10-Q 1 a2048422z10-q.txt 10-Q -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2001 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 No.) incorporation or organization) 9255 TOWNE CENTRE DRIVE SUITE 600 SAN DIEGO, CALIFORNIA 92121 (Address of principal executive offices) (Zip code)

Registrant's telephone number, including area code: (858) 587-8533 ------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes /X/ No / / Number of shares of common stock outstanding on March 31, 2001: 2,820,386 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- I.C.H. CORPORATION AND SUBSIDIARIES INDEX

2 I.C.H. CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AMOUNTS)

The accompanying Notes are an integral part of the Consolidated Financial Statements. 3 I.C.H. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS--UNAUDITED

The accompanying Notes are an integral part of the Consolidated Financial Statements. 4 I.C.H. CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS--UNAUDITED (IN THOUSANDS)

The accompanying Notes are an integral part of the Consolidated Financial Statements. 5 I.C.H. CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS EXCEPT SHARE AMOUNTS) NOTE 1. BUSINESS PREPARATION OF INTERIM FINANCIAL STATEMENTS The Consolidated Interim Financial Statements of I.C.H. Corporation (the "Company") and Subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). These Consolidated Interim Financial Statements include estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the amounts of revenues and expenses. Actual results could differ from those estimates. In the opinion of management, these statements include all adjustments necessary for a fair presentation of the results of all interim periods reported herein. All adjustments are of a normal recurring nature unless otherwise disclosed. Certain information and footnote disclosures prepared in accordance with generally accepted accounting principles have been either condensed or omitted pursuant to SEC rules and regulations. The Company believes, however, that the disclosures made are adequate for a fair presentation of results of operations, financial position and cash flows. These Consolidated Interim Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company's latest annual report on Form 10-K. BUSINESS AND PRESENTATION The accompanying Consolidated Interim Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, principally Sybra, Inc. ("Sybra"). All significant intercompany accounts and transactions have been eliminated. Certain amounts from prior periods have been reclassified to conform to the current year presentation. NOTE 2. EQUITY AND EARNINGS PER COMMON SHARE Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during each period. Diluted computations include dilutive common share equivalents.

Basic income from continuing operations per share is computed based on the weighted-average number of common shares outstanding during the quarter. Because of the net loss for the quarter 6 ended March 31, 2001, basic and diluted loss per share are calculated based on the same weighted average number of shares outstanding. NOTE 3. CONTINGENCIES LEGAL PROCEEDINGS A former Lyon's restaurant manager has filed a lawsuit on behalf of himself and others allegedly similarly situated, in Superior Court for Sacramento County, California seeking, among other things, overtime compensation. The action, entitled WILLIAM SHIELDS V. LYON'S RESTAURANTS, INC. ET AL., was originally filed on April 27, 2000 and seeks certification of a class of plaintiffs consisting of current and former Lyon's restaurant managers employed by Lyon's or by the former owner of the Lyon's chain. The suit alleges that Lyon's required managers to spend more than 50% of their working time performing non-management tasks, thus entitling them to overtime compensation. The Company contends that Lyon's properly classifies its managers as salaried employees, who are thereby exempt from the payment of overtime compensation. The Company has thus far and will continue to defend this suit vigorously. While the ultimate legal and financial liability of the Company and/or its subsidiaries with respect to this action cannot be estimated with certainty at this time, the Company has recorded, as a liability, a provision for its estimate of a probable amount of loss related to this suit. Management believes it unlikely that the ultimate liability for this suit will materially exceed the recorded liability at March 31, 2001. 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. GUARANTEE OF FORMER SUBSIDIARY TERM DEBT The Company sold its Lyon's subsidiary on January 13, 2001. That transaction requires the Company to remain contingently liable on certain Lyon's term debt assumed by the purchaser. The principal balance of that term debt as of March 31, 2001 was approximately $12,956. However, the purchaser has agreed to indemnify the Company for up to $3.0 million (subject to certain reductions as set forth in the stock purchaser agreement) in the event that the Company is required to make any payments on account of the assumed indebtedness. Should the Company be required to make payment on this assumed indebtedness, such payment could have a material adverse affect on the Company. NOTE 4. SUBSEQUENT EVENT On April 30, 2001, the Company's primary subsidiary, Sybra, Inc., acquired 21 Arby's restaurants located in and around Detroit, Michigan. The purchase price for the acquisition was $18.3 million, which was financed through a combination of leasehold mortgage financing and a note from the seller. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. GENERAL The Company conducts its restaurant operations principally through a wholly-owned subsidiary, Sybra, Inc. Restaurant costs and expenses include all direct costs, including direct labor, occupancy costs, advertising expenses, royalty payments, expenditures for repairs and maintenance, and workers' compensation, casualty and general liability insurance costs. Advertising fees paid by the Company's Sybra subsidiary to the AFA Service Corporation, a non-profit association of Arby's restaurant operators, to develop and prepare advertising materials and to undertake marketing research, are equal to 0.7% of restaurant sales. In addition, the Company operates its restaurants pursuant to licenses which require the Company to pay Arby's, Inc. a royalty based upon percentages of its restaurant sales (presently an aggregate of approximately 3.2% of the Company's restaurant sales). The royalty rate for new restaurants (currently 4.0%) will result in an increase in the Company's aggregate royalty rate 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.

