<PAGE>   1
                                                                      
                                                                      EXHIBIT 13

                                ABOUT THE COMPANY

         Back Yard Burgers operates and franchises quick-service and fast-casual
restaurants that specialize in charbroiled, freshly prepared, great-tasting
food. As its name implies, Back Yard Burgers strives to offer the same
high-quality ingredients and special care typified by outdoor grilling in the
back yard. Its menu features made-to-order gourmet 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.

         Our goal for 1999 is to continue to position Back Yard Burgers as a
favored regional "fast-casual" restaurant chain. We intend to add more
restaurants to our family and further enhance our existing dine-in facilities.
Our primary operating strategy includes serving great-tasting food and providing
the guest with a truly "ENJOYABLE" dining experience. We plan to creatively
communicate our points of differentiation -- charbroiled 1/3 pound hamburgers,
charbroiled chicken sandwiches and a variety of other "Back Yard" favorites.

                              FINANCIAL HIGHLIGHTS*
               (in thousands, except per share amounts and units)

<TABLE>
<CAPTION>
                                           December 28,     January 3,      January 2,
FOR THE YEAR ENDED:                           1996            1998            1999     
                                             -------         -------         -------

<S>                                        <C>              <C>             <C> 
Restaurant sales                             $22,281         $24,150         $25,082
Total revenues                                24,041          26,034          27,364
Net income                                       357             162           1,171
Net income per share:
   Basic                                         .08             .04             .26
   Diluted                                       .08             .04             .25
Weighted average shares outstanding:
   Basic                                       4,221           4,261           4,533
   Diluted                                     4,543           4,587           4,654

System-wide sales                            $49,515         $55,798         $59,564
Units in operation:
   Company-owned                                  34              32              33
   Franchised                                     47              45              48
                                             -------         -------         -------
   Total                                          81              77              81
                                             =======         =======         =======
</TABLE>


    [GRAPH]                     [GRAPH]                     [GRAPH]   
                                                                          
    Revenues               Operating Income**         Same-Store Sales*** 
    ($000's)                   ($000's)               
                           




*  The years ended January 2, 1999 and December 28, 1996 contained 52 weeks 
   while the year ended January 3, 1998 contained 53 weeks.
** Excludes non-cash charge for impairment of long-lived assets of $377,000 in
   1997.
***Depicts percentage increase or decrease over the previous year's same-store 
   sales.




<PAGE>   2

To Our Shareholders:

         Welcome to our Back Yard! 1998 proved to be a successful year for our
company and our system of restaurants. We continued to build our brand as a
"fast-casual" concept.

         Today, I am confident we have chosen the correct path to lead us to
greater profitability, growth and a new era for the company. We believe our
continuing positive results are due to our decision to reposition the company
from primarily a quick-service, double drive-thru concept to primarily a
fast-casual, single drive-thru/dine-in concept.

         Same-store sales for 1998 increased 6.3% for company-operated
restaurants and 5.8% for franchised restaurants. This comes on top of a 1997
increase for company-operated restaurants of 7.0% and for franchised restaurants
of 6.5%. I believe this increase is attributable to the four primary tactical
enhancements begun in 1997: (1) the increased attention to hiring the best
available team members and training them to serve our guests in a friendly
manner to provide a great experience; (2) the impact of converting double
drive-thrus to traditional dine-in/drive-thrus so our guests can enjoy our
great-tasting food in inviting surroundings; (3) a well-balanced, focused
marketing campaign to add brand awareness, increase our guests' frequency of
visits and increase the number of first time guests, and; (4) the commitment of
a dedicated franchise family.

         Our record results for 1998 demonstrate that we are on the right track.
We have had nine consecutive quarters of positive same-store sales. We see
benefits on the tactics we implemented in 1997 and 1998. Operationally, we are
performing better than ever, and our marketing campaign continues to deliver
positive results.

         Under-performing markets and locations have been addressed regularly
and improvements made. In 1998, four additional double drive-thru locations were
converted to traditional dine-in/drive-thru restaurants with favorable results.
This included three company-operated restaurants and one franchised restaurant.
Additionally, ten new restaurants were opened during 1998, three
company-operated and seven franchised. While we have completed the majority of
the possible conversions of restaurants to single drive-thrus with indoor
seating, we hope to complete this process with an additional conversion in 1999.

         Our 1998 strategy of leveraging our brand upward with a "fast-casual"
positioning created a trend of increased same- store sales and revenues. These
increases have been achieved despite heavy discounting by our major competitors.
We have chosen not to compete on price at the expense of quality. We have tested
a number of new menu items and are pleased with the initial results. These
results indicate that we are on course by serving great-tasting, premium
products at a fair price, along with a commitment to deliver outstanding guest
service. We believe we can successfully compete in a crowded marketplace.

         In 1999, in addition to continuing to implement our basic growth
strategy of opening more company-operated restaurants in selective locations and
developing additional franchised restaurants, we have embarked on some new
concepts for our company-operated stores. For example, we opened our first
company-operated restaurant in a Chevron convenience store. We also were awarded
exclusive vending rights for the nationally famous Memphis Zoo.

         As we enter our 12th year, I am proud of our achievements, our
commitment to providing our guests with the best possible tasting food and our
new growth. Most importantly, I am proud of the foundation on which we continued
to build in 1998, and I look forward to executing our strategy in 1999 and
achieving the level of success our system is capable of producing. We are
creating a difference that I hope our customers and shareholders will
appreciate. ENJOY!

Sincerely,


Lattimore M. Michael
Founder, Chairman and Chief Executive Officer



                                        1

<PAGE>   3

                           FORWARD-LOOKING INFORMATION

         Certain information included herein may contain statements that are
forward-looking, such as statements related to financial items and results,
plans for future expansion and other business development activities, capital
spending or financing sources, capital structure and the effects of regulation
and competition. Forward-looking statements made by the company are based upon
estimates, projections, beliefs and assumptions of management at the time of
such statements and should not be viewed as guarantees of future performance.
Such forward-looking information involves important risks and uncertainties that
could significantly impact anticipated results in the future and, accordingly,
such results may differ materially from those expressed in any forward-looking
statements by or on behalf of the company. These risks and uncertainties
include, but are not limited to, increased competition within the industry for
customers, qualified labor and desirable locations, increased costs for beef,
chicken or other food products and management decisions relating to restaurant
growth, financing, franchising and new product development, as well as items
described under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

         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 1998 and 1996 contain 52 weeks
versus 53 weeks for 1997. As a result, operating results for fiscal 1998 are not
directly comparable with those of the prior 53-week period.

         The Back Yard Burgers system included 81 restaurants, of which 33 were
company-operated and 48 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.

