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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-29357
PROSPECTUS
PACKAGED ICE, INC.
OFFER TO EXCHANGE
12% SENIOR NOTES DUE 2004, SERIES B
FOR ALL OUTSTANDING 12% SENIOR NOTES DUE 2004, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON OCTOBER 6, 1997, UNLESS EXTENDED.
THE 12% SENIOR NOTES DUE 2004, SERIES B, WILL BE FULLY AND UNCONDITIONALLY ON A
JOINT AND SEVERAL BASIS GUARANTEED BY THE SUBSIDIARIES OF PACKAGED ICE, INC.
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Packaged Ice, Inc., a Texas corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying letter of transmittal (the "Letter of Transmittal," and
together with this Prospectus, the "Exchange Offer"), to exchange $1,000
principal amount of its 12% Senior Notes due 2004, Series B (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement (as defined herein)
of which this Prospectus constitutes a part, for each $1,000 principal amount of
its outstanding 12% Senior Notes due 2004, Series A (the "Old Notes"), of which
$50,000,000 principal amount is outstanding. The form and terms of the Exchange
Notes are identical in all material respects to the form and terms of the Old
Notes except for certain transfer restrictions and registration rights relating
to the Old Notes. The Exchange Notes will evidence the same debt as the Old
Notes and will be issued under and be entitled to the benefits of the Indenture
(as defined herein). The Exchange Notes and the Old Notes are collectively
referred to herein as the "Notes."
The Notes will be senior unsecured obligations of the Company, ranking pari
passu in right of payment with all senior Indebtedness (as defined) of the
Company and senior to all future Subordinated Indebtedness (as defined) of the
Company. The Notes will be unconditionally and fully guaranteed (the "Subsidiary
Guarantees") on a senior unsecured basis by the Company's principal operating
subsidiaries, which comprise all of the Company's direct and indirect
subsidiaries (the "Subsidiary Guarantors"), and the Subsidiary Guarantees will
rank pari passu in right of payment with all senior Indebtedness of the
Subsidiary Guarantors and senior to all future Subordinated Indebtedness of the
Subsidiary Guarantors. The Subsidiary Guarantees may be released only in the
event of (i) a sale or disposition (whether by merger, stock purchase, asset
sale or otherwise) of a particular Subsidiary Guarantor to an entity which is
not a subsidiary of the Company or (ii) a particular Subsidiary Guarantor
becoming an Unrestricted Subsidiary (as defined herein). The Notes and
Subsidiary Guarantees will be effectively subordinated to secured Indebtedness
of the Company and the Subsidiary Guarantors, respectively, to the extent of any
security interest in assets of the Company and Subsidiary Guarantors, including
any Indebtedness under the Senior Credit Facility (as defined), which is secured
by liens on substantially all of the assets of the Company and the Subsidiary
Guarantors. At March 31, 1997, giving pro forma effect to the Acquisitions (as
defined) and the related financings, the Notes
(Cover continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE
CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 5, 1997
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and the Subsidiary Guarantees would have been effectively subordinated to no
secured Indebtedness of the Company and the Subsidiary Guarantors. The indenture
governing the Notes (the "Indenture") will permit the Company and its
subsidiaries to incur additional Indebtedness in the future, subject to certain
limitations. In the event of a Change of Control, the Company will be required,
subject to certain conditions, to make an offer to purchase all of the Notes at
101% of the principal amount thereof, plus accrued and unpaid interest thereon
to the date of purchase; however, there can be no assurance that in the event of
a change of Control the Company will have or will have access to sufficient
funds to repurchase the Notes. See "Description of Notes -- Ranking and
Guarantees," "-- Change of Control" and "-- Certain Definitions."
The Company will accept for exchange any and all Old Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the Exchange
Offer expires, which will be October 6, 1997, unless the Exchange Offer is
extended. See "The Exchange Offer -- Expiration Date; Extensions; Amendment."
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the business day prior to the Expiration Date (as defined herein),
unless previously accepted for exchange. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered for exchange.
However, the Exchange Offer is subject to certain conditions which may be waived
by the Company and to the terms and provisions of the Registration Rights
Agreement (as defined herein). Old Notes may be tendered only in denominations
of $1,000 principal amount and integral multiples thereof. The Company has
agreed to pay the expenses of the Exchange Offer. See "The Exchange Offer."
The Exchange Notes will bear interest at the rate of 12% per annum, payable
semi-annually on April 15 and October 15 of each year, commencing October 15,
1997. Holders of Exchange Notes of record on October 1, 1997 will receive
interest on October 15, 1997 from the date of issuance of the Exchange Notes,
plus an amount equal to the accrued interest on the Old Notes from the date of
issuance of the Old Notes, April 17, 1997, to the date of exchange thereof.
Interest on the Old Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
The Old Notes were sold by the Company on April 17, 1997 to the Initial
Purchaser (as defined herein) in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Old
Notes were thereupon offered and sold by the Initial Purchaser only to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act) and to a limited number of institutional "accredited investors" (as defined
in Rule 501(a)(1),(2),(3) or (7) under the Securities Act), each of whom agreed
to comply with certain transfer restrictions and other conditions. Accordingly,
the Old Notes may not be offered, resold or otherwise transferred unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy the obligations of the Company
under the Registration Rights Agreement entered into with the Initial Purchaser
in connection with the offering of the Old Notes. See "The Exchange Offer,"
"Description of Notes," and "Registration Rights; Additional Interest."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission" or "SEC") to third parties, including
Exxon Capital Holdings Corporation, SEC No-Action Letter (available April 13,
1989), Morgan Stanley & Co. Inc., SEC No-Action Letter (available June 5, 1991)
(the "Morgan Stanley Letter") and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by the respective holders thereof (other than a "Restricted Holder,"
being (i) a broker-dealer who purchased Old Notes exchanged for such Exchange
Notes directly from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act or (ii) a person that is an
affiliate of the Company within the meaning of Rule 405 under the Securities
Act), without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holder is not
participating in, and has no arrangement with any person to participate in, the
distribution (within the meaning of the Securities Act) of such Exchange Notes.
Eligible holders wishing to accept the Exchange Offer must represent to the
Company that such conditions have been met. Holders who tender Old Notes in the
Exchange Offer with the intention to participate in a distribution of the
Exchange Notes may not rely upon the Morgan Stanley Letter or similar no-action
letters. See "The Exchange Offer -- General." Each broker-
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dealer that receives Exchange Notes for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. A broker-dealer that delivers such a prospectus
to purchasers in connection with such resales will be subject to certain of the
civil liability provisions under the Securities Act and will be bound by the
provisions of the Registration Rights Agreement (including certain
indemnification rights and obligations). This Prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that it will make
this Prospectus and any amendment or supplement to this Prospectus available to
any broker-dealer for use in connection with any such resale for a period of up
to 180 days after consummation of the Exchange Offer. See "Plan of
Distribution."
The Company will not receive any proceeds from the Exchange Offer.
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity of
any markets that may develop for the Exchange Notes or as to the ability of or
price at which the holders of Exchange Notes would be able to sell their
Exchange Notes. Future trading prices of the Exchange Notes will depend on many
factors, including, among others, prevailing interest rates, the Company's
operating results and the market for similar securities. The Company does not
intend to apply for listing of the Exchange Notes on any securities exchange.
Jefferies & Company, Inc. (the "Initial Purchaser") has informed the Company
that it currently intends to make a market for the Exchange Notes. However, it
is not so obligated, and any such market making may be discontinued at any time
without notice. Accordingly, no assurance can be given that an active public or
other market will develop for the Exchange Notes or as to the liquidity of or
the trading market for the Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (which term shall encompass any amendment thereto) under the Securities Act,
for the registration of the Exchange Notes offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement, certain items of which
are contained in the financial statement schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement, including the financial statement schedules and exhibits filed as a
part thereof. Statements made in this Prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits thereto
filed by the Company with the Commission may be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following regional
offices of the Commission: Seven World Trade Center, Suite 1300, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such materials can be obtained by mail from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition the Commission
maintains a site on the World Wide Web that contains reports, proxy and
information statements and other information filed electronically by the Company
with the Commission which can be accessed over the Internet at
http://www.sec.gov.
As a result of this Exchange Offer the Company will be subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). As long as the Company is
subject to such periodic reporting and informational requirements, it will
furnish all reports and other information required thereby to the Commission and
pursuant to the Indenture will furnish copies of such reports and other
information to the Trustee.
The Company has agreed that, whether or not it is required to do so by the
rules and regulations of the Commission (and within 15 days of the date that is
or would be prescribed thereby), for so long as any of the Notes remain
outstanding, it will furnish to the Holders of Notes (excluding exhibits, which
will be available upon request) and file with the Commission (unless the
Commission will not accept such a filing) (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants, and (ii) all
reports that would be required to be filed with the SEC on Form 8-K if the
Company were required to file such reports. In addition, for so long as any of
the Notes remain outstanding, the Company has agreed to make available, upon
request, to any prospective purchaser of the Notes and beneficial owner of the
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act. Information may be obtained from the
Company at 8572 Katy Freeway, Suite 101, Houston, Texas 77024 (telephone number:
(713) 464-9384), Attention: Corporate Secretary.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH
TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements of the Company, including the notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, references in this Prospectus to a
fiscal year shall mean the fiscal year ending December 31 of such year. As used
herein, unless the context otherwise requires, the terms the "Company" and
"Packaged Ice" refers to Packaged Ice, Inc. and its consolidated subsidiaries.
Investors are urged to read this Prospectus in its entirety, including, without
limitation, the information set forth under "Risk Factors."
THE COMPANY
The Company is a leading manufacturer and distributor of packaged ice and
has developed a proprietary ice machine which produces, packages and stores ice
through an automated, self-contained process (the "Packaged Ice System").
Currently operating in Arizona, California, Florida, Louisiana, Nevada, New
Mexico, Oklahoma, Tennessee and Texas, the Company is pursuing a consolidation
strategy within the highly fragmented packaged ice industry. On April 17, 1997,
the Company completed acquisitions of Mission Party Ice, Inc. ("Mission"),
Southwest Texas Packaged Ice, Inc. ("STPI") and Southwestern Ice, Inc. ("SWI").
The Company has grown significantly, primarily through these strategic
acquisitions and the placement of Packaged Ice Systems. The Packaged Ice System,
which is typically installed in supermarkets, provides the Company with several
competitive advantages, including substantially higher margins, reduced
production and distribution costs and superior product quality. The Company has
fourteen traditional ice manufacturing facilities serving over 12,000 customer
locations and, at June 30, 1997, had an installed base of 886 Packaged Ice
Systems located primarily in Albertsons, Kroger, HEB Pantry, Wal-Mart
Supercenters, Super K-Mart stores, and supermarkets affiliated with Fleming
Companies. Management believes that the Company is the second largest packaged
ice company in the United States with pro forma revenues and earnings before
interest, income taxes, depreciation and amortization ("EBITDA") for fiscal 1996
of $26.2 million and $4.6 million, respectively. See "Unaudited Pro Forma
Combined Condensed Financial Statements," and "Selected Historical and Unaudited
Pro Forma Combined Financial Data."
THE INDUSTRY
Management estimates that the packaged ice industry has grown by
approximately 3% per annum during the past ten years to over $2.4 billion in
wholesale revenues in 1996. The packaged ice industry is highly seasonal, but on
a year-to-year basis remains stable, generally only affected by excessive mild
weather or rain within a region. The industry has historically been
characterized as highly fragmented with over 3,000 companies, consisting
primarily of "mom and pop" packaged ice companies, many of which are
undercapitalized. Management believes that the six largest ice manufacturers in
the southern and western U.S. account for approximately 6% of wholesale revenues
with the Company's largest competitor accounting for less than 3% of the market.
Traditional ice manufacturers produce and package ice at centrally-located
facilities and distribute to a limited market radius of approximately 100 miles,
mainly due to high shipping and product distribution costs. Efficient
distribution and customer concentration are important, as transportation is a
high cost component in the price of manufactured ice within a traditional ice
delivery system. It is difficult to ensure prompt and reliable delivery during
peak seasonal months in large markets with traditional ice delivery systems. As
a result, the ice business is primarily a regional service business. Management
believes that significant acquisition opportunities exist for those
service-oriented companies with superior ice delivery systems and significant
capital resources.
PACKAGED ICE SYSTEM
In 1994, the Company completed the development of its proprietary system
that utilizes state-of-the-art technology to produce, package and store ice
directly at customer locations. The Packaged Ice System consists of standard
Hoshizaki America, Inc. ("Hoshizaki") ice cubers, an ice merchandiser built to
the Company's specifications by Beverage Air Corporation ("Beverage Air") and a
bagging machine, the heart of the
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Packaged Ice System, manufactured by Lancer Corporation ("Lancer"), a
shareholder of the Company, under an exclusive equipment manufacturing
agreement. Lancer is an engineering and manufacturing company that is a primary
vendor of fountain soft drink dispensing machines for CocaCola, Inc. The
majority of bags used in the Packaged Ice System are manufactured to the
Company's specifications by Arrow Industries, Inc. ("Arrow"), a subsidiary of
ConAgra Corporation. The Packaged Ice System is capable of producing up to
40,000 bags of ice per year and is most frequently used in large supermarkets.
The latest generation of the Packaged Ice System is equipped with remote
communication capability which allows the Company's national service center to
track production, monitor the systems, and diagnose and correct system errors
through the use of a central processing unit. The Packaged Ice Systems are
serviced by trained representatives and are designed to provide a high degree of
reliability and serviceability through the use of interchangeable parts and a
durable, stainless steel cabinet. To guard against product contamination and
satisfy consumer demand for high quality, sanitary ice, the Packaged Ice System
was engineered to meet all specifications delineated by the National Sanitation
Foundation ("NSF") for ice production and contains a patented automatic
sanitizing system. In addition, the Packaged Ice System is U.L. approved. The
Company began development of the Packaged Ice System in 1990, and experienced
cumulative losses from continuing operations of $1.4 million during the first
four years, which were devoted primarily to research and development. In
addition, management estimates that the Company's strategic partners, Hoshizaki,
Lancer and Beverage Air, funded an aggregate of over $3.5 million of the
development of the Packaged Ice System.
The Packaged Ice System, when combined with traditional delivery methods,
provides the Company with significant advantages, including (i) higher operating
margins, due to significantly reduced production and distribution costs, (ii) a
delivery system designed to supply high volume locations and capable of cost-
effectively servicing a market in excess of 100 miles from its traditional ice
manufacturing facilities, and (iii) the ability to redistribute production from
its traditional ice facilities to additional customers as well as satisfy
seasonal peak demand at stores with Packaged Ice Systems. In addition, the
Packaged Ice System provides numerous advantages to the retailer including (i)
providing a continuous supply of ice, and thus reducing the frequency of product
shortages typical of traditional ice delivery, (ii) significantly reducing costs
associated with delivery and storage at the retail location, (iii) satisfying
consumer demand for a higher quality and more sanitary ice than typically found
with traditional ice delivery, (iv) effectively managing inventory through
computerized production tracking and dedicated technical support, and (v)
increasing safety by reducing "slip and fall" accidents. Management believes the
Packaged Ice System can significantly lower the price of a fully costed bag of
ice to a supermarket as compared to traditional ice delivery. Management
believes that the higher margins and quality of the Packaged Ice System has
enabled it to quickly gain market acceptance. At June 30, 1997, the Company had
an installed base of 886 Packaged Ice Systems, over 90% of which were placed in
supermarkets where the Company was not previously the primary source of packaged
ice. Management believes that the technology utilized in the Packaged Ice System
is unique with five existing and one pending patents covering the bagging
device, and that there are significant barriers to entry for new and existing
competitors with respect to the development of a competitive and reliable
machine that performs the same functions as the Packaged Ice System. See "Risk
Factors -- Competition."
BUSINESS STRATEGY
The Company's strategy is to become a leading consolidator in the packaged
ice industry and to maximize its revenues and cash flows by (i) expanding its
market presence by leveraging its proprietary ice machine technology, (ii)
entering new markets by making strategic acquisitions in the highly fragmented
traditional packaged ice industry, and (iii) reducing costs and exploiting
economies of scale.
Expand Market Presence Through Packaged Ice System. Through selective
placement of its proprietary Packaged Ice Systems, the Company will continue to
reduce transportation, storage and service costs, thereby overcoming traditional
geographical constraints inherent to traditional ice delivery. This strategy not
only provides significant cost savings to the Company but (i) allows for
expansion of its delivery radius beyond that of traditional ice manufacturers,
(ii) maximizes sales in existing markets by converting existing traditional ice
customers to the Packaged Ice System, thereby freeing-up manufacturing capacity
for new customers in the
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market area, and (iii) optimizes traditional production capacity utilization by
reducing ice shortages during peak demand seasons. The Company has expanded its
geographic scope by selling ice to major national and regional supermarket
chains including Albertson's, Kroger, HEB Pantry and supermarkets affiliated
with Fleming Companies, many of whom the Company has successfully convinced to
switch from traditional delivery to higher margin Packaged Ice Systems.
Acquire Traditional Ice Manufacturing Companies in Highly Fragmented
Industry. The Company believes that the highly fragmented packaged ice industry
contains numerous acquisition opportunities. The Company's acquisition strategy
is to target well-managed, traditional ice producers with favorable demographics
and significant customer bases in both new and current market areas. This
acquisition strategy is designed to allow the Company to gain market share
quickly and efficiently, provide for additional distribution channels through
which to place Packaged Ice Systems, and achieve greater economies of scale. In
determining which businesses may be suitable acquisition candidates, management
conducts demographic and competitive analyses and performs comprehensive due
diligence on the target's facilities, management, existing customer base, and
growth opportunities. Since April 17, 1997, the date the Old Notes were sold by
the Company, the Company has made capital expenditures of $2.3 million to
purchase certain assets that complement its core business and business
acquisitions of $3.45 million. In addition, the Company has entered into a
transaction pursuant to which Fiesta Fun Ice Co. ("Fiesta") has the option to
sell for $500,000 all Fiesta stock to the Company until January 1998, at which
time the Company then has the right to purchase for $500,000 all Fiesta stock
until June 1998. The Company is currently negotiating with several other ice
companies regarding potential acquisitions, but does not have a definitive
agreement in place with any of such companies.
Reduce Costs and Exploit Economies of Scale. The Company will continue to
seek reductions in operating costs and working capital requirements in its
existing operations, as well as in its future acquisitions, by (i) closing or
combining less efficient or redundant manufacturing and distribution facilities,
(ii) managing vendor relationships to ensure a high level of responsiveness and
favorable pricing, (iii) increasing market concentration of Packaged Ice Systems
to improve merchandising and servicing efficiencies, and (iv) consolidating
certain administrative and selling functions to eliminate redundancies and
excess costs. Since the Company is focusing its acquisition efforts on related
businesses, it anticipates that the customer base of any acquired business will
be similar to its own and therefore administrative areas such as management
information systems, accounting systems and customer support may be
consolidated.
The Company believes that it is well-positioned to execute its business
strategy given the depth, experience and ability of its management team. The
Company's executive officers are led by James F. Stuart, Chairman and Chief
Executive Officer, who founded Packaged Ice in 1990, and who has twelve years of
industry experience. Mr. Stuart is chiefly responsible for the development of
the Packaged Ice System. Other key management personnel are A.J. Lewis III,
President and Chief Operating Officer, and Steven P. Rosenberg, Vice Chairman.
Management (including shares attributable to directors serving at the direction
of certain investors) holds a 48% fully diluted equity interest in the Company.
The Company's shareholder group also includes Norwest Equity Partners V
("Norwest"), a partnership managed by Norwest Venture Capital Management, Inc.,
a venture capital firm with over $1 billion under management. Norwest is the
Company's largest shareholder and maintains board representation.
THE ACQUISITIONS
On April 17, 1997, Packaged Ice acquired SWI, Mission, and STPI
(collectively, the "Acquisitions"). SWI serves over 5,100 customer locations in
Arizona, California, New Mexico, Tennessee and Texas. STPI and Mission
(previously under common ownership) serve over 5,400 customer locations in South
Texas. The aggregate consideration paid by Packaged Ice for the Acquisitions was
approximately $29.2 million, consisting of approximately $6.9 million payable in
cash, $12.7 million in repayment of sellers' debt, and $9.6 million payable in
shares of Common Stock.
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THE PRIVATE PLACEMENT AND USE OF PROCEEDS
The Old Notes were sold by the Company on April 17, 1997 to the Initial
Purchaser and were thereupon offered and sold by the Initial Purchaser only to
certain qualified buyers. The $48 million net proceeds received by the Company
in connection with the sale of the Old Notes and warrants (the "Warrants") to
purchase an aggregate of 511,885 shares of the Company's $.01 par value common
stock ("Common Stock") were used to finance the cash portion of the purchase
price for the Acquisitions and certain related expenses, to repay outstanding
indebtedness, make capital expenditures and provide working capital for the
Company. The Warrants have an exercise price of $.01 per share, and are
exercisable at any time prior to the maturity date of the Notes. The Warrants
are not being registered in the Exchange Offer, but are subject to a
registration rights agreement. See "Private Placement," "Capitalization" and
"Description of Capital Stock and Warrants."
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $50,000,000 principal
amount of Exchange Notes for up to $50,000,000 principal amount of Old Notes.
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the Old Notes except that the Exchange Notes have been
registered under the Securities Act and will not contain certain transfer
restrictions and hence are not entitled to registration rights with respect to
the Exchange Notes. The Exchange Notes will evidence the same debt as the Old
Notes and will be issued under and be entitled to the benefits of the Indenture
governing the Old Notes. See "Description of Notes."
The Exchange Offer......... Pursuant to a registration rights agreement (the
"Registration Rights Agreement") by and among the
Company, the Subsidiary Guarantors and the Initial
Purchaser, the Company agreed to (i) file a
registration statement with the Commission (the
"Exchange Offer Registration Statement") with
respect to an offer to exchange the Old Notes (the
"Exchange Offer") for senior debt securities of the
Company with terms substantially identical to the
Old Notes (the "Exchange Notes") (except that the
Exchange Notes generally will not contain terms
with respect to transfer restrictions) within 60
days after the date of original issuance of the
Notes and (ii) use its best efforts to cause such
registration statement to become effective under
the Securities Act within 120 days after such issue
date. The Registration Statement of which this
Prospectus is a part constitutes such Exchange
Offer Registration Statement. In the event that
applicable law or interpretations of the staff of
the Commission do not permit the Company to effect
the Exchange Offer, or if certain holders of the
Old Notes notify the Company that they are not
permitted to participate in, or would not receive
freely tradeable Notes pursuant to, the Exchange
Offer, the Company will use its best efforts to
cause to become effective a registration statement
(the "Shelf Registration Statement") with respect
to the resale of the Notes and to keep the Shelf
Registration Statement effective until three years
after the date of original issuance of the Old
Notes. The interest rate on the Old Notes is
subject to increase under certain circumstances if
the Company is not in compliance with its
obligations under the Registration Rights
Agreement. See "Registration Rights; Additional
Interest."
Each $1,000 principal amount of Exchange Notes will
be issued in exchange for each $1,000 principal
amount of outstanding Old Notes. As of the date
hereof, $50,000,000 principal amount of Old Notes
are issued
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and outstanding. The Company will issue the
Exchange Notes to tendering holders of Old Notes on
or promptly after the Expiration Date.
Resale..................... The Company believes that the Exchange Notes issued
pursuant to the Exchange Offer generally will be
freely transferable by the holders thereof without
registration or any prospectus delivery requirement
under the Securities Act. See "The Exchange
Offer -- General" and "Plan of Distribution."
The Old Notes were not registered under the
Securities Act and unless so registered may not be
offered or sold except pursuant to an exemption
from, or in a transaction not subject to, the
registration requirements of the Securities Act.
See "Transfer Restrictions on the Old Notes."
Expiration Date............ 5:00 p.m., New York City time, on October 6, 1997,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date to which the Exchange Offer is extended. See
"The Exchange Offer -- Expiration Date; Extensions;
Amendments."
Procedures for Tendering
Old Notes................ Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with the Old Notes to be exchanged and any other
required documentation to the Exchange Agent at the
address set forth herein and therein or effect a
tender of Old Notes pursuant to the procedures for
book-entry transfer as provided for herein. See
"The Exchange Offer -- Procedures for Tendering."
Special Procedures for
Beneficial Holders....... Any beneficial holder whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on
beneficial holder's behalf. If such beneficial
holder wishes to tender directly, such beneficial
holder must, prior to completing and executing the
Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or
obtain a properly completed bond power from the
registered holder. The transfer of record ownership
may take considerable time. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes and
a properly completed Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely
basis, must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
business day prior to the Expiration Date,
5
<PAGE> 10
unless previously accepted for exchange. See "The
Exchange Offer -- Withdrawal of Tenders."
Termination of the Exchange
Offer.................... The Company may terminate the Exchange Offer if it
determines that the Exchange Offer violates any
applicable law or interpretation of the staff of
the SEC. Holders of Old Notes will have certain
rights against the Company under the Registration
Rights Agreement should the Company fail to
consummate the Exchange Offer. See "The Exchange
Offer -- Termination" and "Registration Rights;
Additional Interest."
Acceptance of Old Notes and
Delivery of Exchange
Notes.................... Subject to certain conditions (as summarized above
in "Termination of the Exchange Offer" and
described more fully in "The Exchange
Offer -- Termination"), the Company will accept for
exchange any and all Old Notes which are properly
tendered in the Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration Date. The
Exchange Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange
Offer -- General."
Exchange Agent............. U.S. Trust Company of Texas, N.A. is serving as
exchange agent (the "Exchange Agent") in connection
with the Exchange Offer. The mailing and hand
delivery address of the Exchange Agent is: U.S.
Trust Company of Texas, N.A., Attention: Corporate
Trust Department, 2001 Ross Avenue, 27th Floor,
Dallas TX 75201. For information with respect to
the Exchange Offer, the telephone number for the
Exchange Agent is (214) 754-1303 and the facsimile
number for the Exchange Agent is (214) 754-1255.
See "The Exchange Offer -- Exchange Agent."
Use of Proceeds............ There will be no cash proceeds payable to the
Company from the issuance of the Exchange Notes
pursuant to the Exchange Offer. See "Use of
Proceeds." For a discussion of the use of the net
proceeds received by the Company from the sale of
the Old Notes, see "Private Placement."
TERMS OF THE NOTES
Notes Outstanding.......... $50 million principal amount of 12% Senior Notes
due 2004.
Maturity Date.............. April 15, 2004.
Interest Rate and
Payment Dates............ The Notes will bear interest at the rate of 12% per
annum. Interest will accrue from the Issue Date and
will be payable semi-annually on April 15 and
October 15 of each year, commencing on October 15,
1997.
Holders of Exchange Notes of record on October 1,
1997 will receive interest on October 15, 1997 from
the date of issuance of the Exchange Notes, plus an
amount equal to the accrued interest on the Old
Notes from the date of issuance of the Old Notes,
April 17, 1997, to the date of exchange thereof.
Consequently, assuming the Exchange Offer is
consummated prior to the record date in respect of
the October 15, 1997 interest payment for the Old
Notes, holders who exchange their Old Notes for
Exchange Notes will receive the same interest
payment on October 15, 1997 that they would have
received had they not accepted the Exchange Offer.
Interest on the Old Notes accepted for exchange
6
<PAGE> 11
will cease to accrue upon issuance of the Exchange
Notes. See "The Exchange Offer -- Interest on the
Exchange Notes."
Optional Redemption........ The Notes will be redeemable, in whole or in part,
at the option of the Company at any time on or
after April 15, 2001 at the redemption prices set
forth herein, plus accrued and unpaid interest
thereon, if any, to the redemption date. In
addition, prior to April 15, 2000, up to an
aggregate of $17.5 million in principal amount of
the Notes are redeemable at the option of the
Company, in whole or in part, from time to time, at
112% of the principal amount thereof, plus accrued
and unpaid interest thereon to the redemption date,
with the net proceeds of a Public Equity Offering
provided that at least $32.5 million in aggregate
principal amount of Notes remains outstanding
immediately after such redemption. See "Description
of Notes -- Optional Redemption."
Change of Control.......... In the event of a Change of Control, the Company
will be required, subject to certain conditions, to
make an offer to purchase all of the Notes at 101%
of the principal amount thereof, plus accrued and
unpaid interest thereon to the date of purchase;
however, there can be no assurance that in the
event of a Change of Control the Company will have
or will have access to sufficient funds to
repurchase the Notes. See "Description of
Notes -- Change of Control."
Ranking and Guarantees..... The Notes will be senior unsecured obligations of
the Company that will rank senior in right of
payment to all Subordinated Indebtedness (as
defined) of the Company. The Notes will rank pari
passu in right of payment to all existing and
future senior Indebtedness (as defined) of the
Company. The Notes will be unconditionally
guaranteed on a senior basis by each of the
Company's Subsidiary Guarantors. The guarantee of
each such Subsidiary Guarantor will rank pari passu
in right of payment to all existing and future
senior Indebtedness of such Subsidiary Guarantor.
The Notes are unsecured, and holders of secured
Indebtedness of the Company, including the Senior
Credit Facility, will effectively rank prior to
Holders of the Notes with respect to the assets
securing such Indebtedness. The Indenture will
permit the Company and its subsidiaries to incur
additional indebtedness under certain
circumstances. See "Description of Notes -- Ranking
and Guarantees" and "Description of Senior Credit
Facility."
The Subsidiary Guarantees may be released under the
following circumstances. A Subsidiary Guarantee may
be terminated upon the sale or disposition (whether
by merger, stock purchase, asset sale or otherwise)
of a particular Subsidiary Guarantor to an entity
which is not a subsidiary of the Company, provided
that (i) such transaction complies with the
Indenture (including, without limitation,
provisions relating to restricted payment, asset
sales, and sale leaseback transactions, and
additional subsidiary guarantees) and (ii) such
termination shall occur only to the extent that all
obligations of such Subsidiary Guarantor under all
of its guarantees of, and under all of its pledges
of assets or other security interests which secure,
any other indebtedness of the Company shall also
terminate upon such release, sale or transfer. A
Subsidiary Guarantee may also be released by a
subsidiary of the Company becoming an Unrestricted
Subsidiary. The Board of Directors may designate
any subsidiary of the Company to be an Unrestricted
Subsidiary unless such subsidiary owns capital
stock of, or owns or holds any lien
7
<PAGE> 12
on any property of, any other subsidiary of the
Company which is not a subsidiary of the subsidiary
of the Company to be so designated or otherwise an
Unrestricted Subsidiary, provided that either (i)
the subsidiary of the Company to be so designated
has total consolidated assets of $100,000 or less
at the time of such designation or (ii) immediately
after giving pro forma effect to such designation,
the Company could incur $1.00 of additional
indebtedness pursuant to the terms of the Indenture
(which mandate that no default or event of default
shall have occurred and be continuing on the date
of the proposed incurrence of debt and that
immediately after giving effect to such proposed
incurrence the Company meets a particular fixed
charge coverage ratio or test). Consequently, any
Unrestricted Subsidiary would have insignificant
assets, or would be created only if the cited
charge coverage ratio would not be effected. See
"Description of Notes -- Ranking and Guarantees"
and -- "Certain Definitions."
Certain Covenants.......... The Indenture will contain certain covenants that,
among other things, limit the ability of the
Company and its Subsidiaries to pay dividends or
make distributions with respect to the Company's
capital stock or make certain other restricted
payments, to incur Indebtedness, to create liens,
to issue preferred or other capital stock of
subsidiaries, to sell assets, to permit
restrictions on dividends and other payments by
subsidiaries to the Company, to consolidate, merge
or sell all or substantially all of its assets, to
engage in transactions with affiliates, or to
engage in certain businesses. See "Description of
Notes -- Certain Covenants."
Original Issue Discount.... The Notes will be issued with original issue
discount for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
For additional information regarding the Notes, see "Description of Notes."
RISK FACTORS
An investment in the Units involves certain risks that should be considered
by a potential investor. See "Risk Factors."
8
<PAGE> 13
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, RATIO AND PERCENTAGE DATA)
The following table sets forth the selected historical financial data
derived from the audited financial statements of Packaged Ice as of and for the
three years ended December 31, 1996 and contains selected financial data derived
from the unaudited financial statements of Packaged Ice for the six months ended
June 30, 1996 and 1997. The unaudited financial statements of Packaged Ice as of
and for the six months ended June 30, 1996 and 1997 reflect all adjustments
necessary in the opinion of management (consisting only of normal recurring
adjustments) for a fair presentation of such data. The unaudited pro forma
combined selected financial data for the year ended December 31, 1996 and as of
and for the six months ended June 30, 1997 reflects operating and other
financial data as if (i) the Acquisitions and (ii) the issuance of the Old Notes
and Warrants and the application of the net proceeds therefrom had occurred at
January 1, 1996 and 1997, respectively. Pro forma balance sheet data is not
presented as the transactions in (i) and (ii) were consummated and reflected in
the historical June 30, 1997 balance sheet. The unaudited pro forma financial
data should not be considered indicative of actual results that would have been
achieved had the Acquisitions been consummated on the dates or for the periods
indicated and do not purport to indicate results of operations as of any future
date or for any future period. The following information should be read in
conjunction with the Consolidated Financial Statements of Packaged Ice,
including the notes thereto, "Unaudited Pro Forma Combined Condensed Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------- ------------------------------------
UNAUDITED
UNAUDITED PRO FORMA
PRO FORMA COMBINED
COMBINED JUNE 30,
1994 1995 1996 1996(4) 1996 1997 1997(4)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues............................. $ 784 $ 2,830 $ 4,427 $ 26,182 $ 2,128 $ 8,124 $ 11,917
Cost of goods sold................... 352 1,251 2,035 15,892 910 4,703 7,767
Gross profit......................... 432 1,579 2,392 10,290 1,218 3,421 4,150
Operating expenses(1)................ 974 1,515 1,981 5,792 838 2,182 3,335
Depreciation and amortization........ 224 751 1,456 4,584 675 1,826 2,825
Interest expense..................... 25 76 130 7,534 34 1,519 3,635
Other income (expense)............... 69 75 185 103 (13) 408 301
Loss from continuing operations...... (722) (688) (990) (7,517) (342) (1,698) (5,344)
OTHER FINANCIAL DATA:
Cash flows -- operating activities... $ (647) $ 148 $ 1,094 $ 235 $ (1,345)
Cash flows -- investing activities... (3,497) (2,961) (5,925) (2,273) (12,402)
Cash flows -- financing activities... 4,897 3,034 3,968 1,173 29,429
EBIT(2).............................. (697) (612) (860) $ 17 (308) (179) $ (1,709)
EBITDA(2)............................ (473) 139 596 4,601 367 1,647 1,116
Property additions................... 2,999 2,717 5,745 8,006 2,221 3,599 1,639
Revenue growth....................... 405.8% 261.0% 56.4% -- -- -- --
Gross margin......................... 55.1% 55.8% 54.0% 39.3% 57.2% 42.1% 34.8%
EBIT margin.......................... (88.9%) (21.6%) (19.4%) 0.0% (14.5)% (2.2)% (14.3)%
EBITDA margin........................ (60.3%) 4.9% 13.5% 17.6% 17.2% 20.3% 9.4%
Ratio of earnings to fixed
charges(3)......................... N/A N/A N/A 0.01x N/A N/A N/A
SUPPLEMENTAL DATA:
Loss per share of common stock....... $ (0.28) $ (0.26) $ (0.35) $ (2.17) $ (0.12) $ (0.53) $ (1.41)
Weighted average shares
outstanding........................ 2,614,681 2,682,261 2,826,371 3,466,228 2,826,371 3,231,789 3,791,071
BALANCE SHEET DATA:
Cash and equivalents................. $ 812 $ 1,033 $ 170 $ 15,853
Working capital (deficiency)......... 639 696 (1,228) 15,656
Total assets......................... 5,513 8,050 11,523 71,703
Total long-term debt, net of
discount........................... 566 211 3,582 44,725
Total preferred stock with put
redemption option.................. 2,497 2,497 3,223
Total common stock with put
redemption option.................. 1,972 1,972 1,972
Total shareholders' equity........... $ 4,427 $ 2,582 $ 1,597 $ 16,382
</TABLE>
- ---------------
(1) Excludes depreciation and amortization.
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBIT represents earnings before interest and income taxes. The
Company has included EBITDA and EBIT data (which are not measures of
financial performance under generally accepted accounting principles)
because it understands such data are used by certain investors to determine
a company's historical ability to service its indebtedness. EBITDA and EBIT
should not be considered by an investor as alternatives to net income, as
indicators of the Company's operating performance or as alternatives to cash
flow as measures of liquidity.
(3) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings from continuing operations before income taxes and
fixed charges. Fixed charges consist of interest expense. Earnings were not
sufficient during each fiscal year, quarter and pro forma period presented
to cover fixed charges. The deficiencies were $722,000 in 1994, $688,000 in
1995, $990,000 in 1996, $7,517,000 for pro forma combined 1996, $342,000 and
$1,698,000 for the six months ended June 30, 1996 and 1997, respectively,
and $5,344,000 for the pro forma combined six months ended June 30, 1997.
(4) Pro forma to reflect the Acquisitions as if they had each occurred at
January 1, 1996 and 1997, respectively, for the operating data. See
"Unaudited Pro Forma Combined Condensed Financial Statements."
9
<PAGE> 14
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") which represent the Company's
expectations and beliefs concerning future events that involve risks and
uncertainties, including those associated with the effects of national and
regional economic conditions. Investors are cautioned that all forward-looking
statements involve risks and uncertainty. Discussions containing such
forward-looking statements may be found in the material set forth under
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Unaudited Pro Forma Combined Condensed Financial Statements," "Business" and
"Description of Notes," as well as elsewhere herein. Actual results may differ
materially from those projected in the forward-looking statements. Although the
Company believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included in this Prospectus will prove to be accurate. Important factors that
could cause actual results to differ materially from the Company's expectations
are disclosed in this Prospectus. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.
The reader should note that initial public offerings are excluded from Section
27A of the Securities Act and Section 21E of the Exchange Act.
RISK FACTORS
The Securities offered hereby involve a high degree of risk. Prospective
purchasers should carefully consider the following factors, together with other
information contained herein, before purchasing the Securities offered hereby.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
The Company is highly leveraged, with substantial debt service in addition
to operating expenses and planned capital expenditures. At June 30, 1997 the
total non-subordinated Indebtedness of the Company was approximately $50.0
million, excluding unamortized debt issue costs. The Indenture will permit the
Company to incur up to $15.0 million of additional Indebtedness, or a greater
amount depending on the Company's Consolidated Fixed Charge Coverage Ratio (as
defined), up to $37.5 million of which may be secured. See "-- Senior Credit
Facility; Effective Subordination," "Description of Senior Credit Facility," and
"Description of Notes -- Certain Covenants."
The Company has historically operated at substantially lower levels of debt
than will be outstanding after giving effect to the foregoing transactions. The
Company's level of indebtedness will have several important effects on its
future operations, including, without limitation, (i) a substantial portion of
the Company's cash flow from operations must be dedicated to the payment of
interest and principal on its indebtedness, (ii) covenants contained in the
Company's Indenture or the Senior Credit Facility will require the Company to
meet certain financial tests, and other restrictions will limit its ability to
borrow additional funds or to dispose of assets, and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities, (iii) the Company's leveraged position will
substantially increase its vulnerability to adverse changes in general economic,
industry and competitive conditions, and (iv) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate and other purposes may be limited. The Company's ability to
meet its debt service obligations and to reduce its total indebtedness will be
dependent upon the Company's future performance, which will be subject to
general economic, industry and competitive conditions. There can be no assurance
that the Company's business will continue to generate cash flow at or above
current levels. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt, it may be required, among other
things, to seek additional financing in the debt or equity markets, to refinance
or restructure all or a portion of its indebtedness, including the Notes, to
sell selected assets, or to reduce or delay planned capital
10
<PAGE> 15
expenditures. There can be no assurance that any such measures would be
sufficient to enable the Company to service its debt, or that any of these
measures could be effected on satisfactory terms, if at all.
SENIOR CREDIT FACILITY; EFFECTIVE SUBORDINATION
The Company anticipates entering into a Senior Credit Facility to provide
additional liquidity. The Company has received a binding commitment from Frost
National Bank, San Antonio, Texas and Zion National Bank, Salt Lake City for a
senior credit facility of up to $20 million. If the Company is unable to obtain
the Senior Credit Facility, it may be required to postpone and/or change
significant elements of its business strategy. The terms of the Senior Credit
Facility will require a pledge of substantially all of the assets of the Company
and the Subsidiary Guarantors. Accordingly, the Notes and Subsidiary Guarantees
will be effectively subordinated to the extent of the collateral used to secure
such bank indebtedness. In the event of a default on the Notes, or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before any
payment therefrom could be made on the Notes. See "Description of Senior Credit
Facility."
COMPETITION
The packaged ice business is highly competitive. The Company faces a number
of competitors in the packaged ice business, including other ice manufacturers,
convenience and grocery retailers that operate captive commercial ice plants,
and retailers that manufacture and package ice at store locations. Competition
exists primarily on a regional basis, with service, price and quality as the
principal competitive factors. Certain of the Company's competitors have greater
financial resources than the Company, which may enable them to compete more
effectively on the basis of price and to better withstand industry downturns. A
significant increase in the utilization of captive commercial ice plants,
on-site manufacturing and packaging by operators of large retail chains served
by the Company, or the successful introduction by a competitor of a machine
which duplicates the function of the Packaged Ice System could have a material
adverse effect on the Company's operations. See "Business -- Packaged Ice
System" and "Business -- Competition."
RISKS ASSOCIATED WITH THE ACQUISITIONS
The Acquisitions will require the Company to integrate and manage
businesses that are related to, but substantially different from, Packaged Ice's
traditional business of marketing and servicing Packaged Ice Systems. While the
Company has retained key members of management from each of SWI and Mission, no
assurance can be given that the Company will be successful in managing and
incorporating such businesses into its existing operations or that such
activities will not require a disproportionate amount of management's attention.
The Company's failure to successfully incorporate the acquired businesses into
its existing operations, or the occurrence of unexpected costs or liabilities in
the acquired businesses, could have a material adverse effect on the Company.
See "The Acquisitions."
SUBSTANTIAL NET OPERATING LOSSES
Packaged Ice has incurred substantial net operating losses since its
inception. At December 31, 1996, Packaged Ice had an accumulated deficit since
inception of $3,096,643. Such deficits reflect the cost of developmental and
other start-up activities, including the industrial design, development and
marketing of the Packaged Ice Systems. The Company also anticipates that it will
incur net operating losses during 1997, primarily as a result of the increased
interest expense associated with the Notes. While management believes that it
has developed a plan of operations that when combined with the Acquisitions, if
successfully implemented, should permit the Company to achieve and sustain
profitable operations, no assurance can be given that the Company's operations
will be profitable in the future.
DEPENDENCE ON MANUFACTURERS
The Company's proprietary bagging device is manufactured by Lancer under an
exclusive original equipment manufacturing agreement ("OEM Agreement"). The
bagging device is highly technical in nature
11
<PAGE> 16
and there can be no assurance that the Company would be able to locate, on a
timely basis or at all, alternative sources of supply for the bagging device if
Lancer was unable to meet its obligations under the OEM Agreement. The inability
to locate such alternative sources of supply would likely have a material
adverse effect on the Company's business and financial condition.
EFFECTS OF INFLATION; RAW MATERIALS
Inflation has not had a significant effect on the operations of the
Company. However, in the event of increases in inflation or commodity prices
from recent levels, the Company could experience sudden and significant
increases in the cost of plastic bags, fuel, or utilities such as water and
electricity. The Company may be unable to pass these increases on to its
customers. The Company uses large quantities of plastic bags. Historically,
market prices for plastic bags have fluctuated in response to a number of
factors, including changes in polyethylene prices. The Company historically has
not attempted to pass through changes in the price of plastic bags, therefore a
large, abrupt change in the price of plastic bags could have a material adverse
effect on the Company's operating margins, although such adverse effects
historically have been temporary. There can be no assurance that significant
changes in plastic bag, electricity, fuel or other commodity prices would not
have a material adverse effect on the Company's business, results of operations
and debt service capabilities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK OF PRODUCT LIABILITY
The Company is subject to the inherent business risk of product liability
claims and adverse publicity in the event that any of its products are alleged
to have resulted in adverse effects to a user of such products. The Company
presently carries product liability insurance that management believes is
adequate under the Company's current circumstances, although there can be no
assurance that such circumstances will not change and that such insurance will
remain available at reasonable costs, if at all. In the event of an inadequately
insured product liability claim, the Company's business and financial condition
could be materially adversely affected.
