-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PxxberTfNi7+JGRn+YuRvANjRfMQDsd6B7bhyqMMKM566TjOsHUNA5X/yMHLXofc dFZZYBrha1aPgR/2/zXs/g== 0000950146-99-000673.txt : 19990402 0000950146-99-000673.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950146-99-000673 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICH CORP /DE/ CENTRAL INDEX KEY: 0000049588 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 436069928 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07697 FILM NUMBER: 99582650 BUSINESS ADDRESS: STREET 1: 9255 TOWNE CENTRE DRIVE STREET 2: SUITE 600 CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 2149547111 MAIL ADDRESS: STREET 1: P.O. BOX 2699 STREET 2: SUITE 400 CITY: DALLAS STATE: TX ZIP: 75221 FORMER COMPANY: FORMER CONFORMED NAME: SOUTHWESTERN LIFE CORP DATE OF NAME CHANGE: 19940808 FORMER COMPANY: FORMER CONFORMED NAME: ICH CORP DATE OF NAME CHANGE: 19930506 FORMER COMPANY: FORMER CONFORMED NAME: ICH CORP/CONSOL NAT/RTS/CFR/MOD AMER LIFE INS/SW LIFE INS/CF DATE OF NAME CHANGE: 19930505 10-K 1 UNITED STATES Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K (X) Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the Fiscal Year Ended December 31, 1998 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 Commission File Number: 1-7697 I.C.H. Corporation ------------------ (Exact Name of Registrant as Specified in its Charter) Delaware 43-6069928 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 9255 Towne Centre Drive, Suite 600, San Diego, CA 92121 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (619) 587-8533 Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period than 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the voting stock held by non-affiliates of the Registrant on March 26, 1999 was $17,167,615, based on the closing price of the Common Stock as provided by the American Stock Exchange on March 26, 1999. As of March 26, 1999, there were outstanding 2,821,582 shares of the Registrant's Common Stock, par value $0.01 per share. ITEM 1. BUSINESS - ----------------- GENERAL I.C.H. Corporation ("ICH", and together with its operating subsidiaries, the "Company"), a Delaware corporation, owns and operates quick-service restaurants under the Arby's name as well as full-service family dining restaurants under the Lyon's name through its wholly-owned subsidiaries. The Company operates its Arby's restaurant units as a franchisee of, and pursuant to license agreements with Arby's, Inc., the franchisor of the Arby's brand. The Company owns the Lyon's brand and all related trademarks and goodwill. The Company's principal executive offices are located at 9255 Towne Centre Drive, San Diego, California 92121, and its telephone number is (619) 587-8533. On April 30, 1997, the Company acquired all of the outstanding capital stock of Sybra, Inc. ("Sybra"), the second largest franchisee of Arby's restaurants. The aggregate purchase price was approximately $39.8 million which included the repayment of $23.7 million of Sybra indebtedness and an additional $2 million of acquisition indebtedness due to the seller within two years. Concurrently with the Company's acquisition of Sybra, Sybra entered into a sale/leaseback transaction on 61 of its restaurant sites with U.S. Restaurant Properties, Inc. ("USRP"). As of December 31, 1998, Sybra owned and operated 181 Arby's restaurants located primarily in Michigan, Texas, Pennsylvania, New Jersey, Florida and California. On July 31, 1998, the Company sold its Perry Park golf course and real estate development, located in Owentown, Kentucky, for $3.1 million in cash. On December 14, 1998, the Company acquired substantially all of the assets of the Lyon's restaurant chain, through a newly-formed wholly-owned subsidiary, Lyon's of California, Inc. ("Lyon's"). The aggregate purchase price was approximately $22.6 million, of which $16.5 million was financed by USRP (Finance) LLC. Lyon's owns and operates a chain of 73 full-service family dining restaurants located in northern California and Oregon. The Company is the post-reorganization successor to ICH Corporation ("Old ICH") which emerged from Chapter 11 effective February 19, 1997. See Note 1 to the Consolidated Financial Statements for additional information concerning the Chapter 11 case and related plan of reorganization of Old ICH. BUSINESS STRATEGY The Company's overall business strategy is to increase profitability through acquisitions and investments that, in the judgment of the Company's management, create value for shareholders. Currently, the Company's primary focus is to expand its operations through the acquisition and construction of additional Arby's restaurants, as well as improving the profitability, quality of operations and competitive position of its existing Arby's and Lyon's restaurants. In addition, the Company will consider the acquisition of operating restaurants and/or restaurant chains other than Arby's and Lyon's which, in the judgment of the Company's management, can ultimately increase the Company's profitability and create value for its shareholders. The Company believes that certain of the markets in which it currently operates Arby's restaurants are underserved, and will thus provide opportunities for acquisition or construction of new restaurants to further penetrate those existing markets, as well as markets in which the Company has been granted exclusive development rights by the franchisor. In addition, the Company believes that the size of the nationwide Arby's restaurant system will continue to present opportunities for selective growth through acquisitions. 2 Consistent with the Company's strategy of expanding its operations through the acquisition of existing Arby's restaurants, Sybra acquired a total of 25 operating Arby's restaurants during 1998. To implement the Company's strategy of expanding through the construction and development of new Arby's restaurants, Sybra has entered into a development agreement with Arbys, Inc., the franchisor of Arby's restuarants, which requires Sybra to construct a total of 210 new Arby's restaurants over ten years (the "Development Agreement"). This agreement supersedes a prior agreement which required the development of 150 new restaurants during the same time period. The Development Agreement grants Sybra the exclusive right to build Arby's restaurants in certain areas, primarily in certain northeast markets in Pennsylvania, Washington D.C., Maryland and New Jersey, as well as the exclusive right to build Arby's restaurants in and around the Detroit and Dallas/Fort Worth markets. Sybra opened a total of eight new Arby's restaurants during 1998 (not including the 25 restaurants which were acquired in 1998), exceeding the 1998 annual minimum opening requirement of six restaurants set out in the Development Agreement. During the first quarter of 1999, Sybra opened one new Arby's restaurant. The number of Arby's restaurants opened in the future may vary depending upon general economic conditions, variability in the time required to obtain necessary permits, the availability of financing and the Company's ability to locate additional suitable restaurant sites. However management currently believes that Sybra will, at a minimum, meet its annual requirement under the Development Agreement (12 restaurants) for 1999. As part of the Company's overall strategy of improving the quality of operations of its existing Arby's and Lyon's restaurants, the Company closely monitors factors affecting the overall profitability of its restaurant operations as well as the profitability of individual restaurants. During 1998, the Company believes it has made improvements in several factors bearing on the overall profitability of its restaurant operations, including reductions in labor and general and administrative costs as a percentage of sales, and increased efficiencies in marketing and advertising. During 1998, the Company also closed two restaurants due to unprofitability. RESTAURANT OPERATIONS The Company conducts its restaurant operations principally through two wholly-owned subsidiaries, Sybra, Inc. and Lyon's of California, Inc. Sybra, Inc. - ----------- As of December 31, 1998, Sybra operated 181 Arby's restaurants as a franchisee of Arby's, Inc. 156 of those restaurants are free-standing units, with the remaining 25 restaurants located in shopping malls or as part of food courts within malls. Menu Each of Sybra's Arby's restaurants offers a diverse menu containing a variety of food items including roast beef, chicken, turkey and ham sandwiches. Arby's restaurants are generally known for their roast beef sandwiches, which are made from thinly-sliced beef which is freshly-roasted at each restaurant. The Arby's menu also typically includes potato products, salads and soft drinks. In addition, the restaurants sell a variety of promotional products, normally on a limited-time basis. A number of Sybra's Arby's restaurants also serve breakfast, including eggs and breakfast meat selections. 3 Site Selection Site selection for new restaurants is made by Sybra's real estate and development department, subject to acceptance by the franchisor, Arby's, Inc. A typical market area will have a population base of at least 30,000 people within a three-mile radius. Within the potential market area, Sybra evaluates major retail and office concentrations and major traffic arteries to determine focal points. Site specific factors which Sybra considers include visibility, convenience of access, proximity to direct competition, access to utilities, local zoning regulations and various other factors. Sybra's current business strategy is to locate new restaurants, whenever possible, on the grounds of or nearby to shopping centers. Restaurant Layout and Operations Sybra's Arby's restaurants (excluding mall and food court locations) typically range from 2,100 to 3,200 square feet, with a seating capacity of between 60 and 90 people and are typically open from 10 a.m. to 11 p.m., with some restaurants open for extended evening hours. Approximately 80% of Sybra's restaurants feature drive-thru windows. Raw Materials As an Arby's franchisee, Sybra complies with recipe and ingredient specifications provided by the franchisor, and purchases all food and beverage inventories and restaurant supplies from independent vendors. Arby's, Inc. does not sell food or supplies to its franchisees. Sybra and all other Arby's franchisees are members of ARCOP, Inc. ("ARCOP"), a non-profit cooperative purchasing organization. ARCOP facilitates negotiation of national contracts for food and distribution, taking advantage of the large purchasing requirements of the member franchisees. Since Arby's franchisees are not required to purchase any food products or supplies from Arby's, Inc., ARCOP facilitates control over food supply costs and avoids franchisor conflicts of interest. Sybra purchases soft drink products from the Coca-Cola Company and its affiliates. In the Southwestern region, Dr. Pepper products are also purchased. Most other food items and supplies purchased by Sybra are warehoused and distributed by AmeriServe, an independent distributor. Sybra has not experienced any significant shortages of food, beverages, equipment, fixtures or other products which are necessary to restaurant operations. The Company anticipates no such shortages and believes that alternate suppliers are available in the event such shortages occur. 4 Lyon's of California, Inc. - -------------------------- As of December 31, 1998, the Company owned and operated 73 full-service family dining restaurants operating under the "Lyon's" name and located in California and Oregon, through its wholly-owned subsidiary, Lyon's of California, Inc. The Lyon's restaurant chain was established in northern California more than 30 years ago, and enjoys nearly 100% brand name recognition in that area. Through its decades of continuous operation, the Lyon's chain has developed and retained a loyal customer base by offering its customers traditional American classic foods, sold at value price points and served in a friendly and relaxed environment. Because many of the Company's Lyon's restaurants have occupied their current locations for decades, they have become integral parts of the communities they serve and enjoy prime locations. Menu Each Lyon's restaurant offers a wide variety of traditional American classic foods served three full meals a day, together with desserts, fountain treats and alcoholic and non-alcoholic beverages. The Lyon's menu features such signature dishes as prime rib (three cut selections), fresh fish, steaks and "San Francisco" stir-fry. To accompany their entrees, Lyon's customers are offered their choice of any two homestyle side dishes from a selection that includes fresh mashed potatoes, creamed spinach, fresh vegetables, cole slaw, pasta salad, cornbread stuffing and others, and a variety of salads and appetizers. The dessert and fountain selections include pies and pastries as well as ice cream, espresso-based beverages and shakes. All Lyon's restaurants offer a full complement of beer, wine and other alcoholic beverages with meals. Some Lyon's restaurants also feature separate bar/lounge areas. This full selection of alcoholic beverages is unique to the segment in which the Lyon's restaurants operate and provides a significant brand differentiation and competitive advantage. While committed to offering the freshest foods available, Lyon's also provides its customers with a significant dining value. Average checks for breakfast, lunch and dinner at Lyon's approximate $6.00, $7.60 and $8.70, respectively, with an overall average of $7.50. Restaurant Layout and Operations The Lyon's restaurants range in size from 3,600 to 8,200 square feet and 103 to 258 seats, and average approximately 5,100 square feet and 150 seats. The Company leases all of the Lyon's restaurants locations, and owns 16 of its restaurant buildings. Many of the Lyon's restaurants occupy high-visibility and high-traffic locations, near major thoroughfares, important intersections and shopping centers. The Company believes that these prime locations, many of which have operated under the Lyon's banner for decades, cannot be easily replicated by competing restaurant companies, and thus provide an important competitive advantage for Lyon's. 24 of the Lyon's restaurants operate 24 hours a day, while the remaining 49 restaurants are typically open from 6:00 a.m. to 12:00 p.m. Raw Materials Lyon's utilizes a centralized purchasing system to purchase its food, beverages and other supplies from a variety of vendors, and has well developed, long-term relationships with its key suppliers. Individual restaurant managers are able to place orders for required items directly with the appropriate suppliers, and orders are typically drop-shipped to each restaurant by the vendor. As a result, Lyon's is able to buy many of its products at costs that are among the lowest in the industry and is able to operate without a central warehouse. Lyon's has not experienced any significant shortages of food, beverages, equipment, fixtures or other products, which are necessary to restaurant operations. The Company anticipates no such shortages and believes that alternate suppliers are available in the event any such shortages occur. 5 FRANCHISE AND DEVELOPMENT AGREEMENTS General - ------- Sybra operates all of its Arby's restaurants as a franchisee of Arby's, Inc. The Company owns the "Lyon's" brand and all related trademarks, service marks and goodwill. Sybra's relationship with Arby's, Inc. is governed by (1) the Development Agreement, which grants the Company exclusive franchise territories and (2) unit franchise agreements (collectively, "Franchise Agreements"), one of which is executed in connection with the opening of each new Arby's restaurant. These agreements provide Arby's, Inc. with significant rights regarding Sybra's business operations. Any acquisition by Sybra of an existing Arby's restaurant, or the development by Sybra of a new Arby's restaurant, requires the prior consent of Arby's, Inc. Sybra is prohibited from operating, managing or having a controlling interest or a fifteen percent (15%) or greater interest in any competing business offering roast beef sandwiches for sale to consumers and located within the Protected Area (as defined in the appropriate Franchise Agreement) for each individual Arby's restaurant it operates. Sybra's agreements with Arby's, Inc. also restrict the sale, assignment or transfer of any substantial portion of the assets of Sybra without the prior written consent of Arby's, Inc. However those agreements do not require approval of the assignment, transfer or pledge of all or any part of the assets of Sybra, excluding the license agreements, or all or any part of the stock of Sybra to banks or other lending institutions as collateral security for loans made directly to or for the benefit of Sybra. Should Sybra fail to comply with the Development Agreement, Arby's, Inc. could terminate the exclusive nature of Sybra's franchises in such covered territory. In addition, certain events of default under a Franchise Agreement give Arby's, Inc. the right to terminate the franchise rights of the Sybra restaurant governed by such Franchise Agreement. A loss of development rights or, depending upon the aggregate number of restaurants affected, a loss of franchise rights, could have a material adverse effect on the Company. Sybra is also required to operate each of its Arby's restaurants in accordance with certain standards contained in the Arby's, Inc. Operations Manual (the "Operations Manual"). Arby's, Inc. periodically monitors the operations of Sybra's restaurants and notifies Sybra of any failure to comply with any of the Franchise Agreements, the Development Agreement or the Operations Manual. 6 Development Agreement - --------------------- Effective as of November 1, 1997, and as amended May 12, 1998, Sybra and Arby's, Inc. entered into a Development Agreement covering nine counties in the Harrisburg-Lancaster-Lebanon-York Dominant Marketing Area ("DMA"), two counties in the Detroit DMA, 12 counties in the Philadelphia DMA, three counties in the Dallas-Fort Worth DMA, seven counties in the Washington, D.C.-Hagerstown, MD DMA, and nine counties in the New York DMA as well as portions of Baltimore County, MD and Burlington County, NJ. Under the terms of the Development Agreement, Sybra has been granted exclusive rights to develop and operate Arby's restaurants within the covered territories, and is required to develop and commence construction of new Arby's restaurants in accordance with schedules set out in the Development Agreement. Pursuant to the Development Agreement, Sybra is required to submit to Arby's, Inc. for its acceptance each proposed restaurant site and the plans for each new restaurant. Under the Development Agreement, Sybra is currently obligated to open or commence construction of a minimum of 12 restaurants in 1999, 16 restaurants in 2000, 26 restaurants in 2001, and 30 restaurants in each year beginning in 2002 through and including 2006. Although no assurances can be given, Sybra currently anticipates meeting or exceeding all of the development requirements under the Development Agreement. Unit Franchise Agreements - ------------------------- Sybra operates each of its Arby's restaurants under a Franchise Agreement with Arby's, Inc. Each Franchise Agreement provides the Company the right to operate an Arby's restaurant for a period of 20 years. The Franchise Agreements are renewable by the Company, subject to certain conditions, generally for 20 years (the financial terms of any renewal period may differ from those in effect during the initial term). Each Franchise Agreement gives Sybra the exclusive right to operate an Arby's restaurant in a particular geographic area, defined by either a radius restriction or specific boundaries. The Franchise Agreements also require Sybra to make royalty payments to Arby's, Inc. equal to a fixed or variable percentage of each restaurant's revenue. For restaurants opened pursuant to the Development Agreement, those royalty payments are set at four percent of sales. Pursuant to the Franchise Agreements, Arby's, Inc. prescribes the designs, color schemes, signs and equipment to be utilized in each restaurant, and determines the menu items as well as the formulas and ingredients for the preparation of food and beverage products. Each new restaurant opened within an area covered by the Development Agreement will be governed by a Franchise Agreement, with an initial licensing fee of $25,000. Of that license fee, $10,000 will be deducted from monies already placed on deposit with Arby's, Inc. in accordance with the Development Agreement. GOVERNMENT REGULATIONS The restaurant business is subject to extensive federal, state and local government regulations relating to the development and operation of restaurants, including regulations relating to building, ingress and egress, zoning, employment issues, the preparation and sale of food and the sale of alcoholic beverages. The Company is subject to federal and state environmental regulations, although such regulations have not historically had a material effect on the Company's operations. The Company is also subject to laws governing relationships with employees, such as minimum wage requirements, health insurance coverage requirements and laws regulating overtime working conditions and employee citizenship. On September 1, 1997, the balance of Congress's 1996 minimum wage increase to $5.15 per hour was put into effect. Further increases in the minimum wage or mandatory health care coverage could have a material adverse effect on the Company. SEASONAL AND QUARTERLY RESULTS Restaurant sales are moderately seasonal and historically January, February and March generate the lowest sales volumes for the Company's restaurants. As a result, operating margins for the first quarter tend to be slightly lower than those for the remaining quarters due to lower sales providing a smaller spread to cover fixed costs. 