8 COMPARISON OF THE QUARTER ENDED MARCH 31, 2001 AND THE QUARTER ENDED MARCH 31, 2000. RESTAURANT SALES--Restaurant sales for the quarter ended March 31, 2001 were $41.3 million, an increase of $3.4 million, or 8.9%, over the prior year comparable period. This increase is the result of sales from new store openings and store acquisitions, offset by a same store sales decrease of 4.8%. RESTAURANT COSTS AND EXPENSES--Restaurant costs and expenses were $35.7 million, or 86.4% of sales for the quarter ended March 31, 2001, as compared to $30.9 million, or 81.5% of sales, for the first quarter of 2000, an increase of $4.8 million due to the sales increase explained above. As a percentage of sales, costs increased primarily as a result of lower same store sales volumes and inflation in the cost of food, labor, utilities and other restaurant operating costs. GENERAL AND ADMINISTRATIVE COSTS--General and administrative costs and expenses were $3.1 million, or 7.6% of sales for the quarter ended March 31, 2001, as compared to $2.9 million, or 7.6% of sales for the first quarter of 2000. The increase was primarily due to increases in regional staff levels to support the Company's newly opened Arby's units. DEPRECIATION AND AMORTIZATION--Depreciation and amortization expense was $1.7 million, or 4.2% of sales for the quarter ended March 31, 2001, as compared to $1.3 million, or 3.4% of sales in the first quarter of 2000. This increase was due to additional depreciation expense associated with the Company's newly opened and acquired Arby's units. INTEREST EXPENSE--Interest expense was $2.3 million, or 5.6% of sales for the quarter ended March 31, 2001, as compared to $2.0 million, or 5.2% of sales in the first quarter of 2000, an increase of $356,000 primarily as a result of debt incurred in connection with new store openings and store acquisitions. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity needs arise from debt service on indebtedness incurred in connection with the original acquisition of Sybra, debt service on built and acquired Arby's units, operating lease requirements and the funding of capital expenditures primarily for new store openings. As of March 31, 2001, the Company had total long-term debt of $88.2 million, which included $25.4 million under a term facility with Atherton Capital Incorporated (the "Atherton Loan"), $15.1 million under three term loans with FINOVA Capital Corporation (the "FINOVA Loans"), a $7.0 million line of credit with FINOVA and certain other indebtedness totaling $40.7 million. The Atherton Loan has a weighted-average maturity of 12.5 years (of which approximately 8.5 years remain), bears interest at 10.63%, requires monthly payments of principal and interest, is collateralized 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 FINOVA Loans have original maturities of 10 to 15 years, interest rates ranging from 10.10% to 10.88%, require monthly payments of principal and interest and are collateralized by certain restaurant assets as defined in the respective loan agreements. The $7.0 million line of credit with FINOVA requires monthly payments of interest only equal to the prime rate plus 2.0% through June, 2003, at which time any unpaid balance can be paid or converted to a term loan. If converted, the term loan requires monthly payments of principal and interest through June, 2010. On January 13, 2001 the Company sold its Lyon's subsidiary. The sales price for that transaction was $16.2 million, which consisted principally of the assumption of existing Lyon's indebtedness. The Company will remain secondarily liable for a significant portion of that assumed indebtedness. However, the purchaser has agreed to indemnify the Company for up to $3.0 million (subject to certain reductions as set forth in the stock purchase agreement) in the event that the Company is required to make any payments on account of the assumed indebtedness. Should the Company be required to 9 make payment on this assumed indebtedness, such payment could have a material adverse effect on the Company. The Company's primary sources of liquidity have been the operation of the restaurants owned by its principal operating subsidiary, Sybra, and debt and lease financing. In the future, the Company's liquidity and capital resources will depend primarily on the operations and cash flow of Sybra. Sybra, like most restaurant businesses, is able to operate with nominal or deficit working capital because all sales are for cash and inventory turnover is rapid. Renovation and/or remodeling 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. During 2000 and in the first quarter of 2001, the restaurant industry encountered generally tightening credit markets, including those markets which have historically financed new restaurant development. The condition of those credit markets could adversely affect the Company's ability to secure adequate financing on acceptable terms for new restaurant construction and/or acquisition, and could in turn impact the Company's ability to meet its obligations under the Development Agreement. The Company also incurred significant cash charges as a result of payments required to be made in connection with (1) the departure of the former CEO in June, 2000, and (2) the disposition of the Lyon's subsidiary in January, 2001. Despite these charges, and although no assurances can be given, the Company believes that cash generated from operations will be adequate to meet its needs for the foreseeable future. ITEM 5. OTHER INFORMATION On January 13, 2001 the company completed the sale of its Lyon's of California, Inc. subsidiary. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: None (b) A Current Report on Form 8-K, dated January 26, 2001, was filed by the Company during the quarter ended March 31, 2001. Items 2 and 7 were reported thereon. A Current Report on Form 8-K/A, dated March 30, 2001, was filed by the Company during the quarter ended March 31, 2001. Items 2 and 7 were reported thereon. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, I.C.H. Corporation has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: May 14, 2001 I.C.H. CORPORATION By: ----------------------------------------- JOHN A. BICKS CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER By: ----------------------------------------- ROBERT H. DRECHSLER CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER By: ----------------------------------------- GLEN V. FRETER CHIEF FINANCIAL OFFICER

ICH CORP /DE/ 10-Q