The following table sets forth the locations of the restaurants operated by the Company (by state) as of December 31, 1998:
Sybra Lyon's ----- ------ California 9 68 Florida 21 - Maryland 2 - Michigan 49 - New Jersey 5 - Oregon - 5 Pennsylvania 26 - Texas 66 - Virginia 3 - --- --- Total: 181 73 === ===
Restaurant costs and expenses include all direct operating costs, including direct labor, occupancy costs, advertising expenses, royalty payments, expenditures for repairs and maintenance, and workers' compensation and casualty and general liability insurance costs. Advertising fees paid by the Company's Sybra subsidiary to the AFA to develop and prepare advertising materials and to undertake marketing research are equal to 0.7% of restaurant sales. In addition, Sybra operates its restaurants pursuant to licenses which require Sybra to pay Arby's, Inc. a royalty based upon percentages of its restaurant sales (presently an aggregate of approximately 3.0% of Sybra's restaurant sales). The royalty rate for new Arby's restaurants (currently 4.0%) will result in an increase in the aggregate royalty rate for Sybra as new Arby's restaurants are opened.
For purposes of the discussion below, the results of operations for the year ended December 31, 1997 represent the mathematical addition of the historical amounts for the Predecessor Period (December 29, 1996 to April 30, 1997) and the Successor Period (May 1, 1997 to December 31, 1997) and are not necessarily indicative of the results that would actually have been obtained if the acquisition had occurred on December 31, 1996. The Predecessor Period does not give effect to, among other items, corporate expenses necessary to operate on a stand-alone basis. Such expenses include, but are not limited to, certain administrative services, tax compliance, treasury service, human resource administration and legal services.
Revenues - Revenues were $140.0 million for 1998 as compared to $112.9 million for 1997, an increase of $27.1 million or 24.0%. Sybra's sales for the year ended December 31, 1998 were $131.3 million, an increase of $19.7 million or 17.6% over the prior year combined comparable period, as a result of a same store sales increase of 4.8% for the period, and sales from new store openings and store acquisitions. Sales from the Company's Lyon's restaurants from the date of acquisition (December 14, 1998) to December 31, 1998, were $7.0 million.
Depreciation and Amortization - Depreciation and amortization expense was $4.9 million, or 3.5% of sales, in 1998 as compared to $5.4 million, or 4.8% of sales, in 1997, a decrease as a percent of sales as a result of the impact of the sale/leasebacks explained above, net of goodwill amortization as a result of purchase accounting related to the Sybra acquisition.
Revenues - Revenues were $112.9 million for 1997 as compared to $116.1 million for 1996, a decrease of $3.2 million primarily as a result of a 3% decline in same store sales for the year due to a change in marketing strategy emphasizing brand quality and fewer price promotions which began in the third quarter of 1997.
Restaurant Costs & Expenses - Restaurant costs and expenses were $93.5 million, or 82.8% of sales, for 1997 as compared to $93.9 million, or 80.8% of sales for 1996, a decrease of $358 due to the sales decline explained above. As a percent of sales, costs increased as a result of increases in rent expense associated with the Company's sale/leaseback of 61 properties previously classified as owned.
General and Administrative - General and administrative costs and expenses were $7.3 million, or 6.5% of sales, for 1997 as compared to $6.2 million, or 5.3% of sales for 1996, an increase as a percent of sales as a result of lower sales and of costs and expenses associated with operating the Company as a stand-alone public company as explained above and increased expenses associated with business development and real estate operations necessary to achieve new store development requirements.
Communication with respect to Year 2000 issues with the Company's suppliers is ongoing. While not expected, the Company may experience delays in receipt of product, which could adversely affect sales and earnings. The Company cannot currently estimate to what extent future operating results might be adversely affected by the possible failure of these third parties to successfully address their Year 2000 issues. However, the Company's program includes actions designed to identify and minimize, where possible, any third party exposure.
The Company's primary source of liquidity during the year was the operation of the restaurants owned by its principal operating subsidiaries, Sybra and Lyon's and debt and lease financing.
In the future, the Company's liquidity and capital resources will primarily depend on the operations of Sybra and Lyon's which, under the provisions of the Company's loan agreements, would permit, under certain conditions, distributions and dividends to the Company. Sybra and Lyon's, like most restaurant businesses, are able to operate with nominal or deficit working capital because all sales are for cash and inventory turnover is rapid. Renovation and/or remodeling
On December 14, 1998, the Company acquired substantially all the assets of Lyon's Restaurants, Inc. The assets acquired include a chain of 73 family-dining restaurants, located primarily in northern California and operating under the "Lyon's" name. The Company funded the acquisition through the use of approximately $5.5 million of its available cash resources, and a $16.5 million fixed-rate term loan from USRP (Finance), LLC. The loan matures in approximately 12 years, bears interest at a rate of 12.75% per annum and is guaranteed by the Company. The balance of the purchase price was paid with a $600 note from the Company to the seller. In addition, the Company issued to USRP (Finance), LLC 125,000 warrants to purchase shares of its common stock at an exercise price of $.01 per share.
On January 5, 1999, Sybra entered into a sale/leaseback transaction with CNL Fund Advisors, Inc. ("CNL") for approximately $6.5 million, resulting in a gain, net of closing costs, of approximately $700. The sale/leaseback transaction relates to ten Arby's restaurants located in Florida. The new leases with CNL have a base term of 20 years.
On February 17, 1998, Sybra executed a new loan commitment letter with FFCA Acquisition Corporation ("FFCA") to finance the construction of up to 15 new Arby's restaurants during the next 18 months. Under the terms of the commitment letter, FFCA has agreed to finance mortgage and equipment loans for up to 15 new Arby's restaurants (of which up to seven sites may involve land leased by Sybra pursuant to a long term ground lease) to be built by Sybra, to a maximum of $1.1 million per location.
On April 25, 1997, the Company sold its interest in the stock of Bankers Multiple Line Insurance Company, which generated a significant tax loss (see Note 3 of Notes to Consolidated Financial Statements). Due to limitations pursuant to the Internal Revenue Code and Treasury regulations thereunder, no deferred tax asset has been recorded for the capital loss carry forward due to the uncertainty of its existence and realizability.
The gain from the sale of a discontinued operations of $388 was related to the sale of Perry Park in July 1998 for approximately $3.1 million in cash. The gain from discontinued operations included a gain from recognizing a tax deferred asset of $719 (the result of the tax loss exceeding the book loss), which the Company believes will be fully utilized to offset other taxable income and capital gains in future periods.
The Company's total capital expenditures were $6.1 million, $5.1 million and $12.5 million in 1996, 1997 and 1998, respectively, which include new store development, as well as store maintenance, store remodel and store renovation capital expenditures. The Company anticipates that store maintenance, store remodel and store renovation capital expenditures for 1999 will approximate $12.0 million. The level of capital expenditures for new store development and acquisitions will be dependent upon several factors, including the number of stores constructed and/or acquired, the availability of appropriate financing as well as the capital structure of any such transactions.
Certain of the Company's operating costs are subject to inflationary pressures, of which the most significant are food and labor costs. As of December 31, 1998, a significant percentage of the Company's employees were paid wages equal to or based on the federal minimum hourly wage rate. Economic growth that would reduce unemployment or make more jobs available in higher paying industries would directly affect the Company's labor costs.