LIMITED PATENT PROTECTION
Other than patents which it owns or licenses on its bagging device, the
Company currently does not have patents relating to its products. While the
Company views the patents relating to the bagging device as important to the
value of the Packaged Ice System as a whole, there can be no assurance that any
issued patent will provide the Company with a meaningful competitive advantage,
that competitors will not design alternatives to reduce or eliminate the
benefits of any issued patent, or that challenges will not be instituted against
the validity or enforceability of these patents. Other companies may obtain
patents claiming products or processes that are necessary for, or useful to, the
development of the Company's products, in which event the Company may be
required to obtain licenses for patents or for proprietary technology in order
to develop, manufacture or market its products. There can be no assurance that
the Company would be able to obtain such licenses on commercially reasonable
terms, if at all.
It is the Company's practice to protect certain of its proprietary
materials and processes by relying on trade secret laws and non-disclosure and
confidentiality agreements. There can be no assurance that confidentiality or
trade secrets will be maintained or that others will not independently develop
or obtain access to such materials or processes.
POSSIBLE CONFLICTS OF INTEREST; RELATED TRANSACTIONS
The Company and certain of its officers and directors are parties to
certain transactions with the Company and have a number of potential conflicts
of interest concerning the Acquisitions, the Company's facilities, and other
matters relating to their respective businesses. In particular, the Company's
President and Chief Operating Officer and shareholder, A. J. Lewis III, will
lease real property and improvements to the Company and is the owner of one of
the Company's primary vendors, Southwest Texas Equipment Distributors, Inc.,
which supplies ice cubers to the Company. In addition, a director of the
Company, Robert
12
<PAGE> 17
G. Miller, leases real property and improvements to SWI. See "Certain
Relationships and Related Transactions."
POTENTIAL LIMITATIONS ON EXPANSION, CAPITAL CONSTRAINTS
The Company's strategy is to continue to expand its ice manufacturing and
distribution business primarily through placement of Packaged Ice Systems in
suitable locations, acquisitions of strong regional operators in new markets,
and consolidating or making acquisitions in its existing markets. The Company
will evaluate specific acquisition opportunities based on market conditions and
economic factors existing at the time and intends to pursue favorable
opportunities as they arise. The Company may encounter increased competition for
acquisitions in the future, which could result in acquisition prices or terms
that the Company does not consider acceptable. There can be no assurance that
the Company will find suitable acquisition candidates at acceptable prices and
terms or succeed in integrating any acquired business into the Company's
existing business or in retaining key customers of acquired businesses. There
can also be no assurance that the Company will have sufficient available capital
resources to realize its acquisition and growth strategy. See "-- Substantial
Leverage and Ability to Service Debt," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Business
Strategy."
SEASONALITY OF ICE BUSINESS
The Company's ice business is seasonal, with its highest sales occurring
during the second and third calendar quarters. In 1996, the Company recorded an
average of approximately 66% of its annual net sales of ice during these two
quarters. Because the Company's operating results depend significantly on sales
during its peak season, adverse weather during this season (such as an unusually
mild or rainy period) could have a disproportionate impact on the Company's
operating results for the full year. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General Economic Trends and
Seasonality."
DEPENDENCE ON KEY PERSONNEL
The future success of the Company's business operations is dependent in
part on the efforts and skills of certain key members of management, including
James F. Stuart, Chairman and Chief Executive Officer, A. J. Lewis III,
President and Chief Operating Officer and Steven P. Rosenberg, Vice Chairman.
The loss of any of its key members of management could have an adverse effect on
the Company. The Company maintains $2.0 million of key-man life insurance on
James F. Stuart. The success of the Company will also depend in part upon the
Company's ability to find, hire and retain additional key management personnel,
including senior management, who are also being sought by other businesses. See
"Management."
RESTRICTIONS IMPOSED BY LENDERS
Each of the Indenture and Senior Credit Facility will contain a number of
covenants that will restrict the ability of the Company to dispose of assets,
merge or consolidate with another entity, incur additional indebtedness, create
liens, make capital expenditures or other investments or acquisitions and
otherwise restrict corporate activities. The ability of the Company to comply
with such provisions may be affected by events that are beyond the Company's
control. The breach of any of these covenants could result in a default under
the Indenture or the Senior Credit Facility, and the terms of the Company's
Indebtedness would permit the holders of the Notes and/or the lenders under the
Senior Credit Facility, as the case may be, to declare all amounts borrowed
thereunder to be due and payable, together with accrued and unpaid interest. If
the Company were unable to repay its indebtedness to its lender under the Senior
Credit Facility, such lender could proceed against any and all collateral
securing such indebtedness. In addition, as a result of these covenants, the
ability of the Company to respond to changing business and economic conditions
and to secure additional financing, if needed, may be significantly restricted,
and the Company may be prevented from engaging in transactions that might
otherwise be considered beneficial to the Company. See "Description of Notes"
and "Description of Senior Credit Facility."
13
<PAGE> 18
FRAUDULENT CONVEYANCE CONSIDERATIONS
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Subsidiary Guarantors' issuance of the Subsidiary Guarantees.
To the extent that a court were to find that (x) a Subsidiary Guarantee was
incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any
present or future creditor or the Subsidiary Guarantor contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (y) a Subsidiary Guarantor did not receive fair consideration
or reasonably equivalent value for issuing its Subsidiary Guarantee and such
Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of
the issuance of such Subsidiary Guarantee, (iii) was engaged or about to engage
in a business or transaction for which the remaining assets of such Subsidiary
Guarantor constituted unreasonably small capital to carry on its business, or
(iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, the court could avoid or subordinate
such Subsidiary Guarantee in favor of the Subsidiary Guarantor's creditors.
Among other things, a legal challenge of a Subsidiary Guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by the Subsidiary
Guarantor as a result of the Company's issuance of the Notes. The Indenture will
contain a savings clause, which generally will limit the obligations of each
Subsidiary Guarantor under its Subsidiary Guarantee to the maximum amount as
will, after giving effect to all of the liabilities of such Subsidiary
Guarantor, result in such obligations not constituting a fraudulent conveyance.
To the extent a Subsidiary Guarantee of any Subsidiary Guarantor was avoided or
limited as a fraudulent conveyance or held unenforceable for any other reason,
holders of the Notes would cease to have any claim against such Subsidiary
Guarantor and would be creditors solely of the Company and any Subsidiary
Guarantor whose Subsidiary Guarantee was not avoided or held unenforceable. In
such event, the claims of the holders of the Notes against the issuer of an
invalid Subsidiary Guarantee would be subject to the prior payment of all
liabilities (including trade payables) of such Subsidiary Guarantor. There can
be no assurance that, after providing for all prior claims, there would be
sufficient assets to satisfy the claims of the holders of the Notes relating to
any avoided portions of any of the Subsidiary Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Subsidiary Guarantor may be considered insolvent either (i) if the sum of its
debts, including contingent liabilities, was greater than the fair market value
or fair saleable value of all of its assets at a fair valuation or if the
present fair market value or fair saleable value of its assets was less than the
amount that would be required to pay its total outstanding debts and liabilities
including its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature, or (ii) if it is incurring
debts beyond its ability to pay as such debts mature. Based upon financial and
other information, the Company and the Subsidiary Guarantors believe that the
Subsidiary Guarantees are being incurred for proper purposes and in good faith
and that the Company and each Subsidiary Guarantor is solvent and will continue
to be solvent after issuing its Subsidiary Guarantee, will have sufficient
capital for carrying on its business after such issuance and will be able to pay
its debts as they mature. There can be no assurance, however, that a court
passing on such standards would agree with the Company. See "Description of
Notes -- Ranking and Guarantees."
PREFERENTIAL TRANSFER
The Indenture will require the Restricted Subsidiaries created or acquired
after the issue date of the Notes to guarantee the Notes. If bankruptcy or
insolvency proceedings were initiated by or against the Company or any
Subsidiary Guarantor within 90 days (or, in certain cases, one year) after any
such guarantee, or if any such guarantee were made in contemplation of
insolvency, such guarantee would be vulnerable to avoidance as a preferential
transfer. In addition, a court could require holders of the Notes to return any
payments made during the 90-day (or one-year) period.
ENVIRONMENTAL MATTERS
The Company's ice manufacturing and ice storage operations are subject to
federal, state and local environmental laws and regulations. As a result, the
Company has the potential to be involved from time to time in administrative or
legal proceedings relating to environmental matters. There can be no assurance
that
14
<PAGE> 19
the aggregate amount of any environmental liabilities that might be asserted in
any such proceeding will not be material. The Company cannot predict the types
of environmental laws or regulations that may from time to time be enacted in
the future by federal, state or local governments, now existing or future laws
or regulations will be interpreted or enforced or what types of environmental
conditions may be found to exist at its facilities. The enactment of more
stringent laws or regulations or a more strict interpretation of existing laws
and regulations may require additional expenditures by the Company, some of
which could be material.
The Company generates and handles certain hazardous substances in
connection with the manufacture and storage of packaged ice. The handling and
disposal of these substances and wastes is subject to federal, state and local
regulations, and site contamination originating from the release or disposal of
such substances or wastes can lead to significant liabilities. In addition,
certain of the Company's current and former facilities are located in industrial
areas and have been in operation for many years. As a consequence, it is
possible that historical activities on property currently or formerly owned by
the Company or that current or historical activities on neighboring properties
have affected properties currently or formerly owned by the Company and that, as
a result, additional environmental issues may arise in the future, the precise
nature of which the Company cannot now predict. Therefore, the Company may
become liable for site contamination at properties currently or formerly owned
by the Company. Although such liability has not had a material adverse effect on
the financial condition or operating results of the Company in the past, and the
Company has no knowledge of claims that could be expected to have a material
adverse effect on its financial condition or operations, there can be no
assurance that the Company will not incur significant costs in connection with
historical handling or disposal of such substances and wastes.
GOVERNMENT REGULATION
The packaged ice industry is subject to various federal, state and local
laws and regulations, which require the Company, among other things, to obtain
licenses for its manufacturing plants and machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding its plants and its Packaged Ice Systems and to continuously control
the quality and quantity of its ice. See "Business -- Government Regulation."
LACK OF PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF NOTE PRICE
The Exchange Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to apply for listing of
the Exchange Notes on any securities exchange or to seek approval for quotation
through any automated quotation system.
There can be no assurance as to the development or liquidity of any market
for the Exchange Notes. If an active market does not develop, the market price
and liquidity of the Exchange Notes will be adversely affected. If such a market
were to develop, the Notes could trade at prices that may be higher or lower
than their initial offering price depending upon many factors, including
prevailing interest rates, the Company's operating results and the markets for
similar securities. Although the Initial Purchaser has informed the Company that
it currently intends to make a market in the Exchange Notes, the Initial
Purchaser is not obligated to do so and any such market-making activity may be
discontinued at any time without notice. Historically, the market for
non-investment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the Notes. In
addition, such market-making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offer and the pendency of the Shelf Registration Statement. See "Registration
Rights; Additional Interest."
CONSEQUENCES OF FAILURE TO EXCHANGE
Untendered Old Notes not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain subject to the existing restrictions upon transfer of
such Old Notes. See "Transfer Restrictions on Old Notes." Because the Company
anticipates that most holders of Old Notes will elect to exchange such Old Notes
for Exchange Notes due to the general lack of restrictions on the resale of
Exchange Notes under the Securities
15
<PAGE> 20
Act, the Company anticipates that the liquidity of the market for any Old Notes
remaining after the consummation of the Exchange Offer may be substantially
limited. Additionally, holders (other than Restricted Holders) of any Old Notes
not tendered in the Exchange Offer prior to the Expiration Date will not be
entitled to require the Company to file the Shelf Registration Statement and the
stated interest rate on such Old Notes will remain at its initial level of 12%.
CHANGE OF CONTROL
In the event of a Change of Control (as defined in the Indenture), the
Company may be required to repurchase all of the outstanding Notes at 101% of
the principal amount, as the case may be, of the Notes plus any accrued and
unpaid interest thereon, and Additional Interest, if any, to the date of
repurchase. The exercise by the holders of the Notes of their rights to require
the Company to offer to purchase Notes upon a Change of Control could also cause
a default under other indebtedness of the Company, even if the Change of Control
itself does not, because of the financial effect of such repurchase on the
Company. The Company's ability to pay cash to any of the holders of Notes upon a
repurchase may be limited by the Company's then existing capital resources.
There can be no assurance that in the event of a Change of Control, the Company
will have, or will have access to, sufficient funds, or will be contractually
permitted under the terms of outstanding indebtedness, to pay the required
purchase price for any Notes. See "Description of Notes."
ORIGINAL ISSUE DISCOUNT; POSSIBLE TAX AND OTHER LEGAL CONSEQUENCES FOR HOLDERS
OF NOTES AND THE COMPANY
The Notes will be issued at a substantial discount from their principal
amount at maturity. However, an original issue discount (i.e., the difference
between the "stated redemption price at maturity" of the Notes and the "issue
price" of the Notes) will accrue from the issue date of the Notes and will be
included as interest income periodically in a holder's gross income for federal
income tax purposes in advance of receipts of the cash payments to which the
income is attributable. See "Certain Federal Income Tax Considerations --
Taxation of the Notes for the applicable high-yield discount obligation rules,
in which case the Company would not be able to deduct the original issue
discount attributable to the Notes until paid in cash or property or, in certain
circumstances, at all.
If a bankruptcy case were commenced by or against the Company under the
United States Bankruptcy Code after the issuance of the Notes, the claim of a
holder of the Notes with respect to the principal amount thereof may be limited
to an amount equal to the sum of (i) the initial offering price and (ii) that
portion of the original issue discount that is not deemed to constitute
"unmatured interest" for purposes of the United States Bankruptcy Code. Any
original issue discount that had not amortized as of the date of any such
bankruptcy filing would constitute "unmatured interest" for purposes of the
United States Bankruptcy Code.
THE ACQUISITIONS
THE SWI ACQUISITION
On April 17, 1997, Packaged Ice consummated an agreement with SWI to merge
SWI into a wholly-owned subsidiary of Packaged Ice (the "SWI Acquisition"). The
total consideration for the SWI Acquisition was $18.8 million, consisting of
$3.5 million in cash, $9.3 million in repayment of seller debt and $6.0 million
in shares of the Company's Common Stock (valued at $10.00 per share) payable to
the SWI shareholders.
SWI operates ice manufacturing facilities in Phoenix, Arizona, Tucson,
Arizona, Albuquerque, New Mexico, El Centro, California, Harlingen, Texas,
McAllen, Texas, and Memphis, Tennessee, which can produce approximately 995 tons
per day, serving approximately 5,100 customer locations. On September 6, 1996,
SWI and Packaged Ice entered into a master lease agreement for Packaged Ice
Systems, and, at December 31, 1996, had placed 92 Packaged Ice Systems in
supermarkets in Arizona and New Mexico. Management anticipates closing the El
Centro, California and Albuquerque, New Mexico facilities as part of a strategic
plan to achieve greater operating efficiencies.
16
<PAGE> 21
THE MISSION ACQUISITION
On April 17, 1997, Packaged Ice entered into agreements with Mission and
STPI, both of which are controlled by A.J. Lewis III, the Company's President
and Chief Operating Officer and a shareholder, to merge Mission and STPI,
respectively, into two wholly-owned subsidiaries of Packaged Ice (the "Mission
Acquisition"). The total consideration for the Mission Acquisition is $10.4
million, consisting of $3.4 million in cash, $3.4 million in repayment of seller
debt and $3.6 million in shares of the Company's Common Stock (valued at $10.00
per share) payable to shareholders of Mission and STPI.
Mission operates ice manufacturing facilities in San Antonio, Texas, Corpus
Christi, Texas and Gonzales, Texas which can produce approximately 275 tons per
day, serving approximately 5,400 customer locations. In addition, STPI owned 83
Packaged Ice Systems and leased five Ice Factory Systems at December 31, 1996,
which are strategically located in supermarkets in Mission's trade area. Mission
was the first company to combine the Packaged Ice System with traditional ice
operations. Management expects to model its future operations on the operations
of Mission and STPI.
GENERAL TERMS
Each of the SWI Acquisition and the Mission Acquisition was structured as a
"tax-free" forward subsidiary merger. The merger agreements contain customary
representations and warranties, including representations and warranties as to
financial statements, liabilities, the absence of material changes in its
business, compliance with laws, title to property, contracts, litigation,
employee benefit matters, taxes and environmental matters. Five percent of the
purchase price paid to shareholders will be held in escrow for one year to
protect against breach of the agreements. The merger agreements also require the
companies to operate their respective businesses in the ordinary course pending
the closing.
PRIVATE PLACEMENT
On April 17, 1997, the Company completed the private sale to the Initial
Purchaser of $50,000,000 principal amount of the Old Notes at a price of 96% of
the principal amount thereof in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Initial
Purchasers thereupon offered and resold the Old Notes only to qualified
institutional buyers and a limited number of institutional accredited investors
at an initial price to such purchasers of 100% of the principal amount thereof.
The $48 million net proceeds received by the Company in connection with the sale
of the Old Notes were used to finance the cash portion of the purchase price for
the Acquisitions and certain related expenses, repay outstanding indebtedness,
make capital expenditures and provide working capital for the Company.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange a like
principal amount of Old Notes, the terms of which are identical in all material
respects to the Exchange Notes. The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any change in capitalization
of the Company.
DIVIDEND POLICY
The Company has never paid or declared cash dividends on its Common Stock
or other securities. The Company currently anticipates that it will retain all
of its future earnings, if any, for use in the expansion and operation of its
business and does not anticipate paying any cash dividends in the foreseeable
future. The Indenture will restrict the Company's ability to pay dividends to
the holders of Common Stock. See "Description of Notes."
17
<PAGE> 22
CAPITALIZATION
The following table sets forth at June 30, 1997 the actual cash, short-term
debt and capitalization of Packaged Ice. Such amounts reflect (i) the
Acquisitions, (ii) the sale of the Old Notes and Warrants and the application of
the net proceeds therefrom (assumed to be $46 million), and (iii) the issuance
of $9.6 million of Common Stock in connection with the Acquisitions. This table
should be read in conjunction with the "Unaudited Pro Forma Combined Condensed
Financial Statements", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Packaged Ice's Consolidated Financial
Statements, including the notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
-----------------
ACTUAL
-----------------
($ IN THOUSANDS)
<S> <C>
Cash and equivalents........................................ $15,853
=======
Current maturities of long-term debt........................ $ -0-
=======
Long-term debt:
Senior Notes due 2004, net of discount.................... $44,725
Existing bank indebtedness................................ -0-
Senior Credit Facility.................................... -0-
-------
Total long-term debt.............................. 44,725
-------
Preferred stock with put redemption option:
Series A convertible, 450,000 shares outstanding.......... 2,497
Series B convertible, 124,831 shares outstanding.......... 726
Common stock with put redemption option, 420,000 shares
outstanding............................................... 1,972
Shareholders' equity:
Common Stock, $.01 par value; 50,000,000 shares
authorized; 3,395,270 shares outstanding............... 34
Additional paid-in capital................................ 21,143
Accumulated deficit....................................... (4,795)
-------
Total shareholders' equity........................ 16,382
-------
Total capitalization.............................. $66,302
=======
</TABLE>
18
<PAGE> 23
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed statements of
operations are derived from the historical financial statements of Packaged Ice,
SWI, Mission and STPI included elsewhere herein, and certain assumptions deemed
appropriate by the Company. The Unaudited Pro Forma Combined Condensed Statement
of Operations for the year ended December 31, 1996 and the six months ended June
30, 1997 reflects (i) the Acquisitions, including the issuance of 955,000 shares
of Common Stock and (ii) the issuance of the Notes and Warrants and the
application of the net proceeds therefrom, as if such transactions had occurred
on January 1, 1996 and 1997, respectively. Such unaudited pro forma combined
condensed financial statements combine (i) the audited operating results for
Packaged Ice for the year ended December 31, 1996 and unaudited operating
results for Packaged Ice for the six months ended June 30, 1997, (ii) the
audited operating results for SWI for the year ended December 31, 1996 and
unaudited operating results for SWI for the three months ended March 31, 1997,
(iii) the audited combined operating results for Mission and STPI for the year
ended December 31, 1996 and unaudited operating results for Mission and STPI for
the three months ended March 31, 1997, and (iv) the unaudited operating results
for the period from April 1, 1997 to April 16, 1997 for SWI, Mission and STPI.
The Acquisitions were consummated on April 17, 1997 and the unaudited operating
results for SWI, Mission and STPI for the period from April 17, 1997 to June 30,
1997 are included in Packaged Ice's historical consolidated operating results
for the six months ended June 30, 1997. The Unaudited Pro Forma Combined
Condensed Financial Statements should be read in conjunction with the notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the historical financial statements of Packaged Ice,
SWI, and the combined Mission and STPI, including the notes thereto, included
elsewhere herein.
The pro forma adjustments to give effect to the various events described
above are based upon currently available information and upon certain
assumptions that management believes are reasonable. The Acquisitions are
accounted for by the Company under the purchase method of accounting and the
assets and liabilities of SWI, Mission and STPI are recorded at their estimated
fair market values at the date of acquisition. The adjustments included in the
Unaudited Pro Forma Combined Condensed Financial Statements reflect the
Company's preliminary assumptions and estimates based upon available
information. There can be no assurance that the actual adjustments will not vary
significantly from the estimated adjustments reflected in the Unaudited Pro
Forma Combined Condensed Financial Statements.
The Unaudited Pro Forma Combined Condensed Financial Statements do not
purport to be indicative of the results of operations that would actually have
occurred or that may be obtained in the future if the transactions described had
occurred as presented in such statements. In addition, future results may vary
significantly from the results reflected in such statements due to general
economic conditions, utility prices, labor costs, competition, the Company's
ability to successfully integrate the operations of SWI, Mission and STPI with
its current business, and several other factors, many of which are beyond the
Company's control. See "Risk Factors."
19
<PAGE> 24
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------------------------
HISTORICAL PRO FORMA
-------------------------------------------------- ---------------------------
PACKAGED ICE MISSION STPI SWI ADJUSTMENTS COMBINED
------------ ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $4,426,860 $6,853,645 $850,869 $14,050,305 $26,181,679
Cost of goods sold....................... 2,034,828 4,327,267 356,040 9,174,084 15,892,219
---------- ---------- -------- ----------- -----------
Gross profit............................. 2,392,032 2,526,378 494,829 4,876,221 10,289,460
Operating expenses(h).................... 1,981,278 1,387,837 110,785 2,612,786 $ (165,741)(a) 5,791,945
(135,000)(f)
Depreciation and amortization............ 1,455,693 698,136 275,576 1,124,380 1,030,121(b) 4,583,906
Interest expense (income)................ 130,475 182,179 93,932 920,136 6,206,897(c) 7,533,619
Other income (expense)................... 184,982 68,448 560 14,682 (165,741)(a) 102,931
---------- ---------- -------- ----------- ----------- -----------
Income (loss) before income taxes........ (990,432) 326,674 15,096 233,601 (7,102,018) (7,517,079)
Income taxes............................. 0 0 0 0 0(g) 0
---------- ---------- -------- ----------- ----------- -----------
Income (loss) from continuing
operations............................. $ (990,432) $ 326,674 $ 15,096 $ 233,601 $(7,102,018) $(7,517,079)
========== ========== ======== =========== =========== ===========
Net loss per share....................... $ (0.35) $ (2.17)
========== ========== ======== =========== =========== ===========
Weighted average number of common shares
outstanding............................ 2,826,371 639,857 3,466,228
========== =========== ===========
</TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------------------------------------
FOR THE
SIX MONTHS
ENDED (E)
JUNE 30, THREE MONTHS ENDED FOR THE
1997 MARCH 31, 1997 PERIOD PRO FORMA
------------ --------------------------------- FROM 4/1/97 ---------------------------
PACKAGED ICE MISSION STPI SWI TO 4/16/97 ADJUSTMENTS COMBINED
------------ --------- -------- ---------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $ 8,123,936 $ 880,409 $118,293 $2,206,840 $ 587,925 $11,917,403
Cost of goods sold........ 4,702,916 757,169 56,496 1,775,321 475,413 7,767,315
----------- --------- -------- ---------- --------- -----------
Gross profit.............. 3,421,020 123,240 61,797 431,519 112,512 4,150,088
Operating expenses(h)..... 2,182,420 370,067 48,661 680,413 248,226 $ (155,186)(a) 3,334,851
(39,750)(f)
Depreciation and
amortization............ 1,825,857 180,934 73,204 298,856 142,743 303,313(b) 2,824,907
Interest expense
(income)................ 1,518,546 61,967 27,767 226,730 125,110 1,675,343(c) 3,635,463
Other income (expense).... 407,597 9,489 103 172,086 (263,947) (155,186)(a) 301,122
130,980(d)
----------- --------- -------- ---------- --------- ----------- -----------
Income (loss) before
income taxes............ (1,698,206) (480,239) (87,732) (602,394) (667,514) (1,807,926) (5,344,011)
Income taxes.............. 0 0 0 0 0(g) 0
----------- --------- -------- ---------- --------- ----------- -----------
Income (loss) from
continuing operations... $(1,698,206) $(480,239) $(87,732) $ (602,394) $(667,514) $(1,807,926) $(5,344,011)
=========== ========= ======== ========== ========= =========== ===========
Net loss per share........ $ (0.53) $ (1.41)
=========== ===========
Weighted average number of
common shares
outstanding............. 3,231,789 559,282 3,791,071
=========== =========== ===========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
20
<PAGE> 25
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(a) Elimination of intercompany revenues/expenses with respect to equipment
leasing and service agreements between Packaged Ice and SWI and/or STPI.
Intercompany transactions during the year ended December 31, 1996 and the three
months ended March 31, 1997 totaled $165,741 and $155,186, respectively.
(b) The excess of total purchase price over the allocation of fair value to
the net assets has been recorded as goodwill, which is calculated and amortized
based on the following assumptions:
<TABLE>
<S> <C>
Value of Common Stock consideration............. $ 9,550,000
Cash consideration.............................. 6,879,442
-----------
Total purchase price............................ 16,429,442
Total net assets acquired(1)(2)....... 977,629
-----------
Goodwill........................................ $15,451,813
15-year estimated life.......................... 15
Calculated annual amortization.................. $ 1,030,121
===========
Calculated amortization for the period from
1/1/97 to 4/16/97............................. $ 303,313
===========
</TABLE>
- ---------------
(1) In recording the purchase price allocation, all historical equity balances
of the acquired companies, as adjusted for certain net assets not acquired,
are eliminated.
(2) The Company has not completed an assessment of the fair value of the net
assets to be acquired for purposes of allocating the purchase price.
Accordingly, the excess of the purchase price over the net asset value of
the acquired companies has been allocated entirely to goodwill. To the
extent that such assessments indicate the fair value of fixed assets is in
excess of net book value, this excess would be allocated to fixed assets and
reduce the goodwill calculated above. Assuming a weighted average
depreciable life for fixed assets of five years, every $500,000 allocated to
fixed assets, rather than goodwill, would increase pro forma 1996
depreciation and amortization expense by $67,000.
(c) Interest expense adjustments are as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM 1/1/97
12/31/96 TO 4/16/97
----------- ------------------
<S> <C> <C>
Offering debt................................. $50,000,000
Interest rate on Offering debt................ 12.00%
-----------
Adjustment to 1996 interest
expense........................... 6,000,000 $1,766,667
Less: Historical interest expense for debt to
be retired with Offering debt........... (1,326,722) (542,890)
Add: Additional interest on amortization of
debt
issuance costs and debt discount:
Total debt issue costs(1)........... 5,347,067
Calculated amortization, 7-year
life.............................. 763,867 224,917
Total debt discount(2).............. 5,388,268
Calculated amortization, 7-year
life.............................. 769,752 226,649
----------- ----------
Net adjustment to interest expense............ $ 6,206,897 $1,675,343
=========== ==========
</TABLE>
- ---------------
(1) Debt issue costs include (i) $4,000,000, of direct cash expenditures, and
(ii) $1,347,067 of estimated fair value of the warrants to purchase 127,972
shares of Common Stock issued to the Initial Purchaser as partial
consideration for services performed.
(2) Estimated fair value of the Warrants offered hereby to purchase 511,885
shares of Common Stock.
21
<PAGE> 26
(d) Elimination of SWI prepayment penalty on capital lease cancellation.
(e) Includes unaudited operating results for Mission, STPI, and SWI for the
period from April 1, 1997 to April 16, 1997 (date of Acquisitions).
(f) Elimination of compensation in 1996 and for the period from January 1,
1997 to April 16, 1997 relating to an officer and shareholder of SWI who was not
retained after the Acquisitions.
(g) The pro forma income tax provision (benefit) has been calculated as if
each acquired company had been included in Packaged Ice's consolidated income
tax return and, therefore, was subject to corporate income taxation. The pro
forma combined statement of operations reflects a loss before income taxes,
however, no income tax benefit is reflected due to the uncertainty of the
Company's ability to utilize such losses in future periods to reduce income
taxes.
(h) Excludes depreciation and amortization.
22
<PAGE> 27
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, RATIO AND PERCENTAGE DATA)
The following table sets forth the selected historical financial data
derived from the audited financial statements of Packaged Ice as of and for the
five years ended December 31, 1996 and contains selected financial data derived
from the unaudited financial statements of Packaged Ice for the six months ended
June 30, 1996 and 1997. The unaudited financial statements of Packaged Ice as of
and for the six months ended June 30, 1996 and 1997 reflect all adjustments
necessary in the opinion of management (consisting only of normal recurring
adjustments) for a fair presentation of such data. The unaudited pro forma
combined selected financial data for the year ended December 31, 1996 and as of
and for the six months ended June 30, 1997 reflects operating and other
financial data as if (i) the Acquisitions and (ii) the issuance of the Old Notes
and Warrants and the application of the net proceeds therefrom had occurred at
January 1, 1996 and 1997, respectively. Pro forma balance sheet data is not
presented as the transactions in (i) and (ii) were consummated and reflected in
the historical June 30, 1997 balance sheet. The unaudited pro forma financial
data should not be considered indicative of actual results that would have been
achieved had the Acquisitions been consummated on the dates or for the periods
indicated and do not purport to indicate results of operations as of any future
date or for any future period. The following information should be read in
conjunction with the Consolidated Financial Statements of Packaged Ice,
including the notes thereto, "Unaudited Pro Forma Combined Condensed Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
UNAUDITED
PRO
FORMA
COMBINED
1992 1993 1994 1995 1996 1996(4)
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues............................ $ 29 $ 155 $ 784 $ 2,830 $ 4,427 $ 26,182
Cost of goods sold.................. 10 56 352 1,251 2,035 15,892
Gross profit........................ 19 99 432 1,579 2,392 10,290
Operating expenses(1)............... 178 431 974 1,515 1,981 5,792
Depreciation and amortization....... 10 48 224 751 1,456 4,584
Interest expense.................... 1 11 25 76 130 7,534
Other income (expense).............. 4 -- 69 75 185 103
Loss from continuing operations..... (166) (391) (722) (688) (990) (7,517)
OTHER FINANCIAL DATA:
Cash flows -- operating
activities........................ $ (144) $ (289) $ (647) $ 148 $ 1,094
Cash flows -- investing
activities........................ (215) (292) (3,497) (2,961) (5,925)
Cash flows -- financing
activities........................ 320 492 4,897 3,034 3,968
EBIT(2)............................. (165) (380) (697) (612) (860) $ 17
EBITDA(2)........................... (155) (332) (473) 139 596 4,601
Property additions.................. 185 252 2,999 2,717 5,745 8,006
Revenue growth...................... -- 434.5% 405.8% 261.0% 56.4% --
Gross margin........................ 65.5% 63.9% 55.1% 55.8% 54.0% 39.3%
EBIT margin......................... (569.0)% (245.2)% (88.9)% (21.6)% (19.4)% 0.0%
EBITDA margin....................... (534.5)% (214.2)% (60.3)% 4.9% 13.5% 17.6%
Ratio of earnings to fixed
charges(3)........................ N/A N/A N/A N/A N/A 0.00x
SUPPLEMENTAL DATA:
Loss per share of common stock...... $ (0.11) $ (0.25) $ (0.28) $ (0.26) $ (0.35) $ (2.17)
Weighted average shares
outstanding....................... 1,491,000 1,538,435 2,614,681 2,682,261 2,826,371 3,466,228
BALANCE SHEET DATA:
Cash and equivalents................ $ 147 $ 58 $ 812 $ 1,033 $ 170
Working capital (deficiency)........ 75 (137) 639 696 (1,228)
Total assets........................ 435 618 5,513 8,050 11,523
Total long-term debt, net of
discount.......................... -- 125 566 211 3,582
Total preferred stock with put
redemption option................. 2,497 2,497
Total common stock with put
redemption option................. 1,972 1,972
Total shareholders' equity.......... 339 247 4,427 2,582 1,597
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
UNAUDITED
PRO
FORMA
COMBINED
JUNE 30,
1996 1997 1997(4)
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING DATA:
Revenues............................ $ 2,128 $ 8,124 $ 11,917
Cost of goods sold.................. 910 4,703 7,767
Gross profit........................ 1,218 3,421 4,150
Operating expenses(1)............... 838 2,182 3,335
Depreciation and amortization....... 675 1,826 2,825
Interest expense.................... 34 1,519 3,635
Other income (expense).............. (13) 408 301
Loss from continuing operations..... (342) (1,698) (5,344)
OTHER FINANCIAL DATA:
Cash flows -- operating
activities........................ $ 235 $ (1,345)
Cash flows -- investing
activities........................ (2,273) (12,402)
Cash flows -- financing
activities........................ 1,173 29,429
EBIT(2)............................. (308) (179) (1,709)
EBITDA(2)........................... 367 1,647 1,116
Property additions.................. 2,221 3,599 1,639
Revenue growth...................... -- -- --
Gross margin........................ 57.2% 42.1% 34.8%
EBIT margin......................... (14.5)% (2.2)% (14.3)%
EBITDA margin....................... 17.2% 20.3% 9.4%
Ratio of earnings to fixed
charges(3)........................ N/A N/A N/A
SUPPLEMENTAL DATA:
Loss per share of common stock...... $ (0.12) $ (0.53) $ (1.41)
Weighted average shares
outstanding....................... 2,826,371 3,231,789 3,791,071
BALANCE SHEET DATA:
Cash and equivalents................ $ 15,853
Working capital (deficiency)........ 15,656
Total assets........................ 71,703
Total long-term debt, net of
discount.......................... 44,725
Total preferred stock with put
redemption option................. 3,223
Total common stock with put
redemption option................. 1,972
Total shareholders' equity.......... 16,382
</TABLE>
- ---------------
(1) Excludes depreciation and amortization.
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBIT represents earnings before interest and income taxes. The
Company has included EBITDA and EBIT data (which are not measures of
financial performance under generally accepted accounting principles)
because it understands such data are used by certain investors to determine
a Company's historical ability to service its indebtedness. EBITDA and EBIT
should not be considered by an investor as alternatives to net income, as
indicators of the Company's operating performance or as alternatives to cash
flow as measures of liquidity.
(3) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings from continuing operations before income taxes and
fixed charges. Fixed charges consist of interest expense. Earnings were not
sufficient during the fiscal years ended December 31, 1992 through 1996 and
pro forma combined 1996 to cover fixed charges. The deficiencies were
$166,000 in 1992, $391,000 in 1993, $722,000 in 1994, $688,000 in 1995,
$990,000 in 1996, $7,517,000 in pro forma combined 1996, $342,000 and
$1,698,000 for the six months ended June 30, 1996 and 1997, respectively,
and $5,344,000 for the pro forma combined six months ended June 30, 1997.
(4) Pro forma to reflect the Offering and the Acquisitions as if they had each
occurred at January 1, 1996 and 1997, respectively. See "Unaudited Pro Forma
Combined Condensed Financial Statements."
23
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Unaudited
Pro Forma Combined Condensed Financial Statements," the "Selected Historical and
Unaudited Pro Forma Combined Financial Data," and the Company's Consolidated
Financial Statements, and the notes thereto, included elsewhere herein.
OVERVIEW
The Company derives its revenues from the sale of packaged ice through the
Packaged Ice System, which manufactures, packages and stores ice at the retail
location, and through traditional delivery methods, whereby ice is manufactured,
packaged and stored at a central facility and transported to the retail location
when needed. Packaged Ice has historically sold ice primarily through Packaged
Ice Systems, but upon acquiring SWI, Mission and STPI (collectively,
"Mission/STPI"), all of which sell ice through both Packaged Ice Systems and
traditional ice delivery methods, now sells ice through both distribution
methods. Such combination is expected to provide the Company with (i) higher
operating margins, due to reduced production and distribution costs, (ii) a
delivery system designed to supply high volume locations and capable of
cost-effectively servicing a market in excess of 100 miles from its traditional
ice manufacturing facilities, and (iii) an ability to redistribute production
from its traditional ice facilities to additional customers and satisfy seasonal
peak demands at customer locations with Packaged Ice Systems.
The Company manufactures its ice in crushed, cubed, half-moon and
cylindrical forms and packages its ice primarily in eight to 40 pound bags for
eventual sale to retail customers and sells block ice in 10 and 300 pound sizes
primarily to commercial and industrial users. Eight pound bags are the most
commonly purchased size in the industry and accounted for $19.2 million, or
73.3%, of the Company's pro forma 1996 revenues. Packaged ice sold in 20 pound
and 40 pound bags is typically purchased by restaurants and other commercial
users, and accounted for $3.6 million, or 13.7%, of the Company's pro forma 1996
revenues. Block ice in 10 pound and 300 pound units is typically sold to
customers in the commercial and agricultural sectors and accounted for $0.9
million, or 3.4%, and $1.3 million, or 5.0%, of the Company's pro forma 1996
revenues, respectively. The Company also provides other services including cold
storage rental which accounted for $1.2 million, or 4.6%, of pro forma 1996
revenues.
Prices for packaged ice are generally stable with some price variation
between markets based on geography and customer base. Pro forma for the
Acquisitions, management believes that it services more states (eight) than any
other ice manufacturer. Texas is the Company's largest market and accounted for
$12.5 million, or 47.7%, of pro forma 1996 revenues; Arizona accounted for $11.1
million, or 42.4%, of pro forma 1996 revenues. Other markets include Tennessee,
California, Louisiana, Nevada, New Mexico and Florida. The Company is currently
expanding into Oklahoma and Colorado. Pro forma for the Acquisitions, no single
customer represented more than 9.0% of pro forma 1996 revenues. The Company, as
the primary supplier to several national or regional supermarket chains, and
many national or regional convenience and pharmacy chains, services over 12,000
customer locations at June 30, 1997. The Company services the significant
segments of the ice industry, from supermarket and convenience store retailers,
to restaurants, commercial users and the agricultural sector. Management
believes that this market diversity helps insulate the Company from both price
and demand fluctuations caused by geography, customer base and product segment.
The Company's costs of goods sold include costs associated with both
traditional ice delivery and the Packaged Ice Systems. In the traditional ice
business, plant occupancy, plastic bags, delivery, labor and utility-related
expenses account for the largest costs. Costs vary significantly by region and
fluctuate based upon, among other things, freezer capacity and local utility
rates. With the Packaged Ice System, ice storage and general operating utility
costs are eliminated. The Company's costs of goods sold also include the cost of
plastic bags which are incurred by both the traditional ice manufacturer plants
and the Packaged Ice Systems. The cost of the bag used in the Packaged Ice
System is substantially higher than that used in traditional delivery due to
special components and greater thickness. Costs of goods sold also includes
labor costs
24
<PAGE> 29
associated with manufacturing, delivery and maintenance. These costs accounted
for approximately 30.0% and 32.0% of historical 1996 revenues at SWI and
Mission, respectively, and have historically grown with inflation. The Packaged
Ice System eliminates certain costs related to production and distribution but
does require in-store customer service representatives and machine technicians.
In the aggregate, labor costs associated with the Packaged Ice System are
substantially lower than labor costs associated with traditional ice
manufacturing. As a result, total production and distribution labor costs for
traditional manufacturing operations at SWI and Mission represented
approximately 30.5% of historical 1996 revenues while corresponding labor costs
at Packaged Ice represented 21.3% of historical 1996 revenues.
The Company's operating expenses include costs associated with selling,
general and administrative functions. These costs include executive officers'
compensation, office and administrative salaries and costs associated with
leasing office space. Selling, general and administrative functions are similar
at both the traditional facilities and at Packaged Ice. These operating expenses
are typically higher when the Company enters new markets, in which it intends to
place Packaged Ice Systems, as new marketing, systems and office facilities must
be established.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, on a historical
basis for Packaged Ice and on a pro forma basis for the Company, selected
operating data and supplemental data expressed as a percentage of total revenue
and the number of ice systems operating at the end of each period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS SIX MONTHS ENDED JUNE 30,
------------------------------------ ENDED ---------------------------
HISTORICAL PRO FORMA JUNE 30, PRO FORMA
----------------------- COMBINED -------------- COMBINED
1994 1995 1996 1996(3) 1996 1997 1996 1997 1997(3)
----- ----- ----- --------- ----- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold.............. 44.9 44.2 46.0 60.7 39.6 58.3 42.8 57.9 65.2
Gross profit..................... 55.1 55.8 54.0 39.3 60.4 41.7 57.2 42.1 34.8
Operating expenses(1)............ 124.2 53.5 44.7 22.1 28.9 22.1 39.4 26.9 28.0
Depreciation and amortization.... 28.6 26.5 32.9 17.5 22.0 18.5 31.7 22.5 23.7
Interest expense................. 3.2 2.7 2.9 28.8 1.6 19.7 1.6 18.7 30.5
Other income (expense)........... 8.8 2.7 4.2 0.4 (2.0) 3.4 (0.6) 5.0 2.5
SUPPLEMENTAL DATA:
EBIT(2).......................... (88.9)% (21.6)% (19.4)% 0.0% 7.4% 4.5% (14.5)% (2.2)% (14.3)%
EBITDA(2)........................ (60.3) 4.9 13.5 17.6 29.4 23.0 17.2 20.3 9.4
</TABLE>
- ---------------
(1) Excludes depreciation and amortization.
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. EBIT represents earnings before interest and income taxes. The
Company has included EBITDA and EBIT data (which are not measures of
financial performance under generally accepted accounting principles)
because it understands such data are used by certain investors to determine
a company's historical ability to service its indebtedness. EBITDA and EBIT
should not be considered by an investor as alternatives to net income, as
indicators of the Company's operating performance or as alternatives to cash
flow as measures of liquidity.
(3) Pro forma combined operating data for the year ended December 31, 1996 and
the six months ended June 30, 1997 reflect the Offering and the Acquisitions
as if they had each occurred at January 1, 1996 and 1997, respectively. See
"Unaudited Pro Forma Combined Condensed Financial Statements" included
elsewhere herein.
HISTORICAL RESULTS OF OPERATIONS
Quarter Ended June 30, 1997 Compared to Quarter Ended June 30, 1996
Revenues: Revenues increased $5.8 million, or 392%, from $1.5 million for
the quarter ended June 30, 1996 to $7.3 million for the quarter ended June 30,
1997. Revenues increased $.1 million due to the placement
25
<PAGE> 30
of additional Packaged Ice machines during the quarter and $5.7 million as a
result of revenue contributed by the Acquisitions and included in the Company's
consolidated results from the effective date of the Acquisitions, April 17,
1997.
Gross Profit: Gross profit increased $2.1 million, or 240% from $.9 million
for the quarter ended June 30, 1996 to $3.0 million for the quarter ended June
30, 1997. As a percentage of revenues gross profit decreased 18.7 percentage
points from 60.4% in fiscal 1996 to 41.7% in fiscal 1997. Gross margins
decreased because of the higher cost of sales reflected in the traditional ice
businesses of the Acquisitions. Traditional ice companies experience
significantly higher costs of goods sold than the lower costs of on-site
manufacturing and delivery associated with the Packaged Ice systems.
Operating Expenses: Operating expenses increased $1.2 million, or 276%,
from $.4 million for the quarter ended June 30, 1996 to $1.6 million for the
quarter ended June 30, 1997. As a percentage of revenues, operating expenses
decreased 6.8 percentage points from 28.9% in fiscal 1996 to 22.1% in fiscal
1997. This decrease was due to greater efficiencies realized by Packaged Ice,
Inc. as its general and administrative expenses were spread over the larger base
of sales enjoyed as a result of the Acquisitions.
