UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended April 3, 2004

For the transition period from                     to                    

Commission file number 1-12104

BACK YARD BURGERS, INC.

1657 Shelby Oaks Dr. N. Ste. 105, Memphis, Tennessee 38134
(Address of principal executive offices)

(901) 367-0888
(Registrant’s telephone number)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ]       No [    ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes [    ]       No [ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class — Common stock, par value $.01 per share

Outstanding at April 30, 2004 — 4,762,826

BACK YARD BURGERS, INC.

INDEX

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Back Yard Burgers, Inc.

Consolidated Balance Sheets
(in thousands, except for share and per share amounts)

See accompanying notes to unaudited consolidated financial statements

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Back Yard Burgers, Inc.

Consolidated Statements of Income (Unaudited)
(in thousands, except per share amounts)

See accompanying notes to unaudited consolidated financial statements

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Back Yard Burgers, Inc.

Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

See accompanying notes to unaudited consolidated financial statements

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BACK YARD BURGERS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Back Yard Burgers, Inc. owns and operates quick-service and fast-casual restaurants and is engaged in the sale of franchises and the collection of royalties based upon related franchise sales. The company grants franchise rights for the use of “Back Yard Burgers,” “BYB” or “BY Burgers” trade names and other associated trademarks, signs, emblems, logos, slogans and service marks which have been or may be developed.

     The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and notes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America. The statements do reflect all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the financial position and results of operations and cash flows in conformity with generally accepted accounting principles in the United States of America. The statements should be read in conjunction with the Notes to Financial Statements for the year ended January 3, 2004 included in the company’s 2003 Annual Report.

     The financial statements include the accounts of Back Yard Burgers, Inc. and its wholly-owned subsidiaries, Little Rock Back Yard Burgers, Inc., Atlanta Burgers BYB Corporation and BYB Properties, Inc., as well as the Back Yard Burgers National Advertising Fund. All significant intercompany transactions have been eliminated.

     The results of operations for the current thirteen week period are not necessarily indicative of the results to be expected for the full year.

     The company maintains its financial records on a 52-53 week fiscal year ending on the Saturday closest to December 31.

     Other Revenue. Other revenue is primarily comprised of sales of proprietary food products to franchisees, volume based incentive receipts under long-term contracts with vendors entered into before December 29, 2002 and contributions to the National Advertising Fund by certain of our vendors based upon purchasing volumes of the Company and our franchisees. Revenue from sales of proprietary food products is recognized when the products are shipped. Volume based revenue and contributions from our vendors are recognized systematically throughout the accounting period based on the estimated annual volume to be achieved under the agreements.

     Preopening costs. The company expenses preopening costs as incurred. There were no preopening costs expensed for the thirteen weeks ended April 3, 2004, compared to $6,000 for the period ended March 29, 2003.

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NOTE 2 — STOCK-BASED EMPLOYEE COMPENSATION

The company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation. Had compensation cost for the company’s stock option plan been determined based on the fair value at the grant date for awards in the quarters ended April 3, 2004, and March 29, 2003, under the plan consistent with the fair value method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, the company’s operating results for the quarters ended April 3, 2004, and March 29, 2003 would have been reduced to the pro forma amounts indicated below (in thousands, except per share data):

     The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.

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NOTE 3 — NET INCOME PER SHARE

The company calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share, which requires the presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

COMPUTATION OF INCOME PER SHARE
(in thousands, except per share amounts)
(unaudited)

The calculation of diluted income per share for the thirteen weeks ended April 3, 2004, and March 29, 2003 excluded 20,000 and 75,704 stock options, respectively, as their effect would be anti-dilutive.

NOTE 4 — DEFERRED FRANCHISE AND AREA DEVELOPMENT FEES

Amounts received for certain franchise and area development rights, net of commissions paid, have been deferred. Revenues on individual franchise fees are recognized when substantially all of the initial services required of the company have been performed, which generally coincides with the opening of the franchises. Under the terms of the franchise agreements, these fees are non-refundable, and may be recognized as income should the franchisee fail to perform as agreed. Area development fees are recognized on a pro-rata basis as each unit opens. At April 3, 2004, deferred fees include franchise and area development rights sold during the following years:

NOTE 5 — COMMITMENTS AND CONTINGENCIES

The company is party to several pending legal proceedings and claims. Although the outcome of the proceedings and claims cannot be determined with certainty, management of the company is of the opinion that it is unlikely that these proceedings and claims will have a material adverse effect on the financial condition or results of operations of the company.