<TABLE>
<CAPTION>
                                                                           FOR THE YEARS ENDED
                                                                           ------------------- 
                                                          JANUARY 2,            JANUARY 3,           DECEMBER 28,
                                                            1999                  1998                  1996
                                                            ----                  ----                  ----

<S>                                                       <C>                   <C>                  <C> 
REVENUES
  Restaurant sales                                          91.7%                 92.8%                 92.7%
  Franchise and area development fees                         .5                    .3                    .7
  Royalty fees                                               4.8                   4.5                   4.2
  Advertising fees                                           1.7                   1.2                   1.1
  Other operating revenue                                    1.3                   1.2                   1.3
                                                           -----                 -----                 -----
    Total revenue                                          100.0%                100.0%                100.0%
                                                           =====                 =====                 =====
</TABLE>



                                        2

<PAGE>   4

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED
                                                    JANUARY 2,     JANUARY 3,    DECEMBER 28,
                                                      1999           1998           1996
                                                      ----           ----           ----

<S>                                                 <C>            <C>           <C>  
COSTS AND EXPENSES
  Cost of restaurant sales (1)                        32.7%          32.8%          33.3%  
  Restaurant operating expenses (1)                   47.2           48.3           49.5   
  General and administrative                          11.9           12.3           11.8   
  Advertising                                          5.5            5.1            4.4   
  Depreciation and amortization                        4.6            4.4            4.6   
  Impairment of long-lived assets                       --            1.4             --   
  Operating income                                     4.7            1.5            2.3   
  Interest income                                      0.1            0.1            0.1   
  Interest expense                                    (1.8)          (0.9)          (0.9)  
  Other, net                                            --             --             --   
  Income before taxes                                  3.0            0.6            1.5   
  Income tax benefit (2)                              42.8             --             --   
  Net income                                           4.3            0.6            1.5   
</TABLE>


      (1)   As a percentage of restaurant sales.   
      (2)   As a percentage of income before taxes.

<TABLE>
<S>                                              <C>              <C>              <C> 
OPERATING DATA
  Restaurant sales (000's)
    Company-operated                             $ 25,082         $ 24,150         $ 22,281
    Franchised                                     34,482           31,648           27,234
                                                 --------         --------         --------
     Total                                       $ 59,564         $ 55,798         $ 49,515
                                                 ========         ========         ========


AVERAGE ANNUAL SALES PER RESTAURANT OPEN
FOR A FULL YEAR (1)
    Company-operated                             $797,000         $731,000         $645,000
    Franchised                                   $759,000         $703,000         $586,000
    System-wide                                  $774,000         $716,000         $615,000

NUMBER OF RESTAURANTS (2)
    Company-operated                                   33               32               34
    Franchised                                         48               45               47
                                                 --------         --------         --------
      Total                                            81               77               81
                                                 ========         ========         ========
</TABLE>



(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)      Subsequent to January 2, 1999, one company-operated and two franchised
         restaurants were opened and one franchised restaurant was closed.



                                        3

<PAGE>   5

COMPARISON OF FISCAL YEAR 1998
TO FISCAL YEAR 1997

BACK YARD BURGERS' FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO DECEMBER 31. AS A
RESULT, FISCAL 1998 CONTAINS 52 WEEKS VERSUS 53 WEEKS FOR THE PRIOR YEAR.
THEREFORE, ALL REFERENCES TO FISCAL 1998 ARE FOR THE 52-WEEK PERIOD ENDED
JANUARY 2, 1999 AND ALL REFERENCES TO FISCAL 1997 ARE FOR THE 53-WEEK PERIOD
ENDED JANUARY 3, 1998.

         RESTAURANT SALES increased 3.9% to $25,082,000 during 1998 compared to
$24,150,000 during 1997. This increase is primarily the result of an increase in
same-store sales at restaurants open for more than one year of 6.3%, which
includes a menu price increase of approximately 3.0% effective at the beginning
of September, 1997. The increase in same-store sales, coupled with new stores
not included in the same-store sales calculation, accounted for approximately
$2,650,000 in additional sales. This increase was partially offset by the loss
of sales from one restaurant which was closed and one restaurant which was
converted to a franchised restaurant, as well as one less week of sales as noted
above. Company management believes that the increases in same-store sales are
the results of improved customer service; the retrofit of three double
drive-thrus to dine-in facilities with single drive-thrus during 1998; and the
menu price increase noted above.

         FRANCHISE AND AREA DEVELOPMENT FEES were $142,000 during 1998, an
increase of 49% from $95,000 in 1997. Six new franchised restaurants were opened
in 1998, as compared to four new franchised units opened in 1997. This increase
in franchised restaurant openings was offset by a decrease of $15,000 in 1998
compared to 1997, in fees recognized from area development agreements which
expired.

         ROYALTY FEES increased 11.5% to $1,313,000 during 1998 compared to
$1,178,000 during 1997. The increase is due to an increase in franchised
restaurant sales upon which the fees are based. Comparable same-store sales at
franchised restaurants open for more than one year increased 5.8%, representing
an increase in royalty fees of approximately $55,000. Additionally, seven
franchised restaurants were opened, one company-operated restaurant was
converted to a franchised unit and five franchised restaurants were closed
during 1998.

         ADVERTISING FEES increased 55.7% to $478,000 for 1998 compared to
$307,000 during 1997. The increase is primarily due to a voluntary increase of
50% in the national advertising fee by 40 of the 47 franchised restaurants to be
used for a direct mail program. The increase is also related to the increase in
franchised restaurant sales as noted above.

         COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$8,206,000 during 1998 and $7,923,000 during 1997, decreasing to 32.7% as a
percentage of restaurant sales during 1998 from 32.8% for 1997. The cost of
beef, the largest single component of cost of restaurant sales, decreased
approximately 2.4% and there were decreases in certain condiment and paper
costs. These decreases were partially offset by increases in the cost of chicken
and certain produce and dairy products.

         RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, rent and certain other unit level operating expenses, increased to
$11,839,000 for 1998 from $11,672,000 during 1997. The increase of $167,000 is
due primarily to operating expenses from a net increase of two new company
operated-restaurants which opened since the beginning of the 1997 third quarter,
as well as the expenses associated with the expanded operations from the
retrofit of three double drive-thru restaurants to single drive-thrus with
dining room facilities. As a percentage of restaurant sales, restaurant
operating expenses decreased to 47.2% from 48.3% for 1997. As a percentage of
restaurant sales, this decrease relates primarily to a decrease of approximately
0.5% in promotional activities, as well as an increase in same- store sales at
existing restaurants of 6.3%. A same-store sales increase results in expenses of
a fixed and semi-variable nature, such as management payroll, rent, utilities,
taxes and insurance, representing a smaller percentage of sales. These decreases
were partially offset by increases in repairs and maintenance, operating
supplies and equipment rental expense.

         GENERAL AND ADMINISTRATIVE COSTS increased to $3,261,000 during 1998
from $3,202,000 in 1997. This represents a decrease as a percentage of total
revenue to 11.9% from 12.3% for 1997. The increase of $59,000 is primarily the
result of (1) adding two new positions: one in the training department and one
in company operations management, the goal of both positions being to facilitate
superior customer service; and (2) annual raises which became effective at the
beginning of the second quarter of 1998.

         ADVERTISING EXPENSE which increased to $1,513,000 for 1998 from
$1,323,000 during 1997, increased as a percentage of total revenues to 5.5% from
5.1%. This is the result of an increase in advertising fees, as described above,
which, in addition to the direct mail program noted above, are used for the
development and production of marketing campaigns and collateral material.

         INTEREST EXPENSE increased 100% to $485,000 for 1998 from $242,000 in
1997. This is due to a net increase in long-term debt of $2,377,000, or 77%,
during 1998. The borrowings from this increase in long-term debt were used to
add new restaurants and retrofit existing restaurants to include dine-in
facilities.



                                       4
<PAGE>   6

         INCOME TAX BENEFIT increased to $351,000 in 1998 from 1997. This
benefit results from the 1998 reversal of valuation allowances established in
prior years for the company's deferred tax assets. The 1998 reversal results
from a change in estimate with respect to the ultimate realization of such
assets.