7 TRADEMARKS AND SERVICE MARKS The Franchise Agreements grant the Company the right to use certain registered trademarks and service marks of Arby's, Inc. The names "Arby's," "Arby's Restaurants" and "Arby's Roast Beef Restaurants" were adopted to identify and promote Arby's. The Company believes that these marks are of material importance to the operation of its Arby's restaurants. The Company owns the trademark and service marks used in connection with the operation of its Lyon's restaurants. The Company believes that these marks are of material importance to the operation of its Lyon's restaurants. COMPETITION The restaurant business is highly competitive and is affected by changes in the public's eating habits and preferences, population trends and traffic patterns, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond the Company's control. Key competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, attractiveness of facilities, advertising, name brand awareness and image and restaurant location. A number of the Company's significant competitors are larger or more diversified and have substantially greater resources than the Company. The Company's operations, as with the restaurant industry generally, can be significantly affected by factors such as changes in local, regional or national economic conditions, changes in consumer tastes, severe weather and consumer concerns about nutritional quality of the various food products offered at the Company's restaurants. In addition, factors such as changes in food, labor and energy costs, the availability and cost of suitable restaurant sites and the availability of an adequate number of hourly-paid employees can also affect the restaurant industry. EMPLOYEES As of December 31, 1998, the Company had approximately 7,200 employees, none of whom are subject to collective bargaining agreements with the Company or any of its subsidiaries. Employees at five of the Company's Lyon's restaurants are represented by Hotel Employees and Restaurant Employees Local Union 340, and were previously subject to collective bargaining agreements with the former owner of the Lyon's chain. The Company is currently in negotiations with representatives of such local union regarding collective bargaining agreements for those five restaurants. Many of the Company's restaurant employees work part-time, and many are paid at or slightly above minimum wage levels. The Company considers its employee relations to be generally good. ITEM 2. PROPERTIES - ------------------ As of December 31, 1998, the Company operated 254 restaurants in the areas listed below. The Company's land and building leases generally are for terms of 20 years with one or more five-year renewal options. Certain leases require the payment of additional rent equal to a percentage of annual sales in excess of specified amounts. The Company leases office space in San Diego, California and New York, New York for its corporate and executive offices and in Foster City, California; Flint, Michigan; Sinking Spring, Pennsylvania; Plano, Texas and Tampa, Florida for its regional operations centers. 8 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 === === ITEM 3. LEGAL PROCEEDINGS - ------------------------- The Company is not a party to any pending legal proceedings which, in management's belief, are likely to have a material adverse effect on the Company, nor to any other pending legal proceedings other than ordinary, routine litigation incidental to its business. The Company also maintains customary commercial, general liability, workers' compensation and directors and officers' insurance policies. On July 8, 1998, the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, entered an order approving the settlement of the Company's claims against certain former officers, directors and advisors of Old ICH. Pursuant to the reorganization plan of Old ICH, these claims were retained as assets of the Company. Under the terms of the settlement, the Company received $340,000 in cash as well as $271,000 in cash proceeds from the sale of 67,652 shares of its own common stock which were surrendered by the settling parties. In addition, under the settlement agreement one of the settling parties agreed to provide the Company with discounted financial advisory services worth up to $150,000. 9 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - --------------------------------------------------------- None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ------------------------------------------------------------------------- MATTERS - ------- MARKET INFORMATION The Company's common stock commenced trading on the American Stock Exchange on July 23, 1997 under the symbol "IH." The following table sets forth, for the periods indicated, the applicable range of the high and low sales prices for the Company's common stock on the American Stock Exchange. 1997 1998 ---- ---- High Low High Low ------ ----- ------ ----- First Quarter N/A N/A 4-1/16 3-1/8 Second Quarter N/A N/A 5-1/2 3-15/16 Third Quarter (with respect to 1997, 4-7/8 3-7/8 5-1/4 3-3/4 for the period July 23, 1997 to September 30, 1997) Fourth Quarter 4-7/16 3 4-1/2 3-1/4 NUMBER OF STOCKHOLDERS The information available indicates that as of March 26, 1999 there were approximately 3,402 holders of record of the Company's common stock. DIVIDENDS The Company has not paid any cash dividends on its common stock and does not intend to pay cash dividends on its common stock for the foreseeable future. The Company intends to retain future earnings to finance future development. ITEM 6. SELECTED FINANCIAL INFORMATION - -------------------------------------- Selected Historical Financial Data Set forth below are selected historical financial 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. 10 Accordingly, the selected historical financial data as of and for the year 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 Period"). Pro forma net income (loss) was derived by retroactively adjusting all prior years as if the acquisition had occurred on January 1, 1994. 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 Company's financial statements and accompanying notes thereto included herein. 11
Predecessor Successor Combined Successor --------------------------------------------- --------- -------- --------- Four Eight Year Year Months Months Year Year Statement of Earnings Data Year ended ended ended Ended Ended ended ended (000's except per share amounts) Dec. 31, Dec. 30, Dec. 28, Apr. 30 Dec. 31 Dec. 31, Dec. 31, (unaudited) 1994 1995 1996 1997 1997(a) 1997 1998 ---- ---- ---- ---- ------- ---- ---- Revenues $115,651 $115,531 $116,124 $37,916 $ 75,006 $112,922 $ 140,032 Cost & Expenses Restaurant costs/expenses 92,821 94,414 93,867 32,006 61,503 93,509 113,845 General & administrative 6,586 6,643 6,179 2,212 5,087 7,299 9,479 Depreciation & amortization 5,935 6,041 5,972 2,006 3,398 5,404 4,923 Non-recurring/restructuring Charges - - - - 1,497 1,497 - Other 1,400 900 1,200 - 977 977 691 Earnings from operations 8,909 7,533 8,906 1,692 2,544 4,236 11,094 Interest expense 1,909 2,605 2,346 638 3,661 4,299 6,035 Income (loss) from continuing operations and before taxes 7,000 4,928 6,560 1,054 (1,117) (63) 5,059 Provision (benefit) for income taxes 2,650 1,913 2,398 434 (253) 181 2,143 Income (loss) from continuing operations 4,350 3,015 4,162 620 (864) (244) 2,916 Gain from sale of discontinued operations - - - - - - 388 Net Income (loss) $ 4,350 $ 3,015 $ 4,162 $ 620 $ (864) $ (244) $ 3,304 Income (loss) from continuing operations per share: Basic - - - - $ (.34) - $ 1.11 Diluted - - - - $ (.34) - $ 1.01 Gain from discontinued operation: Basic - - - - - - $ .15 Diluted - - - - - - $ .13 Net income (loss) per share: Basic - - - - $ (.34) - $ 1.26 Diluted - - - - $ (.34) - $ 1.14 Pro-forma net income (loss) (b) $ 1,496 $ 206 $ 857 $ (791) $ 690 $ (101) $ 2,916 Other data: EBITDA (d) $ 14,844 $ 13,574 $ 14,878 $ 3,698 $ 5,942 $ 9,640 $ 16,017 EBITDA - Pro forma (d) $ 13,082 $ 10,932 $ 12,016 $ 2,212 $ 8,209 $ 10,421 $ 16,017 Balance Sheet Data (c) Working capital deficit $ (9,460) $ (7,112) $ (8,455) n/a $ (5,006) n/a $ (7,459) Total assets $ 68,789 $ 74,373 $ 75,601 n/a $ 75,264 n/a $ 113,466 Total long-term debt $ 27,321 $ 31,152 $ 25,625 n/a $ 50,079 n/a $ 71,105 Shareholders' equity $ 27,965 $ 30,980 $ 35,142 n/a $ 11,185 n/a $ 15,026
12 NOTES: (a) Included in the results of operations for the eight months ending December 31, 1997 are sales and operating loss of $164 and $(188), 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, 1994; (2) increased interest expense for the Predecessor Period as a result of a difference in capital structure; and (3) increased general and administrative expenses reflecting the costs of operating as a stand-alone public company; and has been tax effected using a combined federal and state income tax rate of 40%. (c) Balance sheet data are presented as of December 31, 1994, December 30, 1995, December 28, 1996, December 31, 1997 and December 31, 1998. (d) EBITDA on a pro forma basis gives effect to the adjustments discussed in Note (b) above. For the combined period, pro forma EBITDA would have been $10,421. For 1998, EBITDA is actual. 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS - ------------- 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. Unless otherwise indicated, all amounts are in thousands except share amounts. 13 GENERAL The Company's revenues consist almost entirely of restaurant sales from its principal operating subsidiaries, Sybra and Lyon's. 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. General and administrative expenses consist of corporate and regional office expenses, including executive and administrative compensation, office expenses, travel and professional fees. RESULTS OF OPERATIONS 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.
Predecessor Company -------------- ------------- Combined Company Four Months Eight Months -------- ------------- Ended ended Year ended Year ended April 30, 1997 Dec. 31, 1997 Dec. 31, 1997 Dec. 31, 1998 -------------- ------------- ------------- ------------- Revenues 100.0% 100.0 % 100.0% 100.0% Expenses: Restaurant costs & expenses 84.4% 82.0 % 82.8% 81.3% General & administrative 5.8% 6.8 % 6.5% 6.8% Depreciation & amortization 5.3% 4.5 % 4.8% 3.5% Non-recurring/restructuring charges - 2.0 % 1.3% - Other - 1.3 % .9% .5% ----- ----- ----- ----- Operating income (loss) 4.5% 3.4 % 3.7% 7.9% Interest expense 1.7% 4.9 % 3.8% 4.3% ----- ----- ----- ----- Income (loss) from continuing operations and before taxes 2.8% (1.5)% (.1)% 3.6% Income taxes (benefit) 1.1% (.3)% .1 % 1.5% ----- ----- ----- ----- Income (loss) from continuing operations and before taxes 1.7% (1.2)% (.2)% 2.1% Gain from sale of discontinued operations - - - .3% ----- ----- ----- ----- Net income (loss) 1.7% (1.2)% (.2)% 2.4% ===== ===== ===== =====
14 Comparison of the Years Ended December 31, 1998 and December 31, 1997 - ---------------------------------------------------------------------- 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. Restaurant Costs & Expenses - Restaurant costs and expenses were $113.8 million, or 81.3% of sales, for 1998 as compared to $93.5 million, or 82.8% of sales, for 1997, an increase of $20.3 million due to the sales increase explained above. As a percent of sales, costs decreased as a result of lower labor costs due to improved efficiency, net 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 $9.5 million, or 6.8% of sales, for 1998 as compared to $7.3 million, or 6.5% of sales, for 1997, an increase as a percent of sales as a result of 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. 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. Interest Expense - Interest expense was $6.0 million, or 4.3% of sales, in 1998 as compared to $4.3 million, or 3.8% of sales, in 1997, an increase of $1.7 million as a result of debt incurred in connection with the Company's acquisition of Sybra, new store openings and acquisitions. Comparison of the Years Ended December 31, 1997 and December 28, 1996 - ---------------------------------------------------------------------- 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. 15 Depreciation and Amortization - Depreciation and amortization expense was $5.4 million, or 4.8% of sales in 1997 as compared to $6.0 million, or 5.1% of sales in 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 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. Other - Other expenses were $1.0 million in 1997, as compared to $1.2 million in 1996. Other expenses in 1997 relate primarily to the cost of operations of Perry Park, and for 1996 relate primarily to store closings. Interest Expense - Interest expense was $4.3 million in 1997 as compared to $2.3 million in 1996, an increase of $2.0 million as a result of debt incurred in connection with the Company's acquisition of Sybra. IMPACT OF THE YEAR 2000 ISSUES The Company has completed its assessment of internal systems and has concluded that its hardware and software are Year 2000 compliant. The Company has concluded that it will not be necessary to replace its retail point of sale hardware and that, based on information available at this time, the remaining costs to implement the Year 2000 readiness program will not be material. 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. Costs to implement the Year 2000 readiness program are based on management's estimates, which were derived utilizing numerous assumptions related to future events. There can be no assurance that additional costs will not be incurred, or that the objective of the program will be achieved. However, the Company continues to monitor activities related to the program designed to ensure Year 2000 readiness. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity needs arise from debt service on indebtedness incurred in connection with the Sybra acquisition, the Lyon's acquisition, operating lease requirement and the funding of capital expenditures primarily for new store openings. As of December 31, 1998, the Company had outstanding indebtedness for borrowed money of $33.2 million under a term facility with Atherton Capital Incorporated (the "Atherton Loan") and $16.5 million under a term facility with USRP (Finance) LLC (The "USRP Loan"). The Atheron Loan has a weighted-average maturity of 12.5 years (of which approximately 10.5 years remain), bears interest at 10.63%, requires monthly payments of principal and interest, is collatoralized by substantially all of the assets owned by Sybra at the time it was acquired by the Company and imposes certain financial restrictions and covenants. The USRP Loan has a weighted average maturity of 12 years, a weighted average interest rate of 12.75%, requires monthly payments of principal and interest, is collateralized by substantially all of the assets owned by Lyon's and imposes certain financial restrictions and covenants. 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 16 of existing restaurants is either funded directly from available cash or, in some instances, is financed through outside lenders. Construction or acquisition of new restaurants is generally, although not always, financed by outside lenders. The Company believes that it will continue to be able to secure adequate financing on acceptable terms for new restaurants construction and acquisitions and that cash generated from operations will be adequate to meet its needs for the foreseeable future, although no assurances can be given. Recent Developments - ------------------- 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. Subsequent Events - ----------------- 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. CAPITAL LOSS CARRY FORWARD 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. CAPITAL EXPENDITURES 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. 17 INFLATION 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - --------------------------------------------------- The response to this item is submitted as a separate section of this Form 10-K. See Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- None 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- The information required by Item 10 is incorporated by reference from the Company's definitive proxy statement for its annual meeting of stockholders to be held May 28, 1999. ITEM 11. EXECUTIVE COMPENSATION - ------------------------------- The information required by Item 11 is incorporated by reference from the Company's definitive proxy statement for its annual meeting of stockholders to be held May 28, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information required by Item 12 is incorporated by reference from the Company's definitive proxy statement for its annual meeting of stockholders to be held May 28, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------------------------------------------------------- The information required by Item 13 is incorporated by reference from the Company's definitive proxy statement for its annual meeting of stockholders to be held May 28, 1999. 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------ (a) 1. Financial Statements The financial statements filed as part of this report are listed in the Index to Consolidated Financial Statements on page F-1. Page ---- Independent Accountant's Report F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 2. Financial Statement Schedules Schedules have been omitted either because the required information is shown in the consolidated financial statements or notes thereto or they are not applicable. 3. Exhibits The exhibits to this Report are listed on the accompanying Index to Exhibits and are incorporated herein by reference or are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K A Report on Form 8-K, dated December 22, 1998, was filed by the Company during the quarter ended December 31, 1998. Items 2 and 7 were reported thereon. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. I.C.H. Corporation (Registrant) Dated: March 29, 1999 /s/James R. Arabia -------------------------- James R. Arabia Chairman of the Board, President and Chief Executive Officer Dated: March 29, 1999 /s/David A. Brainard -------------------------- David A. Brainard Senior Vice President and Chief Financial Officer Dated: March 29, 1999 /s/Glen V. Freter -------------------------- Glen V. Freter Vice President, Controller and Chief Accounting Officer Dated: March 29, 1999 /s/John A. Bicks -------------------------- John A. Bicks Senior Vice President, General Counsel, Secretary and Director Dated: March 29, 1999 /s/Timothy Scott -------------------------- Timothy Scott Director Dated: March 29, 1999 /s/David A. Gotz -------------------------- David A. Gotz Director Dated: March 29, 1999 /s/Carl D. Robinson -------------------------- Carl D. Robinson Director Dated: March 29, 1999 /s/Raymond L. Steele -------------------------- Raymond L. Steele Director Dated: March 29, 1999 /s/Robert H. Drechsler -------------------------- Robert H. Drechsler Director 21 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page I.C.H. CORPORATION AND SUBSIDIARIES: Independent Accountant's Report F-2 Consolidated Balance Sheets - Company as of December 31, 1998 and December 31, 1997 F-3 Consolidated Statements of Operations - Company for the year ended December 31, 1998 and the eight-month period ended December 31, 1997 and Predecessor for the four-month period ended April 30, 1997 and the year ended December 28, 1996 F-4 Consolidated Statements of Stockholders' Equity - Company for the year ended December 31, 1998 and the period from February 19, 1997 to December 31, 1997 and Predecessor for the four-month period ended April 30, 1997 and the year ended December 28, 1996 F-5 Consolidated Statements of Cash Flows - Company for the year ended December 31, 1998 and the eight-month period ended December 31, 1997 and Predecessor for the four-month period ended April 30, 1997 and the year ended December 28, 1996 F-6 Notes to Consolidated Financial Statements F-7 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors I.C.H. Corporation In our opinion, the accompanying consolidated balance sheets of I.C.H. Corporation and Subsidiaries ("Company") as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows - Sybra, Inc. ("Predecessor") for the year ended December 28, 1996 and for the four month period ended April 30, 1997 and - Company for the eight month period ended December 31, 1997 and year ended December 31, 1998 present fairly, in all material respects, the consolidated financial position of I.C.H. Corporation and Subsidiaries as of December 31, 1997 and 1998, and the consolidated results of their operations and their cash flows - Predecessor for the year ended December 28, 1996 and for the four month period ended April 30, 1997 and - Company for the eight month period ended December 31, 1997 and year ended December 31, 1998 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. PricewaterhouseCoopers LLP Atlanta, Georgia March 19, 1999 F-2 I.C.H. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)