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Forward-Looking Information

     This document and other written reports and oral statements made from time to time by Back Yard Burgers and its representatives contain forward-looking statements. These statements, which are not statements of historical fact, may contain estimates, assumptions, projections and/or expectations regarding our financial position, results of operations, growth strategy and plans for future expansion, product development, economic conditions, and other similar forecasts and statements of expectation. We generally indicate these statements by words or phrases such as “anticipate,” “estimate,” “plan,” “expect,” “believe,” “intend,” “foresee,” and similar words or phrases. Forward-looking statements are based upon estimates, projections, beliefs and assumptions of management at the time of such statements and should not be viewed as guarantees of future performance. Such forward-looking information involves important risks and uncertainties that could significantly impact anticipated results in the future and, accordingly, such results may differ materially from those expressed in any forward-looking statements by or on behalf of the company. The factors that could cause our actual results to differ materially, many of which are beyond our control, include, but are not limited to, the following: delays in opening new stores or outlets because of weather, local permitting, and the availability and cost of land and construction; increases in competition and competitive discounting; increases in minimum wage and other operating costs; shortages in raw food products; volatility of commodity prices; consumer preferences, spending patterns and demographic trends; the possibility of unforeseen events affecting the industry generally, and other risks described from time to time in our periodic reports filed with the Securities and Exchange Commission. Back Yard Burgers, Inc. disclaims any obligation to update or revise any forward-looking statement based on the occurrence of future events, the receipt of new information, or otherwise.

Introduction

     As of April 3, 2004, the Back Yard Burgers system included 135 restaurants, of which 42 were company-operated and 93 were franchised (of which 9 were co-branded restaurants under the development agreement with YUM! Brands, Inc). Unit activity for the thirteen weeks ended April 3, 2004 included five franchised store openings and two franchised store closings.

     The company’s revenues are derived primarily from company-operated restaurant sales, franchise and area development fees and royalty fees. Certain expenses (cost of restaurant sales, restaurant operating expenses, depreciation and amortization and advertising) relate directly to company-operated restaurants, while general and administrative expenses relate to both company-operated restaurants and franchise operations. The company’s revenues and expenses are affected by the number and timing of the opening of additional restaurants. Sales for new restaurants in the period immediately following their opening tend to be high because of trial by public and promotional activities. As a result, the timing of openings can affect the average volume and other period-to-period comparisons.

Results of Operations

The following table sets forth the percentage relationship to total revenue, unless otherwise indicated, of certain items included in the company’s historical operations and operating data for the periods indicated.

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Comparison of the Company’s Results for the Thirteen Weeks Ended April 3, 2004 and March 29, 2003.

     Restaurant sales increased 11.3% to $8,434,000 during the thirteen weeks ended April 3, 2004, from $7,577,000 for the year-earlier period. This increase is primarily the result of an increase of 9.4% in same-store sales at restaurants open for more than one year.

     Franchise and area development fees remained relatively flat at $88,000 for the thirteen weeks ended April 3, 2004, compared with $90,000 in the year-earlier period. Five new franchise stores opened during the thirteen weeks ended April 3, 2004, and five new franchised stores also opened during the thirteen weeks ended March 29, 2003.

     Royalty fees increased 13.2% to $659,000 during the thirteen week period ended April 3, 2004, compared with $582,000 during the first quarter of 2003. The change is due to a net increase of twelve franchised stores since March 29, 2003 resulting in increased franchised sales on which royalty fees are based. This increase was partially offset by a 2.3% decrease in same-store sales at franchised restaurants compared with the year-earlier period.

     Advertising fees increased 13.8% to $165,000 during the thirteen week period ended April 3, 2004, from $145,000 during the first quarter of 2003. The change is due to an increase in franchised restaurant sales, upon which a portion of the fees are based.

     Other revenues decreased by $43,000 to $137,000 during the thirteen week period ended April 3, 2004, from $180,000 during the first quarter of 2003. The decrease in other revenues is due to a reduction in volume rebates recorded as revenue. The Company adopted EITF 02-16 Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor for all contracts or agreements entered into after December 28, 2002. EITF 02-16 concluded that cash consideration received by a customer from a vendor is presumed to be a reduction of the prices of the vendor’s products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the customer’s income statement.