Depreciation and Amortization: Depreciation and Amortization increased $1.0
million from $.3 million for the quarter ended June 30, 1996 to $1.3 million for
the quarter ended June 30, 1997. As a percentage of sales, deprecation and
amortization decreased 3.5 percentage points from 22.0% to 18.5%. This decrease
was due primarily to the lower historical depreciation and amortization margins
at the Acquisitions. These margins reflect the longer estimated useful lives of
traditional ice plant and equipment as compared to Packaged Ice Systems. This
decrease more than offset the increase related to the amortization of goodwill
resulting from the Acquisitions.
Interest Expense: Interest expense increased $1.41 million, from $.02
million for the quarter ended June 30, 1996 to $1.43 million for the quarter
ended June 30, 1997. This increase was a result of higher levels of debt
associated with Packaged Ice, Inc. borrowing $50.0 million from the issuance of
the Old Notes.
Other Income: Other income increased $.28 million from a negative ($.03)
million for the quarter ended June 30, 1996 to $.25 million for the quarter
ended June 30, 1997. This increase was due primarily to an increase in interest
income derived from the investment of unexpended proceeds received as a result
of the issuance of the Old Notes.
EBITDA: As a result of the foregoing, EBITDA increased $1.2 million, or
285%, from $.4 million for the quarter ended June 30, 1996 to $1.7 million for
the quarter ended June 30, 1997. This increase was due in part to increased
sales from new Packaged Ice machines but resulted primarily from the addition of
the results of operations from the Acquisitions for the quarter.
Six Month Period Ended June 30, 1997 Compared to Six Month Period Ended June
30, 1996.
Revenues: Revenues increased $6.0 million, or 282%, from $2.1 million for
the six month period ended June 30, 1996 to $8.1 million for the six month
period ended June 30, 1997. Revenues increased $.3 million due to the placement
of additional Packaged Ice machines during the six month period and $5.7 million
as a result of revenue contributed by the Acquisitions and included in the
Company's consolidated results from the effective date of the acquisitions,
April 17, 1997.
Gross Profit: Gross profit increased $2.2 million, or 181% from $1.2
million for the six month period ended June 30, 1996 to $3.4 million for the six
month period ended June 30, 1997. The acquisitions contributed $2.1 million of
the increase in gross profit. As a percentage of revenues gross profit decreased
15.1 percentage points from 57.2 in fiscal 1996 to 42.1% in fiscal 1997. Gross
margins decreased because of the higher cost of sales reflected in the
traditional ice businesses of the Acquisitions. Traditional ice companies
experience significantly higher costs of goods sold than the lower costs of
on-site manufacturing and delivery associated with the Packaged Ice systems.
Operating Expenses: Operating expenses increased $1.34 million, or 160%,
from $.84 million for the six month period ended June 30, 1996 to $2.18 million
for the six month period ended June 30, 1997. As a
26
<PAGE> 31
percentage of revenues, operating expenses decreased 12.5 percentage points from
39.4% in fiscal 1996 to 26.9% in fiscal 1997. This decrease was due to greater
efficiencies realized by Packaged Ice, Inc. as its general and administrative
expenses were spread over the larger base of sales enjoyed as a result of the
Acquisitions.
Depreciation and Amortization: Depreciation and Amortization increased $1.1
million from $.7 million for the six month period ended June 30, 1996 to $1.8
million for the six month period ended June 30, 1997. As a percentage of sales,
depreciation and amortization decreased 9.2 percentage points from 31.7% to
22.5%. This decrease was due primarily to the lower historical depreciation and
amortization margins at the Acquisitions. These margins reflect the longer
estimated useful lives of traditional ice plant and equipment as compared to
Packaged Ice Systems. This decrease more than offset the increase related to the
amortization of goodwill resulting from the Acquisitions.
Interest Expense: Interest expense increased $1.49 million, or from $.03
million for the six month period ended June 30, 1996 to $1.52 million for the
six month period ended June 30, 1997. This increase was a result of higher
levels of debt associated with Packaged Ice, Inc. borrowing $50.0 million from
the issuance of the Old Notes.
Other Income: Other income increased $.42 million from a negative ($.01)
million for the six month period ended June 30, 1996 to $.41 million for the six
month period ended June 30, 1997. This increase was due primarily to an increase
in interest income derived from the investment of unexpended proceeds received
as a result of the issuance of the Old Notes.
EBITDA: As a result of the foregoing, EBITDA increased $1.2 million, or
349%, from $.4 million for the six month period ended June 30, 1996 to $1.6
million for the six month period ended June 30, 1997. This increase was due in
part to increased sales from new Packaged Ice machines but resulted primarily
from the addition of the results of operations from the Acquisitions for the six
month period.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995.
Revenues: Revenues increased $1.6 million, or 56.4%, from $2.8 million for
the year ended December 31, 1995 to $4.4 million for the year ended December 31,
1996. Revenues increased due to Packaged Ice's continued success in penetrating
existing markets and its entry into the Arizona market under the terms of its
master lease arrangement with SWI. In fiscal 1996, Packaged Ice placed 241
Packaged Ice Systems, 92 of which were placed in Arizona, and benefitted from an
entire year of revenues from an installed machine base of 417 machines at
December 31, 1995.
Gross Profit: Gross profit increased $0.8 million, or 51.5%, from $1.6
million for the year ended December 31, 1995 to $2.4 million for the year ended
December 31, 1996. As a percentage of revenues, gross profit decreased 1.8
percentage points from 55.8% in fiscal 1995 to 54.0% in fiscal 1996. Gross
margins decreased primarily as a result of purchases of manufactured ice needed
to supplement the Company's Packaged Ice Systems. This increase in demand was
due to unseasonably hot weather in Packaged Ice's primary markets. Purchases as
a percentage of total revenues increased 1.3 percentage points from 0.6% in
fiscal 1995 to 1.9% in fiscal 1996. As an expected benefit from the
Acquisitions, demand exceeding the capacity of in-store Packaged Ice Systems
will be satisfied, where it is economically feasible, by Packaged Ice's
traditional ice production facilities, thereby reducing such costs in the
future.
Operating Expenses: Operating expenses increased $0.5 million, or 30.8%,
from $1.5 million for the year ended December 31, 1995 to $2.0 million for the
year ended December 31, 1996. As a percentage of revenues, operating expenses
decreased 8.8 percentage points from 53.5% in fiscal 1995 to 44.7% in fiscal
1996. This decrease was due primarily to salary-related expenses which, as a
percentage of revenues, decreased 4.4 percentage points from 25.4% in fiscal
1995 to 21.0% in fiscal 1996. This decrease reflected greater efficiencies
realized by Packaged Ice as it continued to consolidate its sales force in its
primary markets.
Depreciation and Amortization: Depreciation and amortization increased $0.7
million, or 93.9%, from $0.8 million for the year ended December 31, 1995 to
$1.5 million for the year ended December 31, 1996. This increase was due
primarily to an increase in capital expenditures from $2.7 million in fiscal
1995 to $5.7 million in fiscal 1996.
27
<PAGE> 32
Interest Expense: Interest expense increased $0.05 million, or 71.1%, from
$0.08 million for the year ended December 31, 1995 to $0.13 million for the year
ended December 31, 1996. This increase was a result of higher levels of
indebtedness associated with Packaged Ice borrowing $3.5 million from its credit
facility with Bank One, Texas, N.A. and $0.8 million of convertible notes from
its shareholders to finance equipment placements in fiscal 1996. The convertible
notes were converted into Series B Convertible Preferred Stock in January 1997.
Other Income: Other income increased $0.1 million, or 146.7%, from $0.1
million for the year ended December 31, 1995 to $0.2 million for the year ended
December 31, 1996. As a percentage of revenues, other income increased 1.5
percentage points from 2.7% in fiscal 1995 to 4.2% in fiscal 1996. The increase
was due primarily to increased lease and management income derived from Packaged
Ice's master lease agreement with SWI.
EBITDA: As a result of the foregoing, EBITDA increased $0.5 million, or
328.8%, from $0.1 million for the year ended December 31, 1995 to $0.6 million
for the year ended December 31, 1996. As a percentage of revenues, EBITDA
increased 8.6 percentage points from 4.9% in fiscal 1995 to 13.5% in fiscal
1996. This increase was due primarily to increased sales from new Packaged Ice
System installations, relatively constant cost of goods sold margins for the new
systems, and reduced operating expense margins.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
Revenues: Revenues increased $2.0 million, or 261.0%, from $0.8 million for
the year ended December 31, 1994 to $2.8 million for the year ended December 31,
1995. This increase was due primarily to the placement of 146 Packaged Ice
Systems during fiscal 1995 and from a full year of revenues generated from
Packaged Ice's installed base of 271 machines at December 31, 1994.
Gross Profit: Gross profit increased $1.2 million, or 265.5%, from $0.4
million for the year ended December 31, 1994 to $1.6 million for the year ended
December 31, 1995. As a percentage of revenues, gross profit increased 0.7
percentage points from 55.1% in fiscal 1994 to 55.8% in fiscal 1995. Although
gross margins increased at Dallas and Houston, where the increase in the number
of locations serviced provided greater efficiencies in service routing, these
increases were offset by lower gross margins from new operations in Nevada and
California. In new markets, costs per store are typically higher until service
route densities increase. Management believes that in any market area, the
greater the density of customers, the lower the cost per store as more stores
can be serviced per day by service representatives.
Operating Expenses: Operating expenses increased $0.5 million, or 55.5%,
from $1.0 million for the year ended December 31, 1994 to $1.5 million for the
year ended December 31, 1995. As a percentage of revenues, operating expenses
decreased 70.7 percentage points from 124.2% in fiscal 1994 to 53.5% in fiscal
1995. This decrease was due primarily to the absorption of office personnel
costs over a larger revenue base which caused a 46.6 percentage point decrease
in salary-related expense margins. In addition, other operating expense margins
decreased 24.1 percentage points as general overhead costs were absorbed over a
larger revenue base.
Depreciation and Amortization: Depreciation and amortization increased $0.6
million, or 235.3%, from $0.2 million for the year ended December 31, 1994 to
$0.8 million for the year ended December 31, 1995. The increase is primarily the
result of the full year depreciation impact of 1994 capital additions of $3.0
million and the partial year impact of $2.7 million of 1995 capital additions.
Interest Expense: Interest expense increased $0.05 million, or 204.0%, from
$0.03 million for the year ended December 31, 1994 to $0.08 million for the year
ended December 31, 1995. This modest increase was primarily a result of
acquisition-related debt incurred in 1994.
Other Income: Other income remained constant between fiscal 1995 and fiscal
1996. As a percentage of revenues, other income decreased 6.1 percentage points
from 8.8% in fiscal 1995 to 2.7% in fiscal 1996. This decrease reflected the
growth of Packaged Ice's primary revenue sources while other income sources
remained constant.
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EBITDA: As a result of the foregoing, EBITDA increased $0.6 million from a
negative $0.5 million for the year ended December 31, 1994 to a positive $0.1
million for the year ended December 31, 1995. As a percentage of revenues,
EBITDA increased 65.2 percentage points from a negative 60.3% in fiscal 1994 to
a positive 4.9% in fiscal 1995. This increase was due primarily to constant
gross margins and substantial decreases in operating expense margins from fiscal
1994 to fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended December 31, 1996, Packaged Ice had net cash
provided by operating activities of $1.1 million; net cash used in investing
activities of $5.9 million, consisting primarily of $5.7 million used to
purchase Packaged Ice Systems; and net cash provided by financing activities of
$4.0 million, consisting of $3.2 million of additional net debt and $0.8 million
from the issuance of convertible demand notes, resulting in a net decrease in
cash and cash equivalents of $0.9 million.
Prior to the issuance of the Old Notes, the Company has primarily financed
its operations and expansion through cash provided by operating activities, bank
loans and proceeds from the issuance of common and preferred stock. The Company
expects to meet its short-term liquidity requirements through net cash provided
by operations and from the proceeds of the sale of the Old Notes and borrowings
under the Senior Credit Facility. Management believes that these sources of cash
will be sufficient to meet the Company's operating needs for at least the next
12 months.
Concurrent with the Acquisitions, Packaged Ice utilized $24.1 million of
the net proceeds from the sale of the Old Notes, which totaled $46.0 million to
pay $6.9 million of the purchase price of the Acquisitions, to repay $12.7
million of long term debt and notes payable of the Acquisitions, to repay $4.4
million of existing debt of the Company and to pay $0.1 million of accrued
interest. Following the closing of the Acquisitions, the Company has made
capital expenditures of $2.3 million related to asset purchases that complement
its existing core business and business acquisitions of traditional ice
companies of $3.45 million. The Company is currently contemplating, subject to
completion of final negotiations and completion of due diligence contingencies
imposed by the Company, the acquisition of additional traditional ice companies
in strategic geographic areas. If and when consummated, such acquisitions are
expected to be financed from the remaining proceeds of the Old Notes and
borrowings under the Senior Credit Facility.
At July 31, 1997 the Company had cash on hand of $10.8 million to meet its
short-term liquidity requirements. Additionally, the Company had received and
accepted a formal commitment letter issued jointly by Zion Bank N.A. and Frost
National Bank for its Senior Credit Facility in the amount of $20.0 million. The
Senior Credit Facility will bear interest at a variable maximum rate of prime
plus 1% and as low as prime dependent upon certain ratios of the Company's
EBITDA to total debt service coverage requirements. The Company, at its option,
may fix any portion of the loan at a margin above LIBOR rates, again dependent
upon the same ratios, at any time. Borrowings under the Senior Credit Facility
will be repayable interest only for a period of two years. Thereafter, principal
payments equal to $250,000 per month plus accrued interest on outstanding
balances will be due until six years from original date when any outstanding
principal balance together with accrued interest will be due and payable. The
terms of the Senior Credit Facility will require a pledge of substantially all
of the assets of the Company and the Subsidiary Guarantors. Accordingly, the
Notes and Subsidiary Guarantees will be effectively subordinated to the extent
of the collateral used to secure such bank indebtedness. In the event of a
default on the Notes, or a bankruptcy, liquidation or reorganization of the
Company, such assets will be available to satisfy obligations with respect to
the indebtedness secured thereby before any payment therefrom could be made on
the Notes.
The Company expects to finance the placement of Packaged Ice Systems, the
acquisition of additional traditional ice manufacturing companies, and capital
expenditures to maintain existing operations with cash provided by operations,
the proceeds of the sale of the Old Notes, borrowings under the Senior Credit
Facility, and the issuance of Common Stock. See "Risk Factors -- Senior Credit
Facility; Effective Subordination" and "Risk Factors -- Potential Limitations on
Expansion, Capital Constraints."
The Company's Packaged Ice Systems are expected to range in cost from
$11,500 to $18,500 per installation and capital expenditures are expected to be
approximately $9.3 million in fiscal 1997 and
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$11.6 million per annum thereafter. During the next two years, the Company
expects to continue acquiring traditional ice companies using a combination of
cash and Common Stock, and has budgeted approximately $16.5 million of
acquisitions in fiscal 1997 and $15.0 million in fiscal 1998. There can be no
assurance that acquisitions based upon the Company's criteria can be obtained or
that funds will be available in sufficient amounts to finance such acquisitions.
Capital expenditures at traditional ice facilities are expected to be
approximately $1.1 million in fiscal 1997 and $1.9 million in fiscal 1998.
The Company may also seek additional debt or equity capital through private
or public offerings of securities. The availability of such capital will depend
upon prevailing market conditions and other factors over which the Company has
no control, as well as the Company's financial condition and results of
operations. There can be no assurance that sufficient funds will be available to
finance intended acquisitions or capital expenditures for the placement of
Packaged Ice Systems to sustain the Company's recent rate of growth.
The Company intends to satisfy its obligations under the Notes, as well as
its future capital expenditures and working capital requirements, primarily with
cash flow from operations. Management believes that cash flow from operations
and funds available under the Senior Credit Facility will provide sufficient
liquidity to enable it to meet its current working capital and capital
expenditure requirements.
GENERAL ECONOMIC TRENDS AND SEASONALITY
The Company's results of operations are generally affected by economic
trends in its market area but results to date have not been impacted by
inflation. If an extended period of high inflation is encountered, the Company
believes that it will be able to pass on its higher costs to its customers.
The packaged ice industry as a whole is extremely seasonal. In the warm
weather regions where the Company primarily operates, however, this seasonality
is less pronounced. Historically, approximately 65.6% of the Company's revenues
occur during the second and third fiscal quarters when the weather conditions
are generally warmer and demand is greater. Approximately 15.2% of the Company's
revenues occur during the first fiscal quarter, and approximately 19.2% of the
Company's revenues occur during the fourth fiscal quarter when the weather is
generally cooler. These percentages can vary slightly from region to region
within the sunbelt depending upon the degree of volatility of the seasons.
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BUSINESS
COMPANY OVERVIEW
The Company is a leading manufacturer and distributor of packaged ice and
has developed the Packaged Ice System. Currently operating in Arizona,
California, Florida, Louisiana, Nevada, New Mexico, Oklahoma, Tennessee and
Texas, the Company is pursuing a consolidation strategy within the highly
fragmented packaged ice industry. The Company has grown significantly, primarily
through strategic acquisitions and the placement of Packaged Ice Systems. The
Packaged Ice System, which is typically installed in supermarkets, provides the
Company with several competitive advantages, including substantially higher
margins, reduced production and distribution costs and superior product quality.
The Company has seventeen traditional ice manufacturing facilities serving over
12,000 customer locations and, at June 30, 1997, had an installed base of 886
Packaged Ice Systems located primarily in Albertsons, Kroger, HEB Pantry,
Wal-Mart Supercenters, Super K-Mart stores, and supermarkets affiliated with
Fleming Companies. Management believes that the Company will be the second
largest packaged ice company in the United States with pro forma revenues and
EBITDA for fiscal 1996 of $26.2 million and $4.6 million, respectively. See
"Unaudited Pro Forma Combined Condensed Financial Statements," and "Selected
Historical and Unaudited Pro Forma Combined Financial Data."
INDUSTRY OVERVIEW
Management estimates that the packaged ice industry has grown by
approximately 3% per annum during the past ten years to over $2.4 billion in
wholesale revenues in 1996. The packaged ice industry is highly seasonal, but on
a year-to-year basis remains stable, generally only affected by excessive mild
weather or rain within a region. The industry has historically been
characterized as highly fragmented with over 3,000 companies, consisting
primarily of "mom and pop" packaged ice companies, many of which are
undercapitalized. Management believes that the six largest ice manufacturers in
the southern and western U.S. account for approximately 6% of wholesale revenues
with the Company's largest competitor accounting for less than 3% of the market.
Traditional ice manufacturers produce and package ice at centrally-located
facilities and distribute to a limited market radius of approximately 100 miles,
mainly due to high shipping and product distribution costs. Efficient
distribution and customer concentration are important, as transportation is a
high cost component in the price of manufactured ice within a traditional ice
delivery system. It is difficult to ensure prompt and reliable delivery during
peak seasonal months in large markets with traditional ice delivery systems. As
a result, the ice business is primarily a regional service business. Management
believes that significant acquisition opportunities exist for those
service-oriented companies with superior ice delivery systems and significant
capital resources.
PACKAGED ICE SYSTEM
In 1994, the Company completed the development of its proprietary system
that utilizes state-of-the-art technology to produce, package and store ice
directly at customer locations. The Packaged Ice System consists of standard
Hoshizaki ice cubers, an ice merchandiser built to the Company's specifications
by Beverage Air, and a bagging machine, the heart of the Packaged Ice System,
manufactured by Lancer, a shareholder of the Company, under an exclusive
equipment manufacturing agreement. Lancer is an engineering and manufacturing
company that is a primary vendor of fountain soft drink dispensing machines for
Coca-Cola, Inc. The majority of bags used in the Packaged Ice System are
manufactured to the Company's specifications by Arrow, a subsidiary of ConAgra
Corporation. The Packaged Ice System is capable of producing up to 40,000 bags
of ice per year and is most frequently used in large supermarkets. The latest
generation of the Packaged Ice System is equipped with remote communication
capability which allows the Company's national service center to track
production, monitor the systems, and diagnose and correct system errors through
the use of a central processing unit. The Packaged Ice Systems are serviced by
trained representatives and are designed to provide a high degree of reliability
and serviceability through the use of interchangeable parts and a durable
stainless steel cabinet. To guard against product contamination and satisfy
consumer demand for high quality, sanitary ice, the Packaged Ice System was
engineered to meet all specifications delineated by the
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NSF for ice production and contains a patented automatic sanitizing system. In
addition, the Packaged Ice System is U.L. approved. The Company began
development of the Packaged Ice System in 1990, and experienced cumulative
losses from continuing operations of $1.4 million during the first four years,
which were devoted primarily to research and development. In addition,
management estimates that the Company's strategic partners, Hoshizaki, Lancer
and Beverage Air, funded an aggregate of over $3.5 million of the development of
the Packaged Ice System.
The Packaged Ice System, when combined with traditional delivery methods,
provides the Company with significant advantages, including (i) higher operating
margins, due to significantly reduced production and distribution costs, (ii) a
delivery system designed to supply high volume locations and capable of cost-
effectively servicing a market in excess of 100 miles from its traditional ice
manufacturing facilities, and (iii) the ability to redistribute production from
its traditional ice facilities to additional customers as well as satisfy
seasonal peak demand at stores with Packaged Ice Systems. In addition, the
Packaged Ice System provides numerous advantages to the retailer including (i)
providing a continuous supply of ice, and thus reducing the frequency of product
shortages typical of traditional ice delivery, (ii) significantly reducing costs
associated with delivery and storage at the retail location, (iii) satisfying
consumer demand for a higher quality and more sanitary ice than typically found
with traditional ice delivery, (iv) effectively managing inventory through
computerized production tracking and dedicated technical support, and (v)
increasing safety by reducing "slip and fall" accidents. Management believes the
Packaged Ice System can significantly lower the price of a fully costed bag of
ice to a supermarket as compared to traditional ice delivery. Management
believes that the higher margins and quality of the Packaged Ice System has
enabled it to quickly gain market acceptance. At June 30, 1997, the Company had
an installed base of 886 Packaged Ice Systems, over 90% of which were placed in
supermarkets where the Company was not previously the primary source of packaged
ice. Management believes that the technology utilized in the Packaged Ice System
is unique with four existing and two pending patents covering the bagging
device, and that there are significant barriers to entry for new and existing
competitors with respect to the development of a competitive and reliable
machine that performs the same functions as the Packaged Ice System. See "Risk
Factors -- Competition."
BUSINESS STRATEGY
The Company's strategy is to become the leading consolidator in the
packaged ice industry and to maximize its revenues and cash flows by (i)
expanding its market presence by leveraging its proprietary ice machine
technology, (ii) entering new markets by making strategic acquisitions in the
highly fragmented traditional ice industry, and (iii) reducing costs and
exploiting economies of scale.
Expand Market Presence Through Packaged Ice System. Through selective
placement of its proprietary Packaged Ice Systems, the Company will continue to
reduce transportation, storage and service costs, thereby overcoming traditional
geographical constraints inherent to traditional ice delivery. This strategy not
only provides significant cost savings to the Company but (i) allows for
expansion of its delivery radius beyond that of traditional ice manufacturers,
(ii) maximizes sales in existing markets by converting existing traditional ice
customers to the Packaged Ice System, thereby freeing-up manufacturing capacity
for new customers in the market area, and (iii) optimizes traditional production
capacity utilization by reducing ice shortages during peak demand seasons. The
Company has expanded its geographic scope by selling ice to major national and
regional supermarket chains including Albertsons, Kroger, HEB Pantry and certain
stores affiliated with Fleming Foods, many of whom the Company has successfully
convinced to switch from traditional delivery to higher margin Packaged Ice
Systems.
Acquire Traditional Ice Manufacturing Companies in Highly Fragmented
Industry. The Company believes that the highly fragmented packaged ice industry
contains numerous acquisition opportunities. The Company's acquisition strategy
is to target well-managed, traditional ice producers with favorable demographics
and significant customer bases in both new and current market areas. This
acquisition strategy is designed to allow the Company to gain market share
quickly and efficiently, provide for additional distribution channels through
which to place Packaged Ice Systems, and achieve greater economies of scale. In
determining which businesses may be suitable acquisition candidates, management
conducts demographic
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and competitive analyses and performs comprehensive due diligence on the
target's facilities, management, existing customer base, and potential for
revenue and operating cash flow improvement.
Reduce Costs and Exploit Economies of Scale. The Company will continue to
seek reduction in operating costs and working capital requirements in its
existing operations, as well as in its future acquisitions, by (i) closing or
combining less efficient or redundant manufacturing and distribution facilities,
(ii) managing vendor relationships to ensure a high level of responsiveness and
favorable pricing, (iii) increasing market concentration of Packaged Ice Systems
to improve merchandising and servicing efficiencies, and (iv) consolidating
certain administrative and selling functions to eliminate redundancies and
excess costs. Since the Company is focusing its acquisition efforts on related
businesses, it anticipates that the customer base of any acquired business will
be similar to its own and therefore administrative areas such as management
information systems, accounting systems and customer support may be
consolidated. Although the Company expects to realize certain cost savings and
economies of scale from the Acquisitions, none are reflected in "Unaudited Pro
Forma Combined Condensed Financial Data."
The Company believes that it is well-positioned to execute its business
strategy given the depth, experience and ability of its management team. The
Company's executive officers are led by James F. Stuart, Chairman and Chief
Executive Officer, who founded Packaged Ice in 1990, and who has twelve years of
industry experience. Mr. Stuart is primarily responsible for the development of
the Packaged Ice System. Other key management personnel are A.J. Lewis III,
President and Chief Operating Officer, and Steven P. Rosenberg, Vice Chairman.
The Company's directors and officers as a group hold a 48% fully diluted equity
interest in the Company (including shares attributable to directors designated
by shareholders). The Company's shareholder group also includes Norwest Equity
Partners V ("Norwest"), a partnership managed by Norwest Venture Capital
Management, Inc., a venture capital firm with over $1 billion under management.
Norwest is the Company's largest shareholder and maintains board representation.
DISTRIBUTION AND SALES
Efficient service, distribution and pricing are the key determinants of
profitability due to the limited amount of product differentiation in the
packaged ice industry. The Company delivers ice to consumers through (i)
placement of Packaged Ice Systems, and (ii) traditional distribution methods.
Packaged Ice System Placement. By producing and bagging the ice at the
customer's location, the Company's Packaged Ice System reduces the Company's
distribution costs. To store and inventory ice, traditional producers build
expensive refrigerated facilities and incur significant utility costs to
maintain temperatures below freezing. The Packaged Ice System eliminates these
storage costs by moving ice production to the site of the customer. Traditional
manufacturers are also subject to high transportation costs, especially over
long distances. These expenses are minimized by on-site production. Remote
communications systems between the Packaged Ice Systems and the Company's
national service center allow for monitoring of on-site inventories and usage,
thereby enhancing the Company's service quality and efficiency. In severe
weather conditions this technology provides instant information on the need for
supplemental ice deliveries and allows rapid, cost-effective responses to each
individual customer's product and servicing needs. As a result of these cost
savings, the proprietary Packaged Ice System provides the Company with (i)
higher operating margins, and (ii) a delivery system designed to supply high
volume locations and capable of cost-effectively servicing a market in excess of
100 miles from its traditional ice manufacturing facilities.
The Company places its Packaged Ice Systems inside supermarkets and other
commercial locations, such as airport catering facilities, construction staging
areas, and large manufacturing plants. The Company provides the machines and
pays for all installation costs, while the retailer provides and pays for the
cost of water, sewer and electricity. The Company maintains ownership of the
machines and charges its customers by the bag. The Company's prices are
competitive with prices for bagged ice delivered by traditional ice companies.
The Company believes that retailers are becoming increasingly aware of the
benefits of the Packaged Ice System, which provides a high quality product
without the necessity of receiving large shipments of ice on a weekly or more
frequent basis.
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In accordance with the Company's expansion strategy, the placement of the
Packaged Ice Systems at customer locations is based upon a thorough review of
each site, which primarily focuses on the historical ice sales at the site. Also
included in the site review is an analysis of the surrounding trade area, the
level of overall retail activity, the level of direct competition and the
proximity of the site to other Packaged Ice Systems operated by the Company.
Further, the Company reviews each site in order to ensure that the site has high
visibility and easy access for the consumer, that the site meets the Company's
standards for sanitary conditions including a connection to the municipal water
supply, that it has received, where available, an acceptable rating from the
local health department, and that it has an acceptable power source. Upon
completion of this review, the Company makes a determination as to the viability
of the location and whether a single machine or multiple machines are required
at the time of initial installation. Multiple machines may be installed at a
site if the volume of sales so warrants.
The Company believes that providing frequent, regular and reliable service
and support is one of the most important elements in the operation of its
machine network. In order to maintain this level of service and support, the
Company has implemented its route servicing system, utilizing trained service
representatives to perform the Company's regularly scheduled service procedures.
A service representative has a route consisting of up to 30 Packaged Ice
Systems, each of which are visited and serviced on a regular basis. The Company
maintains regional centers in Tucson, Arizona; Phoenix, Arizona; Orange County,
California; Baton Rouge, Louisiana; Las Vegas, Nevada; Albuquerque, New Mexico;
Dallas, Texas; San Antonio, Texas; Austin, Texas; Corpus Christi, Texas;
Houston, Texas; and Miami, Florida which are designed to support the activities
of the service representatives. Inventories of filters, supplies and machine
parts are maintained at the centers for use in service calls. Finally, the
Company maintains 24-hour, toll-free telephone support for responding to
consumer calls regarding machine operation problems.
Traditional Distribution. The Company transports packaged ice produced at
its traditional manufacturing facilities to its retail and commercial customers.
The Company utilizes an extensive computerized database which tracks the time
and quantity of customer purchases, estimates customer inventory levels,
catalogues client service histories and details on-site storage capacities. The
system then interrelates this data with information concerning truck
availability and capacity. This allows the Company to efficiently schedule daily
deliveries and service calls. In addition, the Company's market presence
provides it with the necessary customer density to efficiently transport its
products.
PRODUCTS
The Company markets its products to satisfy a broad range of customers,
including retailers, commercial users, restaurants and agricultural users under
a variety of brand names, including Mission Party Ice and Crystal Ice. The
Company produces its ice in cube, half-moon, cylindrical and crushed forms to
satisfy the demand of particular customers. The Company's primary ice product is
cocktail ice packaged in eight pound bags, which it sells principally to
convenience stores and supermarkets. The Company also sells cocktail ice in
assorted bag sizes ranging from 20 to 40 pounds to restaurants, bars, stadiums,
vendors and caterers. In addition, the Company sells block ice in 10 and 300
pound sizes, primarily to commercial, agricultural and industrial customers.
CUSTOMERS
The Company markets its products to a broad range of customers, including
supermarket chains, convenience stores, commercial users, agricultural buyers,
resorts and restaurants and competitive producers and self-suppliers who
experience supply shortages. Management believes that the superior economics and
product quality of the Packaged Ice System has allowed it to develop
relationships with certain high volume national supermarket chains, and will
continue its penetration into this segment.
Retailers with no internal ice production capacity are the primary
purchasers of the Company's manufactured ice products and users of its Packaged
Ice System. Management believes that reasonable pricing when combined with
quality service results in customer loyalty. The Company has a diversified
customer base, with its largest customer accounting for approximately 8.6% of
pro forma net sales in 1996. In
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addition, the Company has geographically diversified its customer base. The
geographic expansion of the Company's customer base protects it from adverse
environmental factors such as abnormally cold summer weather in a particular
region.
COMPETITION
The traditional manufactured ice industry is highly competitive. In
addition to the Company's direct competition, numerous convenience and grocery
retailers operate commercial ice plants for internal use or manufacture and bag
ice at their store locations. Because only one ice manufacturer typically
services an individual retail site, the Company's products generally do not face
competition at the retail level. The traditional delivery packaged ice industry
in the southern and western U.S. is led by six regional, multi-facility
competitors, consisting of the Company, Reddy Ice, Mountain Water, Glacier Ice,
Mid-South Ice, and Triangle Ice, and includes numerous local and regional
companies of varying sizes and competitive resources. The Company believes that
the capabilities of the Packaged Ice System and the Company's associated cost
structure and technological resources, enable it to increase sales to
supermarkets quickly and expand beyond its existing market. The Company's
principal competitor within many of its primary market areas is Reddy Ice, a
subsidiary of Suiza Foods, Inc., a company with greater financial resources than
the Company. The remaining competitors vary greatly in terms of their relative
size and market strength.
Competition in the packaged ice industry is based primarily on service,
price and quality. In order to successfully compete, an ice manufacturer must be
able to substantially increase production and distribution on a seasonal basis
while maintaining cost efficiency. Management believes that the Company's high
quality traditional production facilities, substantial financial resources
resulting from this Offering, high regional market share and associated route
density and proprietary ice machine technology provide it with numerous
competitive advantages. The Company believes that there are significant barriers
to entry to new and existing competitors with respect to the development of a
machine with the same functions as the Packaged Ice System, such as the
substantial capital outlay required to develop such a machine, the larger number
of machines needed to achieve competitive operating efficiencies, the time and
cost involved in developing a sophisticated service network, and the
identification of locations suitable to place the machines. To the Company's
knowledge, of its principal competitors, only Reddy Ice delivers ice through the
use of a similar machine known as the "Ice Factory." In 1994, the Company
acquired the assets of Southco, Inc., which had approximately 175 Ice Factory
systems in Texas. The Company has systematically replaced the Ice Factory
machines with the Packaged Ice System and now operates only 5 Ice Factory
systems, all of which are scheduled for replacement in 1997. See "Risk
Factors -- Competition."
INTELLECTUAL PROPERTY
The Company regards the Packaged Ice System as proprietary and relies
primarily on a combination of patents, nondisclosure and confidentiality
agreements, and other copy protection methods to secure and protect its
intellectual property rights. The Company holds or has exclusive rights to five
United States patents and has one patent pending relating to the Packaged Ice
Systems.
While the Company views the patents relating to the bagging device as
important to the value of the Packaged Ice System as a whole, there can be no
assurance that any issued patent will provide the Company with a meaningful
competitive advantage, that competitors will not design alternatives to reduce
or eliminate the benefits of any issued patent or that challenges will not be
instituted against the validity or enforceability of these patents. Other
companies may obtain patents claiming products or processes that are necessary
for, or useful to, the development of the Company's products, in which case the
Company may be required to obtain licenses for patents or for proprietary
technology in order to develop, manufacture or market its products. There can be
no assurance that the Company would be able to obtain such licenses on
commercially reasonable terms, if at all.
The Company does not hold any registered trademarks, but believes that it
has common law protection for certain of its trademarks in certain markets.
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The Company protects certain of its proprietary materials and processes by
relying on trade secret laws and non-disclosure and confidentiality agreements
and requires all of its employees and third-party developers to sign
nondisclosure agreements. There can be no assurance that confidentiality or
trade secrets will be maintained or that others will not independently develop
or obtain access to such materials or processes.
FACILITIES
The Company has fourteen manufacturing plants located in Arizona,
California, New Mexico, Tennessee and Texas. These fourteen plants have a
combined manufacturing capacity of approximately 1390 tons per day. The Company
intends to consolidate or close two of its manufacturing facilities in order to
obtain greater efficiencies in certain markets. In addition, the Company has
service centers for its Packaged Ice Systems in Arizona, California, Florida,
Louisiana, Nevada, New Mexico and Texas. These service centers are staffed by
trained route service representatives who visit and merchandise the Packaged Ice
Systems on a weekly or more frequent basis.
GOVERNMENT REGULATION
The packaged ice industry is subject to various federal, state and local
laws and regulations, which require the Company, among other things, to obtain
licenses for its business plants and machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding its plants and the Packaged Ice Systems and to continuously control
the quality and quantity of its ice.
The Company's packaged ice products are subject to federal and state
regulation as a food pursuant to the federal Food, Drug and Cosmetic Act,
regulations promulgated thereunder by the Food and Drug Administration ("FDA")
and analogous state statutes. These statutes and regulations impose
comprehensive good manufacturing practices requirements governing the sanitary
conditions of the facilities where ice is manufactured, the design and
maintenance of the equipment used to manufacture the ice, the quality of source
water and the sanitary practices of employees during ice production. The State
of Florida has imposed yet additional requirements that include quarterly
testing of the ice for the presence of microbes and certain substances regulated
under the federal Safe Drinking Water Act, specific requirements for keeping ice
packaging operations separate from other activities and labeling requirements
for the bags used including the name of the company and the net weight. All of
the Company's Packaged Ice Systems and ice manufacturing facilities are subject
to routine and random safety, health and quality inspections. The Company
believes that its facilities, manufacturing practices and Packaged Ice Systems
are in compliance with all applicable federal, state and local laws and
regulations and that the Company will be able to maintain such substantial
compliance in the future.
The Company is subject to certain health and safety regulations including
regulations issued pursuant to the Occupational Safety and Health Act ("OSHA").
These regulations require the Company to comply with certain manufacturing,
health and safety standards to protect its employees from accidents.
ENVIRONMENTAL MATTERS
The Company's ice manufacturing and ice storage operations are subject to
federal, state and local environmental laws and regulations. As a result, the
Company has the potential to be involved from time to time in administrative or
legal proceedings relating to environmental matters. There can be no assurance
that the aggregate amount of any environmental liabilities that might be
asserted in any such proceeding will not be material. The Company cannot predict
the types of environmental laws or regulations that may from time to time be
enacted in the future by federal, state or local governments, how existing or
future laws or regulations will be interpreted or enforced or what types of
environmental conditions may be found to exist at its facilities. The enactment
of more stringent laws or regulations or a more strict interpretation of
existing laws and regulations may require additional expenditures by the
Company, some of which could be material.
The Company generates and handles certain hazardous substances in
connection with the manufacture and storage of packaged ice. The handling and
disposal of these substances and wastes is subject to federal, state and local
regulations, and site contamination originating from the release or disposal of
such substances
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or wastes can lead to significant liabilities. In addition, certain of the
Company's current and former facilities are located in industrial areas and have
been in operation for many years. As a consequence, it is possible that
historical activities on property currently or formerly owned by the Company or
that current or historical activities on neighboring properties have affected
properties currently or formerly owned by the Company and that, as a result,
additional environmental issues may arise in the future, the precise nature of
which the Company cannot now predict.
The Company thus may become liable for site contamination at properties
currently or formerly owned by the Company. Although such liability has not had
a material adverse affect on the financial condition or operating results of the
Company in the past, and the Company has no knowledge of claims that could be
expected to have a material adverse affect on its financial condition or
operations, there can be no assurance that the Company will not incur
significant costs in connection with historical handling or disposal of such
substances and wastes.
INSURANCE
The Company carries general and product liability insurance. Its combined
coverage per occurrence and aggregate loss coverages are in amounts the Company
believes to be adequate. Although the Company is not aware of any actions having
ever been filed and believes that the technology utilized at its manufacturing
facilities and contained in its machines makes any contamination of the ice
manufactured at its plants or dispensed by its machines unlikely, any
significant damage awards against the Company in excess of the Company's
insurance coverage could result in a material loss to the Company.
EMPLOYEES AND LABOR RELATIONS
At July 31, 1997, the Company had 749 employees, 507 of whom are full-time
employees and 242 of whom are part-time or seasonal employees. The Company
generally has not experienced difficulty in meeting its seasonal employment
needs.
With the exception of 125 employees of SWI, none of the Company's employees
are represented by a union or are subject to a collective bargaining agreement.
The Company has never experienced a work stoppage due to labor difficulties and
management believes its relationship with its employees is good.
LITIGATION AND OTHER LEGAL PROCEEDINGS
The Company is a party in certain legal proceedings that have resulted from
the ordinary conduct of its business, including several personal injury
lawsuits. In the opinion of the Company's management, none of these proceedings
is expected to have a material adverse effect on the Company.
37
<PAGE> 42
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Company has assembled an experienced management team to oversee the
development and operation of the Company. The name, age and respective position
of each director and executive officer of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James F. Stuart................. 55 Chairman of the Board of Directors and Chief
Executive Officer
A.J. Lewis III.................. 41 President and Chief Operating Officer, Director
Steven P. Rosenberg............. 38 Vice Chairman of the Board of Directors
H.D. Wiginton................... 59 Vice President, Marketing
Diana F. Rice................... 47 Treasurer, Controller and Secretary
Stephen R. Sefton............... 41 Director
Richard A. Coonrod.............. 66 Director
Robert G. Miller................ 46 Director
Rod Sands*...................... 49 Director
</TABLE>
- ---------------
* In connection with the investment in the Company by SV Capital Partners, L.P.
("SV") on July 17, 1997, the holders of at least 60% of the outstanding
capital stock of the Company executed a voting agreement pursuant to which SV
may designate a representative to be elected to the Board of Directors of the
Company. SV has designated Rod Sands to be its Board representative, and it is
anticipated that Mr. Sands will be elected to the Board of Directors at its
next regular meeting. Mr. Sands is a limited partner in SV, and a member of
its investment committee. From 1992 to 1997, Mr. Sands served as President and
Chief Operating Officer of Pace Foods, Inc., San Antonio, Texas, a producer of
picante sauce products. See "Certain Relationships and Related
Transactions -- Stock Purchase Agreement with SV Capital Partners, L.P."
The following is a brief description of the background and principal
occupation of each director and executive officer:
James F. Stuart, Chairman of the Board and Chief Executive Officer and a
founder of Packaged Ice, served as President of the Company from 1990 until
January 1997, when he was elected Chairman of the Board of Directors and Chief
Executive Officer. Mr. Stuart is Chairman of the Executive Committee of the
Board of Directors.
A.J. Lewis III is President and Chief Operating Officer, a position to
which he was elected in January 1997. Mr. Lewis has been an investor and
director of the Company since 1991, and also serves on the Executive Committee.
Mr. Lewis acquired Mission in 1988 and was its president and the sole director
until its acquisition by the Company. He founded STPI in 1991 and was its
president and a director from inception until its acquisition by the Company.
Since 1989, Mr. Lewis has been a director and president of Southwest Texas
Equipment Distributors, Inc., which is a distributor of Hoshizaki ice equipment.
Steven P. Rosenberg is Vice Chairman of the Board of Directors, an officer
position to which he was elected in March 1997. Mr. Rosenberg has been an
investor and a director since 1991 and also serves on the Executive Committee.
Mr. Rosenberg is involved in special projects for the Company. From 1992 to
February 1997, Mr. Rosenberg was President of Arrow, now a wholly owned
subsidiary of ConAgra. Arrow is a diversified food product packaging company
which supplies the Company with a substantial portion of its plastic bags.
38
<PAGE> 43
H.D. Wiginton is Vice President, Marketing. He joined the Company in July
1996. For the five years prior to joining the Company, Mr. Wiginton was
Executive Vice President of Tower Marketing, a Texas-based, regional food
brokerage concern.
Diana F. Rice is Treasurer, Controller and Assistant Secretary of the
Company. Ms. Rice joined the Company in July 1993 as a contract controller,
became full-time controller in January 1994, and was elected to the offices of
Controller and Assistant Secretary in June 1996. Ms. Rice was elected to the
office of Treasurer in March 1997. From 1992 until joining the Company, Ms. Rice
was a contract controller to Glass Wholesalers, Inc., Houston, Texas, a
wholesale distributor of glass doors and custom glass products.
Stephen R. Sefton has been a director since 1995 and is a member of the
Compensation and Audit Committee of the Board of Directors. Mr. Sefton was
designated to be elected as a director by Norwest Equity Partners V, L.P., the
Company's largest shareholder. Since 1986, Mr. Sefton has been Vice President of
Norwest Venture Capital Management, Inc. where he is responsible for
originating, approving and managing investments for its various investment
partnerships. Mr. Sefton is a general partner of Itasca Partners II which is
general partner of Norwest Equity Partners V, L.P.
Richard A. Coonrod has been a director since 1995 and is a member of the
Compensation Committee of the Board of Directors. Mr. Coonrod was designated to
be elected as a director by The Food Fund Limited Partnership ("Food Fund"), a
shareholder of the Company. Mr. Coonrod has been a general partner of The Food
Fund Limited Partnership, a Minneapolis-based limited partnership specializing
in food-related investments, since 1989 and has been President of Coonrod
Agriproduction Corporation, a food and agribusiness consulting and investment
firm, since 1985. Mr. Coonrod has been a director of Orange-co, Inc. since 1987,
and has been a director of Michael Foods, Inc. since 1994.
