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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 22, 1997
REGISTRATION NO. 333-29357
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PACKAGED ICE, INC., ISSUER
PACKAGED ICE LEASING, INC.
SOUTHCO ICE, INC.
MISSION PARTY ICE, INC.
SOUTHWEST TEXAS PACKAGED ICE, INC.
SOUTHWESTERN ICE, INC., GUARANTORS
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
TEXAS 2097 76-0316492
NEVADA 88-0300560
TEXAS 76-0452649
TEXAS 76-0533333
TEXAS 76-0533335
TEXAS 76-0533332
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
8572 Katy Freeway, Suite 101 James F. Stuart
Houston, Texas 77024 Chief Executive Officer
(713) 464-9384 Packaged Ice, Inc.
8572 Katy Freeway, Suite 101
(Address, including zip code, and Houston, Texas 77024
telephone number including area code (713) 464-9384
of registrant's principal executive (Name, address, including zip code, and telephone number,
offices) including area code of agent for service)
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Copies to:
Alan Schoenbaum, P.C.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent Street, Suite 1500
San Antonio, Texas 78205
(210) 270-0853
Approximate date of commencement of proposed sale of the securities to
the public: As soon as practicable following the effectiveness of this
Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER UNIT (1) PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
12% Senior Notes due $50,000,000 100% $50,000,000 $15,152 (3)
2004
Guarantees (2) ___ ___ ___ ___
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Guarantees by subsidiaries of the Registrant of the payment of the
principal and interest on the 12% Senior Notes due 2004. Pursuant to Rule
457(n), no additional fee is required.
(3) The fee of $15,152 has been previously paid.
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
------------------------------
<PAGE> 3
PACKAGED ICE, INC.
CROSS REFERENCE SHEET
BETWEEN ITEMS IN PART I OF THE REGISTRATION STATEMENT
(FORM S-4) AND PROSPECTUS PURSUANT TO ITEM 501(B)
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ITEM OF FORM S-4 LOCATION IN PROSPECTUS
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and Outside
Front over Page of Prospectus . . . . . . . . . . Facing Page of the Registration Statement; Cross Reference
Sheet; Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus. . . . . . . . . . . . . . . . . . . . Inside Front Cover Page of Prospectus; Available
Information; Outside Back Cover Page of Prospectus
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information . . . . . . . . . . Summary Historical and Pro Forma Combined Financial Data;
Prospectus Summary; Risk Factors
4. Terms of the Transaction. . . . . . . . . . . . . Outside Front Cover Page of Prospectus; Prospectus Summary;
Risk Factors; The Private Placement; Use of Proceeds; The
Exchange Offer; Description of Notes; Transfer Restrictions
of Old Notes; Plan of Distribution
5. Pro Forma Financial Information . . . . . . . . . Unaudited Pro Forma Combined Condensed Financial Statements;
Selected Historical and Unaudited Pro Forma Combined
Financial Data
6. Material Contracts with the Company Being
Acquired . . . . . . . . . . . . . . . . . . . . *
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be
Underwriters. . . . . . . . . . . . . . . . . . . *
8. Interest of Named Experts and Counsel . . . . . . Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities. . *
B. INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3 Registrants . . . *
11. Incorporation of Certain Information by . . . . . *
Reference
12. Information with Respect to S-2 or S-3 . . . . . *
Registrants
13. Incorporation of Certain Information by . . . . . *
Reference
14. Information with Respect to Registrants Other than Outside Front Cover Page; Available Information; Prospectus
S-2 or S-3 Registrants. . . . . . . . . . . . . . Summary; Risk Factors; Private Placement; Use of Proceeds;
Capitalization; Unaudited Pro Forma Combined Condensed
Financial Statements; Selected Historical and Unaudited
Pro Forma Combined Financial Data; Management's
Discussion and Analysis of Financial Condition and Results of
Operation; Business; Financial Statements.
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<TABLE>
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C. INFORMATION ABOUT THE COMPANY BEING
ACQUIRED
15. Information with Respect to S-3 Companies. . . . . *
16. Information with Respect to S-2 or S-3 Companies. *
17. Information with Respect to Companies other than
S-2 or S-3 Companies . . . . . . . . . . . *
18. Information if Proxies, Consents or Authorizations
are to be Solicited. . . . . . . . . . . . *
19. Information if Proxies, Consents or Authorizations
are not to be Solicited in an Exchange Offer. . . Management; Principal Shareholders; Certain Relationships
and Related Transactions; Description of Capital Stock and
Warrants
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* Not applicable
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********************************************************************************
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
********************************************************************************
SUBJECT TO COMPLETION, DATED ______________, 1997
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 ________________ , 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.
------------------------------
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."
(Cover continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 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 _________, 1997
<PAGE> 6
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 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
theron 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 __________, 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-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
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<PAGE> 7
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.
3
<PAGE> 8
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 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
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<PAGE> 10
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 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
6
<PAGE> 11
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.
7
<PAGE> 12
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.
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
per 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 Notes (the
"Exchange Offer") for senior debt securities of
the Company with terms substantially identical to
the 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 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 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 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".
8
<PAGE> 13
Expiration Date 5:00 p.m., New York City time, on _______, 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, 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
9
<PAGE> 14
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 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 an 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 (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."
10
<PAGE> 15
RISK FACTORS
An investment in the Units involves certain risks that should be
considered by a potential investor. See "Risk Factors."