COMPARISON OF FISCAL YEAR 1997
TO FISCAL YEAR 1996

BACK YARD BURGERS' FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO DECEMBER 31. AS A
RESULT, FISCAL 1997 CONTAINS 53 WEEKS VERSUS 52 WEEKS FOR THE PRIOR YEAR.
THEREFORE, ALL REFERENCES TO FISCAL 1997 ARE FOR THE 53-WEEK PERIOD ENDED
JANUARY 3, 1998 AND ALL REFERENCES TO FISCAL 1996 ARE FOR THE 52-WEEK PERIOD
ENDED DECEMBER 28, 1996.

         RESTAURANT SALES increased 8.4% to $24,150,000 during 1997 compared to
$22,281,000 during 1996. This increase is primarily the result of an increase in
same-store sales at restaurants open for more than one year of 7.0%, which
includes menu price increases of approximately 3.5%, 4.0% and 3.0% effective at
the beginning of July, 1996, May, 1997 and September 1997, respectively. The
increase in same-store sales, coupled with new stores not included in the
same-store sales calculation , accounted for approximately $2,130,000 in
additional sales. This increase was partially offset by the loss of two
restaurants which were closed, and one which was converted to a franchised
restaurant. Management of the company believes that the increase in same-store
sales is the result of converting five double drive-thru units to dine-in
facilities with single drive-thrus and the menu price increases noted above, as
well as a balanced marketing campaign strategy which is focused on increasing
customer awareness and resultant sales.

         FRANCHISE AND AREA DEVELOPMENT FEES were $95,000 during 1997, a
decrease of 45.7% from $175,000 in 1996. Four new franchised restaurants were
opened in 1997, as compared to 11 new franchised units opened in 1996. This
decrease in franchised restaurant openings was offset by an increase of $25,000
from fees recognized from area development agreements which expired in 1997.

         ROYALTY FEES increased 16.5% to $1,178,000 during 1997, compared to
$1,011,000 in 1996. The increase is due to an increase in franchised restaurant
sales upon which the fees are based. The sales increase resulted primarily from
an increase in same-store sales of 6.5% at franchised restaurants open for more
than one year, representing an increase in royalty fees of approximately
$46,000. Although there was a net decrease of two franchised restaurants during
1997, the new restaurants and those not included in the same-store sales
calculation because they had not been open the required length of time,
contributed approximately $121,000 in royalty fees. During 1997, four franchised
restaurants were opened, seven were closed and one company-operated store was
converted to a franchised store.

         ADVERTISING FEES increased 16.3% to $307,000 in 1997, from $264,000 in
the prior year. This increase is related to the increase in franchised
restaurants' sales as noted above.

         COST OF RESTAURANT SALES, consisting of food and paper costs, totaled
$7,923,000 for 1997 and $7,429,000 during 1996, decreasing as a percentage of
restaurant sales to 32.8% from 33.3% in 1996. This percentage decrease is due
primarily to the menu price increases noted above coupled with a continuing
focus on improving operating procedures to reduce waste, as well as price
decreases in all paper costs. These decreases were partially offset by an
increase of approximately 6.3% in the cost of beef, as well as various other
price increases in certain dairy and produce items.

         RESTAURANT OPERATING EXPENSES, consisting of labor, supplies,
utilities, rent and certain other unit level operating expenses, increased to
$11,672,000 for 1997 from $11,032,000 in 1996. This represents a decrease as a
percentage of restaurant sales to 48.3% for 1997 from 49.5% in 1996. As a
percentage of sales, repair and maintenance activities increased approximately
0.3%. This increase was more than offset by an increase in same-store sales at
existing restaurants of 7.0% which resulted in expenses of a fixed and
semi-variable nature, such as management payroll, rent, utilities, taxes and
insurance, representing a smaller percentage of sales.

         GENERAL AND ADMINISTRATIVE COSTS which increased to $3,202,000 for 1997
from $2,840,000 in 1996, increased as a percentage of total revenue in 1997 to
12.3% from 11.8% in 1996. The increase of $362,000 is primarily the result of
(1) the addition during the last quarter of 1996 of operations management
personnel in the Memphis and Little Rock markets, (2) at the corporate level, an
individual to reactivate franchise sales which were suspended during 1996, (3)
an MIS specialist to direct point of sale maintenance and upgrade programs, and
(4) personnel costs related to an increased level of restaurant management
training programs to facilitate improved customer service.

         ADVERTISING EXPENDITURES which increased to $1,323,000 for 1997 from
$1,066,000 in 1996, increased as a percentage of total revenues to 5.1% for 1997
from 4.4% in 1996. The increase as a percentage of total revenues is the result
of aggressive advertising efforts to improve the company's name recognition and
to offset, to the extent possible, the effect of competitors' marketing programs
in the company's existing marketing areas. This included an increase in the
amount allocated for local marketing and media purposes of 0.6% of restaurant
sales during 1997.



                                       5
<PAGE>   7

IMPAIRMENT OF LONG-LIVED ASSETS

         At each balance sheet date, the company assesses whether there has been
an impairment in the value of all long-lived assets (including intangibles) by
determining whether projected undiscounted future cash flows from operations for
each restaurant, as defined in Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To be Disposed Of, 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.

         Although no stores became impaired in 1998, two stores became impaired
during 1997. One store closed in 1997 and the other closed in 1998. While some
of the fixed assets at the locations were utilized by other stores, certain
assets were fixed to the site and were unrecoverable. Based on an analysis of
projected undiscounted cash flows for these locations, the company determined in
1997 that the carrying value of certain long-lived assets necessitated a
write-down of $275,000 and a related accrual for future lease payments of
$102,000 was recorded. In 1998, $51,000 of lease payments were incurred for
these closed stores and charged against this reserve. As of January 2, 1999, the
company's remaining accrual for future lease obligations was $51,000 for the
remaining lease payments due net of estimated sublease income.

LIQUIDITY AND CAPITAL RESOURCES

         Capital expenditures totaled $4,983,000 for 1998, $2,758,000 for 1997
and $863,000 for 1996. Generally, the company constructs its restaurant
buildings on leased properties for its company-operated restaurants. The average
monthly lease cost for the 19 company-operated restaurants on leased sites is
approximately $3,070 per month. For the eight restaurants where the company
leases the building as well as the site, the average monthly cost is
approximately $4,820 per month.

         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 and, in 1997, a charge for
impaired assets. Depreciation and amortization totaled $1,270,000 for 1998,
$1,143,000 for 1997 and $1,112,000 for 1996. Year to year increases relate to
the addition of buildings, equipment and other depreciable items. The increases
from 1997 to 1998 resulted from the addition of two company-operated restaurants
and three dining room additions to existing company-operated restaurants during
the year. The increases from 1996 to 1997 resulted from the addition of one
company-operated restaurant and five dining room additions in 1997.

         Cash from operations totaled $1,978,000, $2,003,000 and $1,596,000 for
1998, 1997 and 1996, respectively. Since January 1, 1996, cash from operations
and debt have been used for the addition of dining rooms to certain existing
double drive-thru restaurants, new restaurants and equipment.