Robert G. Miller is a private investor and was Chairman of the Board of
Directors of SWI for the past five years until its acquisition by the Company.
From 1980 to 1992, Mr. Miller was President and Chief Executive Officer of
Glacier Water, Inc., a publicly traded water vending company.
VOTING AGREEMENT
In excess of 80% of the shareholders have entered into a voting agreement
(the "Voting Agreement") which fixes the number of directors at no less than
five and no more than nine and provides for the election to the Board of
Directors of the Company of (i) James F. Stuart, (ii) one representative
designated by The Food Fund, who shall initially be Richard A. Coonrod, (iii)
one representative designated by Norwest Equity Partners V, who shall initially
be Stephen R. Sefton, (iv) one representative designated by Steven P. Rosenberg,
who shall initially be Steven P. Rosenberg, and (v) A. J. Lewis III. The Voting
Agreement terminates upon the earlier of (i) the agreement of the holders of 80%
of the Company's Common Stock, Series A Preferred Stock and Series B Preferred
Stock voting as a single class on as converted basis, (ii) the completion by the
Company of an initial public offering resulting in aggregate net proceeds to the
Company and any selling shareholders of $7,500,000 or more, (iii) the merger or
consolidation of the Company with or into another entity which results in the
shareholders holding less than 50% of the voting securities of the surviving
entity, or the sale of all or substantially all of the Company's assets, or (iv)
as to any party's right to designate a director, the reduction of such
shareholder's holdings to less than 50% of the September 20, 1995 levels.
Amendments to the Voting Agreement require the agreement of holders of 80% of
the Company's Common Stock, Series A Preferred Stock and Series B Preferred
Stock voting on an as converted basis. In addition, certain holders of in excess
of 50% of the Company's voting stock have entered into a Voting Agreement with
certain former shareholders of SWI to elect Robert G. Miller to the Board of
Directors.
39
<PAGE> 44
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
Chief Executive Officer of the Company and the Company's only other highly
compensated executive officer (the "Named Executive Officers.") Compensation
information is shown for fiscal 1994, 1995 and 1996.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
----------------- -------------------------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SARS COMPENSATION
----------------------- ---- -------- ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James F. Stuart 1996 $125,000 -- --(1) -- $1,827(2)
Chairman, Chief Executive 1995 75,000 -- --(1) -- --
Officer 1994 75,000 -- --(1) -- --
A.J. Lewis III (3) $125,000 -- --(1) -- --
President, Chief Operating
Officer
H. D. Wiginton 1996(4) 18,333 -- --(1) 6,000 3,000(5)
Vice President, Marketing
</TABLE>
- ---------------
(1) Did not receive perquisites and other personnel benefits from Packaged Ice
in excess of $50,000 or 10% of the Named Executive Officer's total annual
salary and bonus paid for the years indicated.
(2) Contributions to Packaged Ice's 401(k) plan made by Packaged Ice in 1996 in
the amount of $1,827.
(3) Did not serve as executive officer of Packaged Ice at the end of the last
completed fiscal year.
(4) Represents partial year compensation. No compensation information is
provided for prior years as Mr. Wiginton's employment commenced November
1996.
(5) Automobile allowance.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding the number of
stock options to purchase shares of the Company's Common Stock granted to the
Named Executive Officers during the year ended December 31, 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED IN PER SHARE OPTION TERM
OPTIONS FISCAL EXERCISE OR EXPIRATION ----------------------
NAME GRANTED YEAR 1996 BASE PRICE DATE 5% 10%
---- ---------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
H. D. Wiginton 6,000 100% $7.50 12/17/2006 $28,300 $71,718
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table provides certain information regarding the exercise of
stock options to purchase shares of the Company's Common Stock during the year
ended December 31, 1996, by the Named Executive Officers, and the fiscal
year-end value of stock options held by such officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR END(#) FISCAL YEAR END(1)
ACQUIRED ON ---------------------------- ----------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
James F. Stuart................ -- -- -- -- --
A.J. Lewis III................. -- -- -- -- --
H. D. Wiginton................. -- -- 6,000 -- $15,000
</TABLE>
- ---------------
40
<PAGE> 45
(1) Based on a fiscal year end of December 31, 1996, and a fair market value of
$10.00 per share, as determined by the Company's Board of Directors. The
value of in-the-money options is calculated as the difference between the
fair market value of the Packaged Ice Common Stock underlying the options at
fiscal year end and the exercise price of the options. Exercisable options
refer to those options that are exercisable as of December 31, 1996, while
Unexercisable options refer to those options that become exercisable at
various times thereafter.
DIRECTOR COMPENSATION
Directors of the Company are elected annually and hold office until the
next annual meeting of shareholders or until their successors are elected and
qualified. See "-- Voting Agreement." Directors are not compensated for their
services as directors. Directors are reimbursed, however, for ordinary and
necessary expenses incurred in attending board or committee meetings.
STOCK OPTION PLAN
The Company adopted the Packaged Ice, Inc. Stock Option Plan on July 26,
1994 (the "Option Plan"). Under the Option Plan, options to purchase up to
130,000 shares of Common Stock may be granted to employees, outside directors
and consultants and advisers to the Company or any subsidiary. The purposes of
the Option Plan are to further the growth, development and financial success of
the Company by providing additional financial incentives to key personnel and to
retain and attract qualified individuals who will contribute to the overall
success of the Company. Shares that by reason of the expiration of an option
(other than by reason of exercise) or which are no longer subject to purchase
pursuant to an option granted under the Option Plan may be reoptioned
thereunder. The Option Plan is currently administered by the Board of Directors,
but the Board of Directors may determine to delegate this responsibility to a
committee of the Board which would then have the authority to set specific terms
and conditions of options granted under the Option Plan and administer the
Option Plan. Options granted under the Option Plan are non-qualified options and
are not intended to be "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended. Stock options granted under the
Option Plan may be granted for a term not to exceed ten years and are not
transferable other than by will or the laws of descent and distribution. Each
option may be exercised within the term of the option pursuant to which it was
granted (so long as the optionee, if an employee, continues to be employed by
the Company). In addition, an option may be exercised as to vested shares within
90 days after the termination of employment of the optionee (except in the case
of a termination for cause, in which case the option shall automatically expire
on termination), and in the event of a termination in case of death, disability
or eligible retirement, all options shall become exercisable and may be
exercised until the earlier of the first anniversary of such event or the stated
expiration date.
The exercise price of all stock options must be at least equal to the fair
market value of the Common Stock on the date of grant. Stock options may be
exercised by payment in cash of the exercise price with respect to each share to
be purchased, or by a method in which a concurrent sale of the acquired stock is
arranged, with the exercise price payable in cash from such sale proceeds.
At August 1, 1997, the Company had outstanding options for 79,500 shares of
Common Stock at a weighted average exercise price of $7.31 of which 29,100 were
presently exercisable. All options granted under the Option Plan have a
five-year vesting period, which will be accelerated in the event of a change of
control or initial public offering. All of the outstanding options were granted
at exercise prices determined by the Board of Directors to be equal to the fair
market value of the Common Stock on the date of grant. To date, no options have
been exercised under the Option Plan.
EMPLOYMENT AND TERMINATION
None of the executive officers currently have employment agreements, with
the exception of H. D. Wiginton. Mr. Wiginton, the Company's Vice President,
Marketing, entered into an employment agreement effective November 1, 1996,
which establishes a base salary of $110,000 per year, provides for
41
<PAGE> 46
certain cash bonus incentives relating to his performance and grants Mr.
Wiginton the immediate right to purchase 6,000 shares of Common Stock plus 6,000
shares under the Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1996, A. J. Lewis III and Richard A.
Coonrod served as members of the Compensation Committee. During 1996, no member
of the Compensation Committee was an officer, former officer or employee of the
Company or any of its subsidiaries. During 1996, no executive officer of the
Company served as a member of: (i) the compensation committee of another entity
in which one of the executive officers of such entity served on the Company's
Compensation Committee, (ii) the Board of Directors of another entity in which
one of the executive officers of such entity served on the Company's
Compensation Committee, or (iii) the compensation committee of another entity in
which one of the executive officers of such entity served as a member of the
Company's Board of Directors. A. J. Lewis III resigned from the Compensation
Committee upon being named an executive officer.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of August 1, 1997
with respect to the beneficial ownership of Packaged Ice Common Stock (assuming
conversion of the Series A Preferred Stock and Series B Preferred Stock which
have voting rights equivalent to that of the Common Stock) by: (i) each director
of the Company, (ii) each Named Executive Officer of the Company, (iii) each
other person known to hold 5% or more of the outstanding shares of Common Stock,
and (iv) all current executive officers (regardless of salary and bonus level)
and directors of the Company as a group. Unless otherwise indicated, the persons
listed in the table below have sole voting and investment powers with respect to
the shares indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
-------------------
SHARES %
---------- ------
<S> <C> <C>
James F. Stuart 358,700 7.0%
8572 Katy Freeway, Suite 101
Houston, Texas 77024
A. J. Lewis III(1) 393,943 7.7%
1120 E. Durango
San Antonio, Texas 78205
Steven P. Rosenberg(2) 473,401 9.2%
5430 LBJ Freeway, Suite 1600
Dallas, Texas 75219
Stephen R. Sefton(3) 820,449 16.0%
Jack Stazo(4) 260,864 5.1%
10606 N. Evers Park
Houston, Texas 77024
Norwest Equity Partners V(5) 820,449 16.0%
222 South Ninth St, Suite 2800
Minneapolis, MN 55402-3388
Richard A. Coonrod(6) 91,161 1.8%
5720 Smetana Drive, Suite 300
Minnetonka, MN 55343
H. D. Wiginton 12,000 0.2%
8572 Katy Freeway, Suite 101
Houston, Texas 77024
Robert G. Miller 286,540 5.6%
4425 West Olive, Suite 310
Glendale, Arizona 85302
SV Capital Partners, L.P.(7)(9) 400,000 7.8%
200 Concord Plaza, Suite 620
San Antonio, Texas 78716
</TABLE>
42
<PAGE> 47
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
-------------------
SHARES %
---------- ------
<S> <C> <C>
Rod Sands(8)(9) 400,000 7.8%
200 Concord Plaza, Suite 620
San Antonio, Texas 78716
All directors and executive officers as a group (9 persons)
(1)(10)(11) 2,848,194 55.7%
</TABLE>
- ---------------
(1) Includes 2,000 shares of Common Stock held by Mr. Lewis, as Trustee, 25,000
shares owned by South Texas Equipment Distributors, Inc., a corporation
owned by Mr. and Mrs. Lewis, and 69,350 shares held by Mr. and Mrs. Lewis
as tenants in common.
(2) Includes 83,221 shares of Series B Preferred Stock.
(3) Includes 405,000 shares of Series A Preferred Stock and 37,449 shares of
Series B Preferred Stock. Mr. Sefton does not own any shares of record.
However, as Vice President of Norwest Venture Capital Management, Inc., and
general partner of Itasca Partners II, the general partner of Norwest
Equity Partners V, Mr. Sefton may be deemed to be the beneficial owner of
the shares held by Norwest Equity Partners V. Mr. Sefton disclaims
beneficial ownership of the shares held by Norwest Equity Partners V.
(4) Includes 4,000 shares of Common Stock held by Jack Stazo as Trustee.
(5) Includes 405,000 shares of Series A Preferred Stock and 37,449 shares of
Series B Preferred Stock.
(6) Includes 45,000 shares of Series A Preferred Stock and 4,161 shares of
Series B Preferred Stock. Mr. Coonrod does not own any shares of record.
However, as general partner of Food Fund, Mr. Coonrod may be deemed to be
the beneficial owner of the shares held by Food Fund. Mr. Coonrod disclaims
beneficial ownership of the Shares held by Food Fund.
(7) Christopher Goldsbury, Jr. is a director and controlling shareholder of the
corporate general partner of SV Capital Partners, L.P. and the majority
limited partner of SV Capital Partners, L.P. As a result, Mr. Goldsbury may
be deemed to have indirect beneficial ownership of the shares of the
Company owned by SV Capital Partners, L.P.
(8) Comprised solely of 400,000 shares of Common Stock beneficially owned by SV
Capital Partners, L.P. Mr. Sands, a limited partner of SV Capital Partners,
L.P. and a member of its investment committee, may be deemed to have
indirect beneficial ownership of the shares of the Company owned by SV
Capital Partners, L.P. Mr. Sands disclaims any such beneficial ownership.
(9) Includes 100,000 shares of Common Stock subject to warrants currently
exercisable.
(10) Includes 450,000 shares of Series A Preferred Stock and 124,831 shares of
Series B Preferred Stock.
(11) In connection with the investment in the Company by SV Capital Partners,
L.P. ("SV") on July 17, 1997, the holders of at least 60% of the
outstanding capital stock of the Company executed a voting agreement
pursuant to which SV may designate a representative to be elected to the
Board of Directors of the Company. SV has designated Rod Sands to be its
Board representative, and it is anticipated that Mr. Sands will be elected
to the Board of Directors at its next regular meeting. As a result, Mr.
Sands is included as a director and the 400,000 shares of Common Stock
beneficially owned by SV Capital Partners, L.P. are included in the shares
and percent of total shares beneficially owned by all directors and
officers as a group.
43
<PAGE> 48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain decisions concerning the operations or financial structure of the
Company, including, without limitation, matters relating to the Acquisitions,
may present conflicts of interest between the Company, certain shareholders,
directors and officers, described as follows:
Shareholders Agreement. All current shareholders of Packaged Ice are
parties to a Shareholders Agreement (the "Shareholders Agreement") which
restricts the transfer of their shares of capital stock of the Company and
grants the Company and the other shareholders a right of first refusal to
purchase shares which a shareholder attempts to transfer. The Shareholders
Agreement terminates upon the occurrence of any of the following: (i) if the
Company permanently ceases to do business; (ii) the Company completes an
underwritten public offering of its Common Stock which results in net proceeds
to the Company and any selling shareholders of at least $7,500,000; or (iii)
upon the written agreement of the holders of no less than eighty percent (80%)
of the voting power of the outstanding Common Stock and Preferred Stock voting
as a single class.
Tag-Along and Co-Sale Rights. James F. Stuart and Jack Stazo, founding
shareholders, have entered into agreements with certain other shareholders
granting such shareholders the right to participate pro rata in sales to third
parties.
Voting Agreement. In excess of 80% of the Company's shareholders are bound
by a Voting Agreement which establishes the number and make up of the Board of
Directors. See "Management -- Voting Agreement."
Stock Purchase Agreements with Norwest, et al. On September 20, 1995,
Packaged Ice entered into a stock purchase agreement with Norwest and Food Fund
("Norwest Agreement") pursuant to which the Company issued 450,000 shares of
Series A Preferred Stock at a price of $5.56 per share and 420,000 shares of
Common Stock at a price of $5.00 per share. In addition, the Stock Purchase
Agreement requires a vote of two-thirds of the Board of Directors before the
Company may take certain actions relating to distributions, granting demand
registration rights, guaranteeing indebtedness, making loans, changing the
business, making acquisitions, issuing securities and pledging assets. In
connection with the issuance of stock, Norwest and Food Fund were granted demand
and piggy-back registration rights under a registration rights agreement. The
demand right gives the investors the right to cause the Company to register
their securities at any time after September 20, 2000 and before September 20,
2004. In addition, Norwest and Food Fund were granted a put option to sell their
stock back to the Company at fair market value, which option becomes effective
only if Norwest and Food Fund have been unable to register their stock by
September 20, 2004. The put option terminates in the event the Company completes
a firmly underwritten public offering of Common Stock, provided that the gross
offering price equals or exceeds $7,500,000. In December 1996, Norwest, Food
Fund and Steven P. Rosenberg advanced $750,000 to the Company under convertible
demand notes. On January 17, 1997, the Company entered into a stock purchase
agreement with Norwest, Food Fund and Steven P. Rosenberg pursuant to which the
Company issued 124,831 shares of Series B Preferred Stock at a price of $6.07
per share in exchange for the cancellation of the $750,000 of demand notes. As a
result of the issuance of Series B Preferred Stock, the Shareholders Agreement
and the Voting Agreement were amended to include the Series B Preferred Stock.
In addition, Mr. Rosenberg was granted demand registration rights under the
September 20, 1995 registration rights agreement. The Company has amended the
September 20, 1995 registration rights agreement to grant demand registration
rights to Mr. Rosenberg, Food Fund and Norwest which are substantially similar
to those granted in connection with the issuance of the Warrants. Holders of
Series A Preferred Stock and Series B Preferred Stock have contractual
preemptive rights to acquire capital stock and have waived such preemptive
rights with respect to the Offering.
Stock Purchase Agreements with Individual Investors. The Company entered
into a stock purchase agreement dated December 23, 1993 which granted certain
individual shareholders piggy-back registration rights with respect to the
Common Stock and the right to receive financial and other information and notice
of certain events. The Company entered into a stock purchase agreement on
September 20, 1995 with individual investors which granted them piggy-back
registration rights, contractual preemptive rights to acquire capital stock, and
the right to receive financial and other information. Such holders have waived
their preemptive
44
<PAGE> 49
rights with respect to the Offering. In addition, this agreement requires a vote
of two-thirds of the Board of Directors before the Company may take certain
actions relating to distributions, granting demand registration rights,
guaranteeing indebtedness, making loans, changing the business, making
acquisitions, issuing securities and pledging assets. The Board of Directors has
unanimously approved the issuance of the securities and all ancillary
agreements.
Agreements with A. J. Lewis III. A. J. Lewis III is the President and Chief
Operating Officer and a director of the Company. Mr. Lewis and his wife, Liza B.
Lewis, own 7.7% of the fully diluted shares of Common Stock of the Company. Mr.
and Mrs. Lewis have been granted demand registration rights in connection with
the Mission Acquisition. Prior to completion of the Mission Acquisition, Mr.
Lewis and his wife owned 100% of Mission and 80% of STPI. Mr. Lewis and his wife
also own Southwest Texas Equipment Distributors, Inc. which is a shareholder of
the Company. Southwest Texas Equipment Distributors, Inc., an ice equipment
sales and rental company, has the exclusive right to supply Hoshizaki ice cubers
to the Company under an agreement dated September 9, 1991. Mr. Lewis holds the
option to purchase the real estate on which Mission's facilities are located.
Mr. Lewis intends to exercise this option in 1998. As part of the Mission
Acquisition, the Company will lease these facilities from Mr. Lewis on
arms-length terms approved by a disinterested majority of the Board of
Directors. These agreements with Mr. Lewis may result in conflicts of interest
with respect to certain matters affecting the Company, such as potential
business opportunities, business dealings, demands on Mr. Lewis' time, possible
corporate transactions and other strategic decisions affecting the future of the
Company and Mr. Lewis.
Agreements with SWI and its Principals. Prior to completion of the SWI
Acquisition, Dale M. Johnson, Robert G. Miller and Alan S. Bernstein together
owned 95% of SWI. After completion of the Acquisition, Messrs. Johnson, Miller
and Bernstein will own an aggregate of 16% of the fully diluted shares of Common
Stock of the Company. Messrs. Johnson, Miller and Bernstein will be granted
demand registration rights in connection with the SWI Acquisition. Prior to the
SWI Acquisition, Packaged Ice and SWI were parties to an option agreement and
master lease agreement under which SWI granted to the Company the right to
acquire SWI on specified terms, and under which SWI obtained the right to lease
Packaged Ice Systems and place them in SWI's market area. The option agreement
and master lease agreement with SWI terminated upon consummation of the SWI
Acquisition. Mr. Miller owns and leases to SWI the real property on which an ice
manufacturing plant in Phoenix, Arizona is located.
Stock Purchase Agreement with SV Capital Partners, L.P. On July 17, 1997,
Packaged Ice entered into a stock purchase agreement with SV Capital Partners,
L.P. ("SV") pursuant to which the company issued 300,000 shares of Common Stock
at a price of $10 per share and a warrant to purchase 100,000 shares of Common
Stock at an exercise price of $14 per share until July 17, 2002. In addition,
the Stock Purchase Agreement requires a vote of two-thirds of the Board of
Directors before the company may take certain action relating to distributions,
granting demand registration rights, guaranteeing indebtedness, making loans,
changing the business, making acquisitions, pledging assets and becoming a party
to a merger, consolidation or reorganization resulting in less than 51% voting
power by persons who held at least 51% of the voting power before such
transaction or selling all or substantially all of the Company's assets. In
connection with the investment by SV, the holders of at least 60% of the
outstanding capital stock of the Company executed a voting agreement pursuant to
which SV may designate a representative to be elected to the Board of Directors
and the shareholders shall elect such person to the Board. Also in connection
with the issuance of stock, SV was granted demand and piggy back registration
rights under a registration rights agreement. The demand gives SV the right to
cause the Company to register its securities at any time after 180 days
following completion by the Company of a public equity offering. In addition,
James F. Stuart, A. J. Lewis III and Steven Rosenberg entered into a parallel
exit agreement with SV guaranteeing SV the right to participate pro rata in
sales to third parties. SV also became a party to the Shareholders Agreement and
Voting Agreement in connection with the issuance of stock to SV.
Other Transactions and Relationships with Shareholders. Akin, Gump,
Strauss, Hauer & Feld, L.L.P. ("Akin Gump") provides legal services to the
Company. Cecil Schenker, a shareholder of the Company, is the sole shareholder
of Cecil Schenker, P.C., a partner of Akin Gump. Alan Schoenbaum, the son of
Stanley Schoenbaum, a shareholder of the Company, is the sole shareholder of
Alan Schoenbaum, P.C., a partner of
45
<PAGE> 50
Akin Gump. Kenneth H. Johnson, a shareholder, provides legal services to the
Company. Bill Highsmith, a shareholder, has acted as an insurance agent for the
Company in connection with the Company's health insurance and key-man life
insurance. James M. Raines, a shareholder, provided investment banking services
to the Company in connection with the sale of the Old Notes, for which he was
granted an extension of a Common Stock purchase warrant granted previously to
him, and for which he will receive a finder's fee from Jefferies & Company, Inc.
The warrant gave Mr. Raines the right to purchase 43,296 shares of Common Stock
at a price of $5.78 per share. Mr. Raines acquired 18,271 shares under his
warrant pursuant to a cashless exercise. Steven P. Rosenberg, a shareholder and
director of the Company, is a consultant and former president of Arrow, which
supplies plastic bags to the Company. Lancer Corporation, a shareholder,
supplies the Company's proprietary bagging devices under an exclusive contract.
Fleming Companies, a shareholder, is a significant customer of the Company.
Fleming Companies has offered to sell its shares of Common Stock to the Company
under the Shareholders Agreement. See "Principal Shareholders," footnote 7.
The Company believes that the transactions referred to above are no less
favorable than transactions which would have been obtained from unrelated third
parties. Any future transactions between the Company and related parties will be
approved by outside directors and will be on terms no less favorable then those
which could have been obtained from unrelated third parties.
THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Notes, the purchasers thereof became
entitled to the benefits of certain registration rights under the Registration
Rights Agreement. The Exchange Notes are being offered hereunder in order to
satisfy the obligations of the Company under the Registration Rights Agreement.
See "Registration Rights; Additional Interest."
For each $1,000 principal amount of Old Notes surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Notes will receive $1,000
principal amount of Exchange Notes. Upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, the
Company will accept all Old Notes properly tendered prior to 5:00 p.m., New York
City time, on the Expiration Date. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer in integral multiples of $1,000 principal
amount.
Under existing interpretations of the staff of the SEC, including Exxon
Capital Holdings Corporation, SEC No-Action Letter (available April 13, 1989),
the Morgan Stanley Letter and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Company believes that the Exchange Notes would in
general be freely transferable after the Exchange Offer without further
registration under the Securities Act by the respective holders thereof (other
than a "Restricted Holder," being (i) a broker-dealer who purchased Old Notes
exchanged for such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an affiliate of the Company within the meaning of Rule 405 under
the Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such holder is not
participating in, and has no arrangement with any person to participate in, the
distribution (within the meaning of the Securities Act) of such Exchange Notes.
Eligible holders wishing to accept the Exchange Offer must represent to the
Company that such conditions have been met. Any holder of Old Notes who tenders
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes could not rely on the interpretation by the staff of the SEC
enunciated in the Morgan Stanley Letter and similar no-action letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including that (i) it is neither an affiliate of the Company nor a broker-dealer
tendering Old Notes acquired directly from the Company for its own account, (ii)
any
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<PAGE> 51
Exchange Notes to be received by it are being acquired in the ordinary course of
its business and (iii) it is not participating in, and it has no arrangement
with any person to participate in, the distribution (within the meaning of the
Securities Act) of the Exchange Notes. In addition, in connection with any
resales of Exchange Notes, any broker-dealer (a "Participating Broker-Dealer")
who acquired Old Notes for its own account as a result of market-making
activities or other trading activities must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. The staff of the SEC has taken the position in
no-action letters issued to third parties including Shearman & Sterling, SEC
No-Action Letter (available July 2, 1993), that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes (other than a resale of an unsold allotment from the original sale of Old
Notes) with this Prospectus, as it may be amended or supplemented from time to
time. Under the Registration Rights Agreement, the Company is required to allow
Participating Broker-Dealers to use this Prospectus, as it may be amended or
supplemented from time to time, in connection with the resale of such Exchange
Notes. See "Plan of Distribution."
The Exchange Offer shall be deemed to have been consummated upon the
earlier to occur of (i) the Company having exchanged Exchange Notes for all
outstanding Old Notes (other than Old Notes held by a Restricted Holder)
pursuant to the Exchange Offer and (ii) the Company having exchanged, pursuant
to the Exchange Offer, Exchange Notes for all Old Notes that have been tendered
and not withdrawn on the date that is 30 days following the commencement of the
Exchange Offer. In such event, holders of Old Notes seeking liquidity in their
investment would have to rely on exemptions to registration requirements under
the securities laws, including the Securities Act.
As of the date of this Prospectus, $50,000,000 principal amount of Old
Notes are issued and outstanding. In connection with the issuance of the Old
Notes, the Company arranged for the Old Notes to be eligible for trading in the
Private Offering, Resale and Trading through Automated Linkages (PORTAL) Market,
the National Association of Securities Dealers' screen based, automated market
trading of securities eligible for resale under Rule 144A.
The Company shall be deemed to have accepted for exchange validly tendered
Old Notes when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will act as
agent for the tendering holders of Old Notes for the purpose of receiving
Exchange Notes from the Company and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an invalid
tender or the occurrence of certain other events set forth herein, certificates
for any such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean October 6, 1997 unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time. The Company reserves the right
(i) to delay acceptance of any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Old Notes not previously
accepted, if any of the conditions set forth herein under "-- Termination" shall
have occurred and shall not have been waived by the Company (if permitted to be
waived by the Company), by
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<PAGE> 52
giving oral or written notice of such delay, extension or termination to the
Exchange Agent, and (ii) to amend the terms of the Exchange Offer in any manner
deemed by it to be advantageous to the holders of the Old Notes. Any such delay
in acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Old Notes of such amendment. Without
limiting the manner in which the Company may choose to make public announcements
of any delay in acceptance, extension, termination or amendment of the Exchange
Offer, the Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest payable semi-annually on April 15 and
October 15 of each year, commencing October 15, 1997. Holders of Exchange Notes
of record on October 1, 1997 will receive interest on May 15, 1997 from the date
of issuance of the Exchange Notes, plus an amount equal to the accrued interest
on the Old Notes from the date of issuance of the Old Notes, April 17, 1997, to
the date of exchange thereof. Consequently, assuming the Exchange Offer is
consummated prior to the record date in respect of the October 15, 1997 interest
payment for the Old Notes, holders who exchange their Old Notes for Exchange
Notes will receive the same interest payment on October 15, 1997 that they would
have received had they not accepted the Exchange Offer. Interest on the Old
Notes accepted for exchange will cease to accrue upon issuance of the Exchange
Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile or an Agent's message,
together with the Old Notes and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. The tender
by a holder of Old Notes will constitute an agreement between such holder and
the Company in accordance with the terms and subject to the conditions set forth
herein and in the Letter of Transmittal. Delivery of all documents must be made
to the Exchange Agent at its address set forth herein. Holders may also request
that their respective brokers, dealers, commercial banks, trust companies or
nominees effect such tender for such holders. The method of delivery of Old
Notes and the Letter of Transmittal and all other required documents to the
Exchange Agent is at the election and risk of the holders. Instead of delivery
by mail, it is recommended that holders use an overnight or hand delivery
service. In all cases, sufficient time should be allowed to assure timely
delivery. No Letter of Transmittal or Old Notes should be sent to the Company.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer. The
term "holder" with respect to the Exchange Offer means any person in whose name
Old Notes are registered on the books of the Company or any other person who has
obtained a properly completed stock power from the registered holder.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering Old Notes which are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
Any beneficial holder whose Old Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on behalf of the registered holder. If such
beneficial holder wishes to tender directly, such beneficial holder must, prior
to completing and executing the Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such holder's name or obtain a properly completed bond power from the
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<PAGE> 53
registered holder. The transfer of record ownership may take considerable time.
If the Letter of Transmittal is signed by the record holder(s) of the Old Notes
tendered thereby, the signature must correspond with the name(s) written on the
face of the Old Notes without alteration, enlargement or any change whatsoever.
If the Letter of Transmittal is signed by a participant in DTC, the signature
must correspond with the name as it appears on the security position listing as
the holder of the Old Notes. Signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution")unless the Old Notes tendered pursuant thereto are tendered (i) by
a registered holder (or by a participant in DTC whose name appears on a security
position listing as the owner) who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal and the Exchange Notes are being issued directly to such registered
holder (or deposited into the participant's account at DTC) or (ii) for the
account of an Eligible Institution. If the Letter of Transmittal is signed by a
person other than the registered holder of any Old Notes listed therein, such
Old Notes must be endorsed or accompanied by appropriate bond powers which
authorize such person to tender the Old Notes on behalf of the registered
holder, in either case signed as the name of the registered holder or holders
appears on the Old Notes. If the Letter of Transmittal or any Old Notes or bond
powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
unless waived by the Company, evidence satisfactory to the Company of their
authority to so act must be submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Old Notes
(or a timely confirmation received of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC with an Agent's Message) or a Notice of
Guaranteed Delivery from an Eligible Institution is received by the Exchange
Agent. Issuances of Exchange Notes in exchange for Old Notes tendered pursuant
to a Notice of Guaranteed Delivery by an Eligible Institution will be made only
against delivery of the Letter of Transmittal (and any other required documents)
and the tendered Old Notes (or a timely confirmation received of a book-entry
transfer of Old Notes into the Exchange Agent's account at DTC) with the
Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of the Company or its counsel, be unlawful. The Company also
reserves the absolute right to waive any conditions of the Exchange Offer or
defects or irregularities in tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Neither the Company, the Exchange Agent nor any other person shall be under any
duty to give notification of defects or irregularities with respect to tenders
of Old Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such Old Notes unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date. In addition, the Company reserves the right in its sole
discretion to (i) purchase or make offers for any Old Notes that remain
outstanding subsequent to the Expiration Date, or, as set forth under
"-- Termination," to terminate the Exchange Offer and (ii) to the extent
permitted by applicable law, purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
may differ from the terms of the Exchange Offer.
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BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Old Notes
at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC may make book-entry delivery
of the Old Notes by causing DTC to transfer such Old Notes into the Exchange
Agent's account in accordance with DTC's procedure for such transfer. Although
delivery of Old Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, an Agent's Message must be transmitted and
received by the Exchange Agent on or prior to the Expiration Date at one of its
addresses set forth below under "Exchange Agent", or the guaranteed delivery
procedure described below must be complied with. DELIVERY OF DOCUMENTS TO DTC
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All references in this
Prospectus to deposit or delivery of Old Notes shall be deemed to include DTC's
book-entry delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer on
a timely basis and deliver an Agent's Message, may effect a tender if: (i) the
tender is made by or through an Eligible Institution; (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder of the Old Notes, the registration number or numbers of such Old Notes
(if applicable), and the total principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
business days after the Expiration Date, the Letter of Transmittal, together
with the Old Notes in proper form for transfer (or a confirmation of a
book-entry transfer into the Exchange Agent's account at DTC) and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly completed
and executed Letter of Transmittal, together with the certificate(s)
representing all tendered Old Notes in proper form for transfer(or a
confirmation of such a book-entry transfer) and all other documents required by
the Letter of Transmittal are received by the Exchange Agent within five
business days after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a timely confirmation
of a book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC) must be received by the Exchange Agent, with the Letter of Transmittal and
any other required documents, by the Expiration Date or within the time periods
set forth above pursuant to a Notice of Guaranteed Delivery from an Eligible
Institution. Each holder tendering the Old Notes for exchange sells, assigns and
transfers the Old Notes to the Exchange Agent, as agent of the Company, and
irrevocably constitutes and appoints the Exchange Agent as the holder's agent
and attorney-in-fact to cause the Old Notes to be transferred and exchanged. The
holder warrants that it has full power and authority to tender, exchange, sell,
assign and transfer the Old Notes and to acquire the Exchange Notes issuable
upon the exchange of such tendered Old Notes, that the Exchange Agent, as agent
of the Company, will acquire good and unencumbered title to the tendered Old
Notes, free and clear of all liens, restrictions, charges and encumbrances, and
that the Old Notes tendered for exchange are not subject to any adverse claims
when accepted by the Exchange Agent, as agent of the Company. The holder also
warrants and agrees that it will, upon request, execute and deliver any
additional documents deemed by the Company or the
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Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment and transfer of the Old Notes. All authority conferred or agreed to
be conferred in the Letter of Transmittal by the holder will survive the death,
incapacity or dissolution of the holder and any obligation of the holder shall
be binding upon the heirs, personal representatives, successors and assigns of
such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior to
the Expiration Date, unless previously accepted for exchange. To withdraw a
tender of Old Notes in the Exchange Offer, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the business day prior
to the Expiration Date and prior to acceptance for exchange thereof by the
Company. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including, if applicable, the registration number
or numbers and total principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Depositor withdrawing the tender, (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor and (v) if applicable because the Old Notes have been
tendered pursuant to the book-entry procedures, specify the name and number of
the participant's account at DTC to be credited, if different than that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted or exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange any Old Notes not theretofore accepted for
exchange, and may terminate the Exchange Offer if it determines that the
Exchange Offer violates any applicable law or interpretation of the staff of the
SEC.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period. Holders of Old Notes will have
certain rights against the Company under the Registration Rights Agreement
should the Company fail to consummate the Exchange Offer.
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EXCHANGE AGENT
U.S. Trust Company has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance and requests for additional copies
of this Prospectus or of the Letter of Transmittal should be directed to the
Exchange Agent addressed as follows:
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, 27th Floor
Dallas, Texas 75201
<TABLE>
<S> <C>
Attention: Corporate Trust Department
Facsimile: (214) 754-1303
Telephone: (214) 754-1255
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse the Exchange Agent for its reasonable out-
of-pocket expenses in connection therewith. The Company may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange Offer including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees, will be paid by the Company. The Company will pay all transfer taxes, if
any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, Exchange Notes or Old Notes not tendered or accepted for exchange are
to be delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Old Notes tendered, or if tendered Old
Notes are registered in the name of any person other than the person signing the
Letter of Transmittal, or if a transfer tax is imposed for any reason other than
the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Company over the term of the Exchange Notes under
generally accepted accounting principles.
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DESCRIPTION OF NOTES
The Exchange Notes will be issued, and the Old Notes were issued, pursuant
to the indenture (the "Indenture"), by and among the Company, the Subsidiary
Guarantors and U.S. Trust Company of Texas, N.A., as Trustee (the "Trustee")
dated April 17, 1997. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). The following summary of certain
provisions of the Indenture, the Notes and the Subsidiary Guarantees does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the TIA, and to all of the provisions of the Indenture (copies of
which can be obtained from the Company upon request), including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the TIA as in effect on the date of the Indenture. The definitions
of certain capitalized terms used in the following summary are set forth under
"-- Certain Definitions" below. For purposes of this Section, references to the
"Company" shall mean Packaged Ice, Inc., excluding its Subsidiaries.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration of transfer and exchange at the offices of the Registrar, which
currently is the Trustee's corporate trust office. The Company may change any
Paying Agent and Registrar without notice to Holders of the Notes. The Company
will pay principal (and premium, if any) on the Notes at the Trustee's corporate
office in New York, New York. In addition, in the event the Notes do not remain
in book-entry form, interest may be paid at the Company's option, by wire
transfer or check mailed to the registered address of the Holders as shown on
the Note Register.
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries. Subject to the requirements of the Indenture, the
Company will be able to designate future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to the restrictive
covenants set forth in the Indenture.
Any Old Notes that remain outstanding after the completion of the Exchange
Offer, together with the Exchange Notes issued in connection with the Exchange
Offer, will be treated as a single class of securities under the Indenture.
The obligations of the Company under the Notes will be guaranteed on a
senior basis, jointly and severally, by each of the Subsidiary Guarantors. See
"-- Ranking and Guarantees."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $50,000,000 and
will mature on April 15, 2004. Interest on the Notes will accrue at the rate of
12% per annum and will be payable semi-annually on each April 15 and October 15
commencing on October 15, 1997 to the persons who are registered Holders at the
close of business on the April 1 and October 1 immediately preceding the
applicable interest payment date. Interest on the Notes will accrue from and
including the most recent date to which interest has been paid or, if no
interest has been paid, from and including the Issue Date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Interest on the Notes may increase if the Company fails to fulfill its
obligations under the Registration Rights Agreement, and all references to
"interest" herein include any such increased interest. See "Exchange Offer;
Registration Rights; Additional Interest."
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole at any time
or in part from time to time, on and after April 15, 2001, at the following
redemption prices (expressed as percentages of the principal amount) if redeemed
during the twelve-month period commencing on April 15 of the year set forth
below, plus, in each case, accrued and unpaid interest thereon to the date of
redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2001.............................................. 107.00%
2002.............................................. 103.50%
2003 and thereafter............................... 100.00%
</TABLE>
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<PAGE> 58
Notwithstanding the foregoing, at any time on or prior to April 15, 2000,
the Company may redeem up to an aggregate of $17.5 million principal amount of
Notes at a redemption price of 112% of the principal amount thereof, plus
accrued and unpaid interest thereon to the redemption date, with the net
proceeds of any Public Equity Offering; provided that at least $32.5 million in
aggregate principal amount of Notes remain outstanding immediately after the
occurrence of such redemption; and provided, further, that such redemption
occurs within 90 days of the date of the closing of such Public Equity Offering.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption.
RANKING AND GUARANTEES
The indebtedness of the Company evidenced by the Notes will rank senior in
right of payment to all Subordinated Indebtedness of the Company and pari passu
in right of payment with all existing and future senior Indebtedness of the
Company. The Notes are unsecured and holders of secured Indebtedness of the
Company will effectively rank prior to Holders of the Notes with respect to the
assets securing such secured Indebtedness. As of December 31, 1996, after giving
pro forma effect to the issuance of the Notes and the application of the
estimated net proceeds therefrom, the Company would have had no senior
Indebtedness outstanding.
Each Subsidiary Guarantor fully and unconditionally guarantees, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Notes, including the
payment of principal of and interest on the Notes. The Subsidiary Guarantee of
each Subsidiary Guarantor will rank pari passu in right of payment to all
existing and future senior Indebtedness of such Subsidiary Guarantor. As of
December 31, 1996, after giving pro forma effect to the issuance of the Notes
and the application of the estimated net proceeds therefrom, the Subsidiary
Guarantors would have had no senior Indebtedness outstanding. The obligations of
each Subsidiary Guarantor are limited to the maximum amount which, after giving
effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor and after giving effect to any collections from or payments made by or
on behalf of any other Subsidiary Guarantor in respect of the obligations of
such other Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to
its contribution obligations under the Indenture, will result in the obligations
of such Subsidiary Guarantor under the Subsidiary Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. Each
Subsidiary Guarantor that makes a payment or distribution under a Subsidiary
Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor in an amount pro rata, based on the net assets of each Subsidiary
Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor without limitation, or
with other Persons upon the terms and conditions set forth in the Indenture. See
"-- Certain Covenants -- Mergers, Consolidations and Sale of Assets" and
"-- Certain Covenants -- Asset Sales." In the event all of the capital stock of
a Subsidiary Guarantor is sold
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<PAGE> 59
(including by way of merger or consolidation) by the Company and the sale
complies with the provisions set forth in "-- Certain Covenants -- Asset Sales,"
the Subsidiary Guarantee with respect to such Subsidiary Guarantor will be
released.
Separate financial statements of the Subsidiary Guarantors are not included
herein (except for SWI, Mission and STPI) because such Subsidiary Guarantors are
jointly and severally liable with respect to the Company's obligations pursuant
to the Notes, and the aggregate net assets, earnings and equity of the
Subsidiary Guarantors and the Company are substantially equivalent to the net
assets, earnings and equity of the Company on a consolidated basis.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes on a Business Day (the
"Change of Control Payment Date") not more than 60 nor less than 30 days
following such Change of Control, pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon to
the date of repurchase (the "Change of Control Payment"). Within 30 days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase Notes pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being repurchased by the
Company. The Paying Agent will promptly mail or otherwise deliver to each Holder
of Notes so tendered the Change of Control Payment for such Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by
book-entry) to each Holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture will not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction. The provisions of the Indenture may not afford Holders
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction affecting the Company that may
adversely affect Holders, if such transaction is not the type of transaction
included within the definition of Change of Control. A transaction involving the
management of the Company or its Affiliates, or a transaction involving a
recapitalization of the Company will result in a Change of Control only if it is
the type of transaction specified in such definition.
The existence of a Holder's rights to require the Company to repurchase
Notes in connection with a Change of Control may deter a third party from
acquiring the Company in a transaction that would constitute a "Change of
Control."
The source of funds for any repurchase of Notes upon a Change of Control
will be the Company's cash or cash generated from operations or other sources,
including borrowings or sales of assets; however, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to repay
all Indebtedness owing under other senior Indebtedness or to make any required
repurchases of the Notes. Any failure by the Company to repurchase Notes
tendered pursuant to a Change of Control Offer will constitute an Event of
Default. See "Risk Factors -- Substantial Leverage and Ability to Service Debt."
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<PAGE> 60
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
repurchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries, taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under New York
law, which is the law governing the Indenture and the Notes. Accordingly, the
ability of a Holder of Notes to require the Company to repurchase such Notes as
a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of the Company and its Subsidiaries, taken as a whole, to
another Person or group may be uncertain.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Indebtedness. (a) The Indenture provides that neither
the Company nor any of its Subsidiaries will, directly or indirectly, Incur
any Indebtedness, including, without limitation, any Acquired Indebtedness
(other than Permitted Indebtedness).
(b) Notwithstanding the foregoing limitations, the Company and its
Subsidiaries may Incur Indebtedness (including, without limitation,
Acquired Indebtedness), in each case, if (i) no Default or Event of Default
shall have occurred and be continuing on the date of the proposed
Incurrence thereof or would result as a consequence of such proposed
Incurrence and (ii) immediately after giving effect to such proposed
Incurrence, the Consolidated Fixed Charge Coverage Ratio of the Company is
at least equal to 2.0 to 1.0 if such proposed Incurrence is on or prior to
March 31, 1999; and at least equal to 2.50 to 1.0 if such proposed
Incurrence is thereafter.
(c) Neither the Company nor any Subsidiary Guarantor will, directly or
indirectly, in any event Incur any Indebtedness that by its terms (or by
the terms of any agreement governing such Indebtedness) is subordinated to
any other Indebtedness of the Company or such Subsidiary Guarantor, as the
case may be, unless such Indebtedness is also by its terms (or by the terms
of any agreement governing such Indebtedness) made expressly subordinate to
the Notes or the Subsidiary Guarantee of such Subsidiary Guarantor, as the
case may be, to the same extent and in the same manner as such Indebtedness
is subordinated pursuant to subordination provisions that are most
favorable to the holders of any other Indebtedness of the Company or such
Subsidiary Guarantor, as the case may be.
(d) Notwithstanding the foregoing limitations, the Company and its
Subsidiaries may Incur no more than $37,500,000 of secured Indebtedness.
