The following lists the locations of the restaurants operated by the Company (by region) as of December 31, 1997:
Set forth below are selected historical data of the Company, which is the post-reorganization successor to Old ICH. Until the Company's acquisition of Sybra, Inc. (see Note 2 to Notes To Consolidated Financial Statements), the Company had no significant business operations. Old ICH financial data is not presented as its assets, liabilities and operations were dissolved or sold as part of Old ICH's Reorganization Plan (see Note 1 to Notes To Consolidated Financial Statements). For purposes of presentation, Sybra is considered to be a Predecessor of the Company. Accordingly, the selected historical financial data as of and for each of the four years ended December 28, 1996, and the four months ended April 30, 1997, were derived from the Financial Statements of the Predecessor. Due to required purchase accounting adjustments relating to the acquisition and certain corporate administrative expenses that are necessary to operate on a stand-alone basis, the consolidated financial and other data for the period subsequent to the acquisition (the "Successor" period) is not comparable to such data for the periods prior to the acquisition (the "Predecessor" periods). Pro-forma net income (loss) was derived by retroactively adjusting all prior years as if the acquisition had occurred on January 1, 1993. As such, the effects of purchase accounting, including the impact of the different capital structure of the Predecessor, has been reflected in arriving at pro-forma net income (loss) for the prior periods. In addition, adjustments reflecting the costs of operating a stand-alone company have been retroactively included in arriving at pro-forma net income (loss) for the prior periods. Such costs include, but are not limited to, administrative services, tax compliance, treasury service, human resource administration and legal services. The information contained in this table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and accompanying notes thereto included herein.
NOTES: (a) Included in the results of operations for the eight months ending December 31, 1997 are sales and operating loss of $164,000 and $(188,000), respectively, of the Company for the period from February 19, 1997 to April 30, 1997. (b) Pro-forma net income (loss) reflects 1) the effects of purchase accounting for Sybra as if the purchase was effective on January 1, 1993; 2) increased interest expense for the Predecessor periods as a result of a difference in capital structure; 3) increased general and administrative expenses reflecting the costs of operating as a stand-alone public company; and 4) has been tax effected using a combined federal and state income rate of 40%. (c) Balance sheet data are presented as of December 25, 1993, December 31, 1994, December 30, 1995, December 28, 1996 and December 31, 1997 (d) EBITDA on a pro-forma basis giving effect to the adjustments discussed a in Note (b) above would have been $13,417, $13,082, $10,932, $12,018, $2,212 and $8,209 respectively for the periods. For the combined period, pro-forma EBITDA would have been $10,421. Management believes that EBITDA is generally accepted as providing useful information regarding a company's ability to service and/or incur debt. EBITDA should not be considered in isolation or as a substitute for net income, cash flows, or other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity.
The following discussion should be read in conjunction with the "Selected Historical Financial Data" and the Financial Statements of the Company and the accompanying notes thereto included elsewhere herein. Certain information discussed below may constitute forward-looking statements within the meaning of the federal securities laws. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Forward-looking information is subject to certain risks, trends and uncertainties that could cause actual results to differ materially from projected results. Among those risks, trends and uncertainties are the general economic climate, costs of food and labor, consumer demand, interest rate levels, the availability of financing and other risks associated with the acquisition, development and operation of new and existing restaurants.
The Company's revenues consist almost entirely of restaurant sales from its wholly-owned subsidiary, Sybra, Inc.
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 to AFA to develop and prepare advertising materials and to undertake marketing research are equal to 0.7% of restaurant sales. In addition, the Company operates its restaurants pursuant to licenses which require the Company to pay Arby's, Inc. a royalty based upon percentages of its restaurant sales (presently an aggregate of approximately 2.9% of the Company's restaurant sales). The royalty rate for new restaurants (currently 4%) will result in an increase in the Company's aggregate royalty rate as new restaurants are opened.
The following table sets forth, with respect to the Company and for the periods indicated, the percentage of total revenues represented by certain expense and income items.
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. The discussion below does not include a comparison of the year ended December 28, 1996 to the year ended December 30, 1995 as the results consisted only of the Predecessor operations and are not comparable to the Company's current operations for the reasons mentioned above.
Year Four Months Eight Months Year Ended Ended Ended Ended December 28, April 30, December 31, December 31, 1996 1997 1997 1997 ----------- -------- ------------ ------------
Expenses Restaurant costs & expenses 80.9% 84.4% 82.0% 82.8% General & administrative 5.3% 5.8% 6.8% 6.5% Depreciation & amortization 5.1% 5.3% 4.5% 4.8% Non-recurring/ restructuring charges -- -- 2.0% 1.3% Other 1.0% -- 1.3% .9% ----- ----- ----- -----
Operating income (loss) 7.7% 4.5% 3.4% 3.7% Interest expense 2.0% 1.7% 4.9% 3.8% ----- ----- ----- ----- Income (loss) before taxes 5.7% 2.8% (1.5)% (.1)% Income taxes (benefit) 2.1% 1.1% (.3)% .1% ----- ----- ----- ----- Net income (loss) 3.6% 1.7% (1.2)% (.2)% ================== ===================
General and Administrative - General and administrative costs and expenses were $7.3 million, or 6.5% of sales, for FY 1997 as compared to $6.2 million, or 5.3% of sales for FY 1996, an increase as a percent of sales as a result of lower sales and of costs and expenses associated with operating I.C.H. Corporation 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.
Depreciation and Amortization - Depreciation and amortization expense was $5.4 million, or 4.8% of sales in FY 1997 as compared to $6.0 million, or 5.1% of sales in FY 1996, a decrease as a percent of sales as a result of the impact of the sale/leaseback as explained above net of goodwill amortization as a result of purchase accounting related to the Sybra acquisition.
Non-recurring and Restructuring Charges - Non-recurring and restructuring charges were $1.5 million in FY 1997 as a result of the restructuring of Sybra's operations, buy-out of an employment contract and non-recurring expenses related to obtaining financing and maintaining Sybra's status as an Arby's franchisee.
Interest Expense - Interest expense was $4.3 million in FY 1997 as compared to $2.4 million in FY 1996, an increase of $2.0 million as a result of debt incurred in connection with the Company's acquisition of Sybra.
The Company's primary liquidity needs arise from debt service on indebtedness incurred in connection with the Sybra acquisition and the funding of capital expenditures. As of December 31, 1997, the Company had total outstanding indebtedness for borrowed money of $43 million, comprised of a $34 million term facility with Atherton Capital Incorporated ("Atherton") and a $9 million debt obligation to USRP. The Atherton term facility has a weighted-average maturity of 12.5 years and bears interest at 10.63%. The Atherton term facility requires monthly payments of principal and interest, is collateralized by substantially all of the Company's restaurant equipment, and imposes certain financial restrictions and covenants. The $9 million obligation to USRP bears interest at the rate of 14.5%.
The Company's primary source of liquidity during the period from February 19, 1997 through December 31, 1997 was funds from the operation of the restaurants owned by Sybra and the proceeds of the sale of Bankers Multiple Line Insurance Company ("BML") to the Lone Star Liquidating Trust.
On August 7, 1997, Sybra executed a loan commitment letter with FFCA to finance the construction of up to 12 new Arby's restaurants during the next two years. Under the terms of the commitment letter, FFCA has agreed to finance mortgage and equipment loans for up to 12 new Arby's restaurants to be built by Sybra, to a maximum of $1 million per location.
On April 25, 1997, the Company sold its interest in the stock of BML which generated a significant tax loss (see Note 11 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 existance and realizability.