December 31, December 31, 1997 1998 ------------- ----------- ASSETS Current assets: Cash and cash equivalents $ 4,418 $ 9,235 Accounts receivable 530 1,293 Inventories 1,372 2,828 Deferred income taxes 1,257 1,137 Other current assets 1,565 4,473 -------- -------- Total current assets 9,142 18,966 Property and equipment, net 24,696 40,141 Intangible assets, net 39,470 47,462 Other assets 1,956 4,326 Deferred income taxes-net -- 2,571 -------- -------- Total assets $ 75,264 $113,466 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,741 $ 8,254 Accrued liabilities 8,745 12,743 Current portion of long-term debt 1,714 4,839 Current portion of capital lease obligations 948 589 -------- -------- Total current liabilities 14,148 26,425 Noncurrent liabilities: Long-term debt 44,718 63,193 Long-term capital lease obligations 2,699 2,484 Deferred income taxes 1,908 -- Other liabilities 606 6,338 -------- -------- Total liabilities 64,079 98,440 -------- -------- Stockholders' equity: Preferred stock, $0.01 par value; 1,000,000 authorized; none issued and outstanding -- -- Common stock, $0.01 par value; 9,000,000 authorized; 2,666,615 outstanding (see note 10) 24 28 Paid-in-capital 12,025 12,558 Retained earnings (deficit) (864) 2,440 -------- -------- Total stockholders' equity 11,185 15,026 -------- -------- Total liabilities and stockholders' equity $ 75,264 $113,466 ======== ========
See Notes to Consolidated Financial Statements. F-3 I.C.H. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except share amounts)
Predecessor Company Combined Company ---------------------------- ------------- ------------ ------------- For the For the For the For the For the year four months eight months year year ended ended ended ended ended December 31, April 30, December 31, December 31, December 31, 1996 1997 1997 1997 1998 ------------ ------------ ------------- ------------- ------------ Revenue and other income: Restaurant sales $ 115,973 $ 37,868 $ 73,787 $ 111,655 $138,315 Other 151 48 1,219 1,267 1,717 ----------- ----------- -------- --------- -------- Total revenues 116,124 37,916 75,006 112,922 140,032 Costs and expenses: Restaurant costs and expenses 93,867 32,006 61,503 93,509 113,845 General and administrative 6,179 2,212 5,087 7,299 9,479 Depreciation and amortization 5,972 2,006 3,398 5,404 4,923 Other 1,200 -- 977 977 691 Non-recurring/restructuring charges -- -- 1,497 1,497 -- ----------- ----------- -------- --------- -------- Operating income 8,906 1,692 2,544 4,236 11,094 Interest expense 2,346 638 3,661 4,299 6,035 ----------- ----------- -------- --------- -------- Income (loss) from continuing operations before income taxes 6,560 1,054 (1,117) (63) 5,059 Provision (benefit) for income taxes 2,398 434 (253) 181 2,143 ----------- ----------- -------- --------- -------- Income (loss) from continuing operations 4,162 620 (864) (244) 2,916 Gain from sale of discontinued operation -- -- -- -- 388 ----------- ----------- -------- --------- -------- Net income (loss) $ 4,162 $ 620 $ (864) $ (244) $ 3,304 =========== =========== ======== ========= ======== Income (loss) from continuing operations per share: Basic $ (.34) $ 1.11 Diluted $ (.34) $ 1.01 Gain from discontinued operations per share: Basic -- $ .15 Diluted -- $ .13 Net income (loss) per share: Basic $ (.34) $ 1.26 Diluted $ (.34) $ 1.14 Weighted-average common shares outstanding (see note): Basic 2,549,000 2,620,000 Diluted 2,549,000 2,903,000
See Notes to Consolidated Financial Statements. F-4 I.C.H. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands except share amounts)
Total Common Stock Paid-In Retained Stockholders' Shares Amount Capital Earnings Equity ------ ------ ------- -------- ------ Predecessor Balance at December 28, 1996 55,199 $ 28 $ 21,398 $ 13,716 $ 35,142 Net income for period 620 620 Distributions: Land parcel (845) (845) Cash -- -- -- (46,079) (46,079) ---------- ----- -------- -------- -------- Balance at April 30, 1997 55,199 $ 28 $ 21,398 $(32,588) $(11,162) ========== ===== ======== ======== ======== Company Balance at February 19, 1997 -- $ -- $ 12,190 $ -- $ 12,190 Issuance of common stock 2,549,281 24 (24) -- -- Cash paid for shares redeemed -- -- (141) -- (141) Net loss (see Note 1) -- -- -- (864) (864) ---------- ----- -------- -------- -------- Balance at December 31, 1997 2,549,281 24 12,025 (864) 11,185 Issuance of common stock 117,334 4 533 -- 537 Net income -- -- -- 3,304 3,304 ---------- ----- -------- -------- -------- Balance at December 31, 1998 2,666,615 $ 28 $ 12,558 $ 2,440 $ 15,026 ========== ===== ======== ======== ========
See Notes to Consolidated Financial Statements. F-5 I.C.H. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands except share amounts)
Predecessor Company ---------------------------- --------------------------- For the For the For the year four months eight months For the year ended ended ended ended December 31, April 30, December 31, December 31, 1996 1997 1997 1998 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) $ 4,162 $ 620 $ (864) $ 3,304 Adjustments to reconcile net income (loss) to cash from Operating activities: Depreciation and amortization 5,972 2,006 3,398 4,764 Deferred income taxes (benefit) (645) 480 (68) 147 Accrued rent -- -- 332 Provision for store closings and other Non-recurring/restructuring charges 1,200 -- 462 -- Gain from sale of discontinued operations -- -- -- (388) Changes in current assets and liabilities: Accounts receivable -- -- (231) (831) Inventories (16) 38 89 (604) Payable to (due from) former parent 64 (741) (370) -- Accounts payable and accrued expenses 2,761 (3,173) 880 9,849 Other, net (596) 168 (1,334) (1,441) -------- -------- ------ ------- Net cash provided (used) by operating activities 12,902 (602) 2,294 14,800 -------- -------- ------ ------- Cash flows from investing activities: Capital expenditures (6,095) (1,763) (3,336) (12,876) Proceeds from disposition of property and equipment -- 35,655 232 758 Acquisition of Sybra, Inc., net of $886 cash acquired -- -- (13,614) -- Acquisition of Lyon's Restaurants Inc. -- -- -- (23,233) Acquisition of restaurant properties -- -- -- (5,642) Sale of subsidiary -- -- 5,000 2,955 Proceeds from Old ICH liquidating trust (see Note 3) -- -- 2,790 -- Other, net (94) -- (65) 397 -------- -------- ------ ------- Net cash provided (used) by investing activities (6,189) 33,892 (8,993) (37,641) -------- -------- ------ ------- Cash flows from financing activities: Borrowings on credit agreement 28,758 9,299 -- -- Repayment on credit agreement (45,285) (10,384) -- -- Proceeds from issuance of long-term debt, net of expenses -- -- 36,448 25,182 Proceeds from debt to former parent 11,000 3,772 -- -- Repayment of debt to former owner of Sybra -- -- (23,772) -- Repayment of long-term debt and capital lease obligation -- (306) (1,603) (2,930) Distribution to former owner of Sybra -- (46,079) -- Loan element of sale/leaseback financing -- 9,000 -- Other, net -- -- (456) 5,406 -------- -------- ------ ------- Net cash provided (used) by financing activities (5,527) (34,698) 10,617 27,658 -------- -------- ------ ------- Net change in cash and cash equivalents 1,186 (1,408) 3,918 4,817 Cash and cash equivalent at beginning period 1,108 2,294 500 4,418 ======== ======== ======== ======== Cash and cash equivalent at end of period $ 2,294 $ 886 $ 4,418 $ 9,235 ======== ======== ======== ======== Supplemental non-cash disclosures: Cash paid for Income taxes 3,335 1,029 1,085 1,841 Interest 2,368 606 3,622 6,035 Note issued in acquisition of Sybra, Inc. -- -- 2,000 --
See Notes to Consolidated Financial Statements. F-6 I.C.H. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in 000's except share amounts) 1. Organization, Business and Summary of Significant Accounting Policies: Organization I.C.H. Corporation (the "Company") is the post-reorganization successor to ICH Corporation ("Old ICH"). Old ICH, together with its subsidiaries, filed voluntary petitions for relief under Chapter 11 on October 10, 1995. The Company's plan of reorganization was confirmed February 7, 1997 and became effective on February 19, 1997 (the "Effective Date"). Until its acquisition of Sybra, Inc. (see Note 2), the Company had no significant business operations. On the Effective Date, all of the outstanding equity securities ("Old ICH Common Stock" and "Old ICH Preferred Stock", collectively the "Old ICH Stock") of Old ICH were canceled. The Company's Restated Certificate of Incorporation authorized the issuance of 9,000,000 shares of common stock and 1,000,000 shares of preferred stock. Holders of Old ICH Stock had two years from the Effective Date in which to exchange their canceled shares for the Company's common stock. Generally, holders of the canceled Old ICH shares received 0.0269 shares of the Company's common stock for each share of Old ICH Common Stock and 0.2 shares of the Company's common stock for each share of Old ICH Preferred Stock. 2,549,281 shares of the Company's common stock were issued in exchange for Old ICH stock during the two year conversion period ending on February 19, 1999. Business and Presentation The accompanying Consolidated Financial Statements labeled "Company" include the accounts of the Company and its wholly-owned subsidiaries, principally Sybra, Inc. ("Sybra") and Lyon's of California, Inc. ("Lyon's"). . All significant intercompany accounts and transactions have been eliminated. Included in the results of operations for the eight months ended December 31, 1997 are revenues and operating loss of $164 and $(188), respectively, for the period from February 19, 1997 to April 30, 1997 (the period prior to the acquisition of Sybra). In addition, cash flows for the period prior to the acquisition of Sybra consisting principally of cash from the sale of a subsidiary and from the Lone Star Liquidating Trust, are included in cash flows for the eight months ended December 31, 1997 (see Note 3). Sybra is considered to be a Predecessor of the Company and, accordingly, the historical financial statements of Sybra, prior to its acquisition by the Company on April 30, 1997, are presented with the accompanying financial statements of the Company. The acquisition of Sybra resulted in changes in the cost basis of Sybra's assets and liabilities, use of estimated lives for certain of the intangibles that are different from those used by the Predecessor and a different capital structure. These factors significantly affect the comparability of the Predecessor's financial information. F-7 I.C.H. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in 000's except share amounts) Significant Accounting Policies Fiscal Year. The Company operates on a calendar year basis. Sybra, however, uses a 52/53 week fiscal year ending on the last Saturday of the year and Lyon's uses a 52/53 week fiscal year ending on the last Sunday of the year. Accordingly, the accompanying financial statements include Sybra's results for the periods ended December 28, 1996, April 30, 1997, December 27, 1997 and January 2, 1999 and Lyon's results for the period from the date of acquisition (December 14, 1998) through January 3, 1999. Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Interest income on cash equivalents was $1, $1, $99 and $50 for the periods ended December 28, 1996, April 30, 1997 (four months), December 31, 1997 (eight months) and December 31, 1998, respectively. Food and Supplies Inventories. Food and supplies inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Property and Equipment. Property and equipment is stated at cost less accumulated depreciation and amortization. Normal repairs and maintenance costs are expensed as incurred. Depreciation is being recorded on a straight-line basis over the following estimated useful lives: Buildings 40 years Restaurant equipment 5-10 years Buildings under capitalized leases and leasehold improvements are amortized on a straight-line basis over the lesser of the lease term or the estimated useful lives of the assets. Intangibles. Franchise agreements with Arby's require Sybra to pay a franchise fee for each new restaurant developed and de minimis renewal fees for franchises that have expired. Each franchise agreement provides Sybra the right to operate an Arby's restaurant for a period of 20 years and is renewable by Sybra, subject to certain conditions, for varying terms of up to 20 years. Franchise fees are capitalized and amortized using the straight-line method over 40 years. Acquired royalty rights, representing the fair value of royalty rates of acquired franchises, are capitalized and amortized on a straight-line basis over 20 years or the remaining life of the franchise agreement, whichever is less. Equity in operating leases, representing the estimated fair value of base rental rates, less the actual rental obligation, is amortized on a straight-line basis over 20 years or the remaining life of the lease, including option periods, whichever is less. F-8 Goodwill is amortized using the straight-line method over 40 years. At each balance sheet date, the Company evaluates the realizability of goodwill based upon expectations of operating income for the restaurants as a group. The Company believes that no material impairment of goodwill exists at December 31, 1998. Income Taxes. Deferred income taxes are computed using the liability method, which provides that deferred tax assets and liabilities are recorded based on the differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes (see Note 11). Advertising Expenses. All advertising costs are expensed as incurred. Advertising expenses were approximately $9,400, $3,400, $5,000 and $10,600 for the periods ended December 28, 1996, April 30, 1997 (four months), December 31, 1997 (eight months) and December 31, 1998, respectively. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements and in the disclosure of contingent assets and liabilities. While actual results could differ from those estimates, management believes that actual results will not be materially different from amounts provided in the accompanying consolidated financial statements. Earnings Per Share. In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which requires presentation of both basic and diluted earnings per share. Basic net income per share is computed based on the weighted-average number of common shares outstanding during the year (see Note 10). Because the results for the eight months ended December 31, 1997 reflect a net loss from continuing operations, basic and diluted loss per share are calculated based on the same weighted average number of shares outstanding. Net earnings per common share for the Predecessor is not presented as the per share results are not meaningful due to the changes resulting from the acquisition of Sybra (see Note 2). Segment Reporting. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131 Disclosures about Segments of an Enterprise and Related Information during the year ended December 31, 1998. This Statement supercedes substantially all the reporting requirements previously required under SFAS No. 14 Financial Reporting for Business Segments of an Enterprise and establishes standards for reporting information about operating segments and requires certain disclosures about products and services, geographic areas and major customers. Under SFAS No. 131, the determination of segments to be reported in the financial statements is to be consistent with the manner in which management organizes and evaluates the internal organization to make operating decisions and assess performance. This statement also allows a Company to aggregate similar segments for reporting purposes. Management has determined that its operating units can be aggregated into one segment. Additionally, as the Company operates restaurants within the U.S. and no customer accounts for more than 10% of sales, no segment disclosures have been included in the accompanying notes to the consolidated financial statements. F-9 I.C.H. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in 000's except share amounts) 2. Acquisitions Sybra, Inc. On April 30, 1997, the Company acquired all of the common stock of Sybra for $15,614 including related expenses and net of cash acquired of $886. The Company incurred $2,000 in acquisition indebtedness to the seller and paid the remainder in cash. Concurrently with the Company's acquisition of Sybra, Sybra entered into a sale/leaseback transaction with respect to 61 of its restaurant properties for approximately $44,200. The acquisition was recorded under the purchase method of accounting and, accordingly, the results of operations of Sybra commencing May 1, 1997 are included in the accompanying financial statements of the Company. The purchase price was allocated to identifiable tangible and intangible assets and liabilities based on their estimated fair values, with the excess of the purchase price over the fair value of such net assets acquired reflected as goodwill, as follows: Current assets $ 3,428 Franchise rights 3,865 Other intangibles, excluding goodwill 8,299 Goodwill 28,159 Tangible assets 20,342 Liabilities assumed (48,479) ------- Purchase price $15,614 ======= Lyon's Restaurants, Inc. On December 14, 1998, the Company acquired substantially all of the assets of Lyon's restaurants for $22,600. The Company incurred $16,500 in acquisition indebtedness and paid the remainder of the purchase price with cash and a $600 note payable to the seller. The Company also issued 125,000 warrants to purchase shares of the Company's common stock at $.01 per share to USRP (Finance), LLC as part of the financing of the Lyon's acquisition. The acquisition was recorded under the purchase method of accounting. The purchase price was allocated to identifiable tangible and intangible assets and liabilities based on their estimated fair values, with the excess of the purchase price over the fair value of such net assets acquired reflected as goodwill, as follows: Current assets and liabilities, net $ 1,409 Other intangibles, excluding goodwill 2,057 Goodwill 7,734 Tangible assets 11,400 ------- Purchase price $22,600 ======= F-10 3. Old ICH Transactions On April 25, 1997, the Company exercised its option, pursuant to the reorganization plan of Old ICH, to sell all of the outstanding capital stock of Bankers Multiple Line Insurance Company ("BML"), a property and casualty insurer licensed in all fifty states, for its carrying value of $5,000. In February 1997, the Company received $2,790 in satisfaction of a receivable related to the Old ICH reorganization plan. 4. Other Current Assets Other current assets consist of the following as of: December 31, December 31, 1997 1998 -------------- ------------ Due from Sybra's former parent $ 558 $ 558 Prepaid rent 971 1,040 Other prepaid expenses 36 2,875 ------------- ------------ Other current assets $1,565 $4,473 ============= ============ 5. Intangibles Intangible assets, net, consist of the following as of: December 31, December 31, 1997 1998 -------------- ------------ Franchise rights $ 4,164 $ 4,921 Other intangibles, excluding goodwill 8,024 7,803 Goodwill 28,159 36,944 -------------- ------------ Total 40,347 49,668 Less accumulated amortization 877 2,206 -------------- ------------ Intangible assets, net $39,470 $47,462 ============== ============ 6. Property and Equipment Property and equipment, net, consist of the following as of: December 31, December 31, 1997 1998 --------------- ------------ Land $ 4,363 $ 1,263 Buildings 1,890 10,335 Leasehold improvements 11,752 13,062 Restaurant equipment 11,539 19,089 Construction in progress 726 1,408 ------- ------- Total 30,270 45,157 Less accumulated depreciation and amortization 5,574 5,016 ------- ------- Property and equipment, net $24,696 $40,141 ======= ======= F-11 7. Leases The Company leases substantially all of the land and buildings used in its restaurant operations under noncancelable leases with remaining lease terms of one to twenty years. In many cases, the leases provide for one or more renewal options. The leases generally require the Company to pay property taxes, insurance, maintenance and other operating costs of the properties. Some also require contingent rent payments based on a percentage of restaurant sales. Base rent expense for operating leases for the periods ended December 28, 1996, April 30, 1997 (four months), December 31, 1997 (eight months) and December 31, 1998 was approximately $4,149, $1,373 $5,520 and $9,525, respectively. Additional (contingent) payments were approximately $437, $130, $240 and $463 for the same periods, respectively. Immediately prior to its acquisition by the Company on April 30, 1997, Sybra entered into a sale/leaseback transaction in which Sybra sold land and buildings related to 61 restaurants for their fair value of $36,000 and leased them back under twenty-year base term leases (classified as operating) with options that could, at Sybra's option, extend the leases an additional 20 years. As part of the sale/leaseback transaction, Sybra received an additional $9,000 in the form of a loan. Total proceeds of the transaction were $44,200, net of related expenses. The proceeds were distributed to Sybra's former parent. The lease payments escalate, requiring the Company to straight-line the rent expense over the term of the leases. The Company's future minimum rental commitments as of December 31, 1998 for all noncancelable capital and operating leases are as follows: Operating Fiscal Year Capital Leases Leases ------------------------------------- --------------- ------------- 1999 $ 939 $ 16,447 2000 553 15,252 2001 533 14,573 2002 533 13,774 2003 533 12,609 Thereafter 1,685 106,948 --------------- ------------- Total $4,776 $179,603 ============= Less amount representing interest 1,703 --------------- Present value of future minimum lease payments 3,073 =============== F-12 8. Accrued Liabilities Accrued liabilities consist of the following as of: December 31, December 31, 1997 1998 ----------------- ---------------- Employee related $2,203 $ 3,243 Property and other taxes 1,122 4,436 Insurance related 2,303 1,690 Other 3,117 3,374 ----------------- ---------------- Total $8,745 $12,743 ================= ================ 9. Long-Term Debt Long-term debt consists of the following as of: December 31, December 31, 1997 1998 ------------- ----------- Term loan, 10.63%, payable monthly through 2012 $33,984 $32,319 Loan, 14.50% 9,000 9,000 Acquisition indebtedness due in 1999 2,000 2,000 Term loan, 12.75% payable monthly through February 1, 2011 - 16,500 Other 1,448 8,213 ------------- ----------- 46,432 68,032 Less: current portion 1,714 4,839 ------------- ----------- Total $44,718 $63,193 ============= =========== Concurrently with the acquisition of Sybra, the Company entered into a loan agreement that provides, on an aggregate basis, a $35,000 fixed-rate term loan bearing interest at 10.63% with a weighted-average maturity of 12.5 years. The term loan is collateralized by substantially all of the restaurant equipment owned by Sybra. The proceeds of the term loan were used to fund the acquisition of Sybra and retire debt payable to Sybra's former parent assumed in the acquisition. The loan agreement contains covenants which require, among other things, the maintenance of a minimum fixed charge coverage ratio, restrictions that limit the payment of dividends, and other provisions and restrictive covenants. As mentioned in Note 7, as an element of the sale/leaseback transaction completed immediately before its acquisition by the Company, Sybra received $9,000 as a loan. The loan element of the transaction carries an interest rate of approximately 14.50% and may be repaid at any time without penalty. If not repaid prior to December 31, 1999, the loan will be repaid pursuant to a 20-year amortization schedule. F-13 On December 14, 1998, the Company entered into a term loan agreement for the acquisition of Lyon's Restaurants with USRP (Finance), LLC. The 12.75% term loan matures in 12 years and is collateralized by substantially all of the assets of Lyon's. The agreement contains covenants which require, among other things, the maintenance of a minimum fixed charge coverage ratio and other provisions and restrictive covenants. The Company also has 16 separate notes for the financing of equipment used in restaurants with a remaining principal balance ranging from $150 to $785, interest rates ranging from 8.52% to 10.11% and an average remaining maturity of six years. These loans are collateralized by the underlying equipment. At December 31, 1998, long-term debt had a fair value that approximates the carrying value. The aggregate maturities of long-term debt at December 31, 1998 are as follows: Fiscal year ---------------------------------------------- 1999 $ 4,839 2000 3,140 2001 3,490 2002 3,830 2003 4,098 Thereafter 48,635 --------- $68,032 ========= 10. Equity and Earnings Per Common Share As of February 19, 1997, the Company declared a dividend of one right (collectively, the "Rights") for each share of the Company's common stock. Each Right represents the right to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock (the "Junior Preferred Stock"). The Rights, as amended, have an exercise price of $20.00 per right and are exercisable until February 19, 2007. Ten thousand shares of the Company's authorized preferred stock have been designated as the Junior Preferred Stock and have been reserved for issuance upon the exercise of the Rights. The Rights are not exercisable until the occurrence of those "triggering events" detailed in the Rights Agreement by and between the Company and the Mid-America Bank of Louisville and Trust Company. Upon the occurrence of any of such triggering events, all holders of Rights (other than the holder that caused the triggering event to occur) will thereafter have the right to receive upon exercise that number of shares of the Company's common stock having a market value of two times the exercise price of the Right. The Junior Preferred Stock has voting rights equal to 1,000 votes per share and is entitled to receive dividends, on a cumulative basis, payable in cash, equal to 1,000 times the aggregate per share amount of all cash dividends or all non-cash dividends or other distributions declared on the Company's common stock. Upon liquidation, the Junior Preferred Stock is entitled to receive an aggregate amount per share equal to 1,000 times the aggregate amount to be distributed per share to the holders of shares of common stock plus any accrued and unpaid dividends. F-14 I.C.H. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All amounts in 000's except share amounts) 11. Income Taxes The provision (benefit) for income taxes consists of:
Predecessor Company ------------------------------ --------------------------- For the For the For the year four months eight months For the year ended ended ended ended December 28, April 30, December 31, December 31, 1996 1997 1997 1998 ------------- ------------- -------------- ------------- Current $3,043 $(46) $(185) $1,841 Deferred (645) 480 (68) 302 ------------- ------------- -------------- ------------ $2,398 $434 $(253) $2,143 ============= ============= ============== ============
Significant components of the Company's deferred tax assets and liabilities are as follows:
December 31, December 31, 1997 1998 --------------- -------------- Property and equipment $2,963 $2,106 Accrued liabilities and other 1,906 6,531 --------------- -------------- Deferred tax assets 4,869 8,637 Deferred tax liability - intangible assets (4,060) (4,188) Valuation allowance (1,460) (741) --------------- -------------- Net deferred tax assets (liabilities) $ (651) $3,708 =============== ============== Current deferred tax assets $1,257 $1,137 Non-current deferred tax assets (liabilities) (1,908) 2,571 --------------- -------------- Net deferred tax assets (liability) $ (651) $3,708 =============== ==============
The Company's tax basis in real estate exceeds its book basis, resulting in a deferred tax asset of $1,460 using a 34% federal rate. The Company recorded a full valuation allowance against this deferred tax asset due to the uncertainty surrounding its realizability as of February 19, 1997. F-15 On April 25, 1997, the Company sold its interest in the stock of BML which generated a significant tax loss (see Note 3). 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. A reconciliation of the Federal statutory income tax rate to the Company's effective tax rate follows:
Predecessor Company ------------------------- ------------------------- For the four For the For the months eight months For the year ended ended ended year ended December April 30, December 31, December 28, 1996 1997 1997 1998 ----------- ---------- ---------- ------------ Expected tax expense, at the federal statutory rate of 35% $2,296 $369 $(391) $1,720 State income taxes, net 39 53 (31) 256 Other, net 63 12 169 167 ----------- ---------- ---------- ------------ $2,398 $434 $(253) $2,143 =========== ========== ========== ============
12. Stock Option Plans The Company has two fixed option plans, the I.C.H. Corporation 1997 Employee Stock Option Plan, as amended (the "ESP"), and the I.C.H. Corporation 1997 Director Stock Option Plan (the "DSP"). Under the ESP, the Company may grant incentive stock options with specific vesting periods and non-qualifying options to eligible officers and employees for the purchase of up to an aggregate of 1,500,000 shares of common stock. Under the DSP, the Company may grant non-qualifying options to eligible directors for the purchase of up to an aggregate of 400,000 shares of common stock. Under both plans, the exercise price of each option is equal to the estimated fair value of the Company's stock on the date of grant. Stock options granted under the ESP have 10-year terms and generally vest ratably over four years. Options granted under the DSP also have 10-year terms. A summary of the Company's stock option plans as of December 31, 1998 and the changes during the two years ended December 31, 1998 are presented as follows:
Options Weighted-average exercise price --------- ---------------- Outstanding at January 1, 1997 - - Granted 882,000 $ 3.19 Exercised - - Canceled - - -------- ------- Outstanding at December 31, 1997 882,000 $ 3.19 Granted 169,000 $ 4.38 Exercised (117,000) $(2.17) Canceled - - -------- ------- Outstanding at December 31, 1998 934,000 $ 3.36 ======== ======= Exercisable at December 31, 1998 140,000 $ 3.03 ======== =======
F-16 The following table summarizes information about stock options outstanding at December 31, 1998:
----------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------- -------------------- Weighted- Average Weighted- Range of Remaining Average Exercise Prices Contractual Exercise Weighted- Shares Life Price Shares Average - ------------------ --------- ------------ ---------- ------- -------- $2.17 to $3.09 376,500 8.31 2.65 94,500 2.65 $3.19 to $4.00 466,500 9.31 3.65 42,750 3.78 $4.38 to $4.50 91,500 9.36 4.83 2,750 4.38 - ------------------ --------- ------------ ---------- -------- --------- $2.17 to $4.50 934,500 8.99 3.36 140,000 3.03 ================== ========= ============ ========== ======== =========
The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for grants of stock options. Had compensation cost been determined in accordance with the provisions of SFAS No. 123, "Accounting for Stock Based Compensation," the net loss per share would have been changed to the pro forma amounts indicated below:
For the year ended December 31, 1998 ------------------- Net income-as reported $ 2,916 Net income-pro forma $ 2,779 Basic per share - as reported $ 1.14 - pro forma $ 1.06 Diluted per share - as reported $ 1.01 - pro forma $ .96
The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: a risk-free interest rate range of 5.69%-6.35%; volatility factor of the expected market price of the Company's common stock of 46.6%; expected lives of 2-5 years; and a dividend yield of 0%. The fair value of each option as of December 31, 1998 was $5.19 per option. 13. Benefit Plans The Company maintains a defined contribution 401(k) plan known as the Sybra, Inc. Retirement Income Plan (the "Retirement Plan"). The Retirement Plan permits eligible employees to defer a portion of their compensation (1% to 15%, up to certain maximum limitations established by law) through payroll deductions. The Company may, at its discretion, contribute to the Retirement Plan on behalf of participating employees based on a matching formula or other method. No matching contributions were made to the Retirement Plan for 1997 and 1998. The Predecessor made contributions of $236 to the Retirement Plan for the period ended December 28, 1996. F-17 14. Commitments and Contingencies Franchise agreements with Arby's The Development Agreement contains certain requirements regarding the number of units to be opened in the future. Should the Company fail to comply with the required development schedule or with the requirements for restaurants within areas covered by the Development Agreement, Arby's could terminate the exclusive nature of the Company's franchise and the Company would forfeit prepaid fees. However, the Company would no longer be obligated for any future unpaid fees required by the Development Agreement. The Development Agreement also provides Arby's with certain rights regarding the Company's business operations and any transfer of significant portions of assets owned by Sybra. Commitments under the Development Agreement require payments aggregating $1,190 over the next five (5) years. Legal proceedings Various legal proceedings are pending against the Company, all of which involve routine litigation incidental to the Company's businesses. The consequences of these matters are not presently determinable but, in the opinion of the management of the Company after consulting with legal counsel, the ultimate liability is not expected to have a material effect on the results of operations, financial position, liquidity or capital resources of the Company. 15. Non-recurring and Restructuring Charges During 1997, the Company recorded provisions totaling $1,497 related to (1) restructuring Sybra's operations in the Texas region, (2) buy-out of an employment contract with the former president of Sybra and (3) non-recurring expenses related to obtaining financing and maintaining Sybra's status as an Arby's franchisee. 16. Retiree Liability During 1998, the Company assumed the liabilities associated with a post-retirement healthcare and life insurance plan from The Lone Star Liquidating Trust in return for a lump sum cash payment of approximately $4.9 million. Health benefits under such plan include major medical insurance with deductible and co-insurance providers and are supplemental to Medicare benefits. The plan provides that current participants do not earn any future benefits and provides that certain of the participants pay for a portion of their coverage. The remainder of the costs, including premiums, are paid for on a current basis by the Company. The net present value of the healthcare and life insurance benefits liability at December 31, 1998 was approximately $4.9 million. The liability was calculated assuming a 7% discount rate applied to the estimated future cash flows. It also assumed that medical costs would initially increase at a rate of 10% per annum, declining over a period of 10 years to 5.75%. Active employees are not eligible for post retirement healthcare or life insurance benefits upon retirement. F-18 17. Discontinued Operations On June 30, 1998, the Company sold its Perry Park golf course and real estate development located in Owen County, Kentucky for $3.1 million in cash resulting in a gain of $388. The gain from discontinued operations of $388 included a gain from the recording of a deferred tax asset of $719. Sales and operating income for Perry Park are included in continuing operations due to their immateriality. 18. Quarterly Data (unaudited) The results for each quarter include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods. Selected consolidated data for each quarter within 1997 and 1998 are as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Year Ended December 31, 1997(a): - -------------------------------- Sales $27,863 $28,987 $26,688 $29,343 Operating income 1,324 163 865 2,040 Net income (loss) $ 523 $ (698) $ (492) $ 959 Basic income (loss) per share(b) N/A N/A $ (.19) $ .38 Year Ended December 31, 1998: - ----------------------------- Sales $28,694 $ 31,244 $33,174 $46,920 Operating income 1,862 2,317 2,235 4,680 Income (loss) from continuing operations 293 531 $ 476 $ 1,616 Net income (loss) $ 293 $ 531 $ 864 $ 1,616 Income (loss) from continuing operations per share(b): Basic $ .11 $ .20 $ .18 $ .61 Diluted $ .11 $ .18 $ .16 $ .56