Limitation on Restricted Payments. The Indenture provides that neither the
Company nor any of its Subsidiaries will, directly or indirectly (a) purchase,
redeem or otherwise acquire or retire for value any Capital Stock of the
Company, or any warrants, rights or options to acquire shares of any class of
such Capital Stock, other than through the exchange therefor solely of Qualified
Capital Stock of the Company or warrants, rights or options to acquire Qualified
Capital Stock of the Company, (b) make any principal payment on, purchase,
defease, redeem, prepay, decrease or otherwise acquire or retire for value,
prior to any scheduled final maturity, scheduled repayment or scheduled sinking
fund payment, any Subordinated Indebtedness of the Company or (c) make any
Investment (other than Permitted Investments) in any Person (each of the
foregoing prohibited actions set forth in clauses (a), (b) and (c) being
referred to as a "Restricted Payment"), if at the time of such proposed
Restricted Payment or immediately after giving effect thereto, (i) a Default or
an Event of Default has occurred and is continuing or would result therefrom, or
(ii) the Company is not able to Incur at least $1.00 of additional Indebtedness
in accordance with paragraph (b) of "-- Limitation on Indebtedness" above (as if
such Restricted Payment had been made as of the last day of the Four Quarter
Period), or (iii) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date exceeds or would
exceed the sum of: (u) 50% of the
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<PAGE> 61
Consolidated Net Income (or if Consolidated Net Income shall be a loss, minus
100% of such loss) of the Company during the period (treating such period as a
single accounting period) from the beginning of the first fiscal quarter
commencing after the Issue Date to the end of the Company's most recently ended
fiscal quarter for which internal financial statements are available at the time
of such Restricted Payment; (v) 100% of the aggregate Net Equity Proceeds
received by the Company from any Person from the issuance and sale subsequent to
the Issue Date of Qualified Capital Stock of the Company other than any
Qualified Capital Stock sold to a Subsidiary of the Company; (w) the aggregate
net cash proceeds received after the Issue Date by the Company (other than from
any of its Subsidiaries) upon the exercise of any options, warrants or rights to
purchase shares of Qualified Capital Stock of the Company; (x) the aggregate net
cash proceeds received after the Issue Date by the Company from the issuance or
sale (other than to any of its Subsidiaries) of debt securities or shares of
Disqualified Capital Stock that have been converted into or exchanged for
Qualified Capital Stock of the Company, together with the aggregate cash
received by the Company at the time of such conversion or exchange; (y) an
amount equal to the net reduction in Investments, subsequent to the date of the
Indenture, in any Person resulting from payments of interest on debt, dividends,
repayments of loans or advances, return of capital, or other transfers of
property (but only to the extent such distributions are not included in the
calculation of Consolidated Net Income), in each case, to the Company or any
Subsidiary from any Person, not to exceed in the case of any Person, the amount
of Investments previously made by the Company or any Subsidiary in such Person
and which was treated as a Restricted Payment; and (z) $100,000.
Notwithstanding the foregoing, these provisions do not prohibit: (1) the
acquisition of Capital Stock of the Company or warrants, rights or options to
acquire Capital Stock of the Company either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or warrants, rights or options to acquire
Qualified Capital Stock of the Company, or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company or warrants,
rights or options to acquire Qualified Capital Stock of the Company; (2) the
acquisition of any Subordinated Indebtedness of the Company either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (A) shares of Qualified Capital
Stock of the Company or warrants, rights or options to acquire Qualified Capital
Stock of the Company or (B) Permitted Refinancing Indebtedness; or (3) loans by
the Company or any Subsidiary to employees in the ordinary course of business up
to an aggregate principal amount of $100,000 at any one time outstanding;
provided, however, that in the case of clauses (1), (2) and (3) of this
paragraph, no Default or Event of Default shall have occurred and be continuing
at the time of such payment or as a result thereof. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date, amounts
expended pursuant to clauses (1)(ii), (2)(i) and (2)(ii)(A) shall, in each case,
be included in such calculation.
For purposes of the foregoing provisions, the amount of any Restricted
Payment (other than cash) shall be the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) on the date of the Restricted Payment of the asset(s)
proposed to be transferred by the Company or such Subsidiary, as the case may
be, pursuant to the Restricted Payment. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment complies with the Indenture and
setting forth in reasonable detail the basis upon which the required
calculations were computed, which calculations may be based upon the Company's
latest available internal quarterly financial statements.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would be permitted by the provisions
of this "Limitation on Restricted Payments" covenant and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash
prior to such designation) in the Restricted Subsidiary so designated will be
deemed to be Restricted Payments at the time of such designation and will reduce
the amount available for Restricted Payments under clause (iii) of the first
paragraph of this covenant. All such outstanding
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Investments will be deemed to constitute Investments in an amount equal to the
fair market value of such Investments at the time of such designation.
For purposes of this covenant, if a particular Restricted Payment involves
a non-cash payment, including a distribution of assets, then such Restricted
Payment shall be deemed to be an amount equal to the cash portion of such
Restricted Payment, if any, plus an amount equal to the fair market value of the
non-cash portion of such Restricted Payment.
Limitation on Dividends. The Indenture provides that the Company will not
declare or pay any dividend or make any distribution (other than dividends or
distributions payable solely in Qualified Capital Stock of the Company) on
shares of the Company's Capital Stock to holders of such Capital Stock.
Asset Sales. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, engage in an Asset Sale unless (i) the
Company or the Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors of the Company set forth in an Officers'
Certificate delivered to the Trustee) of the assets or Properties issued or sold
or otherwise disposed of and (ii) at least 85% of the consideration therefor
received by the Company or such Subsidiary is in the form of cash or Cash
Equivalents; provided that the amount of (x) any liabilities (as shown on the
Company's or such Subsidiary's most recent balance sheet) of the Company or any
Subsidiary (other than contingent liabilities and liabilities that are
Subordinated Indebtedness or otherwise by their terms subordinated to the Notes
or the Subsidiary Guarantees) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Subsidiary from further liability and (y) any notes or other obligations
received by the Company or any such Subsidiary from such transferee that are
converted by the Company or such Subsidiary into cash within 180 days of closing
such Asset Sale (to the extent of the cash received), shall be deemed to be cash
for purposes of this provision.
Within 180 days after the receipt of any Net Cash Proceeds from any Asset
Sale, the Company may (i) apply all or any of the Net Cash Proceeds therefrom to
repay Indebtedness (other than Subordinated Indebtedness) of the Company or any
Subsidiary, provided, in each case, that the related loan commitment of any
revolving credit facility or other borrowing (if any) is thereby permanently
reduced by the amount of such Indebtedness so repaid, or (ii) invest all or any
part of the Net Cash Proceeds thereof in properties and other capital assets
that replace the properties or other capital assets that were the subject of
such Asset Sale or in other properties or other capital assets that will be used
in the Ice Business. Pending the final application of any such Net Cash
Proceeds, the Company may temporarily reduce borrowings under any revolving
credit facility or otherwise invest such Net Cash Proceeds in any manner that is
not prohibited by the Indenture. Any Net Cash Proceeds from an Asset Sale that
are not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Available Proceeds Amount." When the aggregate
Available Proceeds Amount exceeds $2.5 million, the Company shall make an offer
to purchase, from all Holders of the Notes and any then outstanding Pari Passu
Indebtedness required to be repurchased or repaid on a permanent basis in
connection with an Asset Sale, an aggregate principal amount of Notes and any
such Pari Passu Indebtedness equal to such Available Proceeds Amount as follows:
(i) (A) The Company shall make an offer to purchase (an "Asset
Proceeds Offer") from all Holders of the Notes in accordance with the
procedures set forth in the Indenture the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out of
an amount (the "Payment Amount") equal to the product of such Available
Proceeds Amount multiplied by a fraction, the numerator of which is the
outstanding principal amount of the Notes and the denominator of which is
the sum of the outstanding principal amount of the Notes and such Pari
Passu Indebtedness, if any (subject to proration in the event such amount
is less than the aggregate Offered Price (as defined in clause (ii) below)
of all Notes tendered), and (B) to the extent required by any such Pari
Passu Indebtedness and provided there is a permanent reduction in the
principal amount of such Pari Passu Indebtedness, the Company shall make an
offer to purchase such Pari Passu Indebtedness (a "Pari Passu Offer") in an
amount (the "Pari Passu Indebtedness Amount") equal to the excess of the
Available Proceeds Amount over the Payment Amount.
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<PAGE> 63
(ii) The offer price for the Notes shall be payable in cash in an
amount equal to 100% of the principal amount of the Notes tendered pursuant
to an Asset Proceeds Offer, plus accrued and unpaid interest, if any, to
the date such Asset Proceeds Offer is consummated (the "Offered Price"), in
accordance with the procedures set forth in the Indenture. To the extent
that the aggregate Offered Price of the Notes tendered pursuant to an Asset
Proceeds Offer is less than the Payment Amount relating thereto or the
aggregate amount of the Pari Passu Indebtedness that is purchased or repaid
pursuant to the Pari Passu Offer is less than the Pari Passu Indebtedness
Amount (such shortfall constituting an "Asset Proceeds Deficiency"), the
Company may use such Asset Proceeds Deficiency, or a portion thereof, for
general corporate purposes, subject to the limitations of the "Limitation
on Restricted Payments" covenant.
(iii) If the aggregate Offered Price of Notes validly tendered and not
withdrawn by Holders thereof exceeds the Payment Amount, Notes to be
purchased will be selected on a pro rata basis. Upon completion of such Net
Proceeds Offer and Pari Passu Offer, the amount of Excess Proceeds shall be
reset to zero.
The Company will not permit any Subsidiary to enter into or suffer to exist
any agreement (excluding Permitted Liens) that would place any restriction of
any kind (other than pursuant to law or regulation) on the ability of the
Company to make an Asset Proceeds Offer following any Asset Sale. The Company
will comply with Rule 14e -1 under the Exchange Act, and any other securities
laws and regulations thereunder, if applicable, in the event that an Asset Sale
occurs and the Company is required to purchase Notes as described above.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, create or otherwise cause or permit
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (a) pay dividends or make any other distributions
on its Capital Stock; (b) make loans or advances or pay any Indebtedness or
other obligation owed to the Company or to any Subsidiary of the Company; or (c)
transfer any of its property or assets to the Company or to any Subsidiary of
the Company (each such encumbrance or restriction in clause (a), (b), or (c) a
"Payment Restriction"), except for such encumbrances or restrictions existing
under or by reason of: (1) applicable law; (2) the Indenture; (3) customary
non-assignment provisions of any lease or license agreements or similar
agreements entered into in the ordinary course of business of any Subsidiary of
the Company; (4) any instrument governing Acquired Indebtedness Incurred in
accordance with paragraph (b) of the covenant "-- Limitation on Indebtedness";
provided that such encumbrance or restriction is not, and will not be,
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, becoming a Subsidiary of
the Company; (5) agreements existing on the Issue Date to the extent and in the
manner such agreements are in effect on the Issue Date; (6) any restriction or
encumbrance contained in contracts for the sale of assets to be consummated in
accordance with the Indenture solely in respect of the assets to be sold
pursuant to such contract; (7) any restrictions on the sale or other disposition
or encumbrance of any property securing Indebtedness as a result of a Permitted
Lien on such property; (8) any agreement relating to an acquisition of property,
so long as the encumbrances or restrictions in any such agreement relate solely
to the property so acquired and are not or were not created in anticipation of
or in connection with the acquisition thereof; (9) the Credit Facilities; or
(10) any encumbrance or restriction contained in Permitted Indebtedness or
Permitted Refinancing Indebtedness Incurred to Refinance the Indebtedness
Incurred pursuant to an agreement referred to in clause (4), (5) or (9) above;
provided that the provisions relating to such encumbrance or restriction
contained in any such Permitted Refinancing Indebtedness are no less favorable
to the Company or to the Holders in any material respect in the reasonable and
good faith judgment of the Board of Directors of the Company than the provisions
relating to such encumbrance or restriction contained in agreements referred to
in such clause (4), (5) or (9).
Limitation on Issuances and Sales of Capital Stock of Subsidiaries. The
Indenture provides that the Company will not cause or permit any of its
Subsidiaries to issue or sell any Capital Stock (other than to the Company or to
a wholly-owned Subsidiary of the Company) or permit any Person (other than the
Company
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<PAGE> 64
or a wholly-owned Subsidiary of the Company) to own or hold any Capital Stock of
any Subsidiary of the Company or any Lien or security interest therein;
provided, however, that such covenant shall not prohibit the disposition (by
sale, merger or otherwise) of all of the Capital Stock of a Subsidiary provided
any Net Cash Proceeds therefrom are applied in accordance with the covenants
described under "-- Asset Sales."
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Subsidiary to, directly or indirectly, create, incur,
assume, affirm or suffer to exist or become effective any Lien of any kind
except for Permitted Liens, upon any of their respective property or assets,
whether now owned or acquired after the Issue Date, or any income, profits or
proceeds therefrom, to secure (a) any Indebtedness of the Company or such
Subsidiary (if it is not also a Subsidiary Guarantor), unless prior to, or
contemporaneously therewith, the Notes are equally and ratably secured, or (b)
any Indebtedness of any Subsidiary Guarantor, unless prior to, or
contemporaneously therewith, the Subsidiary Guarantees are equally and ratably
secured; provided, however, that if such Indebtedness is expressly subordinated
to the Notes or the Subsidiary Guarantees, the Lien securing such Indebtedness
will be subordinated and junior to the Lien securing the Notes or the Subsidiary
Guarantees, as the case may be, with the same relative priority as such
Indebtedness has with respect to the Notes or the Subsidiary Guarantees. The
foregoing covenant will not apply to any Lien securing Acquired Indebtedness,
provided that any such Lien extends only to the property or assets that were
subject to such Lien prior to the related acquisition by the Company or such
Subsidiary and was not created, incurred or assumed in contemplation of such
transaction. The incurrence of additional secured Indebtedness by the Company
and its Subsidiaries is subject to further limitations on the incurrence of
Indebtedness as described under "-- Limitation on Indebtedness."
Mergers, Consolidations and Sale of Assets. The Indenture provides that the
Company will not, in a single transaction or series of related transactions,
consolidate or merge with or into any Person, or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Company's
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless: (i) either (1) the Company shall be the surviving or continuing
corporation or (2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Company's Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and, if applicable, the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness Incurred or anticipated to be
Incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, (1) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction and (2) shall be able to Incur at least
$1.00 of additional Indebtedness pursuant to paragraph (b) of "-- Limitation on
Indebtedness"; provided that in determining the Consolidated Fixed Charge
Coverage Ratio of the Company or such Surviving Entity, as the case may be, such
ratio shall be calculated as if the transaction (including the Incurrence of any
Indebtedness or Acquired Indebtedness) took place on the first day of the Four
Quarter Period; (iii) immediately before and immediately after giving effect to
such transaction and, if applicable, the assumption contemplated by clause
(i)(2)(y) above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness Incurred or anticipated to be Incurred
and any Lien granted in connection with or in respect of the transaction), no
Default and no Event of Default shall have occurred or be continuing; and (iv)
the Company or the Surviving Entity shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied.
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Upon any such consolidation, merger, conveyance, lease or transfer in
accordance with the foregoing, the successor Person formed by such consolidation
or into which the Company is merged or to which such conveyance, lease or
transfer is made will succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture with the same effect as if
such successor had been named as the Company therein, and thereafter (except in
the case of a sale, assignment, transfer, lease, conveyance or other
disposition) the predecessor corporation will be relieved of all further
obligations and covenants under the Indenture and the Notes.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Subsidiary Guarantee is to be released in accordance with the terms of the
Guarantee and the Indenture in connection with any transaction complying with
the provisions of "-- Asset Sales") will not, and the Company will not cause or
permit any Subsidiary Guarantor to, consolidate with or merge with or into any
Person, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets, other than the Company or any other Subsidiary
Guarantor unless: (i) the entity formed by or surviving any such consolidation
or merger (if other than the Subsidiary Guarantor), or to which such disposition
shall have been made, is a corporation organized and existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) such
entity assumes by supplemental indenture all of the obligations of the
Subsidiary Guarantor on the Subsidiary Guarantee; (iii) immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; and (iv) immediately after giving effect to such transaction
and the use of any net proceeds therefrom on a pro forma basis, the Company
could satisfy the provisions of clause (ii) of the first paragraph of this
covenant. Any merger or consolidation of a Subsidiary Guarantor with and into
the Company (with the Company being the surviving entity) or another Subsidiary
Guarantor need only comply with clause (iv) of the first paragraph of this
covenant.
Limitation on Transactions with Affiliates. The Indenture provides that
neither the Company nor any Subsidiary of the Company will conduct any business
or enter into any transaction or series of transactions with or for the benefit
of any of their Affiliates (each an "Affiliate Transaction") but excluding
Specified Affiliate Transactions, except in good faith and on terms that are no
less favorable to the Company or such Subsidiary, as the case may be, than those
that could have been obtained in a comparable transaction on an arm's-length
basis from a Person not an Affiliate of the Company or such Subsidiary. All
Affiliate Transactions (and each series of related Affiliate Transactions which
are similar or part of a common plan) involving aggregate payments or other
property with a fair market value in excess of $250,000 shall be approved by the
Board of Directors of the Company, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Subsidiary of the Company enters into an Affiliate Transaction (or a series of
related Affiliate Transactions related to a common plan) that involves an
aggregate fair market value of more than $3,000,000, the Company or such
Subsidiary shall, prior to the consummation thereof, obtain a favorable opinion
as to the fairness of such transaction or series of related transactions to the
Company or the relevant Subsidiary, as the case may be, from a financial point
of view, from an Independent Financial Advisor and file the same with the
Trustee. Notwithstanding the foregoing, the restrictions set forth in this
covenant shall not apply to (i) transactions between the Company and any
Subsidiary or between Subsidiaries, (ii) any employee compensation arrangement
of the Company or any Subsidiary which has been approved by a majority of the
Company's disinterested directors and found in good faith by such directors to
be in the reasonable best interest of the Company or such Subsidiary, as the
case may be, or (iii) customary directors' fees, indemnification and similar
arrangements.
Additional Subsidiary Guarantees. If the Company or any of its Subsidiaries
transfers or causes to be transferred, in one transaction or a series of related
transactions, any property to any Subsidiary that is not a Subsidiary Guarantor,
or if the Company or any of its Subsidiaries shall organize, acquire or
otherwise invest in another Subsidiary having total assets with a book value in
excess of $50,000, then such transferee or acquired or other Subsidiary shall
(i) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Subsidiary shall
fully and unconditionally guarantee all of the Company's obligations under the
Notes and the Indenture on the terms set forth in the Indenture and (ii) deliver
to the Trustee an Opinion of Counsel that such supplemental indenture has been
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duly authorized, executed and delivered by such Subsidiary and constitutes a
legal, valid, binding and enforceable obligation of such Subsidiary. Thereafter,
such Subsidiary shall be a Subsidiary Guarantor for all purposes of the
Indenture.
Limitation on Conduct of Business. The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries to, engage in the conduct
of any business other than the Ice Business on a basis consistent with the
conduct of such business as it is conducted on the Issue Date.
Limitation on Status as Investment Company. The Indenture will prohibit the
Company and the Subsidiary Guarantors from being required to register as an
"investment company" (as that term is defined in the Investment Company Act of
1940, as amended), or from otherwise becoming subject to regulation under the
Investment Company Act of 1940.
Sale and Leaseback Transactions. The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries to, enter into any sale
and leaseback transaction; provided that the Company or any Subsidiary, as
applicable, may enter into a sale and leaseback transaction if (i) the Company
could have (a) incurred Indebtedness in an amount equal to the Attributable
Indebtedness relating to such sale and leaseback transaction pursuant to the
Consolidated Fixed Charge Coverage Ratio test set forth in clause (b) of the
covenant described above under the caption "-- Limitation on Indebtedness" and
(b) incurred a Lien to secure such Indebtedness pursuant to the covenant
described above under the caption "-- Limitation on Liens," (ii) the gross cash
proceeds of such sale and leaseback transaction are at least equal to the fair
market value (as determined in good faith by the Board of Directors of the
Company and set forth in an Officers' Certificate delivered to the Trustee) of
the property that is the subject of such sale and leaseback transaction and
(iii) the transfer of assets in such sale and leaseback transaction is permitted
by, and the Company applies the proceeds of such transaction in compliance with,
the covenant described under the caption "-- Asset Sales."
Reports to Holders. The Company will file with the Commission all
information, documents and reports required to be filed with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act, whether or not the Company
is then subject to such filing requirements so long as the Commission will
accept such filings. The Company will file with the Trustee, within 15 days
after it files them with the Commission, copies of the annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe), without
exhibits, which the Company files with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. Regardless of whether the Company is required to
furnish such reports to its stockholders pursuant to the Exchange Act, the
Company will cause its consolidated financial statements, comparable to that
which would have been required to appear in annual or quarterly reports, to be
delivered to the Trustee and the Holders. The Company will also make such
reports available to prospective purchasers of the Notes, securities analysts
and broker-dealers upon their request. In addition, the Indenture requires that
for so long as any of the Notes remain outstanding the Company will make
available to any prospective purchaser of the Notes or beneficial owner of the
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act, until such time as the Company has either
consummated the exchange offer for the Notes for securities identical in all
material respects which have been registered under the Securities Act or until
such time as the holders thereof have disposed of such Notes pursuant to an
effective registration statement filed by the Company.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Note for a period of 30 days or
more after such interest becomes due and payable; or
(ii) the failure to pay the principal on any Note, when such principal
becomes due and payable, at maturity, upon redemption, pursuant to an Asset
Sale Offer or a Change of Control Offer or otherwise; or
(iii) (x) the failure of the Company or any Subsidiary Guarantor to
comply with any of the terms or provisions of "-- Certain
Covenants -- Mergers, Consolidations and Sale of Assets" or (y) a default
in
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the observance or performance of any other covenant or agreement contained
in the Indenture which default continues for a period of 30 days after the
Company receives written notice specifying the default from the Trustee or
from Holders of at least 25% in principal amount of outstanding Notes; or
(iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Subsidiary of the Company (or the
payment of which is guaranteed by the Company or any Subsidiary of the
Company) which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness after any applicable
grace period provided in such Indebtedness on the date of such default (a
"payment default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of
any such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity
of which has been so accelerated, aggregates $1,000,000; or
(v) one or more judgments in an aggregate amount in excess of
$1,000,000 (which are not covered by third-party insurance as to which a
financially sound insurer has not disclaimed coverage) being rendered
against the Company or any of its Subsidiaries and such judgments remain
undischarged, or unstayed or unsatisfied for a period of 60 days after such
judgment or judgments become final and non-appealable; or
(vi) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any of its Subsidiaries; or
(vii) any of the Subsidiary Guarantees cease to be in full force and
effect or any of the Subsidiary Guarantees are declared to be null and void
and unenforceable or any of the Subsidiary Guarantees are found to be
invalid or any of the Subsidiary Guarantors denies its liability under its
Subsidiary Guarantee (other than by reason of release of a Subsidiary
Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) occurs and is continuing, then and in
every such case the Trustee or the Holders of not less than 25% in aggregate
principal amount of the then outstanding Notes may declare the unpaid principal
of, premium, if any, and accrued and unpaid interest on, all the Notes then
outstanding to be due and payable, by a notice in writing to the Company (and to
the Trustee, if given by Holders) and upon such declaration such principal
amount, premium, if any, and accrued and unpaid interest will become immediately
due and payable. If an Event of Default with respect to the Company specified in
clause (vi) above occurs, all unpaid principal of, and premium, if any, and
accrued and unpaid interest on, the Notes then outstanding will ipso facto
become due and payable without any declaration or other act on the part of the
Trustee or any Holder.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may rescind an acceleration and its
consequences if all existing Events of Default (other than the nonpayment of
principal of and premium, if any, and interest on the Notes which has become due
solely by virtue of such acceleration) have been cured or waived and if the
rescission would not conflict with any judgment or decree. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
Notwithstanding the foregoing, if an Event of Default specified in clause
(iv) above shall have occurred and be continuing, such Event of Default and any
consequential acceleration shall be automatically rescinded if the Indebtedness
that is the subject of such Event of Default has been repaid, or if the default
relating to such Indebtedness is waived or cured and if such Indebtedness has
been accelerated, the holders thereof have rescinded their declaration of
acceleration in respect of such Indebtedness (provided, in each case, that such
repayment, waiver, cure or rescission is effected within a period of 10 days
from the continuation of such default beyond the applicable grace period or the
occurrence of such acceleration).
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a Default in the payment of the principal of or
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interest on any Notes or a Default in respect of any term or provision of the
Notes or the Indenture that cannot be modified or amended without the consent of
all Holders.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable security or indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, the Company is required to provide an Officers'
Certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided, that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
DEFEASANCE
The Indenture provides that the Company may, at its option and at any time,
elect to have the obligations of the Company and the Subsidiary Guarantors
discharged in accordance with the provisions set forth below with respect to the
Notes then outstanding. Such defeasance means that the Company shall be deemed
to have paid and discharged the entire indebtedness represented by such
outstanding Notes and the Company and the Subsidiary Guarantors shall be deemed
to have satisfied all their respective other obligations under the Notes, the
Subsidiary Guarantees and the Indenture, except for (i) the rights of holders of
such outstanding Notes to receive payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due, (ii) the
Company's and the Subsidiary Guarantors' respective obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and (iv) the redemption and
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the respective obligations of the Company
and the Subsidiary Guarantors released with respect to certain covenants in the
Indenture ("covenant defeasance"), and any omission to comply with such
obligations shall not constitute a Default or an Event of Default with respect
to the Notes. In order to exercise either defeasance or covenant defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in U.S. dollars, U.S. Government Obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such outstanding Notes on the
stated maturity thereof or on the applicable redemption date, as the case may
be, and the Company must specify whether the Notes are being defeased to
maturity or to a particular redemption date; (ii) in the case of defeasance, the
Company shall have delivered to the Trustee an Opinion of Counsel stating that
(A) the Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the Issue Date, there has been a change in
the applicable federal income tax law, in either case to the effect that, and
based thereon such Opinion of Counsel shall confirm that, the holders of the
outstanding Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same times as would have
been the case if such defeasance had not occurred; (iii) in the case of covenant
defeasance, the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit; (v) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a default under, the Indenture or any other material agreement or
instrument to which the Company is a party or by default under, the Indenture or
any other material agreement or instrument to which the Company is a party or by
which it is
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bound; (vi) in the case of defeasance or covenant defeasance, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that after the
91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar law
affecting creditors' rights generally and that such defeasance or covenant
defeasance will not result in the Trustee or the trust arising from such deposit
constituting an Investment Company as defined in the Investment Company Act of
1940, as amended; and (vii) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel each stating that all conditions
precedent provided for relating to either the defeasance or the covenant
defeasance, as the case may be, have been complied with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not
adversely affect the rights of any of the Holders. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture, except that, without the consent of each Holder of the Notes affected
thereby, no amendment may, directly or indirectly: (i) reduce the amount of
Notes whose Holders must consent to an amendment; (ii) reduce the rate of or
change the time for payment of interest, including defaulted interest, on any
Notes; (iii) reduce the principal of or change the fixed maturity of any Notes,
or change the date on which any Notes may be subject to redemption or
repurchase, or reduce the redemption or repurchase price therefor; (iv) make any
Notes payable in money other than that stated in the Notes; (v) make any change
in provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of the Notes to waive Defaults or Events of
Default; (vi) amend, modify or change the obligation of the Company to make or
consummate a Change of Control Offer, an Asset Sale Offer or waive any default
in the performance thereof or modify any of the provisions or definitions with
respect to any such offers; (vii) adversely affect the ranking of the Notes or
the Subsidiary Guarantees; or (viii) release any Subsidiary Guarantor from any
of its obligations under its Subsidiary Guarantee or the Indenture otherwise
than in accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees are governed by, and
construed in accordance with, the laws of the State of New York.
THE TRUSTEE
U.S. Trust Company of Texas, N.A. is the Trustee under the Indenture.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided, that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign within 90 days of becoming aware of such
conflicting interest as provided in the TIA or apply to the Commission for
permission to continue as Trustee. The Trustee may resign at any time, in which
case a successor trustee is to be appointed pursuant to the terms of the
Indenture.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" of any Person means Indebtedness of another Person
and any of its Subsidiaries existing at the time such other Person becomes a
Subsidiary of such Person or at the time it merges or consolidates with such
Person or any of such Person's Subsidiaries or is assumed by such Person or any
Subsidiary of such Person in connection with the acquisition of assets from such
other Person and in each case not Incurred by such Person or any Subsidiary of
such Person or such other Person in connection with, or in anticipation or
contemplation of, such other Person becoming a Subsidiary of such Person or such
acquisition, merger or consolidation, and which Indebtedness is without recourse
to the Company or any of its Subsidiaries or to any of their respective
properties or assets other than the Person or such Person's Subsidiaries or the
assets to which such Indebtedness related prior to the time such Person becomes
a Subsidiary of the Company or the time of such acquisition, merger or
consolidation.
"Affiliate" means, when used with reference to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For the purposes of this definition, "control"
when used with respect to any specified Person means the power to direct or
cause the direction of management or policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth in "-- Certain
Covenants -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means (i) an Investment by the Company or any
Subsidiary of the Company in any other Person pursuant to which such Person
shall become a Subsidiary of the Company or shall be merged with or into the
Company or any Subsidiary of the Company or (ii) the acquisition by the Company
or any Subsidiary of the Company of assets of any Person comprising an existing
business (whether existing as a separate entity), subsidiary, division or unit
of such Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Subsidiaries
(including, without limitation, by means of a sale and leaseback transaction or
a merger or consolidation) (collectively, for purposes of this definition, a
"transfer"), directly or indirectly, in one or a series of related transactions,
of (a) any Capital Stock of any Subsidiary held by the Company or any other
Subsidiary, (b) all or substantially all of the properties and assets of any
division or line of business of the Company or any of its Subsidiaries, (c) any
other properties or assets of the Company or any of its Subsidiaries other than
transfers of cash, Cash Equivalents, accounts receivable, or properties or
assets in the ordinary course of business; provided that the transfer of all or
substantially all of the properties or assets of the Company and its
Subsidiaries, taken as a whole, will be governed by the provisions of the
Indenture described above under the captions "-- Certain Covenants -- Mergers,
Consolidations and Sale of Assets" and/or "-- Change of Control" and not by the
provisions of the "Asset Sales" covenant. For the purposes of this definition,
the term "Asset Sale" also shall not include any of the following: (i) sales of
damaged, worn-out or obsolete equipment or assets that, in the Company's
reasonable judgment, are either (A) no longer used or (B) no longer useful in
the business of the Company or its Subsidiaries; (ii) any lease of any property
entered into in the ordinary course of business and with respect to which the
Company or any Subsidiary is the lessor, except any such lease that provides for
the acquisition of such property by the lessee during or at the end of the term
thereof for an amount that is less than the fair market value thereof at the
time the right to acquire such property is granted; (iii) a Restricted Payment
or Permitted Investment permitted under "Certain Covenants -- Limitation on
Restricted Payments;" and (iv) any transfers that, but for this clause (iv),
would be Asset Sales, if (A) the Company elects to designate such transfers as
not constituting Asset Sales and (B) after giving effect to such transfers, the
aggregate fair market value of the properties or assets transferred in such
transaction or any such series of related transactions so designated by the
Company does not exceed $1,000,000.
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"Asset Proceeds Offer" has the meaning set forth in "-- Certain
Covenants -- Asset Sales."
"Attributable Indebtedness" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended). As used in the preceding sentence, the "net rental
payments" under any lease for any such period shall mean the sum of rental and
other payments required to be paid with respect to such period by the lessee
thereunder, excluding any amounts required to be paid by such lessee on account
of maintenance and repairs, insurance, taxes, assessments, water rates or
similar charges. In the case of any lease that is terminable by the lessee upon
payment of penalty, such net rental payment shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Available Proceeds Amount" has the meaning set forth in "-- Certain
Covenants -- Asset Sales."
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the board of directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other day
on which banking institutions in the City of New York are required or authorized
by law or other governmental action to be closed.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person to pay rent or other amounts under a lease that are required to be
classified and accounted for as capital lease obligations under GAAP and, for
purposes of this definition, the amount of such obligations at any date shall be
the capitalized amount of such obligations at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than 270 days from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within 180 days from
the date of acquisition thereof issued by any commercial bank organized under
the laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (v)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (iv) above; (vi) deposits
available for withdrawal on demand with any commercial bank not meeting the
qualifications specified in clause (ii) above, provided that all such deposits
do not exceed $5,000,000 in the aggregate at any one time; (vii) demand and time
deposits and certificates of deposit with any commercial bank organized in the
United States not meeting the qualifications specified in clause (ii) above,
provided that such deposits and certificates support bond, letter of credit and
other similar types of obligations incurred in the ordinary course of business;
and (viii) investments in money market or other mutual funds substantially all
of whose assets comprise securities of the types described in clauses (i)
through (v) above.
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"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any person (as such term is used in Section 13(d)(3) of the Exchange
Act) other than to the Company or a Subsidiary Guarantor; (ii) the Company
consolidates with or merges into another Person or any Person consolidates with,
or merges into, the Company, in any such event pursuant to a transaction in
which the outstanding Voting Stock of the Company is changed into or exchanged
for cash, securities or other property, other than any such transaction where
(a) the outstanding Voting Stock of the Company is changed into or exchanged for
Voting Stock of the surviving or resulting Person that is Qualified Capital
Stock and (b) the holders of the Voting Stock of the Company immediately prior
to such transaction own, directly or indirectly, not less than a majority of the
Voting Stock of the surviving or resulting Person immediately after such
transaction; (iii) the adoption of a plan relating to the liquidation or
dissolution of the Company not involving a merger or consolidation or a sale or
other disposition of assets described in clause (i) above; (iv) the consummation
of any transaction (including, without limitation, any merger or consolidation)
the result of which is that any person (as defined above), excluding Permitted
Holders, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50%
of the total voting power of the Voting Stock of the Company; provided that the
sale of Voting Stock of the Company to a Person or Persons acting as
underwriters in connection with a firm commitment underwriting shall not
constitute a Change of Control; or (v) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors
(other than by action of the Permitted Holders). For purposes of this
definition, any transfer of an equity interest of an entity that was formed for
the purpose of acquiring Voting Stock of the Company will be deemed to be a
transfer of such portion of such Voting Stock as corresponds to the portion of
the equity of such entity that has been so transferred.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income plus (ii) to the
extent that any of the following shall have been taken into account in
determining Consolidated Net Income, (A) all income taxes of such Person and its
Subsidiaries paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions of assets outside the
ordinary course of business), Consolidated Interest Expense, amortization
expense and depreciation expense, and (B) other non-cash items (other than
non-cash interest) reducing Consolidated Net Income, other than any non-cash
item which requires the accrual of or a reserve for cash charges for any future
period and other than any non-cash charge constituting an extraordinary item of
loss, less other non-cash items increasing Consolidated Net Income, all as
determined on a consolidated basis for such Person and its Subsidiaries in
conformity with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters for which financial information is available (the "Four Quarter
Period") ending on or prior to the date of the transaction or event giving rise
to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the
"Transaction Date") to Consolidated Fixed Charges of such Person for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to (i) the Incurrence or repayment of any
Indebtedness of such Person or any of its Subsidiaries (and the application of
the proceeds thereof) giving rise to the need to make such calculation and any
Incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the Incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, at any time subsequent to the first day of the Four Quarter
Period and on or prior to the Transaction Date, as if such Incurrence or
repayment, as the case may be (and the application of the proceeds thereof),
occurred on the first day of the
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Four Quarter Period, and (ii) any Asset Sales or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of such Person or one of its Subsidiaries (including any
Person who becomes a Subsidiary as a result of any such Asset Acquisition)
Incurring, assuming or otherwise being liable for Acquired Indebtedness) at any
time subsequent to the first day of the Four Quarter Period and on or prior to
the Transaction Date, as if such Asset Sale or Asset Acquisition (including the
Incurrence, assumption or liability for any such Indebtedness or Acquired
Indebtedness and also including any Consolidated EBITDA, based upon the four
fiscal quarters of such Person for which financial information is available
immediately preceding such Asset Acquisition, associated with such Asset
Acquisition) occurred on the first day of the Four Quarter Period; provided that
the Consolidated EBITDA of any Person acquired shall be included only to the
extent includable pursuant to the definition of "Consolidated Net Income." If
such Person or any of its Subsidiaries directly or indirectly guarantees
Indebtedness of a third person, the preceding sentence shall give effect to the
Incurrence of such guaranteed Indebtedness as if such Person or any Subsidiary
of such Person had directly Incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on Indebtedness
determined on a fluctuating basis as of the Transaction Date (including
Indebtedness actually Incurred on the Transaction Date) and which will continue
to be so determined thereafter shall be deemed to have accrued at a fixed rate
per annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date; and (2) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense and
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Common Stock) paid,
accrued or scheduled to be paid or accrued during such period times (y) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective consolidated Federal, state and local tax rate
of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate of the interest expense (without deduction of interest
income) of such Person and its Subsidiaries (excluding amortization of deferred
financing fees) for such period, on a consolidated basis, as determined in
accordance with GAAP, and including (a) all amortization of original issue
discount (other than any original issue discount on Indebtedness attributable to
proceeds of the sale of warrants issued in connection with the Incurrence of
such Indebtedness); (b) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
Subsidiaries during such period; (c) net cash costs under all Interest Swap
Obligations (including amortization of fees); (d) all capitalized interest; and
(e) the interest portion of any deferred payment obligations for such period.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Subsidiaries
for such period on a consolidated basis, determined in accordance with GAAP;
provided that there shall be excluded therefrom (a) after-tax gains from Asset
Sales or abandonments or reserves relating thereto, (b) after-tax items
classified as extraordinary or nonrecurring gains, (c) the net income or loss of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Subsidiary of the referent Person or is merged or consolidated
with the referent Person or any Subsidiary of the referent Person, (d) the net
income (but not loss) of any Subsidiary of the referent Person to the extent
that the declaration of dividends or similar distributions by that Subsidiary of
that income is restricted by a contract, operation of law or otherwise, (e) the
net income of any Person, other than a Subsidiary of the referent Person, except
to the extent of cash dividends or distributions paid to the referent Person or
to a wholly-owned Subsidiary of the referent Person by such Person, (f) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such
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operations were classified as discontinued), and (h) in the case of a successor
to the referent Person by consolidation or merger or as a transferee of the
referent Person's assets, any earnings of the successor corporation prior to
such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Subsidiaries for such period, on a consolidated basis, as
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date; (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board of Directors at the time of such nomination or
election or (iii) was elected or nominated for election pursuant to the Voting
Agreement.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms
(or by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the sole option of the holder thereof, in whole or in part, on or prior
to the final maturity date of the Notes.
"Events of Default" has the meaning set forth in "-- Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934, as amended or any
successor statute or statutes thereto.
"Existing Indebtedness" means up to $4.0 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries in existence on the
Issue Date, until such amounts are repaid.
"Fair market value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length, free market
transaction, for cash, between an informed and willing seller and an informed
and willing and able buyer, neither of whom is under undue pressure or
compulsion to complete the transaction. Fair market value shall be determined by
the Board of Directors of the Company acting reasonably and in good faith and
shall be evidenced by a Board Resolution delivered to the Trustee; provided,
however, that if the aggregate non-cash consideration to be received by the
Company or any of its Subsidiaries from any Asset Sale could be reasonably
likely to exceed $2,500,000 the fair market value shall be determined by an
Independent Financial Advisor.
"Family Member" means, when used with reference to any natural Person, such
Person's spouse, siblings, parents, children, or other lineal descendants
(whether by adoption or consanguinity), and shall mean a trust, the primary
beneficiary of which is the Person's spouse, siblings, parents, children, or
other lineal descendants (whether by adoption or consanguinity).
"Financial Advisor" means an accounting, appraisal or investment banking
firm of nationally recognized standing that is, in the reasonable and good faith
judgment of the Board of Directors of the Company, qualified to perform the task
for which such firm has been engaged.
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"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Ice Business" means (i) the manufacture and sale (including, without
limitation, direct sales, wholesale sales and retail sales) of ice; (ii) the
manufacture and sale of ice and water by means of ice manufacturing or water
purification equipment (including ice makers, bins, baggers, merchandisers,
delivery devices and related equipment) installed on the premises of the
Company's customer(s) whether or not such equipment is owned by the Company, the
customers, or a third party; (iii) contract on-premises ice or water service
(including leasing of ice or water related equipment) for a customer's internal
use; (iv) providing cold storage and freezer related services in conjunction
with the traditional ice business; (v) the sale of products incidental or
related to the foregoing; and (vi) all logical extensions of the foregoing.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"Incurrence," "Incurred," "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that (A) any Indebtedness
assumed in connection with an acquisition of assets and any Indebtedness of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) of the Company or at the time such
Person is merged or consolidated with the Company or any Subsidiary of the
Company shall be deemed to be Incurred at the time of the acquisition of such
assets or by such Subsidiary at the time it becomes, or is merged or
consolidated with, a Subsidiary of the Company or by the Company at the time of
such merger or consolidation, as the case may be, and (B) any amendment,
modification or waiver of any document pursuant to which Indebtedness was
previously Incurred shall not be deemed to be an Incurrence of Indebtedness
unless such amendment, modification or waiver shall increase the principal or
premium thereof or interest rate thereon (including by way of original issue
discount). A guarantee by the Company or a Subsidiary Guarantor of Indebtedness
Incurred by the Company or a Subsidiary Guarantor, as applicable, shall not be a
separate incurrence of Indebtedness.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and accrued liabilities arising
in the ordinary course of business that are not overdue by 90 days or more or
are being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted), (v) all Obligations for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) all Indebtedness of others (including all dividends of other
Persons for the payment of which is) guaranteed, directly or indirectly, by such
Person or that is otherwise its legal liability or which such Person has agreed
to purchase or repurchase or in respect of which such Person has agreed
contingently to supply or advance funds but excluding endorsements of negotiable
instruments and documents in the ordinary course of business, (vii) net
liabilities of such Person under Interest Swap Obligations, (viii) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
any asset or property (including, without limitation, leasehold interests and
any other tangible or intangible property) of such Person, whether or not such
Indebtedness is assumed by such Person or is not otherwise such Person's legal
liability; provided that if the Obligations so secured have not been assumed by
such Person or are otherwise not such Person's legal liability, the amount of
such Indebtedness for the
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purposes of this definition shall be limited to the lesser of the amount of such
Indebtedness secured by such Lien or the fair market value of the assets or
property securing such Lien, and (ix) all Disqualified Capital Stock issued by
such Person with the amount of Indebtedness represented by such Disqualified
Capital Stock being equal to the greater of its voluntary or involuntary
liquidation preference and its maximum fixed repurchase price, but excluding
accrued dividends if any. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at such
date; provided that the amount outstanding at any time of any non-interest
bearing Indebtedness or other Indebtedness issued with original issue discount
is the full amount of such Indebtedness less the remaining unamortized portion
of the original issue discount of such Indebtedness at such time as determined
in conformity with GAAP, but such Indebtedness shall only be deemed to be
Incurred as of the date of original issuance thereof.
"Independent" when used with respect to any specified Person means such a
Person who (a) is in fact independent, (b) does not have any direct financial
interest or any material indirect financial interest in the Company or any of
its Subsidiaries, or in any Affiliate of the Company or any of its Subsidiaries
and (c) is not an officer, employee, promoter, underwriter, trustee, partner,
director or person performing similar functions for the Company or any of its
Subsidiaries. Whenever it is provided in the Indenture that any Independent
Person's opinion or certificate shall be furnished to the Trustee, such Person
shall be appointed by the Company and approved by the Trustee in the exercise of
reasonable care, and such opinion or certificate shall state that the signer has
read this definition and that the signer is Independent within the meaning
thereof.
"Interest Swap Obligations" means the obligations of any Person under any
interest rate protection agreement, interest rate future, interest rate option,
interest rate swap, interest rate cap or other interest rate hedge or
arrangement.