         As of January 2, 1999, the company had total long-term debt of
$5,458,000 and unused lines of credit and loan commitments of potential
additional borrowings of $1,780,000. On October 4, 1996, the company received a
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%. At January 2, 1999, borrowings under the commitment were $1,034,000. On
January 23, 1997, the company received a loan commitment from a financial
institution which provided the company with potential borrowings of up to
$765,000 bearing interest at prime rate plus 1%. On December 15, 1997, the
company entered into a loan agreement with a financial institution which
provided the company with $460,000 bearing interest at 9.75%. On October 27,
1998, the company received a loan commitment from a financial institution which
provided the company with potential borrowings of $788,000 bearing interest at
prime rate plus 1/2%. At January 2, 1999, borrowings under the commitment were
$418,834. On November 10, 1998, the company received a loan commitment from a
financial institution which provided the company with potential borrowings of
$703,936 bearing interest at prime rate plus 1/2%. At January 2, 1999,
borrowings under the commitment were $309,493. Each of the above agreements are
secured by real and personal property to be constructed and/or acquired with the
proceeds of the agreement. The company also guarantees certain debt of joint
ventures of which it is a party. See Note 4 to Consolidated Financial
Statements.

         The company believes that it currently has sufficient resources to fund
anticipated capital expenditures of approximately $3,750,000 during 1999. These
resources include the borrowing commitments described above in addition to the
company's internally generated cash flow. Additional growth in 1999 may require
the company to obtain additional debt or equity financing.

SEASONALITY AND INFLATION

         While the company does not believe that seasonality affects its
operations in a materially adverse manner, first quarter results will generally
be lower than other quarters due to seasonal climate conditions in the locations
of many of its restaurants. Management does not believe that inflation has had a
material effect on income during 1998. 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 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 



                                       6
<PAGE>   8

stockholders of their right to convert preferred stock to common stock and
anticipates that all shares of preferred stock will be converted. Such
conversion began on April 5, 1995, at which time there were 1,199,979 shares of
preferred stock outstanding. As of January 2, 1999, only 23,123 shares have yet
to be converted.

IMPACT OF NEW ACCOUNTING STANDARDS
         COMPREHENSIVE INCOME AND SEGMENT REPORTING - In June, 1997, the 
Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." These statements did not have a material
impact on the company.

YEAR 2000

         The fact that many computers and other systems with embedded microchip
processors were programmed to record only the last two digits of the year for
all dates encountered gives rise to the year 2000 issue. On January 1, 2000,
many date-sensitive calculations could potentially go awry, creating substantial
negative ramifications throughout the business world.

         The company has reviewed its computer systems and software and has
identified four major areas that are critical to the company with respect to the
year 2000 issue: (1) communications hardware and software, (2) network
hardware/software and accounting software, (3) point-of-sale terminals, and (4)
key third parties.

         While the company has taken certain actions to address the year 2000
issue, it has not completed its analysis of the issue. During 1998, the company
upgraded its phone system with a system represented by the outside vendor to be
year 2000 compliant . The company also has communication software in place with
certain financial institutions and is in the process of confirming that such
software is in fact year 2000 compliant. The company has planned a network and
accounting software upgrade that is scheduled to be completed in the first half
of 1999. The upgrade includes the replacement of the existing network server as
well as the replacement and enhancement of certain personal computers. The
company's accounting software is supplied by an outside vendor, and the vendor
has confirmed that the software to be installed upon upgrading the network is
year 2000 compliant. The company is also in the process of determining whether
certain of its spreadsheet and database software will need to be upgraded during
1999. The company estimates the total cost of the software and hardware
enhancements and upgrades necessary to become year 2000 compliant to be
approximately $30,000.

         All existing point-of-sale terminals used by the company and its
franchisees have been represented by outside suppliers to be year 2000 compliant
and all terminals currently being installed are also in compliance.

         One of the greatest risks of year 2000 exists within the supply chain
of most businesses, and for the company, year 2000 compliance by key third
parties, including food product suppliers, energy providers and others, is
crucial to the continuing operations of the company. There is a certain amount
of uncontrollable risk associated with third party year 2000 readiness; however,
the company plans to gain assurance from key third parties, including all
franchisees and their suppliers, as to their year 2000 compliance efforts via
written confirmation by June 30, 1999.

         The failure by the company to properly address its internal year 2000
issues or the inability of outside parties to supply goods and services
necessary to produce and sell the company's products could have a material
adverse impact on the results of operations, liquidity and the financial
condition of the company. These problems could ultimately result in the
cessation of material operations for an unknown period of time.

         Although no formal contingency plan is currently in place, the
company's goals are to: (1) achieve internal year 2000 readiness with respect to
all material operations prior to September 30, 1999, (2) appropriately address
any material concerns over third party readiness with qualified alternate
suppliers as necessary, also prior to September 30, 1999, and (3) continue to
monitor the year 2000 issue and take all appropriate actions through early 2000.

KNOWN TRENDS AND UNCERTAINTIES

         Labor will continue to be a critical factor in the foreseeable future.
In most areas where the company operates restaurants, there is a shortage of
suitable labor. This, in itself, could result in higher wages as the competition
for employees intensifies, not only in the restaurant industry, but in
practically all retail and service industries. It is crucial for the company to
develop and maintain programs to attract and retain quality employees.

         During 1998, the price of beef, the largest single component of the
cost of restaurant sales, decreased approximately 2.4%. Management of the
company expects beef and chicken prices to rise at some point in the future, and
that it will be difficult to raise menu prices to fully cover these anticipated
increases due to the competitive state of the quick-service restaurant industry.
Additional margin improvements would have to be made through operational
improvements, equipment advances and increased volumes to help offset these
potential increases.

         Due to the competitive nature of the restaurant industry, site
selection will become even more difficult as an increasing number of businesses
will be vying for locations with similar characteristics. This could result in
higher occupancy costs for prime locations.

         Same-store sales increased 6.3% during 1998, slightly below the rate of
increase of 7.0% experienced in 1997. The company implemented a balanced
marketing strategy focused on increasing guest awareness and increasing the
frequency of guest visits. The company will continue this strategy in 1999,
however, there are no assurances that the increases in same-store sales will
continue.

         The future success of the company will be determined, to a great
extent, by the ability to positively address these issues.



                                        7

<PAGE>   9

BACK YARD BURGERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                        JANUARY 2,        JANUARY 3,
                                                                           1999              1998
                                                                           ----              ----

<S>                                                                     <C>               <C>  
ASSETS

Cash and cash equivalents                                                $    815          $  1,328
Receivables, less allowance for doubtful accounts of
 $121 ($26 in 1997)                                                           200               354
Inventories                                                                   202               176
Current deferred tax asset                                                    104                --
Prepaid expenses and other current assets                                      96                73
                                                                         --------          --------
     Total current assets                                                   1,417             1,931

Property and equipment, at depreciated cost                                13,365             9,451
Intangible assets, net                                                      1,352             1,457
Noncurrent deferred tax asset                                                 452                --
Notes receivable                                                               98                98
Other assets                                                                  264               218
                                                                         --------          --------
                                                                         $ 16,948          $ 13,155
                                                                         ========          ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable                                                         $    467          $    653
Accrued expenses                                                              850               786
Income taxes payable                                                          205                --
Current installments of long-term debt                                        361               217
                                                                         --------          --------
     Total current liabilities                                              1,883             1,656

Long-term debt, less current installments                                   5,097             2,864
Deferred franchise and area development fees                                  254               215
Other deferred liabilities                                                    128               122
                                                                         --------          --------
     Total liabilities                                                      7,362             4,857
                                                                         --------          --------

Commitments and contingencies (Notes 4, 5, 7 and 13)