Note: (a) The 1997 quarterly information presented here differs from the accompanying 1997 Combined Statements of Operations as a result of immaterial operations from Predecessor activities during 1997. (b) The quarterly per share data has been restated to give effect to the actual number of Old ICH Shares that were converted to shares of Company common stock during the two year conversion period ended on February 19, 1999. F-19 INDEX TO EXHIBITS Exhibit Page Number Description Number 2.1 First Amended Joint Plan of Reorganization Under Chapter 11 (incorporated by reference to Exhibit B to Exhibit 99.1 to the Company's Form 8-K dated November 22, 1996) 2.2 First Nonmaterial Modification to the First Amended Joint Plan of Reorganization Under Chapter 11 (incorporated by reference to Exhibit 2.2 to the Company's Form 8-K dated February 18, 1997) 2.3 Letter to Robert T. Shaw, Henry W. Simon, Jr. and Russell L. Munsch agreeing to nonmaterial modification to the First Amended Joint Plan of Reorganization Under Chapter 11, as filed with the Bankruptcy Court (incorporated by reference to Exhibit 2.3 to the Company's Form 8-K dated February 18, 1997) 2.4 Order confirming the First Amended Joint Plan of Reorganization under Chapter 11, as entered by the United States Bankruptcy Court for the Northern District of Texas, Dallas Division, on February 7, 1997 (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K dated February 18, 1997) 2.5 Findings of Fact and Conclusions of Law in support of Order Confirming First Amended Joint Plan of Reorganization Under Chapter 11 (incorporated by reference to Exhibit 99.2 to the Company's Form 8-K dated February 18, 1997) 3.1 Amended and Restated Certificate of Incorporation of I.C.H. Corporation (incorporated by reference to Exhibit 99.5 to the Company's Form 8-K dated February 19, 1997) 3.2 Amendment No. 1 to Amended and Restated Certificate of Incorporation of I.C.H. Corporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K dated January 15, 1998) 3.3 Amended and Restated By-Laws of I.C.H. Corporation (incorporated by reference to Exhibit 99.6 to the Company's Form 8-K dated February 19, 1997) 3.4 Amendment No. 1 to Amended and Restated By-Laws of I.C.H. Corporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K dated February 10, 1998) 10.1 Form of Rights Agreement between I.C.H. Corporation and The Mid-America Bank of Louisville and Trust Company, which includes as Exhibit B thereto the Form of Rights Certificate (incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A dated February 19, 1997) 10.2 Amendment No. 1 to Rights Agreement between I.C.H. Corporation and The Mid-America Bank of Louisville and Trust Company (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated February 10, 1998) 10.3 Stock Purchase Agreement, dated as of February 7, 1997, by and between I.C.H. Corporation and Valcor, Inc. (incorporated by reference to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.4 First Amendment to Stock Purchase Agreement, dated as of April 18, 1997, by and between I.C.H. Corporation and Valcor, Inc. (incorporated by reference to Exhibit 10.03 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.5 Form of Loan Agreement by and between Sybra, Inc. and Atherton Capital Incorporated (incorporated by reference to Exhibit 10.04 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.6 Form of Promissory Note executed by Sybra, Inc. in favor of Atherton Capital Incorporated (incorporated by reference to Exhibit 10.05 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.7 Form of Leasehold/Deed of Trust Mortgage executed by Sybra, Inc. in favor of Atherton Capital Incorporated (incorporated by reference to Exhibit 10.06 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.8 Form of Security Agreement executed by Sybra, Inc. in favor of Atherton Capital Incorporated (incorporated by reference to Exhibit 10.07 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.9 Form of Master Lease by and between Sybra, Inc. and U.S. Restaurant Properties Operating L.P. (incorporated by reference to Exhibit 10.08 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.10 Employment Agreement, dated as of April 30, 1997, by and between I.C.H. Corporation and Charles N. Hyslop (incorporated by reference to Exhibit 10.09 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.11 Employment Agreement, dated as of April 30, 1978, by and between I.C.H. Cooperation and Donald P. Zima (incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q dated March 31, 1997) 10.12 Second Amended and Restated Employment Agreement, effective as of September 1, 1998, by and between James R. Arabia and I.C.H. Corporation 10.13 I.C.H. Corporation Amended and Restated 1997 Employee Stock Option Plan (incorporated by reference to Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q date June 30, 1998) 10.14 I.C.H. Corporation 1997 Director Stock Option Plan (incorporated by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K dated December 31, 1997) 10.15 Commitment Letter, dated July 25, 1997, between FFCA Acquisition Corporation and Sybra, Inc. (incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K dated December 31, 1997) 10.16 Form of Loan Agreement between FFCA Acquisition Corporation and Sybra, Inc. (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K dated December 31, 1997) 10.17 Form of Promissory Note from Sybra, Inc. to FFCA Acquisition Corporation (incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K dated December 31, 1997) 10.18 Form of Mortgage between Sybra, Inc. and FFCA Acquisition Corporation (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K dated December 31, 1997) 10.19 Asset Purchase Agreement, dated as of November 26, 1997, among Sybra of California, Inc., I.C.H. Corporation, William Brusslan, 294, Inc., American Food Concepts, Inc. and WEB Acquisition Company L.L.C. (incorporated by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K dated December 31, 1997) 10.20 Development Agreement, dated as of October 30, 1997, between Arby's, Inc. and Sybra, Inc. (incorporated by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K dated December 31, 1997) 10.21 Asset Purchase Agreement, dated as of February 18, 1998, between Sybra, Inc. and RGS Enterprises of New Jersey, Inc. (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K dated March 31, 1998) 10.22 Asset Purchase Agreement, dated as of February 19, 1998, between Sybra, Inc., Wolverine Food Systems, Inc. and Wolverine Properties, G.P. (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K dated March 31, 1998) 10.23 Asset Purchase Agreement, dated as of March 11, 1998, among Sybra, Inc., Richard T. Morath, Toni F. Morath and certain affiliated Subchapter S Corporations (incorporated by reference to Exhibit 10.23 to the Company's Quarterly Report on Form 10-Q dated June 30, 1998) 10.24 Asset Purchase Agreement, dated as of August 14, 1998, among Lyon's of California, Inc., ICH Corporation and Lyon's Restaurants, Inc.(incorporated by reference to Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q dated September 30, 1998) 10.25 Amendment to Asset Purchase Agreement, dated as of October 6, 1998, among Lyon's of California, Inc., ICH Corporation and Lyon's Restaurants, Inc.(incorporated by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q dated September 30, 1998) 10.26 Commitment Letter dated February 17, 1999, between FFCA Acquisition Corporation and Sybra, Inc. 27.1 Financial Data Schedule EX-1 2 February 17, 1999 VIA TELECOPY AND AIRBORNE EXPRESS Mr. Jim Arabia President Sybra, Inc. 9255 Towne Centre Drive San Diego, CA 92121 Dear Jim: Sybra, Inc. ("Sybra") has advised FFCA Acquisition Corporation ("FFCA") that Sybra desires to obtain financing for up to fifteen (15) new Arby's restaurants (individually, a "Property" and collectively, the "Properties") during the next eighteen (18) months. For certain Properties, Sybra desires to enter into a build-to-suit sale-leaseback transaction with regard to the land, fixtures and improvements (individually, a "Sale-Leaseback Transaction" and collectively, the "Sale-Leaseback Transactions"). For up to seven (7) of the Properties, Sybra desires to enter into a mortgage loan transaction (individually, a "Mortgage Transaction" and collectively, the "Mortgage Transactions") which may involve land (the "Land") leased by Sybra pursuant to a long term ground lease (individually, a "Ground Lease Site" and collectively, the "Ground Lease Sites") and which are secured by a first lien mortgage or deed of trust, as determined by FFCA, on the building and other improvements (collectively, the "Improvements") (individually, a "Mortgage Loan" and collectively the "Mortgage Loans") and Sybra's leasehold interest in the Land. Additionally, at the time of the final construction draw (the "Final Disbursement") of each Sale-Leaseback Transaction or Mortgage Transaction, Sybra also desires to obtain an equipment loan (individually an "Equipment Loan" and collectively, the "Equipment Loans") secured by a first lien security interest in the furniture, equipment and other trade fixtures at each Property (collectively, the "Equipment") or at Sybra's discretion, it may choose to obtain equipment financing from another lending source. Upon Sybra's acceptance of this commitment letter (this "Commitment"), FFCA commits to make to Sybra (i) up to a total of fifteen (15) Mortgage Loans and Sale-Leaseback Transactions, and (ii) up to fifteen (15) Equipment Loans, all on the terms set forth in this Commitment (individually, a "Transaction" and collectively, the "Transactions"). 1 A. Basic Commitment Terms. Background: This Commitment outlines certain basic terms and conditions of the Transactions; however, it is not meant to define all of the terms and conditions of the Transactions, which will be set forth more fully in a separate term sheet (the "Term Sheet") and the final documentation for each Transaction. The Transactions are subject to, among other things, the approval by FFCA's in-house site review and valuation department of the Properties and the Loan Amount or Purchase Price (as defined below), as applicable, Sybra's compliance with all of the requirements set forth in this Commitment and the receipt by FFCA of all documents and other information requested by FFCA and its counsel. Acceptance: Sybra may accept this Commitment by signing and returning a copy of this Commitment, together with a check for the Fee (as defined below), to FFCA within 10 days of the date hereof. Fee: Sybra shall pay FFCA a $45,000.00 fee for this Commitment. Refundability Although the Fee shall be nonrefundable and fully earned of Fee: when received by FFCA, all or part of the Fee may be applied to the Property Commitment Fees as described in the Property Commitment Fee Sections below. Transaction Processing: Sybra will notify FFCA as soon as Sybra has identified a Property. Such notice shall include a copy of the proposed purchase agreement, a description of the Property, including the proposed improvements, a budget for the proposed improvements, a description and cost estimate for the Equipment, notice to FFCA of whether the proposed Transaction will be a Mortgage Loan or Sale-Leaseback Transaction and any other documents and information available regarding the Property (the "Property Notice"). Upon receipt of the Property Notice, FFCA's in-house site review and inspection department will inspect the Property identified by Sybra. If the identified Property is approved by FFCA, FFCA will prepare a Term Sheet in the form attached hereto as Exhibit A outlining the specific terms and conditions upon which FFCA --------- would be willing to enter into the Transaction. FFCA will not order a title insurance commitment or instruct its counsel to begin preparing any of the documentation, until Sybra has accepted the Term Sheet and returned it to FFCA. Commitment Term: The term of this Commitment shall commence on the date this Commitment is accepted and automatically expire and be of no further force or effect eighteen (18) months after its effective date. Any Property Notice received by FFCA after such date shall be ineffective. Transaction Amount Cap: Notwithstanding anything herein to the contrary, in no event shall FFCA be obligated to fund a Transaction where the sum of (i) the Purchase Price and the Equipment Loan Amount for a Property (including financed soft costs and closing costs) exceeds $1,100,000.00 or (ii) the Mortgage Loan Amount and the Equipment Loan Amount for a Ground Lease Site exceeds $1,100,000.00, less the ground lease base rent for the first year of the term of the ground lease divided by 10.0%. B. Basic Sale-Leaseback Transaction. (a) Basic Sale Terms. Property Commitment Fee: For each Sale-Leaseback Transaction, Sybra shall pay FFCA an underwriting and processing fee equal to the sum of one percent (1%) of the sum of the Purchase Price, the Development Price and the Equipment Loan Amount. Sybra shall be entitled to a $3,000.00 credit towards the Property Commitment Fee owing under each Term Sheet. One-half of the balance of the Property Commitment Fee shall be due upon Sybra's acceptance of a Term Sheet; the balance of the Property Commitment Fee shall be due at the Closing. Documentation: FFCA's counsel will submit to Sybra FFCA's proposed form of build-to-suit sale-leaseback agreement. Title to Properties: Title to each Property shall be conveyed to FFCA by a general warranty deed, free and clear of all liens and encumbrances, except those approved by FFCA. Purchase Price: The Purchase Price of the Land shall be the sum of (i) the fair market value of the Land, as such amount is determined by FFCA's in-house site review and valuation department, (ii) the Property Commitment Fee, and (iii) such other transaction costs as FFCA may approve in its reasonable discretion. Closing Costs: Sybra shall pay FFCA's reasonable in-house site review and valuation expenses, FFCA's reasonable attorneys' fees, Sybra's attorneys' fees, the cost of the phase I environmental reports or environmental insurance, soils reports, and all other reasonable closing costs, including, without limitation, all title insurance premiums, transfer taxes, stamp taxes, transfer, escrow and recording fees, real estate taxes and assessments, and survey fees. Sale Contingency: The closing of the purchase and lease transactions comprising each Sale-Leaseback Transaction are not severable and the closing of the purchase transaction shall be conditioned upon the close of the lease transaction. (b) Basic Lease Terms. Documentation: For each Transaction involving a Sale-Leaseback Transaction, FFCA's counsel will prepare and submit to Sybra FFCA's proposed form of disbursement agreement ("Disbursement Agreement"), lease ("Lease"), Memorandum of Lease and UCC-1 Financing Statements. Each Lease shall (i) contain such representations, warranties, covenants and agreements as are usual and customary in transactions of this type, and (ii) provide that (a) Sybra shall be responsible for all maintenance, utilities, insurance, taxes, assessments and other expenses associated with the Property, (b) Sybra shall not assign, mortgage or pledge its interest in the Lease without FFCA's consent, which shall not be unreasonably withheld, delayed or conditioned, (c) the Property shall be operated as an Arby's restaurant, and (d) Sybra shall indemnify FFCA against all claims, suits and costs whatsoever relating to the Property. Development Price: After FFCA purchases the land, FFCA will fund the sum of (i) the actual and reasonable hard costs incurred to construct the improvements as determined by FFCA's in-house site inspection department, and (ii) Sybra's actual and reasonable out-of-pocket soft costs relating to the construction of the improvements as may be approved as to category and amount by FFCA, in its reasonable discretion. Basic Construction Funding Terms: The Disbursement Agreement shall provide that FFCA will agree to fund the Development Price in progress payments through the title company, and Sybra will agree to complete the improvements as provided therein. Lease Term: Approximately nineteen (19) years and six (6) months with two (2) successive five-year extension options. Base Annual Rental: Prior to the date of the Final Disbursement (the "Final Disbursement Date"), the sum of (i) the greater of (a) 10.0% or (b) the 30-day London Interbank Offered Rate then in effect plus 3.50%, of the Purchase Price multiplied by a fraction, the numerator of which will be the actual number of days between the Closing Date and the Final Disbursement Date, and the denominator of which will be 365, and the sum of (ii) the greater of (a) 10.0% or (b) the 30-day London Interbank Offered Rate then in effect plus 3.50%, of each portion of the Development Price (as defined above) outstanding between the Closing Date and the Final Disbursement Date multiplied by a fraction, the numerator of which will be the actual number of days between the date that each portion of the Development Price was advanced by FFCA and the Final Disbursement Date and the denominator of which will be 365 (collectively, the "Interim Rental"), which amount shall not be paid by Sybra prior to the First Disbursement Date but shall accrue from and after the date the Arby's restaurant opens for business and be capitalized in the Lease on the Final Disbursement Date pursuant to the Lease Amendment. After the date the Arby's restaurant opens for business, an amount equal to the greater of (a) 10.0% of the sum of the Purchase Price and the Development Price or (b) the 10-year U.S. Treasury Note Rate in effect 10 days prior to the date that FFCA initially anticipates the Final Disbursement Date to occur (which date shall be established by a letter from FFCA to Sybra) plus 4.50%, times the sum of the Purchase Price and the Development Price, which amount shall be payable in equal monthly installments on the first day of each month following the month in which the Final Disbursement is made. Base Annual Rental Increases: Commencing with the second anniversary of the completion of the construction of the improvements, and continuing every two years thereafter during the Lease Term, the Base Annual Rental shall increase by the lesser of (i) 4.04% or (ii) the average increase in the U.S. Consumer Price Index during the previous two years times 3 (which increases shall be compounded). Purchase Option: Sybra shall have the option during the ninety (90) days immediately preceding the 10th and 20th anniversaries of the Lease and, if applicable, during the ninety-day periods immediately preceding the end of the first and second extension terms, to purchase the Property for the greater of (i) its fair market value, or (ii) the sum of FFCA's total investment in the Property. C. Basic Mortgage Loan Terms. Property Commitment Fee: For each Transaction involving a Mortgage Loan, Sybra shall pay FFCA an underwriting and processing fee equal to one percent (1%) of the sum of the Loan Amount and the Equipment Loan Amount. Sybra shall be entitled to a $3,000.00 credit towards the Property Commitment Fee owing under each Term Sheet. One-half of the balance of the Property Commitment Fee shall be due upon Sybra's acceptance of a Term Sheet; the balance of the Property Commitment Fee shall be due at the Closing. Documentation: Prior to Closing, FFCA shall provide Sybra with FFCA's proposed form of promissory note ("Note"), loan agreement ("Loan Agreement"), mortgage or deed of trust, as determined by FFCA, and security agreement ("Deed of Trust"), assignment of leases and rents, environmental indemnity, UCC-1 financing statements, disbursement agreement (the "Disbursement Agreement") and such other documents as may be reasonably required by FFCA or the title company (collectively, the "Loan Documents"). Each Deed of Trust shall (a) grant FFCA a first priority lien against the Property, (b) contain such representations, warranties, covenants and agreements as are customary in loan transactions of this type, (c) provide that Sybra will indemnify FFCA against all claims, suits and costs whatsoever relating to the Property, (d) provide that Sybra shall be responsible for all maintenance, utilities, insurance, taxes, assessments and other expenses associated with the Property, (e) provide that the Property be operated as an Arby's restaurant, and (f) provide that the Property shall not be sold, leased, or further encumbered without the prior written consent of FFCA. At the Closing, with respect to each Property, Sybra shall (i) provide FFCA with proof of insurance relating to the Property, (ii) provide FFCA with a satisfactory title insurance commitment, ALTA as-built survey, phase I environmental report and/or environmental insurance, opinion of counsel, non-foreign certificate, and (iii) execute the Loan Documents. Loan Amount: Subject to the Transaction Amount Cap set forth above, the sum of (i) the fair market value of the Land as determined by FFCA's in-house site inspection and review department, (ii) the actual and reasonable cost to construct the improvements, as determined by FFCA's in-house site inspection and review department, (iii) the Property Commitment Fee, and (iv) such soft costs and closing costs as FFCA may approve in its reasonable discretion. Development Price: After Sybra purchases the Land, FFCA will fund the sum of (i) the actual and reasonable hard costs incurred to construct the improvements as determined by FFCA's in-house site inspection department, and (ii) Sybra's actual and reasonable out-of-pocket soft costs relating to the construction of the improvements as may be approved as to category and amount by FFCA, in its reasonable discretion. Basic Construction Funding Terms: The Disbursement Agreement shall provide that FFCA will agree to fund the Development Price in progress payments through the title company, and Sybra will agree to complete the improvements as provided therein. Note Terms: During the construction period, interest shall accrue at a variable rate equal to the 30-day London Interbank Offered Rate then in effect plus 3.50%; thereafter, interest shall accrue at an annual rate equal to the greater of (i) 9.25% or (ii) the 10-year U.S. Treasury Note Rate in effect 10 days prior to the date that FFCA initially anticipates the Final Disbursement to occur (which date shall be established by a letter from FFCA to Sybra) plus 4.25%. Principal and interest shall be paid in equal monthly installments due on the first day of each month based upon a twenty (20) year term and amortization schedule or such shorter term as may be required by FFCA to ensure that the term of the Ground Lease (including all renewals) exceeds the term of the Mortgage Loan by at least five (5) years. Prepayment: Subject to the terms of the Fixed Charge Coverage paragraph below, the Note may not be prepaid in whole or in part during the first five years of the term of the Note. Thereafter, Sybra may prepay the Note, in whole