"Investment" by any Person means any direct or indirect (i) loan, advance
or other extension of credit or capital contribution (by means of transfers of
cash or other property (valued at the fair market value thereof as of the date
of transfer) to others or payments for property or services for the account or
use of others, or otherwise) (excluding commission, travel and similar advances
to officers and employees made in the ordinary course of business); (ii)
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by any other Person; (iii)
guarantee or assumption of any Indebtedness or any other obligation of any other
Person (except for an assumption of Indebtedness for which the assuming Person
receives consideration at the time of such assumption in the form of property or
assets with a fair market value at least equal to the principal amount of the
Indebtedness assumed, extensions of trade credit or other advances to customers
on commercially reasonable terms in accordance with normal trade practices or
otherwise in the ordinary course of business, workers' compensation, utility,
lease and similar deposits and prepaid expenses made in the ordinary course of
business, and endorsements of negotiable instruments and documents in the
ordinary course of business); and (iv) all other items that would be classified
as investments on a balance sheet of such Person prepared in accordance with
GAAP. The amount of any Investment shall not be adjusted for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment. If the Company or any Subsidiary of the Company sells or otherwise
disposes of any Common Stock of any direct or indirect Subsidiary of the Company
such that, after giving effect to any such sale or disposition, the Company no
longer owns, directly or indirectly, greater than 50% of the outstanding Common
Stock of such Subsidiary, the Company shall be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Common Stock of such Subsidiary not sold or disposed of.
"Issue Date" means the date on which the Notes were first issued under the
Indenture.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to
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give any financing statement under the Uniform Commercial Code (or equivalent
statute or statutes) of any jurisdiction other than to reflect ownership by a
third party of property leased to the referent Person or any of its Subsidiaries
under a lease that is not in the nature of a conditional sale or title retention
agreement).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents (including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents)
received by the Company or any of its Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, brokerage, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable ((1) including,
without limitation, income taxes reasonably estimated to be actually payable as
a result of any disposition of property within two years of the date of
disposition and (2) after taking into account any reduction in tax liability due
to available tax credits or deductions and any tax sharing arrangements) and (c)
appropriate amounts to be provided by the Company or any Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"Net Equity Proceeds" means (a) in the case of any sale by the Company of
Qualified Capital Stock of the Company, the aggregate net cash proceeds received
by the Company, after payment of expenses, commissions and the like (including,
without limitation, brokerage, legal, accounting and investment banking fees and
commissions) incurred in connection therewith, and (b) in the case of any
exchange, exercise, conversion or surrender of any outstanding Indebtedness of
the Company or any Subsidiary issued after the Issue Date for or into shares of
Qualified Capital Stock of the Company, the amount of such Indebtedness (or, if
such Indebtedness was issued at an amount less than the stated principal amount
thereof, the accrued amount thereof as determined in accordance with GAAP) as
reflected in the consolidated financial statements of the Company prepared in
accordance with GAAP as of the most recent date next preceding the date of such
exchange, exercise, conversion or surrender (plus any additional amount required
to be paid by the holder of such Indebtedness to the Company or to any
wholly-owned Subsidiary of the Company upon such exchange, exercise, conversion
or surrender and less any and all payments made to the holders of such
Indebtedness, and all other expenses incurred by the Company in connection
therewith), in each case (a) and (b) to the extent consummated after the Issue
Date.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Officers' Certificate" means a certificate signed by two officers of the
Company.
"Opinion of Counsel" means a written opinion from legal counsel which and
who are reasonably acceptable to the Trustee.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is
pari passu in right of payment to the Notes.
"Paying Agent" shall initially be the Trustee until a successor paying
agent for the Notes is selected in accordance with the Indenture.
"Payment default" has the meaning set forth in "-- Events of Default."
"Permitted Holders" means the following Persons: Norwest Equity Partners V,
a Minnesota Limited Partnership, Fleming Companies, Inc., The Food Fund II
Limited Partnership, A. J. Lewis III, Steven P. Rosenberg, and James F. Stuart,
and any of their respective Affiliates and Family Members, each of the foregoing
individually being a Permitted Holder.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes;
(ii) Indebtedness under any Existing Indebtedness;
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(iii) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company or any Subsidiary thereof in the
ordinary course of business, including guarantees or obligations of the
Company or any Subsidiary thereof with respect to letters of credit
supporting such bid, performance or surety obligations (in each case other
than for an obligation for money borrowed);
(iv) Permitted Refinancing Indebtedness;
(v) the Subsidiary Guarantees of the Notes;
(vi) Interest Swap Obligations of the Company; provided, however, that
such Interest Swap Obligations are entered into to protect the Company and
its Subsidiaries from fluctuations in interest rates on Indebtedness
Incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not exceed the
principal amount of the Indebtedness to which such Interest Swap Obligation
relates;
(vii) Indebtedness of a direct or indirect Subsidiary of the Company
to the Company or to a direct or indirect Subsidiary of the Company for so
long as such Indebtedness is held by the Company or a direct or indirect
Subsidiary of the Company in each case subject to no Lien held by a Person
other than the Company or a direct or indirect Subsidiary of the Company;
provided, that if as of any date any Person other than the Company or a
direct or indirect Subsidiary of the Company owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date
shall be deemed the date of the Incurrence of Indebtedness not constituting
Permitted Indebtedness by the issuer of such Indebtedness;
(viii) Indebtedness of the Company to a direct or indirect Subsidiary
of the Company for so long as such Indebtedness is held by a direct or
indirect Subsidiary of the Company in each case subject to no Lien;
provided that (a) any Indebtedness of the Company to any direct or indirect
Subsidiary of the Company is unsecured and subordinated, pursuant to a
written agreement, to the Company's Obligations under the Indenture and the
Notes, and (b) if as of any date any Person other than a direct or indirect
Subsidiary of the Company owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date shall be deemed the
date of the Incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness; and
(ix) additional Indebtedness not to exceed an aggregate principal
amount of $15,000,000 at any one time outstanding and any guarantee
thereof.
"Permitted Investments" means (a) Investments in cash and Cash Equivalents;
(b) Investments by the Company or by any Subsidiary of the Company in any Person
that is or will become immediately after such Investment a direct or indirect
Subsidiary of the Company; (c) any Investments in the Company by any Subsidiary
of the Company; provided that any Indebtedness evidencing such Investment is
unsecured; (d) Investments made by the Company or by its Subsidiaries as a
result of an Asset Sale made in compliance with "-- Certain Covenants -- Asset
Sales"; (e) Interest Swap Obligations to the extent the same constitute
Permitted Indebtedness; (f) Investments in an amount not to exceed $2,000,000 at
any one time outstanding; (g) Investments held by any Person on the date such
Person becomes a Subsidiary to the extent such Investments are not incurred in
anticipation of or in connection with such acquisition; and (h) Investments in
stock, obligations or securities received in settlement of debts owing to the
Company or any Subsidiary as a result of bankruptcy or insolvency proceedings or
upon the foreclosure, perfection or enforcement of any Lien in favor of the
Company or any Subsidiary, in each case as to debt owing to the Company or any
Subsidiary that arose in the ordinary course of business of the Company or any
such Subsidiary, provided that any stocks, obligations or securities received in
settlement of debts that arose in the ordinary course of business (and received
other than as a result of bankruptcy or insolvency proceedings or upon
foreclosure, perfection or enforcement of any Lien) that are, within 30 days of
receipt, converted into cash or Cash Equivalents shall be treated as having been
cash or Cash Equivalents at the time received.
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"Permitted Liens" means the following types of Liens:
(i) Liens existing as of the date of the Indenture;
(ii) Liens securing the Notes, the Subsidiary Guarantees or any
Indebtedness under the Credit Facilities;
(iii) Liens in favor of the Company;
(iv) Liens for taxes, assessments and governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Subsidiaries shall have set
aside on its books such reserves as may be required pursuant to GAAP;
(v) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not delinquent for
more than 30 days or being contested in good faith, if such reserve or
other appropriate provision, if any, as shall be required by GAAP shall
have been made in respect thereof;
(vi) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, or to secure the payment or performance
of tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, government contracts and leases, performance and return of money
bonds and other similar obligations (exclusive of obligations for the
payment of borrowed money);
(vii) judgment Liens not giving rise to an Event of Default so long as
any appropriate legal proceedings which may have been duly initiated for
the review of such judgment shall not have been finally terminated or the
period within which such proceeding may be initiated shall not have
expired;
(viii) any interest or title of a lessor under any Capital Lease
Obligation or operating lease;
(ix) Liens securing Purchase Money Indebtedness incurred in compliance
with the "Limitation on Indebtedness" covenant; provided, however, that (i)
the related Purchase Money Indebtedness shall not be secured by any
property or assets of the Company or any Subsidiary other than the property
or assets so acquired and any proceeds therefrom and (ii) the Lien securing
any such Indebtedness shall be created within 90 days of such acquisition;
(x) Liens securing obligations under or in respect of Interest Swap
Obligations;
(xi) Liens upon specific items of inventory or other goods of any
Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(xii) Liens securing reimbursement obligations with respect to
commercial letters of credit that encumber documents and other property or
assets relating to such letters of credit and products and proceeds
thereof;
(xiii) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements of the
Company or any of its Subsidiaries, including rights of offset and set-off;
and
(xiv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company and Liens on property or
assets of a Subsidiary existing at the time it became a Subsidiary,
provided that such Liens were in existence prior to the contemplation of
the acquisition and do not extend to any assets other than the property of
such Person or the acquired property (and the proceeds thereof), as
applicable.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to refinance, renew, replace, defease or refund, other Indebtedness of
the Company or any of its Subsidiaries incurred pursuant to clause (i), (ii) or
(v) of the definition of "Permitted Indebtedness"; provided that: (i) the
principal amount (or accreted value,
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if applicable) of such Permitted Refinancing Indebtedness does not exceed the
principal amount (or accreted value, if applicable) of the Indebtedness so
exchanged, refinanced, renewed, replaced, defeased or refunded (plus the amount
of related prepayment penalties, fees and reasonable expenses incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of, the Indebtedness being exchanged, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being exchanged, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the Notes
or the Subsidiary Guarantees, such Permitted Refinancing Indebtedness is
subordinated in right of payment to, the Notes or the Subsidiary Guarantees, as
the case may be, on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being exchanged,
refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness
is incurred either by the Company or by the Subsidiary that is the obligor on
the Indebtedness being exchanged, refinanced, renewed, replaced, defeased or
refunded.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness or that portion of
Indebtedness of the Company or any Subsidiary incurred in connection with the
acquisition by the Company or such Subsidiary, subsequent to the Issue Date, of
any property or assets.
"Public Equity Offering" means an underwritten offer and sale of Qualified
Capital Stock of the Company pursuant to a registration statement that has been
declared effective by the Commission pursuant to the Securities Act (other than
a registration statement on Form S-8 or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, renew, refund, repay, prepay, redeem, defease or retire, or to issue
a security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Registrar" shall initially mean the Trustee until a successor registrar
for the Notes is selected in accordance with the Indenture.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Specified Affiliate Transactions" means certain transactions among the
Company and Subsidiaries and certain Affiliates which were entered into prior to
the Issue Date as set forth in a Schedule to the Indenture.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor that is expressly subordinated in right of payment to the
Notes or the Subsidiary Guarantees, as the case may be.
"Subsidiary," with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
Notwithstanding the foregoing, an Unrestricted Subsidiary shall be deemed not to
be a Subsidiary of the Company for purposes hereof and of the Indenture.
"Subsidiary Guarantee" means any guarantee of the Notes by a Subsidiary
Guarantor in accordance with the provisions described under "-- Ranking and
Guarantees."
"Subsidiary Guarantor" means (i) each of Packaged Ice Leasing, Inc.,
Southco Ice, Inc., Packaged Ice Mission, Inc., Packaged Ice STPI, Inc. and
Packaged Ice Southwestern, Inc. and (ii) each of the Company's
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Subsidiaries that in the future executes a supplemental indenture in which such
Subsidiary agrees to be bound by the terms of the Indenture as a Subsidiary
Guarantor; provided that any Person constituting a Subsidiary Guarantor as
described above shall cease to constitute a Guarantor when its respective
Subsidiary Guarantee is released in accordance with the terms of the Indenture.
"Unrestricted Subsidiary" means (1) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors as provided below) and (2) any Subsidiary or Subsidiaries
of an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any lien on any property
of, any other Subsidiary of the Company which is not a Subsidiary of the
Subsidiary of the Company to be so designated or otherwise an Unrestricted
Subsidiary, provided that either (x) the Subsidiary of the Company to be so
designated has total consolidated assets of $100,000 or less at the time of
designation or (y) immediately after giving pro forma effect to such
designation, the Company could incur $1.00 of additional Indebtedness pursuant
to paragraph (b) of the covenant entitled "Limitation on Indebtedness." Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"Voting Stock" means, with respect to any Person, securities of any class
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or only so long as no senior class of stock has voting
power by reason of any contingency) to vote in the election of members of the
Board of Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly-owned Subsidiary" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities which normally have the right to
vote in the election of directors, other than director's qualifying shares, are
owned by such Person or any wholly-owned Subsidiary of such Person.
REGISTRATION RIGHTS; ADDITIONAL INTEREST
Pursuant to the Registration Rights Agreement, the Company agreed to file
with the Commission the Exchange Offer Registration Statement on the appropriate
form under the Securities Act with respect to the Exchange Notes. Upon the
effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the Holders of Transfer Restricted Securities pursuant to the Exchange
Offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for Exchange Notes. Under existing SEC
interpretations, the Transfer Restricted Securities would, in general, be freely
transferable after the Exchange Offer without further registration under the
Securities Act; provided, however, that in the case of broker-dealers
participating in the Exchange Offer, a prospectus meeting the requirements of
the Securities Act will be delivered upon resale by such broker-dealers in
connection with resales of the Exchange Notes. If (i) the Company is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Company within the specified time period that (A) it is
prohibited by law or Commission policy from participating in the Exchange Offer
or (B) that it may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and the prospectus contained
in the Exchange Offer Registration Statement is not appropriate or available for
such resales or (C) that it is a broker-dealer and owns Old Notes acquired
directly from the Company or an affiliate of the Company, the Company will file
with the Commission a Shelf Registration Statement to cover resales of the Old
Notes by the Holders thereof who satisfy certain conditions
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relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer Restricted
Securities" means each Note until (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for an Exchange Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of a Note for an Exchange Note, the date on which such Exchange Note is
sold to a purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that: (i) the Company will file
an Exchange Offer Registration Statement with the Commission on or prior to 60
days after the Issue Date, (ii) the Company will use its best efforts to have
the Exchange Offer Registration Statement declared effective by the Commission
on or prior to 120 days after the Issue Date, (iii) unless the Exchange Offer
would not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
business days after the date on which the Exchange Offer Registration Statement
was declared effective by the Commission, Exchange Notes in exchange for all Old
Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file
the Shelf Registration Statement, the Company will use its best efforts to file
the Shelf Registration Statement with the Commission on or prior to 30 days
after such filing obligation arises (and in any event within 90 days after the
Issue Date) and to cause the Shelf Registration to be declared effective by the
Commission on or prior to 90 days after such obligation arises. If (a) the
Company fails to file any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(b) any of such Registration Statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), (c) the Company fails to consummate the Exchange
Offer within 30 business days of the Effectiveness Target Date with respect to
the Exchange Offer Registration Statement, or (d) the Shelf Registration
Statement or the Exchange Offer Registration Statement is declared effective but
thereafter ceases to be effective or usable in connection with the Exchange
Offer or resales of Transfer Restricted Securities, as the case may be, during
the periods specified in the Registration Rights Agreement (each such event
referred to in clauses (a) through (d) above a "Registration Default"), then the
interest rate on the Transfer Restricted Securities, with respect to the first
90-day period immediately following the occurrence of such Registration Default
will increase ("Additional Interest") by 0.50% per annum and will increase by an
additional 0.50% per annum with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of Additional
Interest of 1.5% per annum with respect to all Registration Defaults. All
accrued Additional Interest will be paid by the Company on each Interest Payment
Date to the Global Note Holder by wire transfer of immediately available funds
and to Holders of Certificated Securities by wire transfer to the accounts
specified by them or by mailing checks to their registered addresses if no such
accounts have been specified. Following the cure of all Registration Defaults,
the accrual of Additional Interest will cease.
Each holder of Old Notes who wishes to exchange such Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any Exchange Notes to be received by it will
be acquired in the ordinary course of business, (ii) it is not participating in,
and it has no arrangement with any person to participate in the distribution
(within the meaning of the Securities Act) of the Exchange Notes and (iii) it is
neither an affiliate of the Company, as defined in Rule 405 of the Securities
Act, nor a broker-dealer tendering notes acquired directly from the Company for
its own account. If the holder is a broker-dealer that will receive Exchange
Notes for its own account in exchange for Old Notes that were acquired as a
result of market-making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. The Company has agreed, for a period of 180 days
after consummation of the Exchange Offer, to make available a prospectus meeting
the requirements of the Securities Act to any such broker-dealer for use in
connection with any resale of any Exchange Notes acquired in the Exchange Offer.
Holders of Notes will also be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
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Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Notes included in the Shelf
Registration Statement and benefit from the provisions regarding Additional
Interest set forth above.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth in the next paragraph, the Exchange Notes will be
issued in the form of one or more fully registered Global Notes (collectively,
the "Global Note"). The Global Note will be deposited with, or on behalf of, DTC
and registered in the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to Accredited Investors
who are not qualified institutional buyers (as defined in "Transfer
Restrictions"), or (ii) held by qualified institutional buyers which elect to
take physical delivery of their certificates instead of holding their interest
through the Global Note (and which are thus ineligible to trade through DTC)
(collectively referred to herein as the "Non-Global Purchasers") will be issued,
in registered certificated form, "Certificated Securities"). Upon the transfer
to a qualified institutional buyer of any Certificated Security initially issued
to a Non-Global Purchaser, such Certificated Security will, unless the
transferee requests otherwise or the Global Note has previously been exchanged
in whole for Certificated Securities, be exchanged for an interest in the Global
Note.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Note, DTC or its custodian will credit, on its internal
system, portions of the Global Note which shall be comprised of the
corresponding respective principal amount of the Global Note to the respective
accounts of persons who have accounts with such depositary and (ii) ownership of
the Notes will be shown on, and the transfer of ownership thereof will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Such accounts initially will be
designated by or on behalf of the Initial Purchaser and ownership of beneficial
interests in the, Global Note will be limited to persons who have accounts with
DTC ("participants") or persons who hold interests through participants.
Qualified institutional buyers may hold their interests in the Global Note
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee will be considered the sole owner or holder of the
Notes represented by the Global Note for all purposes under the Indenture. No
beneficial owner of an interest in the Global Note will be able to transfer such
interest except in accordance with DTC's applicable procedures, in addition to
those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interest in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium (if any) and interest (including Additional Interest)
on the Global Note, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Note as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Note held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and be settled in accordance with DTC rules in same
day funds. If a holder requires physical delivery of a Certificated Security for
any reason, including to sell Notes to persons in states which require physical
delivery
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of such securities or to pledge such securities, such holder must transfer its
interest in the Global Note in accordance with the normal procedures of DTC and
with the procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect to
such portion of Notes, the aggregate principal amount of Notes as to which such
participant or participants have given such direction. However, if there is an
Event of Default under the Indenture, DTC will exchange the Global Note for
Certificated Securities, which it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is under
no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Trustee or the Warrant Agent
will have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Note and a successor depositary is not appointed by the Company,
within 90 days, the Company will issue Certificated Securities in exchange for
the Global Note.
TRANSFER RESTRICTIONS ON OLD NOTES
The Old Notes have not been registered under the Securities Act and may not
be offered or sold except pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act. Accordingly,
the Old Notes were offered and sold by the Initial Purchaser only (i) to a
limited number of "qualified institutional buyers" (as defined in Rule 144A
promulgated under the Securities Act) ("QIBs") in compliance with Rule 144A; and
(ii) to a limited number of other institutional "accredited investors" (as
defined in Rule 501(a)(1), (2), (3) or (7) promulgated under the Securities Act)
("Accredited Investors") that prior to their purchase of any Notes delivered to
the Initial Purchaser a letter containing certain representations and
agreements.
Each purchaser of Old Notes, by its acceptance thereof, will be deemed to
have acknowledged represented and agreed as follows:
1. It is purchasing the Old Notes for its own account or an account
with respect to which it exercises sole investment discretion and that it
and any such account is (i) a QIB, and is aware that the sale to it is
being made in reliance on Rule 144A; or (ii) an Accredited Investor.
2. It acknowledges that the Old Notes have not been registered under
the Securities Act and may not be offered or sold except as set forth
below.
3. It shall not resell or otherwise transfer the Old Notes except (i)
to the Company or any subsidiary thereof, (ii) to a QIB in compliance with
Rule 144A, (iii) to an Accredited Investor that, prior to such transfer,
furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the
Trustee, a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Old Notes (the form of
which letter can be obtained from the Trustee), (iv) pursuant to the
exemption from
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registration provided by Rule 144 promulgated under the Securities Act (if
available), or (v) pursuant to an effective registration under the
Securities Act. Each Accredited Investor that is not a QIB and that is an
original purchaser of the Old Notes will be required to sign an agreement
to the foregoing effect.
4. It agrees that it will give to each person to whom it transfers Old
Notes notice of any restrictions on transfer of Old Notes.
5. It understands that the Old Note will bear a legend substantially
to the following effect unless otherwise agreed by the Company and the
holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS
DEFINED IN RULE 144A PROMULGATED UNDER THE SECURITIES ACT) OR (B) IT IS AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3)
OR (7) PROMULGATED UNDER THE SECURITIES ACT) (AN "ACCREDITED INVESTOR"),
(2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS SECURITY
EXCEPT (A) TO THE ISSUER THEREOF OR ANY SUBSIDIARY THEREOF, (B) TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A PROMULGATED
UNDER THE SECURITIES ACT, (C) TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT,
PRIOR TO SUCH TRANSFER, FURNISHED (OR HAS FURNISHED ON ITS BEHALF BY A U.S.
BROKER-DEALER) TO THE TRUSTEE OR WARRANT AGENT A SIGNED LETTER CONTAINING
CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON
TRANSFER OF THIS SECURITY), (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 PROMULGATED UNDER THE SECURITIES ACT (IF AVAILABLE) OR
(E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY
IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN THREE YEARS AFTER THE
ORIGINAL ISSUANCE OF THIS SECURITY, IF THE PROPOSED TRANSFEREE IS AN
INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER,
FURNISH TO THE TRUSTEE OR WARRANT AGENT AND THE ISSUER SUCH CERTIFICATIONS,
WRITTEN LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY
REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO
AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT.
6. It acknowledges that the Trustee will not be required to accept for
registration of transfer any Old Note acquired by it, except upon
presentation of evidence satisfactory to the Company and the Trustee that
the restrictions set forth herein have been complied with.
7. It acknowledges that the Company, the Initial Purchaser and others
will rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agrees that if any of the
acknowledgments, representations or agreements deemed to have been made by
its purchase of Old Notes are no longer accurate, it shall promptly notify
the Company and Initial Purchaser. If it is acquiring any Old Notes as a
fiduciary or agent for one or more investor accounts, it represents that it
has sole investment discretion with respect to each such account and it has
full power to make the foregoing acknowledgments, representations and
agreements on behalf of each account.
The Old Notes may not be sold or transferred to, and each purchaser by its
purchase of the Old Notes shall be deemed to have represented and covenanted
that it is not acquiring the Old Notes for or on behalf of,
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any pension or welfare plan (as defined in Section 3 of the Employee Retirement
Income Security Act of 1974 ("ERISA")), except that such a purchase for or on
behalf of a pension or welfare plan shall be permitted:
(1) to the extent such purchase is made by or on behalf of a bank
collective investment fund maintained by the purchase in which no plan
(together with any other plans maintained by the same employer or employee
organization) has an interest in excess of 10% of the total assets in such
collective investment fund and the applicable conditions of Prohibited
Transaction exemption 91-38 issued by the Department of Labor are
satisfied;
(2) to the extent such purchase is made by or on behalf of an
insurance company pooled separate account maintained by the purchase in
which, at any time while the Old Notes are outstanding, no plan (together
with any other plans maintained by the same employer or employee
organization) has an interest in excess of 10% of the total of all assets
in such pooled separate account and the applicable conditions of Prohibited
Transaction Exemption 90-1 issued by the Department of Labor are satisfied;
(3) to the extent such purchase is made on behalf of a plan by (A) an
investment advisor registered under the Investment Advisers Act of 1940
that had as of the last day of its most recent fiscal year total assets
under its management and control in excess of $50,000,000 and had
shareholders' or partners' equity in excess of $750,000, as shown in its
most recent balance sheet prepared in accordance with generally accepted
accounting principles, (B) a bank as defined in Section 202(a) of the
Investment Advisers Act of 1940 with equity capital in excess of $1,000,000
as of the last day of its most recent fiscal year or (C) an insurance
company which is qualified under the laws of more than one state to manage,
acquire or dispose of any assets of a plan, which company had, as of the
last day of its most recent fiscal year, net worth in excess of $1,000,000
and which is subject to supervision and examination by a state authority
having supervision over insurance companies, in each case, such investment
advisor, bank or insurance company is otherwise a qualified professional
asset manager, as such term is used in the Prohibited Transaction Exemption
84-14 issued by the Department of Labor, and the assets of such plan when
combined with the assets of other plans established or maintained by the
same employer (or affiliate thereof) or employee organization and managed
by such investment advisor, bank or insurance company, do not represent
more than 20% of the total client assets managed by such investment
advisor, bank or insurance company and the applicable conditions or
Prohibited Transaction Exemption 84-14 are otherwise satisfied; or
(4) to the extent such plan is a governmental plan (as defined in
Section 3 of ERISA) which is not subject to the provisions of Title 1 of
ERISA or Section 4975 of the Code.
Each purchaser by its purchase of the Old Notes shall also be deemed to
have represented that (a) if it is an insurance company, no part of the funds to
be used to purchase the Old Notes to be purchased by it constitutes assets
allocated to any separate account maintained by it such that the use of such
funds constitutes a transaction in violation of Section 406 of ERISA or a
Prohibited Transaction, as such term is defined in Section 4975 of the Code,
which could be subject to, respectively, a civil penalty assessed pursuant to
Section 502 of ERISA or a tax imposed by Section 4975 of the Code and (b) if it
is not an insurance company, that no part of the funds to be used to purchase
the Old Notes to be purchased by it constitutes assets allocated to any trust,
plan or account which contains the assets of any employee pension benefit plan,
welfare plan or account prohibited pursuant to the preceding paragraph of these
"Transfer Restrictions."
Purchasers are advised that the Prohibited Transaction Exemptions described
above do not relieve a fiduciary or other party from all prohibited transaction
provisions of the Code and ERISA and from ERISA's general fiduciary
responsibilities including, but not limited to, a fiduciary's obligation to
discharge his or her duties solely in the interests of participants and
beneficiaries.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
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Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale for a period of 180
days after consummation of the Exchange Offer, or such shorter period as will
terminate when all Old Notes acquired by broker-dealers for their own accounts
as a result of market-making activities or other trading activities have been
exchanged for Exchange Notes and resold by such broker-dealers. A broker-dealer
that delivers such a prospectus to purchasers in connection with such resales
will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations).
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. For a period of 180 days after consummation of the Exchange Offer, or such
shorter period as will terminate when all Old Notes acquired by broker-dealers
for their own accounts as a result of market-making activities or other trading
activities have been exchanged for Exchange Notes and resold by such
broker-dealers, the Company will promptly send additional copies of this
Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. The
Company has agreed in the Registration Rights Agreement to indemnify such
broker-dealers against certain liabilities, including liabilities under the
Securities Act.
Any Old Notes not exchanged in the Exchange Offer for Exchange Notes will
remain subject to the transfer restrictions described above.
DESCRIPTION OF SENIOR CREDIT FACILITY
The Company has received a joint commitment from Frost National Bank, San
Antonio and Zion National Bank, Salt Lake City for a Senior Credit Facility
which is expected to provide for a revolving credit and/or term loan facility in
the aggregate principal amount of approximately $20 million. The Senior Credit
Facility is expected to be available to provide liquidity, fund future working
capital requirements of the Company, and finance future acquisitions consistent
with the Company's business strategy. It is anticipated that the Senior Credit
Facility will be guaranteed by the Subsidiary Guarantors, will be secured by
substantially all of the assets of the Company and the stock and assets of the
Subsidiary Guarantors, and will contain customary representations, warranties
and covenants, including financial covenants. See "Risk Factors -- Senior Credit
Facility; Effective Subordination."
DESCRIPTION OF CAPITAL STOCK AND WARRANTS
GENERAL
The Company's total authorized capital stock consists of 50,000,000 shares
of common stock, par value $.01 per share (the "Common Stock") and 5,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The
Board of Directors has designated 450,000 shares of the Preferred Stock as the
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Series A Convertible Preferred Stock (the "Series A Preferred Stock") and has
designated 200,000 shares of the Preferred Stock as the Series B Convertible
Preferred Stock (the "Series B Preferred Stock"). The Company has 3,817,039
shares of Common Stock, 450,000 shares of Series A Preferred Stock and 124,831
shares of Series B Preferred Stock issued and outstanding. In addition, a total
of 130,000 shares of Common Stock have been reserved for issuance upon exercise
of stock options under the Stock Option Plan, 574,831 shares of Common Stock
have been reserved for issuance upon conversion of the Series A Preferred Stock
and Series B Preferred Stock, and 639,857 shares have been reserved for issuance
upon exercise of the Warrants.
SERIES A PREFERRED STOCK
In September 1995, the Board of Directors authorized the designation of
450,000 shares of Series A Preferred Stock. The Series A Preferred Stock has no
rights of redemption or sinking fund provisions, but upon liquidation of the
Company, the Company must pay the holders of Series A Preferred Stock $5.56 per
share (an aggregate of $2,502,000) before any amounts may be paid to the holders
of Common Stock. Holders of Series A Preferred Stock are entitled to vote on all
matters upon which the holders of Common Stock have the right to vote and are
generally entitled to vote as a class on any matters adversely affecting their
rights as holders of this series of preferred stock. Each share of Series A
Preferred Stock entitles the holder thereof to such number of votes per share as
equals the whole number of shares of Common Stock into which each share of
Series A Preferred Stock is then convertible. Each share of Series A Preferred
Stock is convertible into Common Stock without payment of additional
consideration at a conversion price of $5.56 per share, subject to anti-dilution
adjustments.
SERIES B PREFERRED STOCK
In December 1996, the Board of Directors authorized the designation of
200,000 shares of Series B Preferred Stock and on January 17, 1997 the Company
issued 124,831 shares in full satisfaction of $750,000 of convertible demand
notes bearing interest at a rate of 10% per annum which were issued in December
1996. The Series B Preferred Stock has no rights of redemption or sinking fund
provisions, but upon liquidation of the Company, the Company must pay the
holders of Series B Preferred Stock $6.07 per share (an aggregate of $757,724)
before any amounts may be paid to the holders of Common Stock. Holders of Series
B Preferred Stock are entitled to vote on all matters upon which the holders of
Common Stock have the right to vote and are generally entitled to vote as a
class on any matters adversely affecting their rights as holders of this series
of preferred stock. Each share of Series B Preferred Stock entitles the holder
thereof to such number of votes per share as equals the whole number of shares
of Common Stock into which each share of Series B Preferred Stock is then
convertible. Each share of Series B Preferred Stock is convertible into Common
Stock without payment of additional consideration at a conversion price of $6.07
per share, subject to anti-dilution adjustments.
WARRANTS
General. The Company issued Warrants as part of the issuance of Old Notes.
Each Warrant, when exercised, will entitle the holder thereof to receive 10.2377
shares of Common Stock of the Company (each, a "Warrant Share") at an exercise
price of $.01 per share (the "Exercise Price"). A total of 50,000 Warrants,
representing 511,885 Warrant Shares were issued in connection with the Old
Notes; in addition, the Company issued to the Initial Purchaser warrants to
purchase 127,972 shares of Common Stock at an exercise price of $.01 per share,
and the Company issued to SV Capital Partner, L.P. warrants to purchase 100,000
shares of Common Stock at an exercise price of $14.00 per share. The Exercise
Price and the number of Warrant Shares issuable on exercise of a Warrant are
both subject to adjustment in certain cases. See "Adjustments" below. The
Warrants are exercisable at any time on or after the Issue Date (the
"Exercisability Date"). Unless exercised, the Warrants will automatically expire
on the maturity date of the Notes (the "Expiration Date"). The Company will give
notice of expiration not less than 90 nor more than 120 days prior to the
Expiration Date to the registered holders of the then outstanding Warrants. The
Warrants will entitle the
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holders thereof to purchase in the aggregate approximately 10% of the
outstanding Common Stock of the Company on a fully diluted basis as of the date
of issuance of the Warrants.
Voting Rights. The holders of the Warrants will have no right to vote on
matters submitted to the stockholders of the Company and will have no right to
receive cash dividends. The holders of the Warrants will not be entitled to
share in the assets of the Company in the event of the liquidation, dissolution
or winding up of the Company's affairs.
Adjustments. Each of the number of Warrant Shares purchasable upon the
exercise of the Warrants and the Exercise Price will be subject to adjustment in
certain events including: (i) the payment by the Company of dividends (or other
distributions) on the Common Stock of the Company payable in shares of such
Common Stock or other shares of the Company's capital stock, (ii) subdivisions,
combinations and reclassifications of the Common Stock, and (iii) the
distribution to all holders of the Common Stock of any of the Company's assets,
debt securities or any rights or warrants to purchase securities (excluding cash
dividends or other cash distributions from current or retained earnings).
Subject to certain exceptions set forth in the Warrant Agreement, if the Company
issues (i) shares of Common Stock for a consideration per share less than the
current market value per share or (ii) any securities convertible into or
exchangeable for Common Stock for a consideration per share of Common Stock
initially deliverable upon conversion or exchange of such securities that is
less than the current market value per share on the date of issuance of such
securities, the Company shall offer to sell to each holder of Warrants, at the
same price and on the same terms offered to all other prospective buyers
(provided that the holders of Warrants shall not be required to buy any other
securities in order to buy such Common Stock or convertible securities), a
portion of such Common Stock or convertible securities that is equal to such
holder's portion of the Common Stock then outstanding if immediately prior
thereto all the Warrants had been exercised. Each such holder may elect to buy
all or any portion of the Common Stock or convertible securities offered or may
decline to purchase any.
Registration Rights. The Company has granted demand and piggy back
registration rights to holders of the Warrants pursuant to a Securityholders'
and Registration Rights Agreement (the "Securityholders' Agreement"). From time
to time after 180 days following the completion by the Company of a public
equity offering, holders of Warrant shares owning, individually or in the
aggregate, not less than 25% of the Warrant shares held in the aggregate by all
holders of Warrant shares may make a written request for registration under the
Securities Act of their warrant shares. Subject to certain conditions, within
120 days of the receipt of such written request for such a demand registration,
the Company shall file with the Commission and use its best efforts to cause to
become effective under the Securities Act a registration statement with respect
to such securities. This summary of the Securityholders' Agreement does not
purport to be complete and is qualified in its entirety by reference to the
terms and provisions of the Securityholders' Agreement.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders of the Company. Subject to any
preferential rights of any outstanding series of preferred stock designated by
the Board of Directors, the holders of Common Stock are entitled to receive,
ratably, with the holders of the Series A Preferred Stock and the Series B
Preferred Stock, such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive pro rata all assets of the Company available for
distribution to such holders after distribution in full of the preferential
amount to be distributed to holders of shares of the Series A Preferred Stock
and the Series B Preferred Stock. All outstanding shares of Common Stock are
validly issued, fully paid and nonassessable. The Company's Articles of
Incorporation deny preemptive rights and cumulative voting, however the Company
has granted certain preferential rights to purchase new issuances of shares to
certain shareholders. These rights expire upon an initial public offering of at
least $7.5 million. The Common Stock has no conversion rights or other
subscription rights and there are no redemption or sinking fund provisions
applicable to the Common
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Stock. The Company has granted piggy-back and/or demand registration rights to
certain shareholders. See "Certain Relationships and Related Transactions."
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Company's Articles of Incorporation (the "Articles of Incorporation")
provide that the Board of Directors is vested with authority to establish, from
time-to-time, series of unissued shares of any class, to determine and fix the
designation and the relative rights, preferences and limitations of the shares
of each series so established, and to increase or decrease the number of shares
within each such series. The relative rights and preferences of shares may vary
in any respect between series, but all shares of the same series shall be
identical in all respects. The authority possessed by the Board of Directors to
issue different classes and series of stock could potentially be used to
discourage attempts by others to obtain control of the Company through a merger,
tender offer, proxy contest or otherwise by making such attempts more difficult
to achieve or more costly. The Board of Directors may issue Preferred Stock with
voting and conversion rights that could adversely affect the voting power of the
holders of Common Stock. There are no agreements or understandings for the
issuance of Preferred Stock and the Board of Directors has no present intention
to issue any Preferred Stock other than the Series A Preferred Stock and Series
B Preferred Stock described herein.
Article 1302-7.06 of the Texas Miscellaneous Corporation Act ("TMCA")
authorizes a Texas corporation to include a provision in its articles of
incorporation limiting or eliminating the personal liability of its directors to
the corporation and its shareholders for monetary damages for breach of
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Absent the
limitations authorized by such provision, directors are accountable to
corporations and their shareholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Although
Article 1302-7.06 of the TMCA does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. Pursuant to such provision, the Articles of
Incorporation limit the personal liability of directors of the Company (in their
capacity as directors but not in their capacity as officers) to the Company or
its shareholders to the fullest extent permitted by the TMCA. Specifically, a
director of the Company will not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for (i) any breach of the director's duty of loyalty to the Company or
its shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases, redemptions or other distributions, and
(iv) any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter shareholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have benefitted the Company and its shareholders. However, the
inclusion of this provision together with a provision which requires the Company
to indemnify its officers and directors against certain liabilities, is intended
to enable the Company to attract qualified persons to serve as directors who
might otherwise be reluctant to do so.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The discussion below is intended to be a general description of the United
States tax considerations material to an investment in the Units. It does not
take into account the individual circumstances of any particular investor and
does not purport to discuss all of the possible tax consequences of the
purchase, ownership and disposition of the Notes, Warrants, or Common Stock, and
is not intended as tax advice. Therefore, prospective investors are urged to
consult their own tax advisors with respect to the tax consequences of an
investment in the Units, including the application of state, local, foreign and
other tax laws.
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GENERAL
The following is a summary of certain United States federal income tax
consequences associated with the acquisition, ownership, and disposition of the
Notes and the Warrants. The following summary does not discuss all of the
aspects of federal income taxation that may be relevant to a prospective holder
of the Notes and Warrants in light of its particular circumstances, or to
certain types of holders that are subject to special treatment under the federal
income tax laws (including persons who hold the Notes and Warrants as part of a
conversion, straddle or hedge, dealers in securities, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers and S
corporations). Further, except as specifically provided, this summary pertains
only to holders that are citizens or residents of the United States,
corporations, partnerships, or other entities created in or under the laws of
the United States or any political subdivision thereof, or estates or trusts the
income of which is subject to United States federal income taxation regardless
of its source. For taxable years beginning after December 31, 1996, a trust will
be considered a U.S. holder of a Note only if the trust is subject to the
supervision of a court within the United States and the control of a United
States fiduciary as described in Section 7701(a)(30) of the Internal Revenue
Code of 1986 (the "Code"). In addition, this summary does not describe any tax
consequences under state, local, or foreign tax laws and is limited to holders
who hold Notes, Warrants and Common Stock as "Capital Assets" (generally,
property held for investment) within the meaning of Section 1221 of the Code.
This summary is based upon the Code, Treasury Regulations (the
"Regulations."), rulings and pronouncements issued by the Internal Revenue
Service ("IRS") and judicial decisions now in effect, all of which are subject
to change at any time by legislative, judicial or administrative action. Any
such changes may be applied retroactively in a manner that could adversely
affect the holder of the Notes or Warrants. The Company has not sought and will
not seek any rulings from the IRS or opinions from counsel with respect to the
matters discussed below. There can be no assurance that the IRS will not take
positions concerning the tax consequences of the valuation, purchase, ownership
or disposition of the Units that are different from those discussed herein.
CLASSIFICATION OF THE NOTES
Under applicable authorities, the Notes should be treated as indebtedness
of the Company for federal income tax purposes. In the unlikely event that the
Notes are treated as equity, the amount treated as a distribution on any such
instrument would be treated as (i) ordinary dividend income to the extent of the
current or accumulated earnings and profits of the Company, (ii) a return of
capital to the extent of a holder's basis in a Note, and (iii) thereafter,
capital gain.
Pursuant to Section 385(c) of the Code, a holder of a Note is required to
treat such Note as indebtedness for all United States federal income tax
purposes unless such holder discloses such inconsistent treatment on such
holder's tax return. The characterization of the Notes by the Company is not
binding on the IRS.
TAXATION OF THE NOTES
Issue Price. The issue price of the Notes will be the first price at which
a substantial amount of such Units are sold to investors. In order to determine
the issue price for the Notes and Warrants (initially sold as "Units"), the
aggregate issue price of the Notes and the Warrants must be allocated between
each of such Securities based upon their relative fair market values on the date
of issuance. If a holder purchases a Unit for the issue price of the Unit, the
holder's initial tax basis for the Note and the Warrants constituting the Unit
will equal the portion of the issue price of the Unit allocated to each. The
Company intends to allocate the issue price of the Units on a per Note and per
Warrant basis. A holder of a Unit may not adopt a different allocation unless
such holder properly discloses such different allocation on such holder's
federal income tax return for the year in which the Units were acquired.
Original Issue Discount. As noted above, because the Notes are being
offered as a part of a Unit including the Warrants, a portion of the offering
price for a Unit will be allocated to the Notes and a portion to the Warrants.
Since the portion allocable to a Note will be less than the Note's principal
amount, a Note will likely be issued at a discount from its face amount. If the
discount (generally referred to as "original issue
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discount" or "OID") exceeds a statutory de minimis amount ( 1/4 of 1% of an
obligation's stated redemption price at maturity multiplied by the number of
complete years to its maturity), the Notes will be considered to be issued with
original issue discount. In addition to including in income the amount of stated
interest received or accrued, a holder will be required to include a portion of
any such OID as ordinary income for federal income tax purposes each year over
the term of the Notes so as to provide a constant yield to maturity.
The total amount of OID with respect to each Note will be the difference
between the issue price and the stated redemption price at maturity. The issue
price of a Unit will be the price paid by the purchasers (other than the
Underwriters) of the Units at their initial offering. This issue price will then
be allocated between the Note and the Warrant that comprise the Unit as
described above based on their relative fair market values. The stated
redemption price at maturity of a Note is the sum of all payments provided by
the Note other than "qualified stated interest" payments. Stated interest on the
Notes will constitute "qualified stated interest". Thus, the stated redemption
price at maturity of a Note will be equal to the principal amount of such.
Accept as provided in " -- Taxation of the Notes -- Subsequent Purchasers"
below, under the OID rules, in general, holders of Notes with OID must include
in gross income for federal income tax purposes the sum of the daily portions of
OID with respect to the Note for each day during the taxable year or portion of
a taxable year on which such holder holds the Note (such sum, "Accrued OID").
The daily portion is determined by allocation to each day of any accrual period
within a taxable year a pro rata portion of an amount equal to the adjusted
issue price of the Note at the beginning of the accrual period multiplied by the
yield to maturity of the Note. For purposes of computing OID, the Company will
use six-month accrual periods that end on the days in the calendar year
corresponding to the maturity date of the Notes and the date six months prior to
such maturity date, with the possible exception of the initial accrual period
for the Notes. The adjusted issue price of a Note at the beginning of any
accrual period is the issue price of the Note increased by the Accrued OID for
all prior accrual periods (less all payments made on the Notes other than
payments of qualified stated interest). The yield to maturity of a debt
instrument is the interest rate that will produce an amount equal to the issue
price of the debt instrument used in computing the present value of all payments
to be made pursuant to the debt instrument. The Company will annually furnish to
certain record holders of the Notes and to the IRS information with respect to
any OID accruing during the calendar year as may be required by applicable
Regulations.
Disposition of Notes. Generally, any sale or redemption or other
disposition of Notes (including in connection with an Asset Proceeds Offer) will
result in taxable gain or loss equal to the difference between (i) the amount of
cash and the fair market value of other property received and (ii) the holder's
adjusted tax basis in the Note. In the case of an initial holder who purchases a
Unit for the issue price of the Unit, the adjusted tax basis of a Note will
initially equal the portion of the issue price of the Unit that is allocated to
the Note and will be increased by any Accrued OID includable in such holder's
gross income, and decreased by all payments received by such holder on such
Note, other than a payment of qualified stated interest. Any gain or loss upon a
sale or other disposition of a Note will generally be capital gain or loss,
which will be long-term if the Note has been held by the holder for more than
one year.