Stockholders' equity
   Preferred stock, $.01 par value; 2,000,000 shares authorized;
    23,123 shares issued and outstanding (289,600 in 1997)                     --                 3
   Common stock, $.01 par value; 12,000,000
    shares authorized; 4,596,471 shares issued
    and outstanding (4,276,723 in 1997)                                        46                42
   Paid-in capital                                                         10,098             9,982
   Retained deficit                                                          (558)           (1,729)
                                                                         --------          --------
     Total stockholders' equity                                             9,586             8,298
                                                                         --------          --------
                                                                         $ 16,948          $ 13,155
                                                                         ========          ========
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       8
<PAGE>   10

BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                     YEARS ENDED
                                                                     -----------
                                                    JANUARY 2,        JANUARY 3,       DECEMBER 28,
                                                       1999              1998              1996
                                                       ----              ----              ----

<S>                                                 <C>               <C>              <C>   
Revenues:
   Restaurant sales                                  $ 25,082          $ 24,150          $ 22,281
   Franchise and area development fees                    142                95               175
   Royalty fees                                         1,313             1,178             1,011
   Advertising fees                                       478               307               264
   Other                                                  349               304               310
                                                     --------          --------          --------
        Total revenues                                 27,364            26,034            24,041
                                                     --------          --------          --------

Expenses:
   Cost of restaurant sales                             8,206             7,923             7,429
   Restaurant operating expenses                       11,839            11,672            11,032
   General and administrative                           3,261             3,202             2,840
   Advertising                                          1,513             1,323             1,066
   Depreciation and amortization                        1,271             1,143             1,114
   Impairment of long-lived assets                         --               377                --
                                                     --------          --------          --------
        Total expenses                                 26,090            25,640            23,481
                                                     --------          --------          --------

        Operating income                                1,274               394               560

Interest income                                            24                14                16
Interest expense                                         (485)             (242)             (228)
Other, net                                                  7                (4)                9
                                                     --------          --------          --------
        Income before income taxes                        820               162               357

Income tax benefit                                        351                --                --
                                                     --------          --------          --------
Net income                                           $  1,171          $    162          $    357
                                                     ========          ========          ========

Income per share:
  Basic                                              $    .26          $   0.04          $   0.08
                                                     ========          ========          ========

  Diluted                                            $    .25          $   0.04          $   0.08
                                                     ========          ========          ========

Weighted average number of common shares and
common equivalent shares outstanding:
  Basic                                                 4,533             4,261             4,221
                                                     ========          ========          ========

  Diluted                                               4,654             4,587             4,543
                                                     ========          ========          ========
</TABLE>






          See accompanying notes to consolidated financial statements.



                                        9

<PAGE>   11

BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                     PREFERRED STOCK           COMMON STOCK             
                                     ---------------           ------------        PAID-IN    RETAINED
                                     SHARES    AMOUNT       SHARES      AMOUNT     CAPITAL     DEFICIT    TOTAL
                                     ------    ------       ------      ------     -------     -------    -----

<S>                                <C>         <C>         <C>          <C>        <C>        <C>       <C>
Balance at December 30, 1995         329,415   $     3     4,205,531    $    42    $  9,931   $ (2,248) $  7,728

Conversion of preferred stock        (19,909)                 19,909
Exercise of stock options                                      2,400                      4                    4
Employee stock purchases                                      12,926                     21                   21
Net income                                                                                         357       357
                                   ---------   -------    ----------    -------    --------   --------  --------
Balance at December 28, 1996         309,506         3     4,240,766         42       9,956     (1,891)    8,110

Conversion of preferred stock        (19,906)                 19,906
Employee stock purchases                                      16,051                     26                   26
Net income                                                                                         162       162
                                   ---------   -------    ----------    -------    --------   --------  --------
Balance at January 3, 1998           289,600         3     4,276,723         42       9,982     (1,729)    8,298

Conversion of preferred stock       (266,477)       (3)      266,477          3
Exercise of stock options                                     40,071          1          88                   89
Employee stock purchases                                      13,200                     28                   28
Net income                                                                                       1,171     1,171
                                   ---------   -------    ----------    -------    --------   --------  --------
Balance at January 2, 1999            23,123   $    --     4,596,471    $    46    $ 10,098   $   (558) $  9,586
                                   =========   =======    ==========    =======    ========   ========  ========
</TABLE>





          See accompanying notes to consolidated financial statements.



                                       10

<PAGE>   12

BACK YARD BURGERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                   YEARS ENDED                           
                                                                                   -----------
                                                                    JANUARY 2,       JANUARY 3,      DECEMBER 28,
                                                                      1999             1998             1996
                                                                      ----             ----             ----

<S>                                                                 <C>              <C>             <C>  
Cash flows from operating activities:
   Net income                                                       $ 1,171          $   162          $   357
   Adjustments to reconcile net income
      to net cash provided by operating activities:
        Depreciation and amortization of property
         and equipment                                                1,063            1,022              939
        Impairment of long-lived assets                                  --              377               --
        Deferred income taxes                                          (556)              --               --
        Amortization of intangible assets                               113              104              103
        Amortization/write off of  preopening costs                      95               17               70
        Provision for losses on receivables                             216              163              119
        Gain on sale of assets                                          (42)              --               (3)
        (Increase) decrease in assets
          Receivables                                                   (62)            (184)            (275)
          Inventories                                                   (26)             (26)              17
          Prepaid expenses and other current assets                    (118)             (59)              73
          Other assets                                                   (4)              56               (6)
        Increase (decrease) in liabilities
          Accounts payable and accrued expenses                        (122)             266              233
          Income taxes payable                                          205               --               22
          Other deferred liabilities                                      6               12               25
          Deferred franchise and area development fees                   39               93              (78)
                                                                    -------          -------          -------
                  Net cash provided by operating activities           1,978            2,003            1,596
                                                                    -------          -------          -------

Cash flows from investing activities:
   Additions to property and equipment                               (4,983)          (2,758)            (863)
   Proceeds from sale of property and equipment                          48               34               45
   Investment in joint ventures                                         (50)              --               --
                                                                    -------          -------          -------
                  Net cash used in investing activities              (4,985)          (2,724)            (818)
                                                                    -------          -------          -------

Cash flows from financing activities:
   Issuance of stock                                                     28               26               21
   Principal payments on long-term debt                                (543)            (353)            (230)
   Proceeds from issuance of long-term debt                           2,920            1,275               --
   Proceeds from exercise of stock options                               89               --                4
                                                                    -------          -------          -------
        Net cash provided (used) by financing activities              2,494              948             (205)
                                                                    -------          -------          -------

                  Net increase (decrease) in cash and cash
                    equivalents                                        (513)             227              573

Cash and cash equivalents:

   Beginning of year                                                  1,328            1,101              528
                                                                    -------          -------          -------
   End of year                                                      $   815          $ 1,328          $ 1,101
                                                                    =======          =======          =======

Supplemental disclosure of cash flow information:
   Income taxes refunded                                            $    --          $    --          $    22
                                                                    =======          =======          =======

   Interest paid                                                    $   462          $   232          $   228
                                                                    =======          =======          =======
</TABLE>



          See accompanying notes to consolidated financial statements.