but not in part, on any regularly scheduled payment date; provided, however, any prepayment during the sixth year of the term of the Mortgage Loan shall include a prepayment premium equal to 5% of the then outstanding amount of the loan; any prepayment during the seventh year of the term of the Mortgage Loan shall include a prepayment premium equal to 4% of the then outstanding amount of the loan; any prepayment during the eighth year of the term of the Mortgage Loan shall include a prepayment premium equal to 3% of the then outstanding amount of the loan; any prepayment during the ninth year of the term of the Mortgage Loan shall include a prepayment premium equal to 2% of the then outstanding amount of the loan; and any prepayment during the tenth year of the term of the Mortgage Loan shall include a prepayment premium equal to 1% of the then outstanding amount of the loan. Fixed Charge Coverage Ratio: Prior to a Securitization (as defined below) of any of the Mortgage Loans, Sybra will maintain an annual fixed charge ratio, tested on a consolidated basis as to all of the Properties subject to the Mortgage Loans that are being securitized equal to or greater than 1.3:1 (the "SFCCR"). FFCA will notify Sybra as to the actual date for the calculation of the SFCCR (the "SFCCR Calculation Date") at least 60 days prior to the SFCCR Calculation Date. The SFCCR Calculation Date shall be no more than 30 days prior to the anticipated date of the Securitization. In calculating the SFCCR, FFCA will use actual performance data for any Properties that have been operated for more than 4 months as of the SFCCR Calculation Date. For any Properties that have been operated for less than 4 months as of the SFCCR Calculation Date, FFCA shall use pro forma data to calculate the SFCCR. FFCA will not exclude from any Securitization any of the fully funded Mortgage Loans in FFCA's inventory if the exclusion of the Mortgage Loan causes the SFCCR on the remaining Mortgage Loans to be lower than 1.30:1. Furthermore, the FCCR Calculation Date for any Property shall be no more than one year after the date that the Mortgage Loan for such Property was fully funded. The Loan Documents shall further provide that after the Mortgage Loan has been securitized, Sybra shall maintain an annual fixed charge coverage ratio, tested on a consolidated basis as to all of Sybra's Arby's restaurants, equal to or greater than 1.3:1, with such ratio to be calculated as of each fiscal year end of Sybra ("FCCR"). Both the SFCCR and the FCCR shall be calculated in accordance with the following formula: The ratio of the sum of: 1. Net income according to GAAP (after income tax); plus 2. Income tax; plus 3. Interest expense, plus 4. All non-cash charges including depreciation and amortization; plus 5. All corporate and regional overhead (defined as non-store level general and administrative expense consistent with the method of accounting used for Sybra's 1997 audited report, including, but not limited to, expenses related to automobiles, administrative fees, legal, accounting and other professional services, office supplies, travel and entertainment; plus 6. 7. Non-recurring expenses; minus 7. A standardized management fee representing 2.0% of gross sales for any 12 month period; plus 8. Rent expense (defined as building and ground operating lease expense, plus percent rent, plus capitalized building lease expense (net of principal and interest), minus rent on regional and corporate offices and inactive units); To the sum of: 1. All corporate debt service for the period being measured (interest and required principal payments during such period); plus 2. Rent expense as defined above in number 8 above; plus 3. Interest and required principal payments on all Capital Lease obligations during such period. If Sybra does not achieve either the required SFCCR or the FCCR within 30 days following notice from FFCA, Sybra shall be required to cure such failure through one of the following remedies: (i) pay off the Mortgage Loan(s) on the poorest performing Property or Properties, (ii) prepay the Mortgage Loan(s) on the poorest performing Property or Properties by an amount sufficient to raise the ratio to the required level and the corresponding Note or Notes shall be amended to reamortize the remaining payments due thereunder, (iii) substitute the poorest performing Properties with similar Properties upon terms that are mutually acceptable to the parties, or (iv) pay off the Notes on the poorest performing Properties and enter into a sale-leaseback transaction with FFCA on terms and conditions that are mutually satisfactory to the parties. Closing Costs: Sybra shall pay its attorneys' fees, FFCA's reasonable in-house site inspection expenses, FFCA's reasonable attorneys' fees, the cost of the phase I environmental report and/or environmental insurance, and all other reasonable Mortgage Loan closing costs, including, without limitation, all mortgage and stamp taxes, construction consultant fees, soil report expenses, disbursement agent costs, survey expenses, title insurance premiums, and escrow, filing and recording fees. D. Basic Equipment Loan Terms. Documentation: FFCA's counsel will prepare and submit to Sybra the form of equipment note (the "Equipment Note"), equipment loan agreement (the "Equipment Loan Agreement"), security agreement (the "Security Agreement") and UCC-1 Financing Statements proposed by FFCA. The Security Agreement shall grant FFCA a first priority security interest in the Equipment, and the Equipment Loan Agreement shall (i) contain such representations, warranties, covenants and agreements as are customary in loan transactions of this type, and (ii) provide that Sybra will indemnify FFCA against all claims, suits and costs whatsoever relating to any breach of Sybra's representations and warranties. At the Equipment Loan closing, Sybra shall (i) provide FFCA with proof of insurance and copies of all bills of sale, invoices and purchase agreements relating to the Equipment, and (ii) execute the Equipment Note, the Equipment Loan Agreement, the Security Agreement, the UCC-1 financing statements and such other documents as may be reasonably required by FFCA or the title company (collectively, the "Equipment Loan Documents"). Equipment Loan Amount: The actual and reasonable cost of the Equipment at each Property, but in no event shall such cost exceed the sum of $150,000.00 per Property. Note Terms: Interest shall accrue at the rate per annum equal to the greater of (i) 9.25% or (ii) the 10-year U.S. Treasury Note Rate in effect 10 days prior to the date that FFCA initially anticipates the Final Disbursement to occur (which date shall be established by a letter from FFCA to Sybra) plus 4.25%. Principal and interest shall be paid in equal monthly installments due on the first day of each month based on a seven (7) year amortization schedule. Prepayment: Sybra may not prepay any Note in whole or in part during the first four (4) years thereof; thereafter, Sybra may prepay the Note in whole only on any regularly scheduled payment date; provided, however, any prepayment during the fifth year of the term of the Equipment Loan shall include a prepayment premium equal to 3% of the then outstanding amount of the Equipment Loan; any prepayment during the sixth year of the term of the Equipment Loan shall include a prepayment premium equal to 2% of the then outstanding amount of the Equipment Loan; and any prepayment during the seventh year of the term of the Equipment Loan shall include a prepayment premium equal to 1% of the then outstanding amount of the Equipment Loan. Equipment Loan Closing Date: The Final Disbursement Date. E. Other Material Transaction Terms. Ground Lease Prior to the closing of any Transaction involving a Ground Approval: Lease Site, FFCA's Legal Department shall have received and approved the related ground lease. Financial Statements: Within forty-five days following the end of each quarter during the Commitment Term, Sybra shall provide FFCA with Sybra's financial statements for the preceding quarter. Non-Disclosure: Neither Sybra nor FFCA shall make any public disclosure of this Commitment or the transactions proposed by this Commitment without the prior written consent of the other party hereto, except as required by law or judicial action. Securitization: The loan documents shall provide that FFCA may, at any time, sell, transfer or assign any Note, Deed of Trust and any of the other Loan Documents and Equipment Loan Documents, and any or all servicing rights with respect thereto (each, a "Transfer"), or grant participations therein (each, a "Participation"), or complete an asset securitization vehicle selected by FFCA, in accordance with all requirements which may be imposed by the investors or the rating agencies involved in such securitized financing transaction, as selected by FFCA, or which may be imposed by applicable securities, tax or other laws or regulations, including, without limitation, laws relating to FFCA's status as a real estate investment trust (each, a "Securitization"). Sybra agrees to cooperate in good faith with FFCA in connection with any Transfer, Participation and/or Securitization, including, without limitation, (i) providing such documents, financial and other data, and other information and materials (the "Disclosures") which would typically be required with respect to Sybra by a purchaser, transferee, assignee, servicer, participant, investor or rating agency involved with respect to such Transfer, Participation and/or the Securitization, as applicable; provided, however, Sybra shall not be required to make Disclosures of any confidential information or any information which has not previously been made public unless required by applicable federal or state securities laws; and (ii) amending the terms of the transactions evidenced by the Loan Documents to the extent necessary so as to satisfy the requirements of purchasers, transferees, assignees, servicers, participants, investors or selected rating agencies involved in any such Transfers, Participations or Securitization, so long as such amendments would not have a material adverse effect upon Sybra or the transactions contemplated by this Commitment or make any of the mortgage and equipment loan repayment or covenants more burdensome on Sybra. Sybra consents to FFCA providing the Disclosures, as well as any other information which FFCA may now have or hereafter acquire with respect to the Property or the financial condition of Sybra, to each purchaser, transferee, assignee, servicer, participant, investor or rating agency involved with respect to each Transfer, Participation and/or Securitization, as applicable. FFCA and Sybra shall each pay their own attorneys fees and other out-of-pocket expenses incurred in connection with the performance of their respective obligations under this Paragraph. Cross-Default and Cross- Collateralization: The Mortgage Loan Documents and Equipment Loan Documents between FFCA and Sybra with respect to the Mortgage Loans and the sale-leaseback documents with respect to each Sale-Leaseback Transaction shall be cross-defaulted and, in the case of each loan, cross-collateralized, with all other loan agreements, notes, mortgages, deeds of trust, leases and other agreements now or hereafter entered into between (or, in the case of notes and guaranties, in favor of) (i) FFCA, Franchise Finance Corporation of America or any of its other subsidiaries and affiliates, on the one hand, and (ii) Sybra or any of its subsidiaries or affiliates, on the other hand. F. Other Matters. THE FOREGOING SUMMARY OF BASIC TERMS AND CONDITIONS IS NOT MEANT TO BE NOR SHOULD IT BE CONSTRUED AS AN ATTEMPT TO DEFINE ALL OF THE TERMS AND CONDITIONS REGARDING THE TRANSACTIONS. INSTEAD, IT IS INTENDED ONLY TO OUTLINE CERTAIN BASIC POINTS OF THE BUSINESS UNDERSTANDING AROUND WHICH LEGAL DOCUMENTATION WILL BE STRUCTURED. THE OUTLINED TERMS AND CONDITIONS ARE SUBJECT TO FINAL DOCUMENTATION SATISFACTORY TO ALL PARTIES AND COMPLETE LEGAL REVIEW AND APPROVAL OF ALL PERTINENT MATTERS. This Commitment and the Transaction contemplated hereby, and the obligation of FFCA to consummate the Transaction described in this Commitment shall be subject to, in FFCA's reasonable judgment, there being no adverse material change in (i) the financial condition of Sybra, or (ii) the capital markets utilized by FFCA. Furthermore, this Commitment shall not be assignable by Sybra or relied upon by any third party without the prior written consent of FFCA, and shall be governed by the internal laws of the State of Arizona, without giving effect to conflict of law principles. This Commitment may be assigned by FFCA without the consent of Sybra. This Commitment (i) supersedes any previous discussions, agreements and/or proposal/commitment letters relating to the Transaction, including the commitment letter dated February 1, 1999, and (ii) may only be amended by a written agreement executed by FFCA and Sybra. FFCA reserves the right to cancel this Commitment in the event (i) Sybra has made any misrepresentations or has withheld any information with regard to the Transaction, or (ii) Sybra, or its subsidiaries or affiliates default on any of their contractual obligations to FFCA or its affiliates. ANY ACTION ARISING OUT OF THIS COMMITMENT SHALL BE PROSECUTED ONLY IN THE STATE OR FEDERAL COURTS LOCATED IN THE STATE OF ARIZONA. FFCA AND SYBRA WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY ACTION ARISING OUT OF THIS COMMITMENT. SYBRA WAIVES ANY RIGHT SYBRA HAS OR MAY HAVE TO SEEK OR RECOVER FROM FFCA OR ANY OF ITS AFFILIATES, OFFICERS, DIRECTORS AND EMPLOYEES ANY AWARD OF SPECIAL, INDIRECT, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH ANY DEFAULT BY FFCA UNDER THIS COMMITMENT. Please indicate your acceptance of this Commitment by having a copy of this Commitment signed and returned to FFCA to the attention of Margaret J. Craft, FFCA Acquisition Corporation, 17207 North Perimeter Drive, Scottsdale, Arizona 85255, together with a check in the sum of $45,000.00 payable to "FFCA Acquisition Corporation", within ten (10) days from the date hereof or this Commitment will automatically expire. FFCA Acquisition Corporation, a Delaware corporation /s/ Robert Roach Rob Roach Senior Vice President Corporate Finance ACCEPTED AND AGREED TO on this 22nd day of February, 1999. Sybra, Inc., a Michigan corporation By /s/ James R. Arabia ----------------------------- Printed Name James R. Arabia ------------------- Title President & CEO -------------------------- EXHIBIT A TERM SHEET This Term Sheet is subject to the terms and conditions of that certain commitment letter dated February 17, 1999, between FFCA Acquisition Corporation ("FFCA") and Sybra, Inc. ("Sybra") (the "Commitment Letter"). In the event of any conflict between the provisions of the Commitment Letter and the terms of this Term Sheet, the terms of the Commitment Letter shall prevail. Any capitalized terms used herein without definition shall have the same meaning given in the Commitment Letter. Date: _____________________ Lender/Buyer: FFCA Seller/ Borrower: _____________________ Property Location: _____________________ FFCA Store Number: _____________________ Type of Transaction (indicate one): Sale-Leaseback _____ Mortgage Loan _____ Purchase Price: $_____________________ Loan Amount: $_____________________ Development Price: $_____________________ Property Commitment Fee: $ (including $3,000.00 _____________________ Credit) Base Annual Rental: Prior to the Final Disbursement Date, the sum of (i) the greater of (a) 10.0% or (b) the 30-day London Interbank Offered Rate then in effect plus 3.50%, of the Purchase Price multiplied by a fraction, the numerator of which will be the actual number of days between the Closing Date and the Final Disbursement Date, and the denominator of which will be 365, and the sum of (ii) the greater of (a) 10.0% or (b) the 30-day London Interbank Offered Rate then in effect plus 3.50%, of each portion of the Development Price (as defined above) outstanding between the Closing Date and the Final Disbursement Date multiplied by a fraction, the numerator of which will be the actual number of days between the date that each portion of the Development Price was advanced by FFCA and the Final Disbursement Date and the denominator of which will be 365 (collectively, the "Interim Rental"), which amount shall not be paid by Sybra prior to the First Disbursement Date but shall accrue from and after the date the Arby's restaurant opens for business and be capitalized in the Lease on the Final Disbursement Date pursuant to the Lease Amendment. After the date the Arby's restaurant opens for business, an amount equal to the greater of (a) 10.00% of the sum of the Purchase Price and the Development Price or (b) the 10-year U.S. Treasury Note Rate in effect 10 days prior to the date that FFCA initially anticipates the Final Disbursement to occur (which date shall be established by a letter from FFCA to Sybra) plus 4.50% times the sum of the Purchase Price and the Development Price, which amount shall be payable in equal monthly installments on the first day of each month following the month in which the Final Disbursement is made. Interest Rate: During the construction period, interest shall accrue at a variable rate equal to the 30-day London Interbank Offered Rate ("LIBOR") then in effect plus 3.50%. Thereafter, interest shall accrue at the rate per annum equal to the greater of (i) 9.25% or (ii) the 10-year U.S. Treasury Note Rate in effect 10 days prior to the date that FFCA initially anticipates the Closing to occur (which date shall be established by a letter from FFCA to Sybra) plus 4.25%. Equipment Loan Amount: $_______________________ Interest Rate: Interest shall accrue at the rate per annum equal to the greater of (i) 9.25% or (ii) the 10-year U.S. Treasury Note Rate in effect 10 days prior to the date that FFCA initially anticipates the Final Disbursement to occur (which date shall be established by a letter from FFCA to Sybra) plus 4.25%. Outside Closing Date: ________________________ It is expressly acknowledged that the Transaction is subject to Seller/Borrower satisfying all of the conditions and requirements contained in the Commitment Letter. ACCEPTED AND AGREED TO this _____ day of _________________ , 1999. FFCA ACQUISITION CORPORATION, SYBRA, INC., a Delaware corporation a Michigan corporation By __________________________ By _____________________________ Printed Name: Rob Roach Printed Name:___________________ Title Senior Vice President Title:__________________________ EX-2 3 ICH CORPORATION SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT JAMES R. ARABIA THIS SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") is effective as of the 1st day of September, 1998, by and between I.C.H. Corporation ("ICH"), a Delaware corporation with offices at 9255 Towne Centre Drive, Suite 600, San Diego, CA 92121, and its subsidiaries, Sybra, Inc., a Michigan corporation, Sybra of California, Inc., a California corporation, (collectively with Sybra, Inc., "Sybra"), Lyon's of California, Inc. a California corporation, and Care Financial Corp., a Delaware corporation, each with offices at c/o I.C.H. Corporation, 9255 Towne Centre Drive, Suite 600, San Diego, California 92121 (collectively with ICH and Sybra, the "Companies") and James R. Arabia, an individual residing at 4230 Arguello Street, San Diego, CA 92103 (the "Executive"). WHEREAS, Executive has served as Chairman, President and Chief Executive Officer of ICH and as Chairman, President and Chief Executive Officer of Sybra, pursuant to his prior employment agreement with ICH dated as of January 1, 1998 (the "Prior Agreement") and prior thereto and has recently taken on and will be taking on certain additional responsibilities, including, without limitation, additional responsibilities related to impending acquisitions, and through such service, has acquired special and unique knowledge, abilities and expertise; and WHEREAS, in recognition of Executive's past performance and responsibilities and the additional responsibilities Executive has undertaken and will be undertaking, ICH desires to continue to employ Executive as its President and Chief Executive Officer and to have Executive continue to serve as Chairman of the Board of Directors of ICH (the "ICH Board") and the other Companies desire to employ Executive in similar capacities and the Companies desire to employ Executive in such capacities with any future subsidiaries of the Companies and wish to be assured of his continued