     Cost of restaurant sales, consisting of food and paper costs, totaled $2,634,000 for the thirteen weeks ended April 3, 2004, and $2,418,000 during the same period in 2003, decreasing as a percentage of restaurant sales to 31.2% from 31.9%. The decrease in costs as a percentage of sales is due to a combination of the reclassification of vendor rebates described above as well as a 2% price increase implemented at company operated restaurants in the fourth quarter of 2003. These factors were partially offset by a 13% increase in the cost of beef over the prior year period.

     Restaurant operating expenses, consisting of labor, supplies, utilities, maintenance, rent and certain other unit level operating expenses, increased to $4,083,000 for the thirteen weeks ended April 3, 2004, from $3,641,000 in the same prior year period, increasing as a percentage of restaurant sales to 48.4%, from 48.1% for the year-earlier period. Labor increased by 0.2% as a percentage of sales over the prior year primarily due to increases in health insurance costs incurred by the company. The remainder of the increase is due to higher spending for repairs and maintenance, utilities and property taxes.

     General and administrative costs which increased $104,000 to $1,199,000 for the thirteen weeks ended April 3, 2004 from $1,095,000 in the year-earlier period, decreased as a percentage of total revenue for the thirteen weeks ended April 3, 2004, to 12.6% from 12.8% in the year-earlier period The increase in costs is primarily due to increased spending in the areas of personnel costs, legal fees and training.

     Advertising expense which increased to $514,000 for the thirteen weeks ended April 3, 2004, from $477,000 in the same period in 2003, remained relatively flat as a percentage of total revenues at 5.4% compared with 5.6% in the year-earlier period.

     Depreciation expense increased by $68,000 to $488,000 for the thirteen weeks ended April 3, 2004, from $420,000 in the same period in 2003 due primarily to the addition of approximately $3.6 million in fixed assets since March 29, 2003.

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     Interest expense decreased 9.5% to $114,000 for the thirteen weeks ended April 3, 2004, from $126,000 in the year-earlier period. Since March 29, 2003, long-term debt decreased by $857,000, or 14.3%, to $5,129,000 as of April 3, 2004.

     Other, net expense was $22,000 for the thirteen weeks ended April 3, 2004, compared with a net expense of $15,000 in the prior year. The change is primarily due to a $6,000 increase in franchise and excise taxes over the year-earlier period. Also included in this category is other miscellaneous income and expenses, and these income and expense categories were relatively consistent during the thirteen weeks ended April 3, 2004, and the year-earlier period.

Impairment of Long-Lived Assets

     Pursuant to SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we evaluate the recoverability of assets (including intangibles) when events and circumstances indicate that assets might be impaired. For such assets, we determine impairment by comparing the undiscounted future cash flows estimated to be generated by these assets to their respective carrying amounts. Where an indication of impairment exists, we generally estimate undiscounted future cash flows at the level of individual restaurants or manufacturing facilities. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset. Assets held for disposition are valued at the lower of historical cost, net of accumulated depreciation, or fair market value less disposition cost.

     No impairment charges were recorded during the thirteen weeks ended April 3, 2004, or the thirteen weeks ended March 29, 2003; however, in the past, the company incurred non-cash charges for the effect of company-operated restaurant closings and impaired assets at company-operated restaurants. Also, related accruals for future lease payments of closed stores, net of estimated sub-lease income, were previously recorded.

     During the thirteen weeks ended April 3, 2004, $23,000 of lease obligation payments were incurred for closed stores and charged against this reserve. As of April 3, 2004, the company’s remaining accrual for all future lease obligations discussed above was $58,000 for the remaining lease payments due, net of estimated sub-lease income.

Off-Balance Sheet Arrangements

     At April 3, 2004, the company had a guarantee of a franchisee loan relating to the acquisition of a parcel of land and the construction of a building that is currently being operated as a Back Yard Burgers franchised location. The original loan balance was $655,000 and the balance as of April 3, 2004, was approximately $500,000.

Liquidity and Capital Resources

     Capital expenditures totaled $428,000 for the thirteen weeks ended April 3, 2004 and $344,000 for the year-earlier period. Generally, the company constructs its restaurant buildings on leased properties for company-operated restaurants. The average monthly lease cost for the 14 company-operated restaurants on leased sites at April 3, 2004 is approximately $3,300 per month. For the 19 restaurants where the company leases the building as well as the site, the average monthly lease cost is approximately $5,300.