Subsequent Purchasers. The foregoing does not discuss special rules which
may affect the treatment of purchasers that acquire Notes other than at the time
of original issuance at the issue price, including those provisions of the Code
relating to the treatment of "market discount," "acquisition premium" and
"amortizable bond premium." For example, the market discount provisions of the
Code may require a subsequent purchaser of Notes at a market discount to treat
all or a portion of any gain recognized upon sale or other disposition of the
Notes as ordinary income and to defer a portion of any interest expense that
would otherwise be deductible on any indebtedness incurred or maintained to
purchase or carry such Notes until the holder disposes of the Notes in a taxable
transaction.
AHYDO Rules. Sections 163(e)(5) and (i) of the Code affect the treatment of
interest on certain high yield OID debt instruments maturing more than five
years from the date of issuance ("AHYDOs"). The rules are complex and ambiguous
in many respects, and their full potential application to the Notes cannot be
anticipated with precision.
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The Notes will constitute AHYDOs if (i) the Notes have "significant
original issue discount" within the meaning of the Code, and (ii) the yield to
maturity of the Notes is equal to or greater than the sum of the relevant
applicable federal rate (the "AFR") for the month in which the Notes are issued,
plus five percentage points. Based upon their terms, the Notes may have
"significant original issue discount." The relevant AFR for mid-term debt
instruments issued in March 1997 is 6.32% compounded semiannually. The Company
cannot yet ascertain whether the Notes will actually constitute AHYDOs under the
foregoing rules. If the Notes are AHYDOs, as described above, a portion of the
tax deductions that would otherwise be available to the Company in respect of
the Notes will be deferred or disallowed, which, in turn, might reduce the
after-tax cash flows of the Company. More particularly, if the Notes constitute
AHYDOs, the Company will not be entitled to deduct OID that accrues with respect
to the Notes until amounts attributable to OID are paid in cash or property
(excluding, however, stock of the Company or a related entity).
In addition, if the yield to maturity of the Notes exceeds the sum of the
relevant AFR plus six percentage points (the "Excess Yield"), the "disqualified
portion" of the OID accruing on the Notes will be characterized as a
nondeductible dividend with respect to the Company. The "disqualified portion"
of the OID is the lesser of (i) the amount of OID on the instrument and (ii) the
portion of the total return on such instrument that bears the same ratio to such
total return as the "Excess Yield" bears to the total yield to maturity on the
instrument. The tax treatment to holders of Notes will be unaffected by these
provisions except that corporate holders of the Notes may be treated as
receiving distributions with respect to the stock of the Company (rather than
interest on such debt instrument) eligible for the dividends received deduction,
subject to applicable limitations, to the extent of the "disqualified portion"
of the OID and to the extent that such distributions would have been treated as
dividends if actually made by the Company with respect to its stock.
EXCHANGE OFFER
The Company believes that the offer to exchange Old Notes for Exchange
Notes pursuant to the Exchange Offer does not constitute a material modification
of the terms of the Old Notes and, therefore, such exchange will not constitute
an exchange for United States federal income tax purposes. Accordingly, such
exchange will have no United States federal income tax consequences to holders
of Notes. The basis of the Exchange Notes will be the same as the basis of the
Notes immediately before the exchange and the holding period of the Exchange
Notes will include the holding period of the Notes.
BACKUP WITHHOLDING
A noncorporate holder may be subject, under certain circumstances, to
backup withholding at a 31 percent rate with respect to payments received with
respect to the Notes and the Common Stock acquired upon exercise of a Warrant.
This withholding generally applies only if the holder (i) fails to furnish his
or her social security or other taxpayer identification number ("TIN"), (ii)
furnishes an incorrect TIN, (iii) is notified by the IRS that he or she has
failed to report properly payments of interest and dividends and the IRS has
notified the Company that he or she is subject to back-up withholding, or (iv)
fails, under certain circumstances, to provide a certified statement, signed
under penalty of perjury, that the TIN provided is his or her correct number and
that he or she is not subject to backup withholding. Any amount withheld from a
payment to a holder under the backup withholding rules is allowable as a credit
against such holder's federal income tax liability, provided that the required
information is furnished to the IRS. Certain holders (including, among others,
corporations and foreign individuals who comply with certain certification
requirements) are not subject to backup withholding. Holders should consult
their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
These backup withholding tax and information reporting rules currently are
under review by the IRS and proposed Regulations issued on April 15, 1996, if
finalized would modify certain of such rules generally with respect to payments
made after December 31, 1997. Accordingly, the application of such rules to the
Notes and Common Stock acquired upon exercise of a Warrant could be changed.
89
<PAGE> 94
LEGAL MATTERS
Certain legal matters regarding the Notes will be passed upon for the
Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P., San Antonio, Texas. Cecil
Schenker, a shareholder of the Company, is the sole shareholder of a
professional corporation which is a partner of Akin, Gump, Strauss, Hauer &
Feld, L.L.P. Alan Schoenbaum, the son of a shareholder of the Company, is the
sole shareholder of a professional corporation which is a partner of Akin, Gump,
Strauss, Hauer & Feld, L.L.P.
EXPERTS
The (i) consolidated financial statements of Packaged Ice, Inc. as of
December 31, 1996 and 1995 and for each of the three years in the period ended
December 31, 1996, (ii) the combined financial statements of Mission Party Ice,
Inc. (a S corporation) and Southwest Texas Packaged Ice, Inc. (an affiliated S
corporation) as of December 31, 1996, and for the period then ended included in
this Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon such reports given upon the authority of that firm as experts
in accounting and auditing.
The financial statements of Southwestern Ice, Inc. as of December 31, 1996
and 1995, and for each of the two years then ended included in this Prospectus,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
90
<PAGE> 95
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PACKAGED ICE, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at June 30, 1997 (unaudited) and
December 31, 1996 and 1995................................ F-3
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 1997 and 1996 (unaudited)
and for the Years Ended December 31, 1996, 1995 and
1994...................................................... F-4
Consolidated Statements of Shareholders' Equity for the Six
Months Ended June 30, 1997 (unaudited) and for the Years
Ended December 31, 1996, 1995 and 1994.................... F-5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1996 (unaudited) and for the Years
Ended December 31, 1996, 1995 and 1994.................... F-6
Notes to Consolidated Financial Statements.................. F-7
MISSION PARTY ICE. AND SOUTHWEST TEXAS PACKAGED ICE, INC.
Independent Auditors' Report................................ F-17
Combined Balance Sheet at March 31, 1997 (unaudited) and
December 31, 1996......................................... F-18
Combined Statements of Operations and Retained Earnings for
the Three Months Ended March 31, 1997 (unaudited) and for
the Year Ended December 31, 1996.......................... F-19
Combined Statements of Cash Flows for the Three Months Ended
March 31, 1997 (unaudited) and for the Year Ended December
31, 1996.................................................. F-20
Notes to Combined Financial Statements...................... F-21
Independent Auditors' Report on Additional Information...... F-27
Combined Balance Sheet with Combining Information for the
Year Ended December 31, 1996.............................. F-28
Combined Statement of Operations with Combining Information
for the Year Ended December 31, 1996...................... F-29
SOUTHWESTERN ICE, INC.
Report of Independent Public Accountants.................... F-30
Balance Sheets at March 31, 1997 (unaudited) and at December
31, 1996 and 1995......................................... F-31
Statements of Operations and Changes in Retained Earnings
for the Three Months Ended March 31, 1997 and 1996
(unaudited) and for the Years Ended December 31, 1996 and
1995...................................................... F-32
Statements of Cash Flows for the Three Months Ended March
31, 1997 and 1996 (unaudited) and for the Years Ended
December 31, 1996 and 1995................................ F-33
Notes to Financial Statements............................... F-34
</TABLE>
F-1
<PAGE> 96
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Packaged Ice, Inc.:
We have audited the accompanying consolidated balance sheets of Packaged
Ice, Inc. and its subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 21, 1997
F-2
<PAGE> 97
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 -------------------------
1997 1996 1995
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents...................................... $15,852,684 $ 169,535 $1,032,811
Accounts receivable:
Trade, net.............................................. 3,645,968 213,811 181,752
Affiliates.............................................. 518,740 119,476 169,383
Inventories............................................... 877,960 115,825 79,604
Prepaid expenses.......................................... 162,815 29,309 21,493
----------- ----------- ----------
Total current assets............................... 21,058,167 647,956 1,485,043
PROPERTY, Net............................................... 27,962,476 9,887,687 5,441,480
OTHER ASSETS, Net:
Goodwill.................................................. 15,451,813
Debt issuance cost........................................ 5,234,733
Other..................................................... 1,996,088 987,145 1,123,263
----------- ----------- ----------
TOTAL.............................................. $71,703,277 $11,522,788 $8,049,786
=========== =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 0 $ 703,077 $ 229,637
Accounts payable.......................................... 2,130,994 324,624 238,414
Payable to affiliates..................................... 922,781 634,585 169,130
Accrued wages............................................. 443,640 112,622 66,570
Other accrued expenses.................................... 596,378 58,128 31,595
Accrued interest.......................................... 1,233,333 39,272 5,982
Notes payable............................................. 74,723 3,425 47,225
----------- ----------- ----------
Total current liabilities.......................... 5,401,849 1,875,733 788,553
LONG-TERM DEBT, Net......................................... 44,724,931 2,831,955 210,500
COMMITMENTS AND CONTINGENCIES (Note 13)
CONVERTIBLE NOTES........................................... 750,000
PREFERRED STOCK WITH PUT REDEMPTION OPTION:
----------- ----------- ----------
Series A Convertible -- 450,000 shares issued and
outstanding at June 30, 1997, December 31, 1996 and
1995.................................................... 2,496,527 2,496,527 2,496,527
Series B Convertible -- 124,831 shares issued and
outstanding at June 30, 1997............................ 726,226
COMMON STOCK WITH PUT REDEMPTION OPTION,
420,000 shares issued and outstanding at June 30, 1997,
December 31, 1996 and 1995................................ 1,971,851 1,971,851 1,971,851
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 50,000,000 shares authorized;
shares issued and outstanding of 3,395,270 at June 30,
1997, 2,406,371 at December 31, 1996 and 1995............. 33,953 24,064 24,064
Additional paid-in capital.................................. 21,142,789 4,669,301 4,669,301
Subscription receivable..................................... (4,799)
Accumulated deficit......................................... (4,794,849) (3,096,643) (2,106,211)
----------- ----------- ----------
Total shareholders' equity......................... 16,381,893 1,596,722 2,582,355
----------- ----------- ----------
TOTAL.............................................. $71,703,277 $11,522,788 $8,049,786
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 98
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------ --------------------------
1997 1996 1997 1996
----------- ---------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.................................... $ 7,278,204 $1,478,252 $ 8,123,936 $2,127,925
Cost of sales............................... 4,243,136 585,544 4,702,916 910,266
----------- ---------- ----------- ----------
Gross profit................................ 3,035,068 892,708 3,421,020 1,217,659
Selling, general and administrative
expenses.................................. 1,607,782 427,936 2,182,420 837,982
Depreciation and amortization expense....... 1,347,021 325,669 1,825,857 675,483
----------- ---------- ----------- ----------
Income (loss) from operations............... 80,265 139,103 (587,257) (295,806)
Other income (expense), net................. 246,952 (29,903) 407,597 (13,301)
Interest expense............................ (1,433,246) (23,329) (1,518,546) (33,542)
----------- ---------- ----------- ----------
Income (loss) before income taxes........... (1,106,029) 85,871 (1,698,206) (342,649)
Income taxes................................ -- -- -- --
Net income (loss)........................... $(1,106,029) $ 85,871 $(1,698,206) $ (342,649)
=========== ========== =========== ==========
Income (loss) per share of common stock..... $ (0.30) $ 0.03 $ (0.53) $ (0.12)
=========== ========== =========== ==========
Weighted average common shares
outstanding............................... 3,631,038 2,826,371 3,231,789 2,826,371
=========== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Revenues.................................................. $ 4,426,860 $2,830,493 $ 783,670
Cost of sales............................................. 2,034,828 1,251,527 352,126
----------- ---------- ----------
Gross profit.............................................. 2,392,032 1,578,966 431,544
Selling, general and administrative expenses.............. 1,981,278 1,514,542 974,325
Depreciation and amortization expense..................... 1,455,693 751,291 224,104
----------- ---------- ----------
Loss from operations...................................... (1,044,939) (686,867) (766,885)
Other income, net......................................... 184,982 75,314 69,494
Interest expense.......................................... (130,475) (76,929) (24,522)
----------- ---------- ----------
Loss before income taxes.................................. (990,432) (688,482) (721,913)
Income taxes.............................................. -- -- --
Net loss.................................................. $ (990,432) $ (688,482) $ (721,913)
=========== ========== ==========
Loss per share of common stock............................ $ (0.35) $ (0.26) $ (0.28)
=========== ========== ==========
Weighted average common shares outstanding................ 2,826,371 2,682,261 2,614,681
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 99
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NUMBER OF PAR PAID-IN SUBSCRIPTION ACCUMULATED
SHARES VALUE CAPITAL RECEIVABLE DEFICIT TOTAL
--------- ------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT January 1,
1994...................... 1,559,621 $15,596 $ 1,027,037 $ (99,999) $ (695,816) $ 246,818
Issuance of common
stock.................. 1,066,750 10,668 4,826,297 65,600 4,902,565
Net loss.................. (721,913) (721,913)
--------- ------- ----------- --------- ----------- -----------
BALANCE AT December 31,
1994...................... 2,626,371 26,264 5,853,334 (34,399) (1,417,729) 4,427,470
Issuance of common
stock.................. 280,000 2,800 1,311,767 29,600 1,344,167
Repurchase of common
stock.................. (500,000) (5,000) (2,495,800) (2,500,800)
Net loss.................. (688,482) (688,482)
--------- ------- ----------- --------- ----------- -----------
BALANCE AT December 31,
1995...................... 2,406,371 24,064 4,669,301 (4,799) (2,106,211) 2,582,355
Issuance of common
stock.................. 4,799 4,799
Net loss.................. (990,432) (990,432)
--------- ------- ----------- --------- ----------- -----------
BALANCE AT December 31,
1996...................... 2,406,371 24,064 4,669,301 (3,096,643) 1,596,722
Issuance of common stock
(unaudited)............ 988,899 9,889 16,473,488 16,483,377
Net loss (unaudited)...... (1,698,206) (1,698,206)
--------- ------- ----------- --------- ----------- -----------
Balance at June 30, 1997
(unaudited)............... 3,395,270 $33,953 $21,142,789 $ $(4,794,849) $16,389,893
========= ======= =========== ========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 100
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------- ------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $(1,698,206) $ (342,649) $ (990,432) $ (688,482) $ (721,913)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities (excluding working
capital from acquisitions):
Depreciation and amortization....................... 1,825,857 657,483 1,455,693 751,291 224,104
Gain from disposal of assets........................ (3,915) (3,844) (2,584)
Changes in assets and liabilities:
Accounts receivable............................... (1,549,346) (391,716) 17,848 (70,366) (270,369)
Inventories....................................... (153,522) (17,448) (36,221) (37,575) (40,265)
Prepaid expenses.................................. (93,119) (37,177) (7,816) 1,834 15,749
Accounts payable.................................. 157,597 255,030 551,665 185,273 72,524
Accrued expenses.................................. (169,917) 97,015 105,875 5,908 73,296
----------- ----------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities.................................... (1,344,751) 234,694 1,094,028 147,883 (646,874)
----------- ----------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions...................................... (3,598,702) (2,220,730) (5,744,900) (2,717,444) (2,998,950)
Capital expenditures for assets acquired................ (1,626,499)
Expenditures for business acquired, net................. (6,769,820)
Increase in other assets................................ (485,390) (172,613) (333,918) (243,621) (497,736)
Proceeds from disposition of property................... 78,300 120,826 153,733
----------- ----------- ---------- ---------- ----------
Net cash used in investing activities........... (12,402,111) (2,272,517) (5,925,085) (2,961,065) (3,496,686)
----------- ----------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock.... 71,280 5,812,545 4,902,565
Repurchase of common stock.............................. (2,500,800)
Proceeds from debt issuance, net........................ 48,954,082 1,287,837 3,604,403 82,232 155,077
Proceeds from issuance of convertible demand notes...... 750,000
Debt issuance cost...................................... 2,000,000
Repayment of debt....................................... (17,595,365) (114,818) (386,622) (359,510) (160,564)
----------- ----------- ---------- ---------- ----------
Net cash provided by financing activities....... 29,429,997 1,173,019 3,967,781 3,034,467 4,897,078
----------- ----------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS......... (15,683,149) (864,804) (863,276) 221,285 753,518
CASH AND EQUIVALENTS, BEGINNING OF PERIOD............... 169,535 1,032,811 1,032,811 811,526 58,008
----------- ----------- ---------- ---------- ----------
CASH AND EQUIVALENTS, END OF PERIOD..................... $15,852,654 $ 168,007 $ 169,535 $1,032,811 $ 811,526
=========== =========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- Cash
payments for interest................................. $ 162,418 $ 6,692 $ 114,383 $ 75,606 $ 21,572
=========== =========== ========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Note payable incurred to purchase other assets........ $ 188,862 $ 574,092
=========== ==========
Common stock issued in consideration for business
acquisitions........................................ $9,550,000
===========
Fair value of warrants issued in connection with debt
and acquisitions.................................... $6,735,335
===========
Demand notes converted to preferred stock............. $ 750,000
===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 101
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Packaged Ice, Inc. and its wholly owned subsidiaries (the "Company") own
and operate stand-alone automated merchandising ice systems ("ice systems")
installed primarily in retail grocery locations. These ice systems produce and
package bags of cubed ice at the customer's location. At December 31, 1996, the
Company's customers were located primarily in Texas, Louisiana, California,
Nevada, Arizona, Florida and New Mexico.
2. BASIS OF FINANCIAL STATEMENTS
As shown in the consolidated financial statements, the Company incurred
losses in each of the last three years ended December 31, 1996; however, it was
only in late 1992 that the Company emerged from the development stage to
commence its principal operations of owning and operating automated
merchandising ice systems.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to generate sufficient cash flow
to meet its obligations on a timely basis, to comply with the terms and
covenants of its financing agreements, to obtain additional financing or
refinancing as may be required and, ultimately, to attain successful operations.
In each of the past three years, the Company has consistently demonstrated
the ability to successfully attract additional capital through debt and equity
financing to enable it to expand its operations and meet its obligations.
Management believes the Company will continue in 1997 to meet its obligations
and sustain operations through a combination of increased cash flow from its
expanded base of installed ice systems and through obtaining additional debt
financing and/or equity capital. The Company is currently in the process of
preparing a private placement offering circular to issue $50,000,000 of senior
unsecured debt which will be unconditionally guaranteed, jointly and severally
by each of the Company's wholly owned subsidiaries (see Note 12). Proceeds from
the offering are expected to be used for two pending acquisitions, retirement of
existing long-term debt, and for future capital expenditures, acquisitions and
working capital. See Note 14 for additional information regarding the pending
acquisitions and the private debt offering.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of Packaged Ice, Inc. and its wholly owned subsidiaries.
All significant intercompany transactions have been eliminated upon
consolidation.
Presentation of Unaudited Interim Financial Information -- The consolidated
financial statements presented herein at June 30, 1997 and for the three month
and six month periods ended June 30, 1996 and 1997 are unaudited; however, all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods covered have been made and are of a normal, recurring nature.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of the interim periods are not
necessarily indicative of results to expect for the full year.
Inventories -- Inventories consist of ice packaging polyethylene bags and
spare parts and are valued at the lower of first-in first-out cost or market
basis.
Property -- Property is carried at cost and is being depreciated on a
straight-line basis over an estimated life of three to seven years. Maintenance
and repairs are charged to expense as incurred, while capital improvements which
extend the useful lives of the underlying assets are capitalized.
F-7
<PAGE> 102
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets -- Other assets, consisting primarily of costs to acquire a
competitor's ice system location contracts, ice system patents and deferred
financing costs, are being amortized over 5, 17 and 3 years, respectively (see
Note 5).
Impairment of Long-Lived Assets -- In March 1995 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires that long-lived assets be reviewed by
an entity for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The adoption of
SFAS No. 121 in 1996 did not result in a charge to earnings in the accompanying
financial statements.
Income Taxes -- The Company accounts for income taxes under the liability
method, which requires, among other things, recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's consolidated financial statements or tax
returns. Under this method, deferred income tax liabilities and assets are
determined based on the temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and the
recognition of available tax carryforwards.
Revenue Recognition -- Revenue from owned ice systems is recognized based
upon the number of ice packaging bags delivered to and accepted by customers
under contract terms. Once accepted, there is no right of return with respect to
the bags delivered. Revenue from the sale of ice systems is recognized when the
equipment is shipped. Revenues resulting from leased ice systems is recognized
as earned under contract terms.
Earnings Per Share -- The computation of earnings per share is based on the
weighted average number of shares outstanding. Shares of common stock issuable
under stock options have not been included in the computation of earnings per
share as their effect is antidilutive.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. SFAS No. 128 revises the methodology to be used in
computing earnings per share such that the computations required for primary and
fully diluted earnings per share are to be replaced with "basic" and "diluted"
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed in the same manner as fully diluted
earnings per share, except that, among other changes, the average share price
for the period is used in all cases when applying the treasury stock method to
potentially dilutive outstanding options. The Company will adopt SFAS 128
effective December 31, 1997, and, as required, will restate earnings per share
for all periods presented. The Company anticipates that the amounts to be
reported for basic and diluted earnings per share for the three month and six
month periods ended June 30, 1997 and 1996 and the years ended December 31,
1996, 1995 and 1994 will not differ significantly from the amounts reported
under the current accounting standards.
Cash Flows -- The Company considers all highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
Fair Values of Financial Instruments -- The Company's financial instruments
include certain current assets and liabilities where carrying value approximates
fair value. In addition, the carrying value of financial instruments related to
notes payable and long-term debt approximates fair value as such instruments
have variable rate terms.
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 and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial
F-8
<PAGE> 103
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Reclassification -- Certain amounts from previous years have been
reclassified to conform to the current presentation.
4. PROPERTY AND EQUIPMENT
Property and equipment were as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Ice systems machinery and equipment................ $11,634,671 $ 6,089,241
Furniture and fixtures............................. 32,278 29,114
Computer equipment................................. 65,725 48,082
Autos/trucks....................................... 25,492
Leasehold improvements............................. 16,526 14,695
----------- -----------
Total property and equipment....................... 11,774,692 6,181,132
Less accumulated depreciation...................... 1,887,005 739,652
----------- -----------
Total.............................................. $ 9,887,687 $ 5,441,480
=========== ===========
</TABLE>
Ice systems machinery and equipment includes approximately $1.7 million and
$0 of leased ice systems at December 31, 1996 and 1995, respectively (see Note
9).
Depreciation expense for the three years ended December 31, 1996 was
$1,147,540, $502,161 and $187,047, respectively.
5. ACQUISITION OF SOUTHCO, INC. CONTRACTS
On November 21, 1994, the Company entered into a purchase agreement (the
"Purchase Agreement") with Southco, Inc. ("Southco") to purchase certain of its
assets, primarily the right to operate ice systems at 133 locations and firm
orders to operate ice systems in the future at 85 additional locations. The cost
was approximately $1,072,000 and was partially financed by a $574,092 note
payable (see Note 6). The purchase price and related note are subject to
reduction (as defined) for a three-year period for cancellations/ terminations
of any existing locations or in the event that any of the identified firm order
locations do not become customers.
Since the acquisition date seven existing locations have terminated and 31
firm orders have canceled. Such activity has reduced the value of the rights
acquired to operate ice systems and the related note by approximately $153,000
plus interest previously paid. The assigned value of the right to operate the
ice systems has been recorded within other assets and is being amortized over
five years. The accumulated amortization related to this asset was $366,492 and
$228,910, at December 31, 1996 and 1995, respectively.
6. LONG-TERM DEBT
In March 1996 the Company executed a $10 million credit facility (the
"Facility") with a bank to replace an existing $4.5 million credit facility on
which no borrowings were outstanding at December 31, 1995. Funds available for
borrowing under this Facility are limited to the lesser of the Asset Value
Borrowing Base (as defined) or the Cash Flow Borrowing Base (as defined). The
Facility is secured by all ice systems, accounts receivable, inventory and all
material assets of the Company. In addition the Facility also contains
restrictive covenants which, among other things, require the attainment of
certain financial ratios and a minimum tangible net worth. The Facility bears
interest at the Company's option at either the prime rate or
F-9
<PAGE> 104
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the London Interbank Offered Rate plus an applicable margin based upon the
Company's financial condition (as defined) with outstanding interest due monthly
through March 1997. The applicable interest rate was 8.75% at December 31, 1996.
Beginning in April 1997, the Facility will convert to a 36-month term loan. In
October 1996 the Company notified the bank that it was in violation of certain
of the Facility's covenants and undertook negotiations to amend the Facility. In
December 1996 the Company and the bank amended the Facility with the principal
changes being to reduce the borrowing base to $4.0 million, amend certain
financial ratio covenants, and revise the term loan payments so that they are
calculated on a 48-month amortization with a final balloon payment due at the
end of three years.
In November 1994 the Company entered into a note payable (the "Southco
Note") to finance a portion of the Southco acquisition (see Note 5). The Southco
Note bears interest at an annual rate of prime plus 2% (10.25% at December 31,
1996) and is secured by the shares of Southco Ice, Inc., as well as by certain
contracts to operate ice systems. The Southco Note required interest-only
payments for the first six months and thereafter 36 monthly payments of $19,136
plus accrued interest. At the note holder's option, the Southco Note is
convertible into shares of the Company's common stock at a conversion price of
$8 per share.
At December 31, 1996 and 1995, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- --------
<S> <C> <C>
Bank credit facility................................... $3,485,000
Southco Note........................................... 43,814 $440,137
Other.................................................. 6,218
---------- --------
Total debt............................................. 3,535,032 440,137
Less current maturities................................ 703,077 229,637
---------- --------
Long-term debt, net.................................... $2,831,955 $210,500
========== ========
</TABLE>
The annual maturities of long-term debt as of December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997............................................. $ 703,077
1998............................................. 871,646
1999............................................. 871,250
2000............................................. 1,089,059
----------
$3,535,032
==========
</TABLE>
7. NOTES PAYABLE
In December 1996 the Company received $750,000 in exchange for demand notes
bearing interest at a 10% annual rate. The notes were issued in contemplation of
converting into a new class of preferred stock, subject to appropriate
shareholder approval. Such approval occurred in January 1997 and the notes plus
accrued interest thereon were converted into Series B Convertible Preferred
Stock (see Note 10) at a conversion price of $6.07 per share. At December 31,
1996, the demand notes were reflected as noncurrent liabilities because of the
ability and the intent of the note holders and of the Company to convert the
debt into preferred stock.
In September 1995 the Company entered into a note payable with an
investment holding company for $60,000. The balance on the note was paid in full
during 1996.
F-10
<PAGE> 105
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The Company incurred losses for each of the three years in the period ended
December 31, 1996 for both financial reporting and tax return purposes. Due to
the uncertainty of being able to utilize such losses to reduce future taxes, a
valuation allowance has been provided to reduce to zero the net deferred tax
assets resulting primarily from the loss carryforwards available.
The total provision for income taxes varied from the U.S. federal statutory
rate due to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal income tax benefit at statutory rate........ $(336,747) $(234,084) $(245,450)
Increase in valuation allowance..................... 288,994 240,136 243,106
Non deductible expenses............................. 5,408 4,037 2,973
Other............................................... 42,345 (10,089) (629)
--------- --------- ---------
Total provision for income taxes.................... $ 0 $ 0 $ 0
========= ========= =========
</TABLE>
Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment........................... $ (780,604) $ 295,359
----------- ----------
Deferred tax assets:
Other assets..................................... 91,841 60,585
Net operating loss carryforwards................. 1,694,418 951,435
----------- ----------
Total deferred tax assets................ 1,786,259 1,012,020
----------- ----------
Net deferred tax assets............................ 1,005,655 716,661
Valuation allowance................................ (1,005,655) (716,661)
----------- ----------
Total deferred taxes............................... $ 0 $ 0
=========== ==========
</TABLE>
At December 31, 1996, the Company had approximately $4,900,000 of tax loss
carryforwards that expire between 2006 and 2011.
9. RELATED PARTIES
A customer, who is also a shareholder, represented approximately 16%, 16%
and 32%, respectively, of the Company's revenues for the three years ended
December 31, 1996. At December 31, 1996 and 1995, the customer owed the Company
$56,880 and $109,000, respectively.
Certain affiliates of Company shareholders sell equipment and inventory to
the Company. Total expenditures incurred related to these entities were
$4,058,656 in 1996, $2,527,000 in 1995 and $2,205,000 in 1994. At December 31,
1996 and 1995, accrued liabilities to these entities totaled $605,336 and
$163,000, respectively.
Law firms associated with certain Company shareholders provided services
totaling $67,768 in 1996, $109,000 in 1995 and $52,000 in 1994.
F-11
<PAGE> 106
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A shareholder of the Company performed investment banking services in 1992
in exchange for $60,000 and a stock warrant to purchase up to 43,296 shares of
the Company's common stock for $5.78 per share, subject to antidilution
adjustments. The warrant expires on April 15, 1997.
The Company entered into a distributor agreement (the "Distributor
Agreement") to sell ice systems machinery and equipment to Southwest Texas
Packaged Ice, Inc. ("STPI"), an entity owned by certain Company shareholders.
This entity has exclusive distributor rights in certain Texas counties for a
period of ten years effective May 19, 1994. The distributor purchases each ice
system at an agreed upon price and pays a royalty, as defined. The Company
maintains no future performance obligations and STPI maintains no right of
return provision with respect to machinery and equipment sold under the
Distributor Agreement. Upon termination of the Distributor Agreement, the
Company may repurchase such machinery and equipment at a price as defined. The
distributor purchased machinery and equipment for $147,613 in 1996, $192,000 in
1995 and $176,000 in 1994. At December 31, 1996 and 1995, the distributor owed
the Company $0 and $60,000, respectively.
The Company granted a stock option to a shareholder that gives the option
holder the right to purchase up to 80,358 shares of common stock at an exercise
price of $6.22 per share. The stock option expired December 31, 1996.
In September 1996, the Company and Southwestern Ice, Inc. ("SWI") entered
into equipment lease and service agreements. Under the equipment lease, the
Company leased certain of its existing retail ice system locations and
additional ice systems to be installed within SWI's market area. The term of the
agreement is for five years with a five-year option and is accounted for as an
operating lease. Monthly rentals are variable depending on the number of
locations and ice systems subject to the lease agreement. Based on the number of
ice systems under lease at December 31, 1996 the future minimum rentals to be
received on noncancelable leases are approximately $408,000 annually. For the
year ended December 31, 1996, the Company recorded $93,885 in rent revenue of
which approximately $34,000 was receivable at December 31, 1996. Under the
service agreement, SWI pays the Company a monthly management fee of $10,000 for
the Company to have primary responsibility for marketing the ice systems and
oversight responsibility for installing, operating, managing and servicing the
ice systems. In addition, SWI is required to reimburse the Company for certain
costs relating to activities under the agreement. The term of this agreement is
for ten years or the termination of the equipment lease agreement. The Company
recorded approximately $129,000 in management fees and reimbursed expenses
during 1996 of which approximately $28,000 is receivable at December 31, 1996.
Also during 1996 the Company entered into a consulting arrangement with an
individual affiliated through ownership with SWI. Under the terms of this
arrangement this individual would be paid $10,000 per month. At December 31,
1996, the Company has accrued $30,000 for these services.
10. CAPITAL STOCK
Preferred Stock -- During September 1995, the Company's Board of Directors
authorized the designation of 450,000 shares of $.01 par value Series A
convertible preferred stock ("Series A"). Series A has no rights of redemption
or sinking fund provisions, but upon liquidation of the Company, the Company
must pay the Series A holders $5.56 per share (aggregate of $2,502,000) before
any amounts may be paid to the holders of common stock. Series A holders are
entitled to vote on all matters upon which the holders of common stock have the
right to vote and are generally entitled to vote as a class on any matters
adversely affecting their rights as holders of this series of preferred stock.
Each Series A holder is entitled to vote the number of equivalent common shares
that underlie their respective Series A investment. Each Series A share is
convertible into common stock without payment of additional consideration at a
conversion price of $5.56 per share, subject to antidilution adjustments.
F-12
<PAGE> 107
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 20, 1995, the Company received net proceeds of approximately
$5.8 million from a private placement offering and, in exchange, issued 700,000
shares of common stock and 450,000 shares of Series A convertible preferred
stock. The proceeds from the offering were used (i) to repurchase and retire
420,000 shares of common stock from an unrelated shareholder for $2.5 million,
(ii) to finance the purchase and installation of ice systems in additional
customer locations, and (iii) for working capital and general corporate
purposes. The Company also repurchased and retired 80,000 shares of common stock
for $800. With respect to the above issuance of 700,000 common shares, 480,000
shares contain a "put" option that provides the respective shareholders with the
ability to require the Company to repurchase the common shares if certain
registration rights with respect to the securities are not effected by
September, 2004. The put price would be at the fair market value, as defined, at
the time the put option is exercised. The common shares subject to this
redemption feature are shown on the consolidated balance sheet under the heading
"common stock with put redemption option".
During January 1997, the Company's board of directors authorized and the
shareholders approved the designation of 200,000 shares of $.01 par value Series
B convertible preferred stock ("Series B"). The Company issued 124,831 Series B
shares in full satisfaction of the 10% convertible demand notes (see Note 7).
Series B has no rights of redemption or sinking fund provisions, but upon
liquidation of the Company, the Company must pay the Series B holders $6.07 per
share (aggregate $757,724) before any amounts may be paid to the holders of
common stock. Series B holders are entitled to vote on all matters upon which
the holders of common stock have the right to vote and are generally entitled to
vote as a class on any matters adversely affecting their rights as holders of
this series of preferred stock. Each Series B holder is entitled to vote the
number of equivalent common shares that underlie their respective Series B
investment. Each Series B share is convertible into common stock without payment
of additional consideration at a conversion price of $6.07 per share, subject to
antidilution adjustments.
The Series A and Series B convertible preferred shares are also subject to
the same put redemption option described above for the 480,000 common shares.
This redemption feature would be available beginning September, 2004 if the
preferred stockholder has converted its holding to common shares and if certain
registration rights with respect to the common shares are not effected by
September, 2004. The Series A and Series B shares are shown on the consolidated
balance sheet under the heading "preferred stock with put redemption option".
Common Stock -- Holders of the Company's common stock are entitled to one
vote per share on all matters to be voted on by shareholders and are entitled to
receive dividends, if any, as may be declared from time to time by the Board of
Directors of the Company. Upon any liquidation or dissolution of the Company,
the holders of common stock are entitled, subject to any preferential rights of
the holders of preferred stock, to receive a pro rata share of all of the assets
remaining available for distribution to shareholders after payment of all
liabilities.
On January 4, 1994, the Company issued 1,066,750 shares of common stock for
$4,837,000 in a private placement offering.
In 1993 the Company sold 16,077 common shares at $6.22 per share to an
entity that produces packaging components used in the Company's ice systems. The
$99,999 consideration to be received from this entity was shown as an offset to
shareholders' equity and was reduced by a sales discount on the price charged
for the packaging component of the ice system for each of the first 500
packaging components delivered. At December 31, 1996, full consideration for the
stock subscription had been received.
In connection with the Southco acquisition (see Note 5), two individuals
are eligible to receive stock options to purchase a total of 20,000 shares of
common stock. The exercise price will be the fair market value as determined by
the Board of Directors on the grant date. At December 31, 1996, no options had
been granted under this agreement.
F-13
<PAGE> 108
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EMPLOYEE BENEFIT PLAN
During 1996 the Company established a 401(k) defined contribution savings
plan for the benefit of all employees who have completed one year of service and
have met the eligibility requirements to participate. Employees may contribute
up to the maximum amount allowed by the Internal Revenue Service, while Company
contributions are made at the discretion of the Board of Directors. The Company
contributed approximately $20,000 to the plan during 1996.
During 1994 the Company adopted a nonqualified stock option plan (the
"Plan"), which reserved for issuance 130,000 shares of common stock under the
terms of the Plan. At December 31, 1996, 66,500 shares were available for future
grants. Stock option activity for the three years ended December 31, 1996 is
summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
NUMBER OF PRICE PRICE
OPTIONS SHARES PER SHARE PER SHARE
------- --------- --------- ---------
<S> <C> <C> <C>
Granted during 1994.................................. 35,000 $6.22 $6.22
Granted during 1995.................................. 22,500 6.75 6.75
Granted during 1996.................................. 6,000 7.50 7.50
------
Outstanding at December 31, 1996..................... 63,500 6.53
====== =====
</TABLE>
Such options vest ratably over five years and expire ten years from the
date of grant. The weighted average remaining contractual life of stock options
outstanding under this plan was 8.2 years at December 31, 1996. Exercisable
stock options at December 31, 1996 and 1995 were 18,500 and 7,000, respectively.
The Company measures compensation cost for this Plan using the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized. Had compensation cost for the Plan been determined
using the fair value method of accounting as set forth in SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's pro forma net loss and
net loss per share would have been ($1,017,747) and ($0.36) in 1996 and
($706,692) and ($0.26) in 1995, respectively. Adjusted pro forma information
regarding net loss and net loss per share is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using the "minimal value" method for option
pricing with the following weighted average assumptions: risk free interest rate
of 6.4%; no expected dividend yield; expected life of 8.2 years; expected
volatility of zero.
12. SUBSIDIARIES
The Company has two wholly owned subsidiaries, Southco Ice, Inc. ("SII")
which began operations in November 1994 and Packaged Ice Leasing, Inc. ("PILI")
which began operations in October 1993. SII operates ice systems at the
locations acquired from Southco (see Note 5), while PILI owns certain ice
systems that are leased to the Company. The following table sets forth the
condensed combined financial information for the Company's subsidiaries.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Operating Data:
Revenues...................................... $2,403,516 $2,123,701 $305,909
Net loss...................................... (235,960) (848,779) (122,125)
</TABLE>
F-14
<PAGE> 109
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
Balance Sheet Data:
Current assets........................................... $ 184,434 $ 356,179
Property and equipment, net.............................. 5,422,595 3,198,724
Total assets............................................. 6,099,388 4,343,677
Long-term debt............................................. 43,814 440,137
Total shareholder's equity................................. (1,195,995) (940,035)
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
In April 1993 the Company entered into an agreement to purchase all of the
ice system packaging components from a shareholder for a period of three years
or until a minimum of 3,600 components had been purchased. Since inception of
this agreement, the Company has purchased 811 components. At December 31, 1996
the current purchase price per component was approximately $5,600.
The Company has agreed to purchase all of the merchandiser portions of the
ice systems from an unaffiliated company for a period of two years or until a
minimum of 2,400 merchandisers are purchased. Since inception of this agreement,
the Company has purchased 658 merchandisers. At December 31, 1996 the current
purchase price per merchandiser was approximately $2,400.
Relating to the Purchase Agreement with Southco, the Company's subsidiary
leased and subleased certain ice systems from Southco for a five-year period.
Rental payments are $110 per month per ice system. Payments will be reduced for
any leased ice systems removed from Company locations.
On March 22, 1994, the Company entered into a five-year building operating
lease. Future minimum lease payments will be approximately $45,000 in 1997,
$47,000 in 1998 and $16,000 in 1999. In addition, the Company has a year-to-year
building operating lease for its Dallas facility. Future minimum lease payments
will be approximately $9,000 in 1997.
The Company could be involved in various claims, lawsuits and proceedings
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate costs that may be incurred, management believes
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
14. SUBSEQUENT EVENTS (UNAUDITED)
On April 17, 1997 the Company completed the sale of $50,000,000 senior
unsecured debt (the "Notes") in connection with a private placement offering
which was prepared in compliance with Rule 144A and Regulation D under the
Securities Act. Concurrent with the sale of the Notes, the Company consummated
agreements with Mission Party Ice, Inc. and Southwest Texas Packaged Ice, Inc.
(the "Mission Acquisition" and "STPI Acquisition", respectively) and SWI (the
"Southwestern Acquisition"). The Mission Acquisition and STPI Acquisition
companies are controlled by an existing shareholder of the Company and operate
separate and distinct ice manufacturing facilities primarily in South Texas. SWI
operates ice manufacturing facilities in Arizona, New Mexico, California, Texas
and Tennessee. Total combined consideration for the Mission and STPI
Acquisitions was $10.4 million, consisting of $3.4 million in cash, $3.4 million
in the assumption and repayment of seller debt and $3.6 million in shares of the
Company's common stock. Total consideration for the SWI Acquisition was $18.8
million, consisting of $3.5 million in cash, $9.3 million in the assumption and
repayment of seller debt and $6.0 million in shares of the Company's common
stock. Each acquisition is being accounted for under the purchase method.
Results of operations and cash flows of the acquired businesses will be included
in the consolidated financial statements for the periods subsequent to the
F-15
<PAGE> 110
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respective dates of acquisition. The Company has not completed an assessment of
the fair value of the net assets acquired for purposes of allocating the
purchase price. Accordingly, the approximate $15.5 million excess of the
purchase price over the net book value of the acquired businesses has been
allocated entirely to goodwill at this time. Terms of the Notes provided that
the debt obligation is guaranteed by all of the direct and indirect current and
future subsidiaries of the Company and that such guarantees are full,
unconditional and joint and several. Financial statements of each guarantor
subsidiary have not been presented based upon the belief of management of the
Company that such financial statements are not material to investors.
The Company sold the Notes at a price of 96% of the par value, or
$48,000,000, which was used to finance the cash portion of the purchase price
for the above acquisitions and to pay certain related expenses, repay
outstanding indebtedness, make capital expenditures and provide additional
working capital.
In August 1997, the Company was in the process of exchanging the Notes with
new debt (the "Exchange Notes"). The Exchange Notes will be identical in all
material respects to the form and terms of the Notes except that the Exchange
Notes will be registered under the 1933 Securities Act and will not contain
certain transfer restrictions.
In addition to the acquisitions described above, during July 1997 the
Company acquired certain traditional ice businesses for purchase prices totaling
approximately $3.45 million. Such expenditures were funded from the proceeds of
the sale of the Notes. The acquired businesses were recorded using the purchase
method of accounting, and therefore, the results of their operations will be
included in the Company's unaudited consolidated financial statements from the
date of their respective purchase. The Company has not completed assessments of
the fair value of the net assets acquired for purposes of allocating the
respective purchase prices.
On July 17, 1997, the Company sold to an unaffiliated entity 300,000 shares
of common stock for $10 per share and issued a warrant entitling the new
shareholder the right to purchase 100,000 shares of common stock at an exercise
price of $14. The warrant expires on July 17, 2002.
On July 24, 1997, the Company repurchased, at cost, treasury stock for
approximately $1.5 million from a customer (See Note 9).
In the second quarter of 1997, the Company issued 10,000 stock options to
employees under the Plan (See Note 11). Also in the second quarter, a
shareholder acquired 18,271 shares of the Company's common stock in the form of
a cashless exercise of the shareholder's warrant to purchase 43,296 common
shares at an exercise price of $5.78 per share (See Note 9).
F-16
<PAGE> 111
INDEPENDENT AUDITORS' REPORT
To the Stockholder of Mission Party Ice, Inc. and
Stockholders of Southwest Texas Packaged Ice, Inc.:
We have audited the accompanying combined balance sheet of Mission Party
Ice, Inc. (a S corporation) and Southwest Texas Packaged Ice, Inc. (an
affiliated S corporation) (collectively, the "Companies"), both of which are
under common ownership and common management, as of December 31, 1996, and the
related combined statements of operations and retained earnings and of cash
flows for the year then ended. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of the Companies at December 31, 1996,
and the combined results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 21, 1997
F-17
<PAGE> 112
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents...................................... $ 46,094 $ 46,468
Accounts receivable:
Trade, net............................................. 521,095 556,925
Affiliates............................................. 595,737 379,619
Inventories............................................... 142,706 164,013
Prepaid expenses.......................................... 24,673 47,180
---------- ----------
Total current assets.............................. 1,330,305 1,194,205
PROPERTY, NET............................................. 4,518,417 4,547,978
OTHER ASSETS, NET......................................... 269,634 274,352
NET ASSETS FROM DISCONTINUED OPERATIONS................... 0 316,520
---------- ----------
TOTAL............................................. $6,118,356 $6,333,055
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $1,906,633 $1,483,228
Accounts payable:
Trade.................................................. 496,571 621,562
Payable to affiliates.................................. 162,436 155,408
Accrued expenses.......................................... 118,779 82,707
---------- ----------
Total current liabilities......................... 2,684,419 2,342,905
---------- ----------
LONG-TERM DEBT, NET......................................... 1,704,378 1,692,620
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Common stock (Mission: 1,000,000 shares authorized, $.01
par value, 1,000 shares issued and outstanding; STPI:
1,000,000 shares authorized, $1 par value; 1,250 shares
issued)................................................ 1,260 1,260
Additional paid-in capital................................ 1,538,026 1,538,026
Retained earnings......................................... 200,273 768,244
Less 25 shares of STPI treasury stock at cost............. (10,000) (10,000)
---------- ----------
Total shareholders' equity........................ 1,729,559 2,297,530
---------- ----------
TOTAL............................................. $6,118,356 $6,333,055
========== ==========
</TABLE>
See notes to combined financial statements.