services on the terms and conditions hereinafter set forth; and WHEREAS, Executive desires to continue to be employed by ICH as its President and Chief Executive Officer and to serve as Chairman of the ICH Board, and by the other Companies and any future subsidiaries of the Companies in similar capacities and to perform and to serve the Companies on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and of the mutual promises, agreements and covenants set forth herein, the parties hereto agree as follows: 1. Employment. The Prior Agreement is hereby amended and restated in its entirety as of the date of this Agreement. (a) Duties. The Companies hereby agree to continue to employ Executive, and Executive hereby accepts such continued employment, as the President and Chief Executive Officer of ICH and agrees to serve as Chairman of the ICH Board and as President and Chief Executive Officer and Chairman of the Board of Directors of each of the other Companies. In his role as President and Chief Executive Officer of ICH and the other Companies, Executive shall be responsible for such duties and functions of a supervisory or managerial nature as may be directed from time to time by the ICH Board and each other respective Board of Directors provided that such duties are reasonable and customary for a President and Chief Executive Officer. Executive agrees that he shall, during the term of this Agreement, except during reasonable vacation periods, periods of illness and the like, devote substantially all his business time, attention and ability to his duties and responsibilities hereunder; provided, however, that nothing contained herein shall be construed to prohibit or restrict Executive from (i) serving as a director of any corporation, with or without compensation therefor; (ii) serving in various capacities in community, civic, religious or charitable organizations or trade associations or leagues; or (iii) attending to personal business; provided, however, that no such service or activity permitted in this Section 1(a) shall materially interfere with the performance by Executive of his duties hereunder. Executive shall report directly to the ICH Board and each other respective Board of Directors. (b) Term. (i) Except as otherwise provided in this Agreement to the contrary, the terms and conditions of this Agreement shall be and remain in effect during the period of employment (the "Employment Period") established under this Section 1(b). The initial Employment Period shall be for a term commencing on the date of this Agreement and ending on the third anniversary of the date of this Agreement provided, however, that commencing on the first day after the date of this Agreement and on each day thereafter, the Employment Period shall be extended for one additional day so that a constant three (3) year Employment Period shall be in effect, unless (A) ICH (on its behalf and on behalf of the other Companies) or Executive elects not to extend the term of this Agreement by giving written notice to the other party in accordance with Sections 5(b) and 12 hereof, in which case, the term of this Agreement shall become fixed and shall end on the third anniversary of the date of such written notice ("Notice of Non-Renewal"), or (B) Executive's employment terminates hereunder. (ii) Notwithstanding anything contained herein to the contrary, (A) Executive's employment with the Companies may be terminated by ICH (on its behalf and on behalf of the other Companies) or Executive during the Employment -2- Period, subject to the terms and conditions of this Agreement; and (B) nothing in this Agreement shall mandate or prohibit a continuation of Executive's employment following the expiration of the Employment Period upon such terms and conditions as the ICH Board and Executive may mutually agree. (iii) If Executive's employment with the Companies is terminated, for purposes of this Agreement, the term "Unexpired Employment Period" shall mean the period commencing on the date of such termination and ending on the last day of the Employment Period. (c) Location/Travel. Executive shall work at ICH's headquarters in San Diego County, California. Executive shall not be required to relocate from the San Diego area during the Employment Period. 2. Compensation. Subject to the provisions of Section 8 hereof, the Companies shall each be responsible and have joint and several liability for all compensation and benefits owed to Executive under this Agreement. A reference to an ICH plan, program, obligation or commitment shall also be considered an obligation or commitment of each of the other Companies but shall not result in duplicate benefits being paid or provided to Executive. (a) Salary. Executive shall receive an annual base salary of Four Hundred Seventy-Five Thousand Dollars ($475,000) which shall be payable to Executive on a bi-weekly basis. The annual base salary payable to Executive pursuant to this Section 2(a), which may be increased but not decreased by the ICH Board or the Compensation Committee of the ICH Board (the "ICH Compensation Committee"), as the case may be, shall be hereinafter referred to as the "Annual Base Salary." (b) Annual Bonus. (i) Executive shall be entitled to receive an annual cash bonus, hereinafter referred to as the "Annual Bonus," based upon a formula and subject to certain performance goals having been achieved (the "Formula"), determined by the ICH Board, in its sole discretion, by the end of the first quarter of each year. The target bonus payable to Executive for each fiscal year based upon the Formula established by the ICH Board shall be an amount equal to at least forty percent (40%) of Executive's Annual Base Salary for such year. (ii) Executive's Annual Bonus shall be paid to Executive no later than forty five (45) days following the end of the period for which the bonus is being paid. (c) Reimbursement of Business Expenses. ICH shall reimburse Executive for all reasonable out-of-pocket expenses incurred by him during the Employment Period. ICH shall also promptly reimburse Executive for reasonable out-of-pocket expenses incurred by him pursuant to his employment hereunder, including -3- but not limited to all reasonable travel and entertainment expenses. Executive may only obtain reimbursement under this Section 2(c) upon submission of such receipts and records as may be initially required by the ICH Board and, thereafter, as may be required under the reimbursement policies established by ICH. (d) Additional Benefits; General Rights. During the Employment Period, Executive shall be entitled to: (i) participate in all employee stock option, pension, savings, and other similar benefit plans of ICH and/or such other plans or programs of the other Companies as ICH may designate from time to time; (ii) participate in all welfare plans established by ICH such as life insurance, medical, dental, disability, and business travel accident plans and programs and/or such other plan or programs of the other Companies as ICH may designate from time to time. In addition, ICH shall reimburse Executive for (i) any premium costs Executive may incur with respect to the health insurance plan currently maintained by ICH (and which may be maintained by ICH from time to time) in which Executive (and his spouse and children) participates and (ii) for all other medical and dental expenses not covered by any medical or dental plan in which Executive (and his spouse and children) participates, including, without limitation, deductibles and out of pocket expenses; (iii) reimbursement from ICH for any premium costs associated with the term life insurance in the amount of one and one-half million dollars ($1,500,000.00) issued by Security Connecticut and currently owned by Executive; (iv) a minimum eight hundred dollars ($800) per month local travel allowance; (v) four (4) weeks paid vacation per year; and (vi) any other benefits provided by ICH to its executive officers. (e) Withholding. ICH and/or the other Companies, as the case may be, shall deduct from all compensation paid to Executive under this Agreement, any Federal, State or city withholding taxes, social security contributions and any other amounts which may be required to be deducted or withheld by the Companies pursuant to Federal, State or city laws, rules or regulations. 3. Option Grant. (a) (i) Upon execution of Executive's first employment agreement with ICH dated February 11, 1997 (the "First Agreement"), Executive received options issued pursuant to ICH's 1997 Employee Stock Option Plan, as amended (the "Stock Option Plan"), to purchase up to 176,000 shares of common stock of ICH, $0.01 par -4- value (the "Common Stock"), at an exercise price per share equal to $ 2.17 (the "1997 Options"). Subject to Sections 3(e) and 6 below, such 1997 Options shall have vested or vest, as applicable, and are exercisable as follows: 58,667 1997 Options, effective upon execution of the First Agreement; 58,667 1997 Options, effective February 11th, 1998; and the balance 58,666 1997 Options, effective February 11th, 1999. The terms and conditions of the 1997 Options granted to Executive are memorialized in the written option grant agreement between ICH and Executive dated February 11, 1997 and attached to the First Agreement as Exhibit A (the "1997 Option Grant Agreement"). Such 1997 Options shall expire on February 11, 2007. (ii) On the effective date of this Agreement, Executive shall be granted additional options issued pursuant to the Stock Option Plan to purchase up to 74,000 shares of Common Stock at an exercise price per share equal to $4.00 (the "1998 Options"). Subject to Sections 3(e) and 6 below, such 1998 Options shall vest and be exercisable as follows: 18,500 1998 Options, on the effective date of this Agreement; 18,500 1998 Options, effective on the first anniversary of this Agreement; 18,500 1998 Options, effective on the second anniversary of this Agreement and the balance 18,500 1998 Options, effective on the third anniversary of this Agreement. The terms and conditions of the 1998 Options granted to Executive are memorialized in the written option grant agreement between ICH and Executive dated the date hereof and attached hereto as Exhibits A and B (the "1998 Option Grant Agreements"). Such 1998 Options shall expire on September 1, 2008. (iii) The 1997 Options, the 1998 Options plus any additional options granted to Executive in the future (collectively referred to herein as the "Options") were and are intended to qualify as incentive stock options within the meaning of Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"); provided, however, that to the extent that any of such Options do not satisfy the requirements of Section 422(b) of the Code either at the time of grant or before or after exercise, including, without limitation, upon disposition of the underlying stock acquired by the exercise of Options prior to the requisite holding period, they shall be treated as non-qualified stock options. (b) In the event that Executive incurs taxable income as a result of any or all of his Options being treated as non-qualified options (i.e. Options have been exercised and the requirements of Section 422(b) of the Code have not been or are no longer met) (the "Taxable Event") as soon as practicable after a determination by ICH and Executive that the Options are non-qualified and a Taxable Event has occurred, ICH shall make an additional single sum cash payment to Executive in an amount equal to thirty percent (30%) of Executive's taxable income resulting from the Taxable Event. Such payment shall only be made in the event Executive's employment with ICH has not terminated for Cause within the meaning of Section 5(a)(i) of this Agreement. (c) Upon termination of his employment for any reason, Executive shall have the right to exercise his 1998 Options at any time through September 1, 2008 and any additional options granted after the date hereof at any time through the -5- date they would otherwise expire if Executive had not terminated employment. Executive understands that the effect of exercising any incentive stock options on a day that is more than ninety (90) days after the date of termination of employment (or, in the case of a termination of employment on account of death or disability, on a day that is more than one (1) year after the date of such termination) shall be to cause such incentive stock options to be treated as non-qualified stock options. (d) In the event ICH issues additional shares of Common Stock and/or any class of stock convertible into Common Stock and/or any other security convertible into Common Stock (including, without limitation, options and warrants which may be granted to individuals or entities other than employees and directors) at any time during the Employment Period and prior to Executive's termination of employment and in connection with a public or private equity offering or in connection with an acquisition, Executive shall be granted additional stock options and/or provided with a loan, as determined by the ICH Board, to purchase a sufficient amount of Common Stock so that the aggregate of Executive's stock ownership (i.e. Common Stock owned plus options to purchase Common Stock whether or not vested) in ICH shall equal ten percent (10.0%) of the then Outstanding Stock less any shares sold or otherwise disposed of by Executive on or after the date hereof. Outstanding Stock shall mean all outstanding shares of Common Stock, any class of stock convertible into Common Stock and any other security convertible into Common Stock less shares of Common Stock outstanding as a result of employee or director option exercises with the amount of such reduction limited to one million nine hundred thousand (1,900,000) shares (i.e., the aggregate number of shares of Common Stock currently authorized under the Stock Option Plan and the ICH 1997 Director Stock Option Plan) and adjustments for stock repurchases and recapitalizations first being applied to reduce the number of shares of Common Stock outstanding as a result of director and employee option exercises. (e) To the extent any Options are not vested upon a "Change in Control" of ICH, such unvested Options shall become fully vested and immediately exercisable upon a "Change in Control" of ICH (whether or not such Change in Control is approved of by the Continuing Directors of ICH (as defined in the Rights Agreement between ICH and Mid-America Bank of Louisville and Trust Company dated as of February 19, 1997 and amended as of February 10, 1998)). A "Change in Control" of ICH shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the ICH Board or stockholders of ICH of a transaction that would result in the reorganization, merger, or consolidation of ICH with one or more other "Persons" within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act"), other than a transaction following which: -6- (A) at least seventy-one percent (71%) of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by Persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least seventy-one percent (71%) of the outstanding equity ownership interests in ICH; and (B) at least seventy-one percent (71%) of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by Persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least seventy-one percent (71%) of the securities entitled to vote generally in the election of directors of ICH; (ii) the acquisition of all or substantially all of the assets of ICH; (iii) a complete liquidation or dissolution of ICH, or approval by the stockholders of ICH of a plan for such liquidation or dissolution; (iv) the occurrence of any event in the nature of an event described in this Section 3(e) if, immediately following such event, at least seventy-five percent (75%) of the members of the ICH Board do not belong to any of the following groups: (A) individuals who were members of the ICH Board on the date of this Agreement; or (B) individuals who first became members of the ICH Board after the date of this Agreement either: (I) upon election to serve as a member of the ICH Board by affirmative vote of three-quarters of the members of such ICH Board, or of a nominating committee thereof, in office at the time of such first election; or (II) upon election by the stockholders of ICH to serve as a member of the ICH Board, but only if nominated for election by affirmative vote of three-quarters of the -7- members of the ICH Board, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the ICH Board. (v) one or more other Persons, other than an employee benefit plan sponsored by ICH, becomes the "beneficial owner," as such term is used in Section 13 of the Exchange Act, of thirty percent (30%) or more of the Common Stock of ICH issued and outstanding prior to such acquisition. 4. Loans to Executive. (a) Residence Loan. (i) ICH hereby agrees to make a loan to Executive at such time as Executive elects during the Employment Period in a principal amount of $350,000 for the purchase of a principal residence (the "Residence Loan"). The Residence Loan shall accrue interest at an annual rate equal to the published applicable federal rate (AFR) for loans of similar maturity at the time the Residence Loan is granted. Principal plus interest shall be repayable on a self-amortizing basis in years eight (8) through ten (10). Executive shall be required to execute such evidences of indebtedness and other documents as are reasonably necessary to effectuate the Residence Loan. (ii) In the event Executive's employment is terminated by ICH in connection with a Change in Control which is not approved by the Continuing Directors of ICH, ICH shall on the consummation of such Change in Control, forgive all principal and accrued interest then outstanding on the Residence Loan. Additionally, on the consummation of such Change in Control, ICH shall pay Executive, in one lump sum, a cash amount sufficient to gross up Executive for the full tax consequences of such forgiveness so that on a net after tax basis Executive shall be in the same position as if no taxable event had occurred upon such forgiveness. The forgiveness of the Residence Loan and the related gross up payment shall hereinafter be referred to as the "Residence Loan Forgiveness". (b) 1997 Option Loans. (i) ICH has loaned Executive Two Hundred Fifty-Four Thousand Six Hundred Fourteen Dollars and Seventy-Eight Cents ( $254,614.78) and -8- shall to loan Executive One Hundred Twenty-Seven Thousand Three Hundred Five Dollars and Twenty-Two Cents ( $127,305.22) on February 11, 1999 in order to enable Executive to exercise all his 1997 Options (collectively, the "1997 Option Loans"). (ii) In the event (A) Executive remains in the continuous employ of ICH during the period beginning on January 1, 1999 and ending on December 31, 2001, (B) Executive's employment is terminated by ICH in connection with a Change in Control not approved by the Continuing Directors of ICH or without Cause or by Executive for Good Reason or (C) Executive's employment is terminated due to his death or disability, ICH shall, on December 31, 2001, or in the case of such Change in Control, on the consummation of such Change in Control, or in the case of such termination of Executive's employment, on the date of termination, forgive all principal and accrued interest then outstanding on such 1997 Option Loans. Additionally, on January 15, 2002 , or in the case of a Change in Control not approved of by the Continuing Directors of ICH, on the consummation of such Change in Control, or in the case of such termination of employment, on the date of termination, ICH shall pay Executive in one lump sum, a cash amount sufficient to gross up Executive for the full tax consequences of such forgiveness so that on a net after tax basis Executive shall be in the same position as if no taxable event had occurred upon such forgiveness. The forgiveness of the 1997 Option Loans and the related gross up payment shall hereinafter be referred to as the "1997 Option Loan Forgiveness". (iii) ICH has and will require Executive to pledge a sufficient amount of shares of Common Stock acquired upon exercise of his 1997 Options (the "Option Shares") to secure each of the 1997 Option Loans. ICH shall, as soon as practicable after the date hereof, determine with respect to the first 1997 Option Loan and such loan shall be secured only by, the lesser of the full amount of the Option Shares acquired at the time such loan was made or the number of Option Shares having a fair market value of one hundred and twenty percent (120%) of the outstanding principal amount of the