     Cash from operations for the company is primarily affected by net earnings adjusted for deferred franchise fees and non-cash expenses which consist primarily of depreciation and amortization. Depreciation and amortization totaled $488,000 for the thirteen weeks ended April 3, 2004 and $420,000 for the year-earlier period.

     Cash provided by operations for the thirteen week period ended April 3, 2004, was $894,000 compared with $277,000 in the year-earlier period. In recent history, cash from operations and debt have been used for the addition of new restaurants and equipment as well as the re-imaging of existing restaurants to reflect the company’s new logo and related color scheme.

     As of April 3, 2004, the company had total long-term debt of $5,129,000 and unused lines of credit and loan commitments of potential additional borrowings of $2,500,000. While the company does have, in addition to this $2,500,000, an $876,000 loan commitment, the company does not anticipate drawing these funds due to high interest rates for the commitment. On February 11, 2003, the company entered a loan agreement with a financial institution in the amount of $5,000,000. The loan agreement comprised the following three components: (1) a $2,500,000 five-year loan with a fixed rate of 5.2%. The funds from the

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five-year term loan were used to refinance approximately $2.3 million of existing term loans with an average interest rate of 6.8% and maturity dates ranging from one to two years, (2) a $2.0 million draw down line for future expansion with a variable rate of interest equal to the one month LIBOR rate plus a spread not to exceed 3% that is calculated based on certain financial covenants and (3) a $500,000 revolver line with a variable rate of interest equal to the one month LIBOR rate plus a spread not to exceed 3% that is calculated based on certain financial covenants. No long-term debt commitments or loan draws were made by the company during the thirteen weeks ended April 3, 2004.

     On January 2, 2001, the company’s board of directors adopted a stock repurchase plan that allows the company to repurchase up to 500,000 shares of its outstanding common stock. As of April 3, 2004, the company had repurchased 25,000 shares of common stock under the plan. No further purchases are anticipated in the near term.

     The company has budgeted capital expenditures of approximately $4.0 million in fiscal year 2004, excluding potential acquisitions and share repurchases. These capital expenditures primarily relate to the development of additional company-operated restaurants, the re-imaging of existing restaurants to reflect the company’s new logo and related color scheme, addition of new menu boards, store equipment upgrades, and enhancements to existing financial and operating information systems. As of April 3, 2004, the company had spent $428,000 of these budgeted capital expenditures. The company expects to fund these capital expenditures through cash flow from operations and borrowings under existing loan commitments of up to $2.0 million.

Seasonality and Inflation

     While the company does not believe that seasonality affects its operations in a materially adverse manner, first quarter results are generally lower than other quarters due to seasonal climate conditions in the locations of many of its restaurants. Although results were negatively impacted during the first quarter of 2004 due to a 13% increase in the cost of beef, management does not believe that inflation has had a material effect on income during the thirteen weeks ended April 3, 2004. Increases in food, labor or other operating costs could adversely affect the company’s operations. In the past, however, the company generally has been able to increase menu prices or modify its operating procedures to substantially offset increases in its operating costs.

Conversion of Preferred Stock

     In accordance with the provisions of the company’s 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 notified preferred stockholders of their right to convert preferred stock to common stock, and anticipates that all shares of preferred stock will eventually be converted. Such conversion began on April 5, 1995, at which time there were 1,199,979 shares of preferred stock outstanding. As of April 3, 2004, only 19,617 shares have yet to be converted.

Known Trends and Uncertainties

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

     During the thirteen weeks ended April 3, 2004, the cost of beef increased approximately 13.0% over the prior year period while the cost of chicken was relatively stable. In light of what appeared to be a sustained period of increased beef costs, the company implemented menu price increases of approximately 2% effective October 12, 2003 in order to partially offset these increased costs. It may be difficult to raise menu prices to fully cover these or any future cost increases. Additional margin improvements may be required to be made through operational improvements, equipment advances and increased volumes to help offset these increases, due to the competitive state of the quick-service restaurant industry.

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     Due to the competitive nature of the restaurant industry, site selection continues to be challenging as the number of businesses vying for locations with similar characteristics increases. This will likely result in higher occupancy costs for prime locations.

     Franchised same-store sales decreased 2.3% and company-operated same-store sales increased 9.4% during the thirteen weeks ended April 3, 2004. Management attributes the disparity between franchised and company-operated same-store sales to certain initiatives undertaken at company-operated restaurants that have yet to be fully implemented in the franchised stores.