                                       11

<PAGE>   13

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


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
"Back Yard Burgers," "BYB" or "BY Burgers" trade names and other associated
trademarks, signs, emblems, logos, slogans and service marks which have been or
may be developed. At January 2, 1999, the Company operated 33 restaurants in
three states (Mississippi, Arkansas and Tennessee) and franchised 48 restaurants
in 15 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. Significant 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 2,
1999 contains 52 weeks while the years ended January 3, 1998 and December 28,
1996 contained 53 and 52 weeks, respectively.

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
as cash and cash equivalents for purposes of the statement of cash flows.

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.

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 operation 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.

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 10).
These fees are recorded on the accrual basis of accounting.



                                       12

<PAGE>   14

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

RESTAURANT OPERATING EXPENSES. Restaurant operating expenses include all costs
associated with the operation of the restaurant except corporate overhead,
advertising, depreciation and amortization.

DEPRECIATION. 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: building
and improvements - 15 to 25 years; fixtures and equipment - 3 to 7 years; and
transportation vehicles - 3 to 5 years.

PREOPENING COSTS. Effective October 4, 1998, the Company recorded a charge of
approximately $11,000 to reflect the decision to write off all existing
preopening costs and to thereafter expense such costs as incurred. The Company
did not separately state this change as a cumulative effect of a change in
accounting principle due to the immaterial effect of the change. Previously, the
Company capitalized certain operating costs incurred prior to the opening of a
new restaurant and amortized such costs over a one-year period.

ADVERTISING COSTS. Advertising costs, including production costs, are charged to
expense as incurred on the first date of the advertising period.

INTANGIBLE ASSETS. Intangible assets consist of the excess of the cost of
acquired companies and assets over the values assigned to net tangible assets.
These intangibles are being amortized by the straight-line method over an 18
year period. Accumulated amortization totaled $710,000 at January 2, 1999 and
$605,000 at January 3, 1998.

IMPAIRMENT OF LONG-LIVED ASSETS. At each balance sheet date, the Company
assesses whether there has been an impairment in the value of all long-lived
assets (including intangibles) by determining whether projected undiscounted
future cash flows from operations for each restaurant, as defined in Statement
of Financial Accounting Standards ("SFAS") No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
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.

Management scheduled two stores for closure in 1997. One store closed in 1997,
and the other was closed in January 1998. While some of the fixed assets at
these locations are mobile and can be utilized by other stores, certain assets
are fixed to the site and were deemed unrecoverable. Based on an analysis of
projected undiscounted cash flows for these locations, the Company determined
that the carrying amount of certain long-lived assets necessitated a write-down
of $275,000 and a related accrual was for future lease payments of $102,000. In
1998, $51,000 of lease payments were incurred for these closed stores and
charged against this reserve. As of January 2, 1999, the Company's remaining
accrual for future lease obligations was $51,000 for the remaining lease
payments due net of estimated sub-lease income.

PREFERRED STOCK. In accordance with the provisions of the Company's 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 2, 1999, all but 23,123 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 12).



                                       13

<PAGE>   15

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

FAIR VALUE OF FINANCIAL INSTRUMENTS. At January 2, 1999, 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 2, 1999, the carrying
value was $5,458,000 and the fair value was approximately $5,369,000 versus a
carrying value of $3,081,000 and a fair value of $3,079,000 at January 3, 1998.


NOTE 2 - 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:

<TABLE>
<CAPTION>
                                                                                  JANUARY 2,        JANUARY 3,
                                                                                     1999              1998
                                                                                     ----              ----
                                                                                         (IN THOUSANDS)

   <S>                                                                            <C>              <C>  
   Corporate receivables                                                          $       170      $       178
   National Advertising Fund receivables                                                   68               55
   Other                                                                                   83              147
                                                                                  -----------      -----------
                                                                                          321              380
   Allowance for doubtful receivables                                                    (121)             (26)
                                                                                  -----------      -----------
                                                                                  $       200      $       354
                                                                                  ===========      ===========
</TABLE>



NOTE 3 - PROPERTY AND EQUIPMENT

Summaries of property and equipment follow:

<TABLE>
<CAPTION>
                                                                                  JANUARY 2,        JANUARY 3,
                                                                                     1999              1998
                                                                                     ----              ----
                                                                                         (IN THOUSANDS)

   <S>                                                                            <C>              <C> 
   Land                                                                           $      3,417     $     1,547
   Buildings                                                                             6,263           4,434
   Building and site improvements                                                        3,351           3,011
   Equipment                                                                             5,234           4,380
   Automobiles                                                                             240             168
                                                                                  ------------     -----------
                                                                                        18,505          13,540
   Accumulated depreciation and amortization                                            (5,140)         (4,089)
                                                                                  ------------     -----------
                                                                                  $     13,365     $     9,451
                                                                                  ============     ===========
</TABLE>



NOTE 4 - INVESTMENT IN JOINT VENTURES

The Company has invested a total of $200,000 for 23%-25% interests in four joint
ventures for the purpose of operating Back Yard Burgers restaurants. Two of the
joint ventures purchased the building and land from the



                                       14

<PAGE>   16

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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 financing leases 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 2, 1999, $372,000 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 5 - DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES

At January 2, 1999, deferred fees received for certain franchise and area
development rights, net of commissions paid, include amounts sold during the
following years (in thousands):

<TABLE>
              <S>                                                        <C> 
              1998                                                       $       140
              Previous years                                                     114
                                                                         -----------
                                                                         $       254
                                                                         ===========
</TABLE>



NOTE 6 - INDEBTEDNESS

Long-term debt is secured by property and equipment with a net book value
aggregating $6,809,133 and guaranteed by the personal endorsements of certain
stockholders. The balances consist of the following.

<TABLE>
<CAPTION>
                                                                                   JANUARY 2,       JANUARY 3,
                                                                                      1999             1998
                                                                                      ----             ----
                                                                                          (IN THOUSANDS)

   <S>                                                                            <C>              <C> 
   Notes payable to financial institutions, payable in monthly 
     installments ranging from $1,626 to $9,788, including
     interest ranging from 7.0% to 9.8%                                           $     3,083      $     1,138

   Financing lease transactions to Lester's Back Yard Burgers 
     Joint Venture I, II and IV (See Note 4), payable in monthly 
     installments ranging from $2,396 to $7,009 and effective
     interest rates ranging from 12.0% to 12.5%.                                        1,341            1,144

   Notes payable to a leasing company, payable in monthly 
     installments ranging from $1,123 to $5,643 including
     interest of 14.1%                                                                  1,034              799
                                                                                  -----------      -----------
                                                                                        5,458            3,081
   Less current installments                                                             (361)            (217)
                                                                                  -----------      -----------
      Total                                                                       $     5,097      $     2,864
                                                                                  ===========      ===========
</TABLE>


The principal maturities of all long-term debt subsequent to 1999 are as
follows: $490,000 in 2000; $697,000 in 2001; $789,000 in 2002; $659,000 in 2003
and $2,462,000 thereafter.
                                       


                                       15

<PAGE>   17

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


The Company has a line of credit with a financial institution for $150,000. The
line of credit is secured by a $50,000 certificate of deposit. There were no
borrowings outstanding under the agreement at January 2, 1999.

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 2, 1999, borrowings outstanding
under the commitment are $1,034,000, and $876,000 remains available.


NOTE 7 - 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 2, 1999, are as follows (in thousands):

<TABLE>
              <S>                                                                 <C>   
              1999                                                                $     1,095
              2000                                                                        935
              2001                                                                        804
              2002                                                                        678
              Thereafter                                                                2,301
                                                                                  -----------
                                                                                  $     5,813
                                                                                  ===========
</TABLE>

Rent expense was $1,058,000, $1,187,000 and $1,093,000 in 1998, 1997 and 1996,
respectively.