first 1997 Option Loan, together with interest projected to accrue thereon through December 31, 2001 ("Maximum Amount Due"). ICH shall reasonably determine the aggregate fair market value of the collateral (the "Market Value") being held and shall release to Executive such portion of the collateral the aggregate fair market value of which equals the Market Value less one hundred and twenty percent (120%) of the Maximum Amount Due, free and clear of any and all encumbrances under the related stock pledge agreements. With respect to the second 1997 Option Loan to be made to Executive on February 11, 1999, such loan shall initially be secured by the full amount of Option Shares acquired at the time such loan was made. On each March 1 and each September 1, through the date the 1997 Option Loans are either repaid or forgiven (each such date a "Determination Date"), ICH shall reasonably determine the Market Value of the collateral being held. If on such Determination Date the Market Value exceeds the Maximum Amount Due, ICH shall, unless otherwise requested by Executive, automatically release to Executive such portion of the collateral the aggregate fair market value of which equals the Market Value less one hundred and twenty percent (120%) of the Maximum Amount Due, free and clear of any and all encumbrances under the related stock pledge agreements. -9- 5. Termination of Employment; Events of Termination. (a) Executive's employment hereunder may be terminated during the Employment Period under the following circumstances: (i) Cause. Executive's employment hereunder shall terminate for "Cause" ten days after the date ICH shall have given Executive notice of the termination of his employment for "Cause". For purposes of this Agreement, "Cause" shall mean (A) the commission by Executive of fraud, embezzlement or an act of serious, criminal moral turpitude; (B) the commission of an act by Executive constituting material financial dishonesty against any of the Companies; or (C) Executive's gross neglect in carrying out his material duties and responsibilities under this Agreement which has a material adverse effect on any of the Companies and which is not cured within thirty (30) days subsequent to written notice from ICH to Executive of such breach. (ii) Death. Executive's employment hereunder shall terminate upon his death. (iii) Disability. Executive's employment hereunder shall terminate ten days after the date on which ICH shall have given Executive notice of the termination of his employment by reason of his physical or mental incapacity or disability on a permanent basis. For purposes of this Agreement, Executive shall be deemed to be physically or mentally incapacitated or disabled on a permanent basis if the ICH Board determines he is unable to perform his duties hereunder for a period exceeding six (6) months in any twelve (12) month period. (iv) Good Reason. Executive shall have the right to terminate his employment for "Good Reason." This Agreement shall terminate effective immediately on the date Executive shall have given the ICH Board notice of the termination of his employment with ICH for "Good Reason." For purposes of this Agreement, "Good Reason" shall mean (A) any material and substantial breach of this Agreement by any of the Companies, (B) a diminution of Executive's responsibilities, loss of title or position in which Executive currently serves, failure to reelect Executive to the ICH Board or the Board of Directors of any of the other Companies, reappoint Executive Chairman of the ICH Board or Chairman of the Board of Directors of any of the other Companies, or maintain the composition of the Nomination Committee of the ICH Board as it exists on the date hereof (i.e. with Executive being its sole member), but not including the loss of responsibilities and title -10- associated with any of the Companies other than ICH upon the sale of the stock or substantially all of the assets of such other Company, (C) a Change in Control occurs and Executive voluntarily quits at any time within the six (6) month period on or immediately following the Change in Control, (D) ICH issues a Notice of Non-Renewal to Executive, (E) a reduction in Executive's Annual Base Salary or a material reduction in other benefits (except for bonuses or similar discretionary payments) as in effect at the time in question, or any other failure by the Companies to comply with Sections 2 and 3, hereof, (F) the relocation of Executive's office outside the San Diego area, or (G) this Agreement is not assumed by a successor to ICH. (v) Without Cause. ICH shall have the right to terminate Executive's employment hereunder without Cause subject to the terms and conditions of this Agreement. In such event, this Agreement shall terminate, effective immediately upon the date on which ICH shall have given Executive notice of the termination of his employment for reasons other than for Cause or due to Executive's Disability. (vi) Without Good Reason. Executive shall have the right to terminate his employment hereunder without Good Reason subject to the terms and conditions of this Agreement. This Agreement shall terminate, effective immediately upon the date as of which Executive shall have given the ICH Board notice of the termination of his employment without Good Reason. (b) Notice of Termination. Any termination of Executive's employment by ICH or any such termination by Executive (other than on account of death) shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. In the event of the termination of Executive's employment on account of death, written Notice of Termination shall be deemed to have been provided on the date of death. 6. Payments Upon Termination. (a) Without Cause, for Good Reason or Disability. If Executive's employment is terminated by ICH without Cause (pursuant to Section 5(a)(v)), by Executive for Good Reason (pursuant to Section 5(a)(iv)), or by ICH due to Executive's Disability (pursuant to Section 5(a)(iii)), Executive, or in the case of Executive's Disability, Executive's legal representative, shall be entitled to receive from ICH (i) a lump sum payment in an aggregate amount equal to four (4) times the sum of (A) then -11- current Annual Base Salary and (B) the average of Executive's Annual Bonus paid during the two (2) immediately preceding full fiscal years of employment ending prior to the date of termination (the "Severance Payment"); (ii) any bonuses which have been earned but not been paid prior to such termination ("Prior Bonus Payment") and (iii) reimbursement of expenses incurred prior to date of termination (the "Expense Reimbursement"). The aforesaid amounts shall be payable in cash without discount for early payment, at the option of Executive, either in full immediately upon such termination or monthly over the Unexpired Employment Period (the "Payment Election"). In addition, (x) Executive's fringe benefits specified in Section 2 shall continue through the end of the Unexpired Employment Period, provided, however, that such benefits which may not continue pursuant to law, such as participation in a qualified pension plan, shall terminate on the date of termination and further provided, that Executive shall be entitled to COBRA continuation coverage and to continue the applicable life insurance policies thereafter, at his cost ("Fringe Benefit Continuation); (y) all outstanding Options which are not vested as of the date of termination, if any, shall upon such date of termination vest and become immediately exercisable in accordance with the terms of the Option grant agreements ("Vested Options") and (z) Executive shall be entitled to the 1997 Option Loan Forgiveness as set forth in Section 4(b)(ii) hereof. Any outstanding balance (principal and interest) of the Residence Loan and any other loans made to Executive (except for the 1997 Options Loans which shall be forgiven as set forth in the paragraph above) by ICH or any of the other Companies shall become due on the date of such termination and shall be payable in a single sum payment. Any amounts owed by Executive to ICH or the other Companies hereunder shall be set off against any amounts payable from ICH or the other Companies to the Executive. In the event Executive terminates his employment within the six month period on or immediately following a Change in Control which constitutes a termination for Good Reason under this Agreement pursuant to Section 5(a)(iv)(C), Executive shall be entitled to receive from ICH an additional lump sum cash payment in an amount sufficient to pay any excise taxes which may be imposed on Executive pursuant to Section 4999 of the Code (or any successor provisions) plus any excise or income tax liability on the gross up payment itself so that on a net after tax basis Executive shall be in the same position as if the excise tax under Section 4999 of the Code (or any successor provisions) had not been imposed. In the event Executive is terminated by ICH without Cause or due to Executive's Disability, or Executive terminates his employment with ICH for Good Reason, Executive shall have no duty to mitigate the amount of the payment received pursuant to this Section 6(a), it being understood that Executive's acceptance of other employment shall not reduce ICH's or the other Companies' obligations hereunder. (b) Death. If Executive's employment is terminated due to death of Executive (pursuant to Section 5(a)(ii)), Executive's estate or beneficiary(ies), as the -12- case may be, shall be entitled to the proceeds of the key man life insurance policy currently held by ICH (the "Death Benefit"). In the event that the Death Benefit exceeds the sum of (i) sixty percent (60%) of the value of the Severance Payment and (ii) the outstanding balance (principal and interest) of the Residence Loan and any other loans made to Executive (except the 1997 Option Loans) by ICH or any of the other Companies ((i) and (ii) being collectively referred to as, the "Target Death Benefit"), such excess amount shall be due and payable by the Executive's estate or beneficiary(ies) to ICH or the other Companies, as the case may be, on the date of such termination in a single sum payment; provided, however, that the amount of such payment by the Executive's estate or beneficiary(ies) shall not exceed the outstanding balance (principal and interest) of the Residence Loan and any other loans made to Executive (except the 1997 Option Loans) by ICH or any of the other Companies. In the event that the Death Benefit is less than the Target Death Benefit, ICH shall pay the amount of such difference to the Executive's estate or beneficiary(ies) on the date of such termination in a single sum payment. In addition, Executive's estate or beneficiary(ies), as the case may be, shall be entitled to receive Executive's Prior Bonus Payment, Vested Options, Expense Reimbursement, and the 1997 Option Loan Forgiveness as set forth in Section 4(b)(ii) hereof and Executive's spouse and covered children shall be entitled to receive Fringe Benefit Continuation to the extent applicable. Any amounts owed by Executive's estate or beneficiary(ies) to ICH or any of the other Companies hereunder shall be set off against any amounts payable from the Companies to the Executive's estate or beneficiary(ies), as the case may be. (c) Termination With Cause or Voluntary Quit. If ICH terminates Executive's employment for Cause (pursuant to Section 5(a)(i)) or in the event Executive voluntarily terminates his employment without Good Reason (pursuant to Section 5(a)(vi)) ("Voluntary Quit"), Executive shall be entitled to his Annual Base Salary through the date of the termination of such employment and Executive shall be entitled to any bonuses which have been earned but not paid prior to such termination. Executive shall not be entitled to any other bonuses. Executive's additional benefits specified in Section 2 shall terminate at the time of such termination and the entire outstanding balance (principal and interest) of the Residence Loan, the 1997 Option Loans and any other loans from ICH or any of the other Companies to Executive shall be due and owing on date of such termination. Any amounts owed by Executive to ICH or the other Companies hereunder shall be set off against any amounts payable from the Companies to the Executive. Additionally, Executive shall be entitled to all Options that have vested as of the date of such termination. All outstanding Options, which have not vested, if any, as of date of such termination shall be forfeited, and if the termination is for Cause, no further payments pursuant to Section 3(b) shall be made to Executive. (d) Termination by ICH Upon Change in Control. If ICH terminates Executive's employment for any reason in connection with a Change in Control which is -13- not approved by the Continuing Directors of ICH, Executive shall receive from ICH in one lump sum, payable on the consummation of the Change in Control an amount equal to the Severance Payment, the Prior Bonus Payment and the Expense Reimbursement. The aforesaid amount shall be payable in cash without discount for early payment on the consummation of such Change in Control. In addition, any outstanding balances (principal and interest) of the Residence Loan, the 1997 Option Loans and any other loans made by ICH and any of the other Companies to Executive shall be forgiven on the consummation of such Change in Control. Executive shall be entitled to his Vested Options and Executive (and his spouse and children) shall be entitled to Fringe Benefit Continuation. In addition to the aforesaid cash payment, ICH shall pay Executive, on the consummation of the Change in Control, in one lump sum, a cash payment (i) in an amount sufficient to cover the full tax consequences of the forgiveness of any loans so that on a net after tax basis Executive shall be the same as if no taxable events had occurred upon such forgiveness (ii) in an amount sufficient to pay any excise taxes which may be imposed on Executive pursuant to Section 4999 of the Code (or any successor provisions) plus any excise or income tax liability on the gross up payment itself so that on a net after tax basis Executive shall be the same as if the excise tax under Section 4999 of the Code (or any successor provisions) had not been imposed. In the event Executive is terminated by ICH in connection with a Change in Control which is not approved by the Continuing Directors of ICH, Executive shall have no duty to mitigate the amount of the payment received pursuant to this Section 6(d), it being understood that Executive's acceptance of other employment shall not reduce the Companies obligations hereunder. (e) Vesting Trust. At Executive's option, the Companies shall establish a vesting trust into which the Companies shall, to the extent economically feasible, contribute and/or pledge assets to secure their severance obligations to Executive under this Agreement. 7. Successors and Assigns. (a) This Agreement shall be binding upon and inure to the benefit of ICH, its successors and assigns. ICH shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all its assets to expressly assume and agree to perform this Agreement in the same manner and to the same extent ICH would be required to perform if no such succession had taken place. (b) Executive agrees that this Agreement is personal to him and may not be assigned by him other than by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representative. 8. Joint and Several Liability. -14- (a) No Duplication of Payments. The Companies shall be jointly and severally liable for any amounts payable to Executive under this Agreement. Any amounts payable to Executive shall be paid in the first instance by ICH, and to the extent not paid by ICH shall be paid by the other Companies. In no event shall any amount payable pursuant to this Agreement be paid by ICH and any other Company, or any two or more Companies and Executive shall not be entitled to receive duplicate benefits or payments under any of the provisions of this Agreement. (b) New Subsidiaries. Any subsidiary of the Companies that is formed or acquired on or after the date hereof shall be required to become a signatory to this Agreement and shall become jointly and severally liable with the Companies for the obligations hereunder. (c) Sale of Subsidiaries. Upon the sale of the stock or substantially all of the assets of any subsidiary of the Companies, which is approved by the ICH Board, such subsidiary shall be automatically released from its obligations hereunder and shall not be considered as having any continuing liability for the obligations hereunder, and Executive shall be released from his obligations to such subsidiary hereunder. 9. Governing Law. This Agreement shall be construed in accordance with, and its validity, interpretation, performance and enforcement and shall be governed by, the laws of the State of California without regard to conflicts of law principles thereof. 10. Entire Agreement. (a) This instrument contains the entire understanding and agreement among the parties relating to the subject matter hereof, except as otherwise referred to herein, and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof. The parties recognize that the Prior Agreement has been amended and restated in its entirety by this Agreement and the terms of the Prior Agreement are of no further force and effect. (b) Neither this Agreement nor any provisions hereof may be waived or modified, except by an agreement in writing signed by the party(ies) against whom enforcement of any waiver or modification is sought. 11. Provisions Severable. In case any one or more of the provisions of this Agreement shall be invalid, illegal or unenforceable in any respect, or to any extent, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 12. Notices. Any notice required or permitted to be given under the provisions of this Agreement shall be in writing and delivered by courier or personal delivery, facsimile transmission (to be followed promptly by written confirmation mailed -15- by certified mail as provided below) or mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: If to ICH or any of the other Companies: ICH Corporation 9255 Towne Centre Drive Suite 600 San Diego, California 92121 Attention: Corporate Secretary Facsimile Number: (619) 535-1634 With a copy to: John A. Bicks, Esq. c/o Pryor Cashman Sherman & Flynn LLP 410 Park Avenue New York, NY 10022 Facsimile Number: (212) 326-0806 If to Executive: Mr. James Arabia 4230 Arguello Street San Diego, California 92103 Facsimile Number: (619) 298-3212 If delivered personally, by courier or facsimile transmission (confirmed as aforesaid and provided written confirmation and receipt is obtained by the sender), the date on which a notice is delivered or transmitted shall be the date on which such delivery is made. Notices given by mail as aforesaid shall be effective and deemed received upon the date of actual receipt or upon the third business day subsequent to deposit in the U.S. mail, whichever is earlier. Either party hereto may change its or his address specified for notices herein by designating a new address by notice in accordance with this Section 12. 13. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and both of which taken together shall constitute one and the same agreement. -16- IN WITNESS WHEREOF, the Companies and Executive have executed this Agreement as of the date first above written. EXECUTIVE ICH CORPORATION /s/ James R. Arabia /s/ John A. Bicks - -------------------- ---------------------------- James R. Arabia Name: John A. Bicks Title: Senior Vice President and General Counsel SYBRA, INC. /s/ John A. Bicks ---------------------------- Name: John A. Bicks Title: Senior Vice President and General Counsel SYBRA OF CALIFORNIA, INC. /s/ John A. Bicks ---------------------------- Name: John A. Bicks Title: Senior Vice President and General Counsel LYON'S OF CALIFORNIA, INC. /s/ John A. Bicks ---------------------------- Name: John A. Bicks Title: Senior Vice President and General Counsel CARE FINANCIAL CORP. /s/ John A. Bicks ---------------------------- Name: John A. Bicks Title: Senior Vice President and General Counsel -17- EX-27 4 I.C.H. CORPORATION FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 0000049588 I.C.H. Corporation Financial Data Schedule $US 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 9,235 0 1,293 0 2,828 18,966 40,141 4,923 113,466 26,425 0 0 0 28 15,026 113,466 138,315 140,032 8,592 128,938 0 0 6,035 5,059 2,143 2,916 388 0 0 3,304 1.26 1.14
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