     These initiatives include the re-imaging of existing company-operated restaurants to reflect the company’s new logo and related color scheme. The company completed the re-imaging of the exterior of all company operated restaurants during the first quarter of 2004. Franchised locations are just beginning the process of being re-imaged, and the company anticipates having the exterior of all franchised locations re-imaged by the end of 2005. As of the end of the first quarter of 2004, fifty franchised locations had yet the stores’ exteriors re-imaged. All locations, both company-operated and franchised, constructed since the beginning of 2002 have been constructed with the company’s new logo and related color scheme.

     The company has been testing a late-night operations program at company-operated restaurants since the second quarter of 2004. The company will continue its late night operations at company-operated locations through the end of 2004, but has not mandated additional hours of operations for franchised stores at this time.

     The company is also testing a breakfast program at eight of the 42 company-operated restaurants, which also had a positive impact on same-store sales at company operated restaurants during the first quarter of 2004. The company is still in the process of developing its menu and refining its operations for the breakfast program. No franchised locations were serving breakfast as of the end of the first quarter of 2004.

     The company took a 2% menu price increase taken for company-operated restaurants in October of 2003 which also positively impacted same-store sales for company-operated restaurants. While some franchised locations may have taken price increases in the last year, there has been no across the board price increases taken for all franchised locations during the last year.

     Management intends to continue with its marketing strategy of enhancing the company’s points of differentiation and further positioning the company as a premium fast-food provider.

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

     Under the terms of a Development Agreement entered into in January 2002 with YUM! Brands, Inc., the company granted YUM! the right to use Back Yard Burgers trademarks in connection with the establishment and operation of up to ten Back Yard Burgers outlets as part of multi-brand units with Taco Bell, Pizza Hut and/or KFC operations. The Development Agreement also granted YUM! an option to co-brand up to 500 additional Back Yard Burgers restaurants within certain geographic areas if certain conditions were satisfied. YUM! did not exercise its option, and the Company has been holding discussions with YUM! with respect to whether and to what extent the parties will extend any license and sublicense arrangements.

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Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

     On an on-going basis, management evaluates company estimates, including those related to bad debts, carrying value of investments in property and equipment, goodwill, income taxes, contingencies and litigation. Management bases company estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Management believes the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition:

     Revenue recognition at Company-operated restaurants is straightforward as customers pay for products at the time of sale. The earnings reporting process is covered by the company’s system of internal controls and generally does not require significant management judgments and estimates. The company calculates royalty income each week based upon amounts reported by franchisees and provides for estimated losses for revenues that are not likely to be collected. The company maintains these allowances for doubtful accounts for estimated losses resulting from the inability of our franchisees and other borrowers to make required payments. If the financial conditions of our customers or other borrowers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

     Franchise fees are recognized as revenue when substantially all of the initial services required of the company have been performed, which generally coincides with the opening of the franchises. Such services include training and assistance with site location, equipment vendors, structural design and operating policies. Area development fees arise when franchisees are awarded the right to develop, own and operate additional Back Yard Burgers restaurants in specific geographical areas pursuant to the terms of an Area Development Agreement. Such fees are based on the number of restaurants the franchisee expects to develop. These fees are included as revenue in accordance with the franchise fee recognition policy as each additional restaurant is opened. Under the terms of the franchise and area development agreements, the fees are non-refundable and may be recognized as revenue should the franchisee fail to perform as agreed. Commission costs associated with the sales of franchise and area development rights are expensed when related revenues are recognized.

     Prior to December 29, 2002, the company collected funds from certain vendors relating to future purchases by the company. The company deferred this amount as other deferred income. These funds are recorded as income in a proportionate manner with respective future purchases. Under the terms of signed contracts, the company is required to purchase specific volumes in future years. If these purchase volumes are not met, funds related to the volume shortages will be refunded to the vendors.

Long-Lived Assets:

     The restaurant industry is capital intensive. The company has approximately 74% of its total assets invested in property and equipment. The company capitalizes only those costs that meet the definition of capital assets under generally accepted accounting principles. Accordingly, repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

     The depreciation of our capital assets over their estimated useful lives, and the determination of any salvage values, requires management to make judgments about future events. Because the company utilizes many of its capital assets over relatively long periods, the company periodically evaluates whether adjustments to our estimated lives or salvage values are necessary. The accuracy of these estimates affects the amount of depreciation expense recognized in a period and, ultimately, the gain or loss on the disposal

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of the asset. Historically, gains and losses on the disposition of assets have not been significant. However, such amounts may differ materially in the future based on restaurant performance, technological obsolescence, regulatory requirements and other factors beyond our control.