NOTE 8 - RELATED PARTY TRANSACTIONS

In connection with the purchase of a franchised restaurant in 1994, the Company
acquired a note receivable of $45,000 from an officer of the Company of which a
remaining balance of $30,000 is included in notes receivable as of January 3,
1998, and January 2, 1999.


NOTE 9 - INCOME TAXES

Deferred income taxes are provided in recognition of temporary differences in
reporting certain revenues and expenses for financial statement and income tax
purposes.



                                       16

<PAGE>   18

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

The deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
                                                           JANUARY 2,       JANUARY 3,
                                                              1999             1998
                                                              ----             ----
                                                                 (IN THOUSANDS)

   <S>                                                     <C>              <C> 
   Current                                                                             
                                                                                       
      Current deferred tax assets                                                      
        Allowance for doubtful receivable                    $    41          $    10  
        Accrued expenses                                          59               31  
        Reserve for store closings                                15               39  
                                                             -------          -------  
                                                                 115               80  
      Current deferred tax liabilities                           (11)              (4) 
                                                             -------          -------  
      Net current deferred tax asset                             104               76  
      Deferred tax asset valuation allowance                      --              (76) 
                                                             -------          -------  
                                                             $   104          $    --  
                                                             =======          =======  
                                                                                       
   Noncurrent                                                                          
                                                                                       
      Noncurrent deferred tax assets                                                   
        Franchise fees                                       $    47          $    81  
        Net operating loss carryforwards                         531              683  
        Alternative minimum tax credit carryforwards             145               --  
        Goodwill amortization                                    349              378  
        Other                                                     30               26  
                                                             -------          -------  
           Gross noncurrent deferred tax assets                1,102            1,168  
                                                             -------          -------  
                                                                                       
      Noncurrent deferred tax liabilities                                              
        Depreciation                                            (520)            (458) 
                                                             -------          -------  
           Gross noncurrent deferred tax liabilities            (520)            (458) 
                                                             -------          -------  
                                                                                       
      Net noncurrent deferred tax asset                          582              710  
      Deferred tax asset valuation allowance                    (130)            (710) 
                                                             -------          -------  
                                                             $   452          $    --  
                                                             =======          =======  
</TABLE>

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. During 1998, the
Company evaluated 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 in 1998
is based on management's conclusion that it is more likely than not that certain
state tax carryforward items will expire unused. The valuation allowance in 1997
was based on management's conclusion that it was more likely than not that
certain state and federal tax carryforward items would expire unused.



                                       17

<PAGE>   19

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

A reconciliation of the statutory Federal income tax rate to the income tax
provision is as follows:

<TABLE>
<CAPTION>
                                                    
                                                    
                                           1998                 1997                1996
                                           ----                 ----                ----
                                    AMOUNT       %       AMOUNT       %       AMOUNT       %   
                                    ------     -----     ------     -----     ------     -----
                                                      (DOLLARS IN THOUSANDS)

<S>                                 <C>        <C>       <C>        <C>       <C>        <C>
Computed "expected" tax             $ 287       35.0%    $  57       35.0%    $ 125       35.0%  
State income taxes, net of                                                                       
 Federal income tax effect             --         --         9        5.3        16        4.5   
Goodwill amortization                  15        1.8        14        8.9        14        3.9   
Valuation allowance                                                                              
 release                             (656)     (79.6)      (78)     (48.0)     (151)     (42.3)  
Other                                   3         --        (2)      (1.2)       (4)      (1.1)  
                                    -----      -----     -----      -----     -----      -----   
                                    $(351)     (42.8)%   $  --        0.0%    $  --        0.0%  
                                    =====      =====     =====      =====     =====      ===== 
</TABLE>
  
As of January 2, 1999, and January 3, 1998, the Company has net operating loss
carryforwards available for federal and state income tax reporting purposes on a
consolidated basis of approximately $1,177,000 and $3,300,000, respectively.
These net operating loss carryforwards expire between 2004 and 2011.
Approximately $20,000 of these net operating loss carryforwards were acquired in
certain purchase transactions and are subject to annual limitations on their
usage. These carryforwards expire during the period 2004 through 2008.


NOTE 10 - 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 11 - 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.



                                       18

<PAGE>   20

BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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. During 1998, the Company granted options for
an aggregate of 81,864 shares of common stock at a weighted average exercise
price of $2.35 per share, based upon fair market values at grant dates.

A summary of activity in the above two option plans for the years ended January
2, 1999, January 3, 1998 and December 28, 1996 follows:

<TABLE>
<CAPTION>
                                1998                    1997                  1996
                                ----                    ----                  ----

                                      WEIGHTED                WEIGHTED               WEIGHTED
                                      AVERAGE                 AVERAGE                AVERAGE
                                      EXERCISE                EXERCISE               EXERCISE
                        OPTIONS        PRICE    OPTIONS        PRICE    OPTIONS       PRICE
                        -------        -----    -------        -----    -------       -----

<S>                     <C>          <C>        <C>          <C>        <C>          <C>
Outstanding at
 beginning of year      303,637      $   3.25   226,568      $   3.72   168,242      $   4.68

Granted                  81,864          2.35    84,922          1.87    80,800          1.71

Exercised               (40,071)         2.11        --         --       (2,400)         1.50

Canceled                (48,303)         4.00    (7,853)         2.04   (20,074)         3.87
                        -------                 -------                 -------   

Outstanding
 at end of year         297,127          3.03   303,637          3.25   226,568          3.72
                        =======                 =======                 =======

Exercisable
 at end of year         271,966          3.12   269,226          3.41   195,706          3.94
                        =======                 =======                 =======
</TABLE>



                                       19

<PAGE>   21


BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


A summary of information about the Company's stock options outstanding at
January 2, 1999 follows:

<TABLE>
<CAPTION>
                                   WEIGHTED                              WEIGHTED
                                   AVERAGE     WEIGHTED                   AVERAGE       WEIGHTED
RANGE OF                          REMAINING     AVERAGE                  REMAINING       AVERAGE
EXERCISE          OPTIONS        CONTRACTUAL   EXERCISE     OPTIONS     CONTRACTUAL     EXERCISE
 PRICES         OUTSTANDING         LIFE        PRICE     EXERCISABLE      LIFE          PRICE
--------        -----------      -----------   --------   -----------   -----------     --------

<S>             <C>              <C>           <C>        <C>           <C>             <C>
$1.50-$2.00       97,179              7.8        1.72        91,223        7.8            1.72
 2.00- 2.50       78,957              8.9        2.25        60,916        9.0            2.26
 3.00- 3.50       51,653              6.3        3.05        50,489        6.4            3.06
 5.50- 6.00       69,338              4.7        5.75        69,338        4.8            5.75
-----------      -------              ---        ----       -------        ---            ----
$1.50-$6.00      297,127              7.1        3.03       271,966        7.0            3.12
===========      =======              ===        ====       =======        ===            ====
</TABLE>

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
1998, 1997 and 1996 under the plan consistent with the method prescribed by SFAS
No. 123, Accounting for Stock-Based Compensation, the Company's operating
results for 1998, 1997 and 1996 would have been reduced to the pro forma amounts
indicated below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                1998         1997      1996
                                ----         ----      ----
<S>                           <C>            <C>      <C>
Net income
    As reported               $ 1,171        $ 162    $ 357
    Pro forma                   1,053           69      298

Basic earnings per share
    As reported                   .26          .04      .08
    Pro forma                     .23          .02      .07

Diluted earnings per share
    As reported                   .25          .04      .08
    Pro forma                     .23          .02      .07
</TABLE>


The weighted-average grant-date fair value of options granted during 1998, 1997
and 1996 was $1.70, $1.31, and $1.15, respectively. 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
1998, 1997 and 1996, respectively:

<TABLE>
<CAPTION>
                                          1998       1997       1996
                                          ----       ----       ----
     <S>                                  <C>        <C>        <C>

     Average expected life (years)         7.0        7.0        7.0
     Average expected volatility          64.4%      66.5%      67.0%
     Risk-free interest rates              6.1%       6.1%       6.1%
     Dividend yield                        0.0%       0.0%       0.0%
</TABLE>


                                       20

<PAGE>   22


BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


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.