F-18
<PAGE> 113
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 998,702 $7,704,514
Costs of sales.............................................. 813,665 4,683,307
--------- ----------
Gross profit................................................ 185,037 3,021,207
Selling, general and administrative expenses................ 418,728 1,498,622
Depreciation and amortization expense....................... 254,138 973,712
--------- ----------
Income (loss) from operations............................... (487,829) 548,873
Other income, net........................................... 9,592 64,432
Interest expense............................................ (89,734) (271,535)
--------- ----------
Income (loss) from continuing operations before income
taxes..................................................... (567,971) 341,770
Income taxes................................................ 0
--------- ----------
Income (loss) from continuing operations.................... (567,971) 341,770
Income from discontinued operations......................... 0 83,133
--------- ----------
Net income (loss)........................................... (567,971) 424,903
Retained earnings, Beginning of period...................... 768,244 343,341
--------- ----------
Retained earnings, End of period............................ $ 200,273 $ 768,244
========= ==========
</TABLE>
See notes to combined financial statements.
F-19
<PAGE> 114
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations............... $(567,971) $ 341,770
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation and amortization............................. 254,138 973,712
Gain from disposal of assets.............................. (29,529)
Changes in assets and liabilities:
Accounts receivable.................................... 132,706 (406,564)
Inventories............................................ 21,307 (23,559)
Prepaid expenses....................................... 22,507 37,160
Accounts payable....................................... (114,437) 175,410
Accrued expenses....................................... 36,072 1,377
Net cash flows provided by operating activities of
discontinued operations.............................. 0 447,319
--------- -----------
Net cash provided by used in operating
activities...................................... (215,678) 1,517,096
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions........................................ (219,859) (1,731,607)
Proceeds from disposition of property..................... 77,023
Net cash flows used in investing activities of
discontinued operations................................ (413,390)
--------- -----------
Net cash used in investing activities............. (219,859) (2,067,974)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance............................... 600,000 1,647,500
Repayment of debt......................................... (164,837) (1,055,657)
Treasury stock purchases.................................. (10,000)
Net cash flows from financing activities of discontinued
operations............................................. 0 4,347
--------- -----------
Net cash provided by financing activities.............. 435,163 586,190
--------- -----------
NET DECREASE IN CASH AND EQUIVALENTS........................ (374) 35,312
CASH AND EQUIVALENTS, DECEMBER 31, 1996..................... 46,468 11,156
--------- -----------
CASH AND EQUIVALENTS, MARCH 31, 1997........................ $ 46,094 $ 46,468
========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- Cash
payments for interest..................................... $ 20,641 $ 272,849
========= ===========
</TABLE>
See notes to combined financial statements.
F-20
<PAGE> 115
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Mission Party Ice, Inc. ("Mission") and Southwest Texas Packaged Ice, Inc.
("STPI") (collectively, the "Company" or "Companies") were incorporated to do
business in Texas in 1988 and 1991, respectively. Mission owns and operates ice
manufacturing facilities in San Antonio, Corpus Christi and Gonzales, Texas.
STPI owns and operates stand-alone automated merchandising ice systems ("ice
systems") installed primarily in retail grocery locations. These ice systems
produce and package bags of cubed ice at the customer's location. The Company
operates in the South Texas region.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination -- Both Mission and STPI are controlled through
ownership by the same stockholder and are under common management. As a result
the 1996 financial statements and related footnote disclosures are presented on
a combined basis. All significant intercompany accounts and transactions have
been eliminated upon combination.
Presentation of Unaudited Interim Financial Information -- The combined
financial statements presented herein at March 31, 1997 and for the three-month
periods ended March 31, 1997 are unaudited; however, all adjustments which are,
in the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods covered have been
made and are of a normal, recurring nature. Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end. The
results of the interim periods are not necessarily indicative of results to
expect for the full year.
Inventories -- Inventories are valued at the lower of first-in first-out
cost or market basis and consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Manufactured ice.................................. $ 33,547
Ice packaging bags................................ 75,804
Parts and supplies................................ 54,662
--------
Total inventory................................... $164,013
========
</TABLE>
Property -- Property is carried at cost and is being depreciated on a
straight-line basis over estimated lives of five to seven years. Maintenance and
repairs are charged to expense as incurred, while capital improvements which
extend the useful lives of the underlying assets are capitalized.
Other Assets -- Other assets, consisting primarily of costs associated with
the acquisition of competitors' ice manufacturing facilities and ice system
location contracts, are being amortized over three to five years (see Note 5).
Accumulated amortization was $210,398 at December 31, 1996.
Impairment of Long-Lived Assets -- In 1996 the Companies adopted Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires that long-lived assets be reviewed for impairment whenever events
or circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS No. 121 did not result in a charge to earnings
in the accompanying combined financial statements.
Income Taxes -- Mission and STPI are not subject to income taxes as both
have elected, under applicable provisions of the Internal Revenue Code, to be
treated as a Subchapter S corporation. Accordingly, the proportionate share of
each Company's taxable income or loss is reported in the respective
stockholder's individual tax return. Therefore, no liability for federal income
taxes has been recorded in the accompanying combined financial statements.
F-21
<PAGE> 116
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition -- Mission's revenues are recognized upon the delivery
and acceptance of ice products to customer locations. Revenue is recognized by
STPI in accordance with contracted terms based upon the number of ice packaging
bags delivered to and accepted by customers. Once accepted, there is no right of
return with respect to the bags delivered.
Cash Flows -- The Company considers all highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
Fair Values of Financial Instruments -- The Company's financial instruments
include certain current assets and liabilities where carrying value approximates
fair value. In addition, the carrying value of financial instruments related to
long-term debt approximate fair value based on management's opinion that stated
interest rates are representative of rates currently available to the Companies
for comparable borrowings. It is not practicable to estimate the fair value of
the related party balances due to the instruments nature.
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 and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
3. DISCONTINUED OPERATIONS
In December 1996, Mission entered into formal negotiations to sell Mission
Ice Equipment Company ("MIECO"), a division of Mission, to Southwest Texas
Equipment Distributors ("STED"). STED is affiliated with Mission through common
ownership. MIECO's business involves the sale or lease of commercial food
service equipment to retail establishments. The net assets of MIECO were sold on
January 2, 1997 for a price of $316,520, which equaled their net bookvalue at
this date. No gain or loss was recorded on the disposal. Costs and expenses
directly associated with the disposition were paid by STED.
4. PROPERTY AND EQUIPMENT
Property and equipment were as follows at December 31, 1996:
<TABLE>
<S> <C>
Ice systems machinery and equipment............ $6,250,893
Furniture and fixtures......................... 122,068
Auto/truck..................................... 1,480,184
Computer equipment............................. 246,204
Leasehold improvements......................... 12,967
Land........................................... 35,095
----------
Total property and equipment................... 8,147,411
Less accumulated depreciation.................. (3,599,433)
----------
Total.......................................... $4,547,978
==========
</TABLE>
Depreciation expense for the year ended December 31, 1996 was $893,485.
5. CURRENT ACQUISITIONS
McGehee -- Neutze, Inc. ("MNI") -- In May 1996 Mission acquired certain
assets of MNI including ice merchandising equipment and a vehicle for $77,500.
The acquisition was funded through Mission's bank credit facility. As part of
the acquisition, MNI agreed to perform sales and customer relations work within
the MNI market area, primarily Webb County, Texas in exchange for approximately
$170,000 to be paid over a
F-22
<PAGE> 117
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
three year term. Such purchase consideration was recorded in other assets with
an offsetting amount in accounts payable. Payment of amounts under this service
agreement are guaranteed by Mission's sole stockholder. The assigned value of
this agreement is being amortized over the agreement term with accumulated
amortization of approximately $23,000 at December 31, 1996.
Southco, Inc. ("Southco") Contracts -- On November 21, 1994, STPI entered
into a purchase agreement (the "Purchase Agreement") with Southco to purchase
certain of its assets, primarily the right to operate ice systems at 33
locations and firm orders to operate ice systems in the future at seven
additional locations. The cost was approximately $188,000 and was partially
financed by a $105,620 note payable (see Note 6). The purchase price and related
note are subject to reduction (as defined) for a three year period for
cancellations/terminations of any existing locations or in the event that any of
the identified firm order locations do not become customers.
The assigned value of the right to operate ice systems and associated costs
has been recorded within other assets and is being amortized over five years.
The accumulated amortization related to this asset was approximately $80,000 at
December 31, 1996.
6. LONG-TERM DEBT AND NOTES PAYABLE
At December 31, 1996, long-term debt of the Companies consisted of the
following:
<TABLE>
<S> <C>
Frost National Bank............................ $2,612,616
Jefferson State Bank........................... 523,249
Southco Note................................... 33,958
Other.......................................... 6,025
----------
Total debt..................................... 3,175,848
Less current maturities........................ 1,483,228
----------
Long-term debt, net............................ $1,692,620
==========
</TABLE>
Frost National Bank -- The Company and Frost National Bank have entered
into a secured loan agreement (the "Bank Loan Agreement"), as last amended
January 1997, to finance capital expenditures and seasonal working capital
needs. Under the provisions of the Bank Loan Agreement, available financing
consists of a term loan (the "Term Loan"), a working capital line of credit and
an equipment purchase line of credit (collectively, the "Lines of Credit").
Borrowings under the Bank Loan Agreement are secured by Mission's machinery and
equipment, accounts receivable, the pledge of Mission's common stock and the
personal guarantee of Mission's sole shareholder as well as the guarantees of
STPI and STED. The Bank Loan Agreement contains restrictive covenants which,
among other things, requires the Company to maintain a minimum tangible net
worth (as defined) and a specific ratio of cash flow to current maturities of
long-term debt. The terms of the Bank Loan Agreement also prohibit the payment
of dividends, limit annual capital expenditures and limit the Companies' ability
to incur additional debt. The maximum combined credit under the Lines of Credit
is $1,475,000, subject to borrowing base limitations which are generally
computed as a percentage of various classes of eligible accounts receivable,
qualifying inventory and fixed assets (as defined) of Mission, STPI and STED.
The Company pays no annual facility fee related to the Lines of Credit.
The balance of the Term Loan was $904,155 at December 31, 1996. The Term
Loan bears interest at prime plus 1% (9.25% at December 31, 1996) and is payable
in monthly installments of $21,840 through July 2000. The balance of the Lines
of Credit was $425,000 at December 31, 1996. The Lines of Credit mature on May
31, 1997 and bear interest at prime plus 1% (9.25% at December 31, 1996).
F-23
<PAGE> 118
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Companies enter into secured promissory note agreements
with Frost National Bank from time to time in order to finance the purchase of
equipment, which is in turn used as collateral for the notes. At December 31,
1996, borrowings under such notes were $1,283,461. These notes bear interest at
prime plus 1% (9.25% at December 31, 1996) and require principal and interest
payments in equal monthly installments ranging from three to five years.
Jefferson State Bank -- The Companies enter into secured promissory note
agreements ("Promissory Notes") with Jefferson State Bank at various dates in
order to finance the purchase of ice merchandisers and/or transportation
vehicles, which are in turn used as collateral for the Promissory Notes. The
notes outstanding at December 31, 1996 bear interest at a fixed rate ranging
from 6.5% to 9.0%. The Promissory Notes require principal and interest payments
in equal monthly installments ranging from two to four years.
Southco Note -- In November 1994 STPI issued a note (the "Southco Note") to
finance a portion of the Southco acquisition (see Note 5). The Southco Note
bears interest at an annual rate of prime plus 2% (10.25% at December 31, 1996)
and is secured by the contracts to operate ice systems. The Southco Note
required interest-only payments for the first six months and thereafter 36
monthly payments of $3,521 plus accrued interest.
The weighted average interest rate for the Companies was 9.27% for the year
ended December 31, 1996.
The Companies' long-term debt maturities are as follows:
1997........................................... $1,483,228
1998........................................... 782,292
1999........................................... 584,820
2000........................................... 317,328
2001........................................... 8,180
----------
$3,175,848
==========
7. RELATED PARTIES
STPI entered into a distributor agreement (the "Distributor Agreement") to
purchase ice systems machinery and equipment from Packaged Ice, Inc. ("Packaged
Ice"), an entity affiliated through common ownership. Under provisions of the
Distributor Agreement, STPI has exclusive purchasing rights in certain Texas
counties for a period of ten years effective May 19, 1994. STPI purchases each
ice system at an agreed upon price and pays a royalty, as defined. Packaged Ice
has the right to repurchase all of the ice systems at a price defined in the
Distributor Agreement. STPI's purchases under the Distributor Agreement were
$147,613 for the year ended December 31, 1996. No amounts were payable related
to these transactions at December 31, 1996.
Certain affiliates of the Companies' shareholders sell ice merchandisers to
Mission. During 1996, Mission incurred approximately $100,000 of capital
expenditures related to these entities.
The Companies, from time to time, advance and receive funds from affiliates
in the normal course of operations for working capital purposes. Such
transactions are reflected in accounts receivable-affiliates and accounts
payable-affiliates on the combined balance sheet in the respective amounts of
$360,589 and $49,856 at December 31, 1996. In addition, Mission has $105,552 of
8.75% interest bearing demand notes due affiliates and $19,030 of employee
receivables at December 31, 1996.
The Companies lease certain property from individuals affiliated through
ownership. Total payments under these leases were $87,600 in 1996. See Note 9
for additional information regarding noncancellable lease commitments.
F-24
<PAGE> 119
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. CAPITAL STOCK
Common Stock -- Respective holders of Mission and STPI's common stock are
entitled to one vote per share on all matters to be voted on by shareholders and
are entitled to receive dividends, if any, as may be declared from time to time
by the respective Board of Directors of the Companies. Upon any liquidation or
dissolution of either Company, the holders of common stock are entitled to
receive a pro rata share of all of the assets remaining available for
distribution to shareholders after payment of all liabilities.
In 1993, STPI entered into a Stock Purchase and Restriction Agreement (the
"Agreement") with certain employees of STPI. The Agreement allowed these
employees to purchase up to a 20% interest in STPI's $1 par value common stock
for a purchase price of $50,000. The Agreement gave the new shareholders a put
option whereby STPI would repurchase the shares at a price equal to the greater
of the original purchase price or the then adjusted book value (as defined).
Upon termination of employment or death, STPI has the option to repurchase such
shares in accordance with the put option formula. The Agreement restricts such
shares from being sold, pledged, gifted or otherwise disposed of without
offering such shares to the majority stockholder. During 1996 STPI repurchased
and placed in treasury 25 shares of common stock from minority shareholders for
$10,000.
9. COMMITMENTS AND CONTINGENCIES
Relating to the Purchase Agreement with Southco, STPI leased certain ice
systems from Southco for a five year period. Rental payments are $110 per month
per ice system.
The Companies have entered into various noncancellable operating leases for
buildings and other property. The Company subleases some of the property
included under these leases. The annual future minimum lease payments under
these leases, and the related sublease amounts, are as follows:
<TABLE>
<CAPTION>
PAYMENT SUBLEASE NET
-------- -------- --------
<S> <C> <C> <C>
1997.................................................. $330,000 $12,000 $318,000
1998.................................................. 74,000 2,000 72,000
1999.................................................. 16,000 16,000
</TABLE>
The Companies may be involved in various claims, lawsuits and proceedings
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate costs that may be incurred, management believes
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Companies's combined financial position or
results of operations.
10. EMPLOYEE BENEFIT PLANS
On January 1, 1994, the Company, in conjunction with affiliated companies
controlled through ownership by the same stockholder established a 401(k)
defined contribution savings plan (the "Plan") covering substantially all of the
affiliates' employees. Employees may elect to contribute on a pre-tax basis up
to 15% of their eligible compensation to the Plan. For those participants who
have elected to make voluntary contributions to the Plan, the Company's matching
contributions consist of an amount of up to 2% of the eligible compensation of
the participants. An additional matching contribution may be made by the Company
at the discretion of the Board of Directors. Such contributions vest ratably
over a period of five years. The Company contributed approximately $30,000 to
the Plan for the year ended December 31, 1996.
F-25
<PAGE> 120
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED)
On April 17, 1997, the Companies consummated an agreement with Packaged Ice
to merge into wholly owned subsidiaries of Packaged Ice. The total combined
consideration for those acquisitions was $10.4 million, consisting of $3.4
million in cash, $3.4 million in the assumption and repayment of seller debt and
$3.6 million in shares of Packaged Ice common stock payable to the Companies'
shareholders.
F-26
<PAGE> 121
INDEPENDENT AUDITORS' REPORT
ON ADDITIONAL INFORMATION
To the Stockholder of Mission Party Ice, Inc. and
Stockholders of Southwest Texas Packaged Ice, Inc.:
Our audit was conducted for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The additional combined balance
sheet with combining information as of December 31, 1996 and the combined
statement of operations with combining information for the year ended December
31, 1996 are presented for the purpose of additional analysis of the basic
combined financial statements rather than to present the financial position and
results of operations of the individual companies and are not a required part of
the basic combined financial statements. This additional combining information
is the responsibility of the Companies' management. Such combining information
has been subjected to the auditing procedures applied in our audit of the basic
combined financial statements and, in our opinion, is fairly stated in all
material respects when considered in relation to the basic combined financial
statements taken as a whole.
DELOITTE & TOUCHE LLP
Houston, Texas
March 21, 1997
F-27
<PAGE> 122
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED BALANCE SHEET WITH COMBINING INFORMATION
DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
SOUTHWEST
MISSION TEXAS
PARTY ICE PACKAGED COMBINING COMBINED
INC. ICE, INC. ADJUSTMENTS BALANCE
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents....................... $ 36,149 $ 10,319 $ 46,468
Accounts receivable:
Trade................................... 477,480 79,445 556,925
Affiliates.............................. 491,394 4,778 $(116,553) 379,619
Inventories................................ 146,278 17,735 164,013
Prepaid expenses........................... 45,468 1,712 47,180
---------- ---------- --------- ----------
Total current assets.................... 1,196,769 113,989 (116,553) 1,194,205
PROPERTY, NET................................ 3,591,511 956,467 4,547,978
OTHER ASSETS, NET............................ 161,740 112,612 274,352
NET ASSETS FROM DISCONTINUED OPERATIONS...... 374,282 (57,762) 316,520
---------- ---------- --------- ----------
TOTAL........................................ $5,324,302 $1,183,068 $(174,315) $6,333,055
========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.......... $1,161,544 $ 321,684 $1,483,228
Accounts payable........................... 509,689 111,873 621,562
Payable to affiliates...................... 105,522 224,201 $(174,315) 155,408
Accrued expenses........................... 63,473 19,234 82,707
---------- ---------- --------- ----------
Total current liabilities.......... 1,840,228 676,992 (174,315) 2,342,905
---------- ---------- --------- ----------
LONG-TERM DEBT, NET.......................... 1,178,618 514,002 1,692,620
---------- ---------- --------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, 2,000,000 shares authorized;
(1,000,000 shares, $.01 par value,
authorized for Mission, 1,000 shares issued
and outstanding; 1,000,000 shares, $1 par
value; authorized for STPI, 1,250 shares
issued).................................... 10 1,250 1,260
Additional paid-in capital................... 1,514,513 23,513 1,538,026
Retained earnings............................ 790,933 (22,689) 768,244
Less 25 shares of STPI treasury stock at
cost....................................... (10,000) (10,000)
---------- ---------- --------- ----------
Total shareholders' equity......... 2,305,456 (7,926) 2,297,530
---------- ---------- --------- ----------
TOTAL........................................ $5,324,302 $1,183,068 $(174,315) $6,333,055
========== ========== ========= ==========
</TABLE>
See notes to combined financial statements at pages F-21 through F-26.
F-28
<PAGE> 123
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED STATEMENT OF OPERATIONS WITH COMBINING INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SOUTHWEST
MISSION TEXAS
PARTY ICE PACKAGED COMBINING COMBINED
INC. ICE, INC. ADJUSTMENTS BALANCE
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues....................................... $6,853,645 $850,869 $7,704,514
Costs of sales................................. 4,327,267 356,040 4,683,307
---------- -------- ----------
Gross profit................................... 2,526,378 494,829 3,021,207
Selling, general and administrative expenses... 1,387,837 110,785 1,498,622
Depreciation and amortization expense.......... 698,136 275,576 973,712
---------- -------- ----------
Income from operations......................... 440,405 108,468 548,873
Other income, net.............................. 68,448 560 $(4,576) 64,432
Interest expense............................... (182,179) (93,932) 4,576 (271,535)
---------- -------- ------- ----------
Income from continuing operations before income
taxes........................................ 326,674 15,096 341,770
Income taxes...................................
---------- -------- ------- ----------
Income from continuing operations.............. 326,674 15,096 341,770
Income from discontinued operations............ 83,133 83,133
---------- -------- ------- ----------
Net income..................................... $ 409,807 $ 15,096 $ $ 424,903
========== ======== ======= ==========
</TABLE>
See notes to combined financial statements at pages F-21 through F-26.
F-29
<PAGE> 124
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southwestern Ice, Inc.:
We have audited the accompanying balance sheets of SOUTHWESTERN ICE, INC.
(an Arizona corporation) as of December 31, 1996 and 1995, and the related
statements of operations and changes in retained earnings and cash flows for the
years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwestern Ice, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 27, 1997.
F-30
<PAGE> 125
SOUTHWESTERN ICE, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash.............................................. $ 32,595 $ 39,821 $ 135,289
Short-term investments............................ 50,000 95,000 --
Accounts receivable, less allowance for doubtful
accounts of $27,000 at both December 31, 1996
and 1995 (Note 1).............................. 1,379,319 1,204,745 1,352,607
Inventories....................................... 427,362 371,433 370,300
Prepaid expenses and other current assets......... 55,664 89,599 103,216
----------- ----------- -----------
Total current assets...................... 1,944,940 1,800,598 1,961,412
PROPERTY, PLANT AND EQUIPMENT, net (Notes 2 and
3)................................................ 9,782,141 10,168,279 10,591,579
ASSETS HELD FOR SALE (Note 1)....................... 265,655 265,655 --
OTHER ASSETS, net................................... 170,202 173,292 199,689
----------- ----------- -----------
$12,162,938 $12,407,824 $12,752,680
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of debt and obligations under
capital leases (Note 3)........................ $ 1,043,137 $ 1,068,181 $ 1,868,159
Operating line of credit (Note 3)................. 600,000 600,000 --
Accounts payable.................................. 1,168,779 733,799 1,096,257
Accrued liabilities............................... 521,669 475,513 565,430
Other liabilities (Note 4)........................ -- -- 500,000
----------- ----------- -----------
Total current liabilities................. 3,333,585 2,877,493 4,029,846
----------- ----------- -----------
DEBT AND OBLIGATIONS UNDER CAPITAL LEASES, less
current portion (Note 3).......................... 7,757,550 7,856,134 8,112,280
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 5)
STOCKHOLDERS' INVESTMENT:
Capital stock; no par value, 1,000,000 shares
authorized, 1,110 shares issued and outstanding
at both December 31, 1996 and 1995............. 1,110 1,110 1,110
Retained earnings................................. 1,070,693 1,673,087 609,444
----------- ----------- -----------
Total stockholders' investment............ 1,071,803 1,674,197 610,554
----------- ----------- -----------
$12,162,938 $12,407,824 $12,752,680
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-31
<PAGE> 126
SOUTHWESTERN ICE, INC.
STATEMENTS OF OPERATIONS AND CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------ --------------------------
1997 1996 1996 1995
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES................................. $2,206,840 $2,350,481 $14,050,305 $13,933,266
COST OF SALES......................... 2,066,527 2,053,176 10,270,979 10,414,557
---------- ---------- ----------- -----------
Gross profit................ 140,313 297,305 3,779,326 3,518,709
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................ 688,063 579,291 2,640,271 2,464,654
---------- ---------- ----------- -----------
Income (loss) from operations....... (547,750) (281,986) 1,139,055 1,054,055
---------- ---------- ----------- -----------
OTHER (INCOME) EXPENSE:
Interest expense.................... 226,730 194,952 920,136 798,316
Other (income) expense.............. (172,086) 9,034 (14,682) (238,406)
---------- ---------- ----------- -----------
Total other expense, net......... 54,644 203,986 905,454 559,910
---------- ---------- ----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM...... (602,394) (485,972) 233,601 494,145
EXTRAORDINARY ITEM:
Gain from extinguishment of debt.... -- -- 830,042 --
---------- ---------- ----------- -----------
NET (LOSS) INCOME..................... (602,394) (485,972) 1,063,643 494,145
RETAINED EARNINGS, beginning
balance............................. 1,673,087 609,444 609,444 115,299
---------- ---------- ----------- -----------
RETAINED EARNINGS, ending balance..... $1,070,693 $ 123,472 $ 1,673,087 $ 609,444
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 127
SOUTHWESTERN ICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- --------------------------
1997 1996 1996 1995
--------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(602,394) $(485,972) $ 1,063,643 $ 494,145
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities-
Depreciation and amortization........................... 298,852 269,313 1,124,380 1,020,393
Debt discount amortization.............................. 2,343 3,446 12,127 51,311
Gain on sale of property, plant and equipment........... (172,085) -- (198,601) (207,986)
Gain on extinguishment of debt -........................ -- -- (830,042) --
(Increase) decrease in assets:
Accounts receivable................................... (174,574) 71,206 147,862 (65,800)
Inventories........................................... (55,929) 35,687 (1,133) 80,332
Prepaid expenses and other current assets............. 33,935 21,598 13,617 (26,188)
Other assets.......................................... (1,231) (8,188) (9,470) (19,607)
Increase (decrease) in liabilities:
Accounts payable...................................... 434,980 (156,480) (362,458) 184,151
Accrued liabilities................................... 46,156 115,838 88,309 (348,244)
--------- --------- ----------- -----------
Net cash (used in) provided by operating
activities........................................ (189,947) (133,552) 1,048,234 1,162,507
--------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment and
assets held for sale...................................... 328,495 -- 525,000 1,611,285
Purchase of property, plant and equipment................... (64,803) (125,609) (631,526) (417,292)
Proceeds from (purchase of) short-term investments.......... 45,000 -- (95,000) --
Disposition costs of assets held for sale -................. -- -- -- (553,374)
--------- --------- ----------- -----------
Net cash (used in) provided by investing
activities........................................ 308,692 (125,609) (201,526) 640,619
--------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................................ -- 19,441 8,041,542 --
Principal payments on long-term debt........................ (125,971) (372,731) (9,583,718) (1,842,841)
Proceeds from line of credit................................ -- 500,000 1,311,950 200,000
Payments on line of credit.................................. -- -- (711,950) (200,000)
--------- --------- ----------- -----------
Net cash used in financing activities............... (125,971) 146,710 (942,176) (1,842,841)
NET DECREASE IN CASH........................................ (7,226) (112,451) (95,468) (39,715)
CASH, beginning balance..................................... 39,821 135,289 135,289 175,004
--------- --------- ----------- -----------
CASH, ending balance........................................ $ 32,595 $ 22,838 $ 39,821 $ 135,289
========= ========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.............................. $ 229,140 $ 179,348 $ 951,991 $ 713,853
========= ========= =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Capital lease obligations of $803,307 and $116,312
were incurred during 1996 and 1995, respectively
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 128
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations
Southwestern Ice, Inc. (the Company) was incorporated in the State of
Arizona on February 25, 1992. The Company's primary business activity is the
production, marketing, and distribution of ice products in Arizona, southern
Texas, Memphis, Tennessee, Albuquerque, New Mexico and El Centro, California.
The Company has elected to be organized as an S corporation and therefore, is
not subject to income taxes. Accordingly, there is no provision for income taxes
reflected in the accompanying financial statements.
In 1994, the Company's program for market penetration culminated with the
acquisition of the national ice operations of Southeastern Public Service
Company (SEPSCO). During the following two years the Company disposed of
unprofitable segments of the SEPSCO operations; additionally it made three
strategic acquisitions of small operations in order to strengthen the Company's
primary markets. See specific discussion on acquisition/disposal activity below.
During the summer of 1996, new technology was introduced into the Company's
primary market. Specifically, this technology produces and bags ice within the
ice merchandiser located at the customer site. Realizing the opportunities for
increased sales volume and market penetration while allowing the Company to
reduce its production and shipping costs, the Company entered into a Master
Equipment Lease Agreement with the owner of the technology. The Company also
believes the addition of this new technology will compliment its traditional ice
operations by increasing its production capacity during periods of the year in
which demand has typically exceeded the Company's production capacity. Pursuant
to the lease agreement, the Company granted the technology owner an option to
purchase the Company, exercisable within five years from the date of the Master
Equipment Lease Agreement at a price based on an agreed-upon formula (see Note
4).
During 1996, the Company sold certain assets related to its Corpus Christi,
Texas ice production and distribution facility and certain mobile refrigerated
vacuum equipment. The Company recognized a gain of approximately $145,000 on
proceeds of approximately $525,000. The Company has classified the assets still
located in Corpus Christi as assets held for sale and is actively marketing
these assets. No depreciation expense has been recorded since the date the
assets were taken out of production and made available for sale. The assets held
for sale at December 31, 1996, consist of the following:
<TABLE>
<S> <C>
Land...................................... $155,506
Buildings................................. 110,149
--------
$265,655
========
</TABLE>
The following unaudited pro forma information has been prepared assuming
the disposal of the Corpus Christi assets and discontinuance of those operations
occurred at the beginning of 1996.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Revenues................................ $13,839,730
Gross profit............................ 3,793,418
Income from operations.................. 1,204,780
</TABLE>
The unaudited pro forma combined financial data is provided for
illustrative purposes only and is not necessarily indicative of the results of
operations that would have been reported had the disposition of these operations
occurred on January 1, 1996, nor does it represent a forecast of the results of
operations for any future period.
F-34
<PAGE> 129
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company sold for aggregate proceeds of approximately
$1,408,000 certain assets located in Florida and certain assets related to its
Albuquerque water operations, all of which were originally acquired in the
SEPSCO acquisition discussed below. No gain or loss resulted from these sales as
the assets were recorded at their net realizable value. Also, during 1995, the
Company sold certain assets related to its Phoenix dry ice operations. The sale
of these assets resulted in a gain of approximately $208,000 on proceeds of
approximately $250,000.
During 1995, the Company acquired certain assets of three ice distributors
for a total purchase price of approximately $246,000. The excess cost over the
net assets acquired of approximately $38,000 is included in other assets in the
accompanying financial statements and is being amortized over 15 years. In
accordance with APB No. 16, Accounting for Business Combinations, the
acquisitions were accounted for as purchases and, accordingly the purchase price
was allocated to the assets acquired based on their respective estimated fair
values at the date of acquisition.
Effective April 8, 1994, the Company, pursuant to a Purchase Agreement with
Southeastern Public Service Company (SEPSCO), acquired substantially all of the
assets, subject to certain liabilities (see Note 4) of an ice manufacturing and
distribution company for approximately $9,295,000. Funding was provided by the
issuance of a note payable to SEPSCO in the amount of $4,295,000 and $5,000,000
obtained on the issuance of a note payable to a bank (see Note 3).
The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets and liabilities acquired based on
their respective estimated fair values at the date of acquisition. The
allocation is summarized as follows:
<TABLE>
<S> <C>
Accounts receivable..................... $ 1,044,868
Inventories............................. 468,478
Property, plant and equipment........... 9,362,494
Assets held for sale.................... 506,226
Accounts payable........................ (546,014)
Accrued liabilities..................... (541,052)
Other liabilities....................... (1,000,000)
-----------
$ 9,295,000
===========
</TABLE>
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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Short-Term Investments
Short-term investments consist of certificates of deposits with a financial
institution which have original maturities in excess of three months and are
carried at cost, which approximate market.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. The Company's inventory consists of wet ice and bags for the
transportation and storage of ice.
F-35
<PAGE> 130
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other Assets
The cost of customer lists, trade name and other identifiable intangible
assets acquired in connection with business acquisitions are amortized on a
straight-line basis over 15 years. Amortization expense totaled to $18,000 and
$17,000 for the years ended December 31, 1996 and 1995. Accumulated amortization
was $47,700 and $34,200 as of December 31, 1996 and 1995, respectively.
Other Liabilities
At December 31, 1995, other liabilities consisted of the remediation costs
associated with SEPSCO acquisition (see Note 4). These remediation costs were
fully paid in conjunction with the debt refinancing discussed in Note 3.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The Company earns approximately 76% of
its revenues from Arizona with the remaining portion earned from Texas,
Tennessee, New Mexico and California. Also, approximately 44% of the Company's
sales are to major supermarket chains.
Recently Issued Pronouncements
During 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This statement requires companies to
review long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable and provides guidance to be considered in
performing such reviews. The adoption of SFAS No. 121 did not have an impact on
the Company's financial position or results of operations.
(2) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is recorded at cost. Property and equipment
held under capital leases is stated at the present value of minimum lease
payments, net of accumulated amortization. These assets are amortized over the
lesser of the lease term or the estimated useful life of the underlying assets
using the straight-line method. Additions, improvements and major renewals are
capitalized. Maintenance, repairs and minor renewals, which do not improve or
significantly extend the life of assets, are expensed as incurred. Depreciation
is computed on a straight-line basis over the following estimated useful lives:
<TABLE>
<CAPTION>
ASSET DESCRIPTION ESTIMATED LIVES
----------------- ---------------
<S> <C>
Buildings and improvements..................... 31 years
Machinery and equipment........................ 7-12 years
Furniture and fixtures......................... 7-12 years
Vehicles....................................... 5 years
</TABLE>
F-36
<PAGE> 131
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property, plant and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Land.............................................. $ 749,361 $ 994,031
Buildings and improvements........................ 3,010,772 3,183,380
Machinery and equipment........................... 7,213,527 6,625,892
Furniture and fixtures............................ 691,394 656,437
Vehicles.......................................... 1,431,552 1,059,695
----------- -----------
13,096,606 12,519,435
Less -- Accumulated depreciation.................. (2,928,327) (1,927,856)
----------- -----------
$10,168,279 $10,591,579
=========== ===========
</TABLE>
(3) DEBT AND OBLIGATIONS UNDER CAPITAL LEASES:
In July 1996, the Company used $8,600,000 in proceeds from borrowings with
a bank to retire approximately $9,083,000 in debt and $500,000 in accrued
remediation liabilities (see Note 4). The new debt consists of a senior term
note, a secondary term note and a revolving line of credit. The retired debt
consisted of three loan agreements and a revolving line of credit with a bank
and a subordinated note payable to SEPSCO. The refinancing resulted in an
extraordinary gain on extinguishment of debt of $830,042.
F-37
<PAGE> 132
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Debt and obligations under capital leases at December 31 consists of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Senior note payable to bank collateralized by personal
property, real estate, capital stock and a shareholder
certificate of deposit, payable in monthly installments of
$65,775 including interest at prime (8.25% at December 31,
1996), plus 1.5% through June 2006........................ $4,606,854 $ --
Secondary note payable to bank collateralized by personal
property, real estate, capital stock and a shareholder
certificate of deposit, payable in monthly installments of
interest only at prime plus 1.5% through June 2006........ 3,000,000 --
Note payable to bank collateralized by accounts receivable
and equipment, payable in monthly installments of $106,060
including interest at 8.25% per annum, paid in full in
July 1996................................................. -- 4,188,471
Subordinated note payable to SEPSCO, payable in annual
installments of $120,000 plus interest at 5% per annum,
beginning April 1996 and 1995, paid in full in July
1996...................................................... -- 3,880,767
Installment note payable to bank collateralized by accounts
receivable and equipment and personally guaranteed by a
shareholder, payable in monthly installments of $13,911
plus interest at prime plus 2%, paid in full in July
1996......................................................
Obligations under capital leases, net of amounts
representing interest. Interest ranging from 9% to 13%,
maturing through October 2001............................. 879,035 407,099
Note payable to bank, collateralized by shareholder
certificate of deposit, interest payable in monthly
installments at time deposit rate plus 2% per annum, paid
in full in July 1996...................................... -- 495,000
Note payable to shareholder, due in monthly installments of
$6,458 plus interest at 10% through April 1999............ 284,167 322,917
Other....................................................... 165,804 279,221
---------- ----------
8,935,860 10,004,111
Less -- Current portion..................................... (1,068,181) (1,868,159)
Unamortized discount........................................ (11,545) (23,672)
---------- ----------
$7,856,134 $8,112,280
========== ==========
</TABLE>
Pursuant to the refinancing, the Company entered in a revolving line of
credit with a bank which is secured by personal property, real estate, capital
stock and a shareholder certificate of deposit. Interest is payable monthly at
prime plus 1.5% until maturity of the line of credit in May 1997. The maximum
borrowing base is determined by the Company's accounts receivable balance, as
defined, not to exceed $600,000. The line of credit was fully drawn at the time
of refinancing to pay in full the outstanding balance of an existing line of
credit with a bank. Interest on the retired line of credit was payable monthly
at the institution's reference rate plus 2%.
F-38
<PAGE> 133
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Maturities on long-term debt and obligations under capital leases are as
follows:
<TABLE>
<S> <C>
1997..................................... $1,146,639
1998..................................... 979,496
1999..................................... 886,543
2000..................................... 819,752
2001..................................... 832,196
Thereafter............................... 4,428,239
----------
9,092,865
Less -- Interest on capital leases....... (168,550)
----------
$8,924,315
==========
</TABLE>
(4) COMMITMENTS AND CONTINGENCIES:
Pursuant to the Purchase Agreement with SEPSCO, the Company set forth a
remediation plan for all environmental contamination at all real properties
acquired. As a result of the Company refinancing its debt and accrued
liabilities to SEPSCO, the Company was relieved of its remaining remediation
liability by SEPSCO in July 1996. The Company's maximum liability was
$1,500,000. Costs paid by the Company in excess of $500,000 reduced
dollar-for-dollar the principal balance of the note payable to SEPSCO up to a
maximum reduction of $500,000. As of the refinancing date, the Company had paid
approximately $795,000 in remediation costs which resulted in a forgiveness of
$500,000 in accrued remediation liability which is included in the calculation
of the gain from the debt extinguishment.
In September 1996, the Company entered into an option agreement (the
Agreement) with another corporation (the Buyer) whereby the Company granted the
Buyer a five-year option to purchase its assets. The purchase price set forth in
the Agreement is calculated from the Company's earnings before interest, taxes,
depreciation and amortization (EBITDA) with a valuation premium, as defined in
the Agreement. This option may be exercised by the Buyer on or before September,
2001 by giving written notice to the Company. Payment of the agreed-upon price
must be in the form of a combination of cash and common stock of the Buyer
issued in conjunction with an initial public offering. Certain personal and real
property are excluded from the option. No consideration was received from the
Buyer in exchange for the option.
The Company also entered into a Master Equipment Lease Agreement in
September 1996 with the Buyer to lease various ice manufacturing and
merchandising systems for retail and commercial use. The lease agreement is for
an initial term of five years with an option to renew for an additional
five-year term. The annual per unit lease rate is equal to 25% of the Buyer's
cost to manufacture and install the ice merchandising systems. The Company has
agreed to lease 157 systems as of September 1997 and an additional 100 systems
per year thereafter.
Future minimum lease payments under the Master Equipment Lease are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C> <C>
1997..................................... $ 385,314
1998..................................... 385,314
1999..................................... 385,314
2000..................................... 385,314
2001..................................... 266,509
----------
Total minimum lease payments............. $1,807,765
==========
</TABLE>
F-39
<PAGE> 134
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the lease agreement, the Company entered into a service
agreement with the Buyer whereby the Company will pay a monthly management fee
of $10,000 for the Buyer to have primary responsibility for marketing the ice
merchandising systems and oversight responsibility for installing, operating,
managing and servicing the systems. In addition, the Company is required to
reimburse the Buyer for all costs relating to activities under the agreement
including all costs associated with the operation, repair and maintenance of the
systems. The Company also must pay directly or through reimbursement to the
Buyer, all salaries, wages and other compensation and benefits of all personnel
employed by the Buyer and involved with the operation of the Company's leased
systems. The term of the agreement is for ten years or the termination of the
Master Equipment Lease Agreement.
Effective September 1994, the Company adopted a 401(k) profit sharing plan
(the "Plan") for all employees who are 21 years of age or older and have
completed one year of service. The Plan provides for a mandatory matching
contribution equal to 25% of the amount of the employee's salary deduction not
to exceed 5% of an employees annual compensation. The Company's matching
contribution was $10,580 and $15,000 for Plan years ending December 31, 1996 and
1995, respectively.
(5) RELATED PARTY TRANSACTIONS:
The Company makes monthly payments of $3,000 to a company owned by a
shareholder to rent an ice manufacturing and storage facility. The Company is
also responsible for the related property taxes on the facility. The shareholder
has an obligation to extend the current lease (which expires February 1997) for
an additional five years. Total lease and tax obligations paid or accrued to or
on behalf of the shareholder were $63,600 and $36,000 for 1996 and 1995,
respectively.
The Company has entered into a management consulting agreement with a
shareholder. The management contract is renewable annually. Under the management
contract, the shareholder is entitled to receive monthly payments of $10,000.
Fees paid or accrued to the shareholder were $128,550 and $120,000 during 1996
and 1995, respectively.
(6) EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITORS' REPORT:
On March 26, 1997, the Company sold its Albuquerque, New Mexico facility to
a non-related third party and entered into a ten month lease-back agreement for
this facility.
On April 16, 1997, the Company distributed certain property and buildings
with an approximate net book value of $369,000 to SWI, Inc., a related entity.
On April 17, 1997, the Company consummated an agreement with Packaged Ice,
Inc. to merge into a wholly-owned subsidiary of Packaged Ice, Inc. (SWI
Acquisition). The total consideration for the SWI Acquisition was $18.8 million,
consisting of $3.5 million in cash, $9.3 million in repayment of the Company's
debt and $6.0 million in shares of the Company's common stock (valued at $10.00
per share) payable to the Company's shareholders.
(7) PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements presented herein at March 31, 1997 and for the
three-month periods ended March 31, 1997 and 1996 are unaudited; however, all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods covered have been made and are of a normal, recurring nature.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of the interim periods are not
necessarily indicative of results to expect for the full year.
F-40
<PAGE> 135
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE REGISTERED
SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY EXCHANGE MADE HEREUNDER WILL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. iv
Prospectus Summary..................... 1
Disclosure Regarding Forward-Looking
Statements........................... 10
Risk Factors........................... 10
The Acquisitions....................... 16
Private Placement...................... 17
Use of Proceeds........................ 17
Dividend Policy........................ 17
Capitalization......................... 18
Unaudited Pro Forma Combined Condensed
Financial Statements................. 19
Selected Historical and Unaudited Pro
Forma Combined Financial Data........ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 24
Business............................... 31
Management............................. 38
Principal Shareholders................. 42
Certain Relationships and Related
Transactions......................... 44
The Exchange Offer..................... 46
Description of Notes................... 53
Registration Rights; Additional
Interest............................. 77
Book-Entry; Delivery and Form.......... 79
Transfer Restrictions on Old Notes..... 80
Plan of Distribution................... 82
Description of Senior Credit
Facility............................. 83
Description of Capital Stock and
Warrants............................. 83
Certain Federal Income Tax
Considerations....................... 86
Legal Matters.......................... 90
Experts................................ 90
Index to Financial Statements.......... F-1
</TABLE>
======================================================
======================================================
PACKAGED ICE, INC.
$50,000,000 12% SERIES A
SENIOR NOTES DUE 2004
FOR
$50,000,000 12% SERIES B
SENIOR NOTES DUE 2004
PROSPECTUS
OFFER TO EXCHANGE
SEPTEMBER 5, 1997
======================================================