     Due to the fact that the company invests a significant amount in the construction or acquisition of new restaurants, the company has risks that these assets will not provide an acceptable return on our investment and an impairment of these assets may occur. The accounting test for whether an asset held for use is impaired involves first comparing the carrying value of the asset with its estimated future undiscounted cash flows. If these cash flows do not exceed the carrying value, the asset must be adjusted to its current fair value. The company periodically performs this test on each of our restaurants to evaluate whether impairment exists. Factors influencing our judgment include the age of the restaurant (new restaurants have significant start up costs which impede a reliable measure of cash flow), estimation of future restaurant performance and estimation of restaurant fair value. Due to the fact that the management can specifically evaluate impairment on a restaurant by restaurant basis, the company has historically been able to identify impaired restaurants and record the appropriate adjustment.

     The company has approximately $1.8 million of goodwill on its balance sheet resulting from the acquisition of businesses. New accounting standards adopted in 2002 require that we review goodwill for impairment on an annual basis and cease all goodwill amortization. The adoption of these new rules did not result in an impairment of our recorded goodwill. The annual evaluation of goodwill impairment requires a two-step test in which the market value of the company is compared to the recorded book value. If the market value is less than the book value, goodwill impairment is recorded. Once an impairment of goodwill has been recorded, it cannot be reversed.

Deferred Income Taxes:

     The company records income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. The company records a valuation allowance to reduce deferred tax assets to the balance that is more likely than not to be realized. In evaluating the need for a valuation allowance, management must make judgments and estimates on future taxable income, feasible tax planning strategies and existing facts and circumstances. When management determines that deferred tax assets could be realized in greater or less amounts than recorded, the asset balance and income statement reflect the change in the period such determination is made. Based on management’s estimates, there is presently a $389,000 valuation allowance recorded on the company’s deferred tax assets. However, changes in facts and circumstances that affect our judgments or estimates in determining the proper deferred tax assets or liabilities could materially affect the recorded amounts.

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Item 3 Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

     The company is exposed to certain financial market risks, the most predominant being fluctuations in interest rates on variable rate debt and the repricing of fixed rate debt at maturity. Management monitors interest rate fluctuations as an integral part of the company’s overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce the potential adverse effect of our results. The effect of interest rate fluctuations historically has been small relative to other factors affecting operating results, such as food, labor and occupancy costs.

     Less than 10% of the company’s debt portfolio as of April 3, 2004, had variable rates or had maturity dates of less than two years. With every 25 basis point increase in interest rates, the company could be subject to additional interest expense of approximately $1,500 annually, depending on the timing of the rate changes and debt maturities.

     The company has considered the use of hedging instruments to minimize interest rate fluctuation risk, but based on the debt portfolio structure described above, no hedging tool has been deemed necessary for the company at this time.

Commodity Price Risk

     We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements on certain products; however, the cost the company pays for beef fluctuates weekly based on beef commodity prices. The company does not currently manage this risk with commodity future and option contracts.

Item 4. Disclosure Controls

     The company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by the report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), the company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by the report. There have been no changes in our internal control over financial reporting during the fiscal year covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II          OTHER INFORMATION

     Item 1     Legal Proceedings

     The company is involved in litigation incidental to its business, including, but not necessarily limited to, claims alleging violations of federal and state discrimination laws. Such litigation is not presently considered by management to be material to the financial condition or results of operations of the company.

     Item 2     Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securties

     None

     Item 3     Defaults Upon Senior Securities

     Not Applicable

     Item 4     Submission of Matters to a Vote of Security Holders

     None

     Item 5     Other Information

     None

     Item 6     Exhibits and Reports on Form 8-K

     Exhibits

31.1     Certification by the Chief Executive Officer
31.2     Certification by the Chief Financial Officer
32.1     Certification by the Chief Executive Officer
32.2     Certification by the Chief Financial Officer

     Reports on Form 8-K

     Fourth quarter and year-end 2004 earnings release filed on March 18, 2004.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BACK YARD BURGERS, INC.

Date:	May 17, 2004		By:		/s/ Lattimore M. Michael
					Lattimore M. Michael
					Chairman and Chief Executive Officer

Date:	May 17, 2004		By:		/s/ Michael G. Webb
					Michael G. Webb
					Chief Financial Officer

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