Additionally, 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 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 1998, 1997 and 1996, 13,200,
16,051 and 12,926 shares were purchased, respectively, under the ESPP.

NOTE 12 - EARNINGS PER SHARE

A reconciliation of basic earnings per share to diluted earnings per share
follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                               YEAR ENDED
                                   ----------------------------------------------------------------------------------------------
                                          JANUARY 2, 1999                   JANUARY 3, 1998               DECEMBER 28, 1996
                                   -------------------------------   ------------------------------   ---------------------------
                                                         PER-SHARE                        PER-SHARE                     PER-SHARE
                                   INCOME     SHARES      AMOUNT     INCOME    SHARES      AMOUNT     INCOME   SHARES    AMOUNT
                                   ------     ------     ---------   ------    ------     ---------   ------   ------   ---------
<S>                                <C>        <C>       <C>          <C>       <C>      <C>           <C>      <C>      <C>
BASIC EPS
Income available to
  common stockholders              $1,171      4,533    $    0.26     $162      4,261   $   0.04       $357     4,221    $  0.08

EFFECT OF DILUTIVE SECURITIES
Convertible preferred stock                                             69        298                             322
Stock options                                                           52         28                              --
                                   ------      -----      -------     ----      -----   -----          ----     -----    -------

DILUTED EPS
Income available to
  common stockholders
  plus assumed conversions         $1,171      4,654    $    0.25     $162      4,587   $   0.04       $357     4,543    $  0.08
                                   ======      =====    =========     ====      =====   ========       ====     =====    =======
</TABLE>

Options and warrants to purchase shares of the Company's common stock were
outstanding during the years 1998, 1997 and 1996 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 2, 1999; however, the warrants expired as of that date. 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.



                                       21

<PAGE>   23


BACK YARD BURGERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


NOTE 13 - COMMITMENTS AND CONTINGENCIES

CONCENTRATION OF RISK. Financial instruments which potentially subject the
Company to concentration of credit risk are primarily cash and cash equivalents.
The Company places its cash and cash equivalents in insured depository
institutions and attempts to limit the amount of credit exposure to any one
institution. At January 2, 1999, the Company's uninsured cash balance totaled
$543,000.

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.




                                       22

<PAGE>   24

Report of Independent Accountants                  (PRICEWATERHOUSECOOPERS LOGO)




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 2, 1999 and January 3,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards 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 the opinion expressed above.




Memphis, Tennessee
January 22, 1999


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 which 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 two outside directors and one director who is an employee of the
company. The committee reviews with the independent auditors the scope and
results of the annual audit.
     The 1998 consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, 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
accountants 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.




Lattimore M. Michael                                    Michael G. Webb
Founder, Chairman  and Chief Executive Officer          Chief Financial Officer






                                       23

<PAGE>   25



                             DIRECTORS AND OFFICERS

<TABLE>
<CAPTION>
BOARD OF DIRECTORS                                            OFFICERS
<S>                                                           <C>

Lattimore M. Michael                                          Lattimore M. Michael
  Chairman and Chief Executive Officer                          Chairman and Chief Executive Officer

Joseph L. Weiss                                               Joseph L. Weiss
  President and Chief Operating Officer                         President and Chief Operating Officer

William N. Griffith                                           William N. Griffith
  Executive Vice President                                      Executive Vice President and Secretary-Treasurer
     and Secretary-Treasurer
                                                              Michael C. McDermott
Stephen J. King                                                 Executive Vice President, Corporate Operations
  CPA, Consultant
                                                              Michael G. Webb
W. Kurt Henke                                                   Chief Financial Officer
  Partner
  Henke, Heaton & Bufkin                                      Stephen C. Reid
  (attorneys-at-law)                                            Vice President, Research and Development

William B. Raiford, III
 Of Counsel
  Merkel & Cocke
  (attorneys-at-law)
</TABLE>



                                       24

<PAGE>   26



                              CORPORATE INFORMATION


CORPORATE OFFICES
2768 Colony Park Drive
Memphis, TN 38118
901/367-0888

TRANSFER AGENT
Union Planters Bank
6200 Poplar Avenue, Third Floor
P. O. Box 387
Memphis, Tennessee 38147
901/580-5523

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Memphis, Tennessee

GENERAL COUNSEL
Henke, Heaton & Bufkin
Professional Corporation
Clarksdale, Mississippi

SECURITIES COUNSEL
Giroir, Gregory, Holmes & Hoover, PLC
Little Rock, Arkansas

ANNUAL MEETING OF STOCKHOLDERS The company's 1998 annual meeting of stockholders
will be held at 10:00 a.m. local time on Thursday, May 20, 1999, at the
Guesthouse Inn & Suites in Memphis, Tennessee. Stockholders of record as of
March 26, 1999, are invited to attend this meeting.

ANNUAL REPORT ON FORM 10-KSB
A copy of the company's Annual Report on Form 10- KSB for the year ended January
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
by stockholders of record without charge upon request to the company.

STOCKHOLDER ACCOUNT ASSISTANCE
For address changes, registration changes, lost stock certificates, or if you
are receiving duplicate copies of the Annual Report, please contact Union
Planters Bank at the address or number listed above.

STOCK MARKET INFORMATION
The company's common stock trades on the Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol BYBI. At March 26, 1999, the company had
approximately 2,500 stockholders, including beneficial owners holding shares in
nominee or "street" name.

Back Yard Burgers completed its initial public offering of common stock in June
1993 and began public trading on June 25, 1993. The table below sets forth the
high and low stock bid prices for the two-year period ended January 2, 1999:

<TABLE>
<CAPTION>
QUARTER ENDED:                HIGH             LOW
<S>                        <C>              <C>      
March 29, 1997             $    2.25        $    1.75
June 28, 1997              $    2.00        $    1.63
September 27, 1997         $    2.00        $    1.75
January 3, 1998            $    3.63        $    1.94

April 4, 1998              $    3.63        $    2.25
July 4, 1998               $    3.63        $    2.63
October 3, 1998            $    2.81        $    2.25
January 2, 1999            $    2.38        $    1.88
</TABLE>

The company currently anticipates that it will retain all of its earnings to
support its operations and the development of its business. Therefore, the
company does not pay any cash dividends on its outstanding common stock. Future
cash dividends, if any, will be at the discretion of the company's board of
directors and will depend upon, among other things, future operations and
earnings, capital requirements, general financial conditions, contractual
restrictions, and other factors that the board may consider relevant.