
    
    168Impaired asset write-off
    
    
    266
    
    
    
    Other
    
    
    83
    
    
    
    55Gross noncurrent deferred tax assets
    
    
    1,713
    
    
    
    1,342Noncurrent deferred tax liabilities:Depreciation
    
    
    (198
    )
    
    
    (485
    )Gross noncurrent deferred tax liabilities
    
    
    (198
    )
    
    
    (485
    )Net noncurrent deferred tax assets
    
    
    1,515
    
    
    
    857Deferred tax asset valuation allowance
    
    
    (644
    )
    
    
    (366
    )$
    871
    
    
    $
    491
  F-28




---



##### Table of Contents



20032005
    
    

2004
    
    
    (restated)Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Computed tax at 35%
statutory rate
    
    $
    (41
    )
    
    
    35.0
    
    
    $
    626
    
    
    
    35.0
    
    
    $
    620
    
    
    
    35.0State income taxes, net of
federal benefit
    
    
    35
    
    
    
    (29.9
    )
    
    
    7
    
    
    
    0.4
    
    
    
    
    
    
    
    Stock option expense
    
    
    74
    
    
    
    (63.4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Work opportunity tax credit
    
    
    (100
    )
    
    
    85.5
    
    
    
    (100
    )
    
    
    (5.6
    )
    
    
    (62
    )
    
    
    (3.5
    )Valuation allowance releases
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (1.6
    )
    
    
    
    
    
    
    Other
    
    
    (41
    )
    
    
    35.2
    
    
    
    20
    
    
    
    1.1
    
    
    
    (11
    )
    
    
    (0.6
    )$
    (73
    )
    
    
    62.4
    
    
    $
    525
    
    
    
    29.3
    
    
    $
    547
    
    
    
    30.9
  NOTE 12  NATIONAL ADVERTISING FUND
  NOTE 13  STOCK OPTION AND BENEFIT PLANS
     F-29




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    PriceOutstanding at
beginning of year
    
    
    629,576
    
    
    $
    3.29
    
    
    
    659,051
    
    
    $
    3.24
    
    
    
    498,961
    
    
    $
    2.58Granted
    
    
    93,500
    
    
    
    5.00
    
    
    
    7,000
    
    
    
    7.90
    
    
    
    223,000
    
    
    
    4.93Exercised
    
    
    (144,800
    )
    
    
    2.31
    
    
    
    (35,140
    )
    
    
    2.93
    
    
    
    (21,342
    )
    
    
    3.03Canceled
    
    
    (18,430
    )
    
    
    5.41
    
    
    
    (1,335
    )
    
    
    3.07
    
    
    
    (41,568
    )
    
    
    4.63Outstanding at end of year
    
    
    559,846
    
    
    
    3.77
    
    
    
    629,576
    
    
    
    3.29
    
    
    
    659,051
    
    
    
    3.24Exercisable at end of year
    
    
    464,036
    
    
    
    3.51
    
    
    
    599,216
    
    
    
    3.13
    
    
    
    535,741
    
    
    
    2.65
  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
    
    
    
    75,000
    
    
    
    5.0
    
    
    $
    0.68
    
    
    
    75,000
    
    
    
    5.0
    
    
    $
    0.68$
    1.00 - $2.00
    
    
    
    124,686
    
    
    
    4.1
    
    
    
    1.53
    
    
    
    124,686
    
    
    
    4.1
    
    
    
    1.53$
    2.00 - $3.00
    
    
    
    1,740
    
    
    
    1.9
    
    
    
    2.25
    
    
    
    1,740
    
    
    
    1.9
    
    
    
    2.25$
    3.00 - $4.00
    
    
    
    130,200
    
    
    
    6.6
    
    
    
    3.93
    
    
    
    130,200
    
    
    
    6.6
    
    
    
    3.93$
    4.00 - $5.00
    
    
    
    118,500
    
    
    
    8.8
    
    
    
    4.87
    
    
    
    25,000
    
    
    
    6.0
    
    
    
    4.38$
    6.00 - $7.00
    
    
    
    82,720
    
    
    
    8.0
    
    
    
    6.24
    
    
    
    82,720
    
    
    
    8.0
    
    
    
    6.24$
    7.00 - $9.00
    
    
    
    7,000
    
    
    
    8.3
    
    
    
    7.90
    
    
    
    4,690
    
    
    
    8.3
    
    
    
    7.90$
    10.00 -$12.00
    
    
    
    20,000
    
    
    
    6.4
    
    
    
    10.38
    
    
    
    20,000
    
    
    
    6.4
    
    
    
    10.38$
    0.50 -$12.00
    
    
    
    559,846
    
    
    
    6.5
    
    
    $
    3.77
    
    
    
    464,036
    
    
    
    5.9
    
    
    $
    3.51
  F-30




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##### Table of Contents



NOTE
14  EARNINGS PER SHARE
  20032005
    
    
    2004
    
    
    (restated)Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-Share
    
    
    
    
    
    
    
    
    
    
    Per-ShareIncome
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    Income
    
    
    Shares
    
    
    AmountBasic EPSIncome available to
common stockholders
    
    $
    (44
    )
    
    
    4,833
    
    
    
    ($0.01
    )
    
    $
    1,264
    
    
    
    4,774
    
    
    $
    0.26
    
    
    $
    1,225
    
    
    
    4,732
    
    
    $
    0.26Effect of Dilutive
SecuritiesConvertible preferred
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    302
    
    
    
    
    
    
    
    
    
    
    
    301Diluted EPSIncome available to
common stockholders
plus assumed
conversions
    
    $
    (44
    )
    
    
    4,833
    
    
    
    ($0.01
    )
    
    $
    1,264
    
    
    
    5,096
    
    
    $
    0.25
    
    
    $
    1,225
    
    
    
    5,053
    
    
    $
    0.24
  NOTE 15  SUBSEQUENT EVENTS
   NOTE
16  COMMITMENTS AND CONTINGENCIES
 Concentration of Risk.
 Legal Proceedings.
 Employment Agreements.
 F-31




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##### Table of Contents



F-32




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 To the Board of Directors and Stockholders of Back Yard Burgers, Inc.
  
 
 F-33