11
<PAGE> 16
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, JUNE 30, 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
12
<PAGE> 17
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."
13
<PAGE> 18
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
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
14
<PAGE> 19
"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 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.
15
<PAGE> 20
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 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
16
<PAGE> 21
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."
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 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
17
<PAGE> 22
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 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.
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 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."
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<PAGE> 23
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 -- to 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.
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<PAGE> 24
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. At 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.
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.
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<PAGE> 25
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."
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<PAGE> 26
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>
22
<PAGE> 27
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."
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<PAGE> 28
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> <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
========== =========== ===========
FOR THE SIX MONTHS ENDED JUNE 30, 1997
----------------------------------------------------------------------------------------------------
For the (e)
Six Months For the
Ended Period
June 30, From 4/1/97
1997 Three Months Ended March 31, 1997 to 4/16/97
----------- ---------------------------------------- -----------
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 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.
24
<PAGE> 29
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> <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.
(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.
25
<PAGE> 30
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, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------- ---------------------------------------------
UNAUDITED
UNAUDITED PRO FORMA
PRO FORMA COMBINED
COMBINED JUNE 30, JUNE 30, JUNE 30,
1992 1993 1994 1995 1996 1996(4) 1996 1997 1997(4)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 29 $ 155 $ 784 $ 2,830 $ 4,427 $ 26,182 $ 2,128 $ 8,124 $ 11,917
Cost of goods sold 10 56 352 1,251 2,035 15,892 910 4,703 7,767
Gross profit 19 99 432 1,579 2,392 10,290 1,218 3,421 4,150
Operating expenses(1) 178 431 974 1,515 1,981 5,792 838 2,182 3,335
Depreciation and
amortization 10 48 224 751 1,456 4,584 675 1,826 2,825
Interest expense 1 11 25 76 130 7,534 34 1,519 3,635
Other income
(expense) 4 -- 69 75 185 103 (13) 408 301
Loss from continuing
operations (166) (391) (722) (688) (990) (7,517) (342) (1,698) (5,344)
OTHER FINANCIAL DATA:
Cash flows - operating
activities (144) (289) (647) 148 1,094 235 (1,345)
Cash flows - investing
activities (215) (292) (3,497) (2,961) (5,925) (2,273) (12,402)
Cash flows - financing
activities 320 492 4,897 3,034 3,968 1,173 29,429
EBIT(2) $ (165) $ (380) $ (697) $ (612) $ (860) $ 17 (308) (179) (1,709)
EBITDA(2) (155) (332) (473) 139 596 4,601 367 1,647 1,116
Property additions 185 252 2,999 2,717 5,745 8,006 2,221 3,599 1,639
Revenue growth -- 434.5% 405.8% 261.0% 56.4% -- -- -- --
Gross margin 65.5% 63.9% 55.1% 55.8% 54.0% 39.3% 57.2% 42.1% 34.8%
EBIT margin (569.0%) (245.2%) (88.9%) (21.6%) (19.4%) 0.0% (14.5%) (2.2%) (14.3%)
EBITDA margin (534.5%) (214.2%) (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 N/A N/A 0.00x N/A N/A N/A
SUPPLEMENTAL DATA:
Loss per share of
common stock $ (0.11) $ (0.25) $ (0.28) $ (0.26) $ (0.35) $ (2.17) $ (0.12) $ (0.53) $ (1.41)
Weighted average
shares outstanding 1,491,000 1,538,435 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 $ 147 $ 58 $ 812 $ 1,033 $ 170 $ 15,853
Working capital
(deficiency) 75 (137) 639 696 (1,228) 15,656
Total assets 435 618 5,513 8,050 11,523 71,703
Total long-term debt,
net of discount -- 125 566 211 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 339 247 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 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."
26
<PAGE> 31
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 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.
27
<PAGE> 32
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 ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- --------------------------- -------------------------
HISTORICAL PRO FORMA 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.
28
<PAGE> 33
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 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 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.
29
<PAGE> 34
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 in fiscal 1996.
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.
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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.
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 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 $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
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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 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
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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 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.
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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.
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
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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 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.
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.
36
<PAGE> 41
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 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
37
<PAGE> 42
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.
38
<PAGE> 43
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>
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.
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.
39
<PAGE> 44
* 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 Puchase Agreement with SV Capital Partners, L.P."
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.
40
<PAGE> 45
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 Officer 1995 75,000 -- --(1) -- --
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>
PERCENTAGE POTENTIAL REALIZABLE VALUE
OF TOTAL AT ASSUMED ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED IN APPRECIATION FOR OPTION
UNDERLYING FISCAL PER SHARE TERM
OPTIONS YEAR EXERCISE OR EXPIRATION ----
NAME GRANTED 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>
41
<PAGE> 46
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 OPTIONS/
NUMBER OF OPTIONS/SARS AT SAR'S AT FISCAL
SHARES FISCAL YEAR END(#) 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>
(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.
42
<PAGE> 47
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
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.
43
<PAGE> 48
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
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.
44
<PAGE> 49
(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.
45
<PAGE> 50
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 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
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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 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 on page 47.
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.
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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 o 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 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
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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 ______________ , 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 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
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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. 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.
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, and Agent's Message must be transmitted to
an received by the Exchange Agent on or prior to the Expiration Date at one of
its addresses set forth below under "B 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.
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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 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
for 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
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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.
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
Attention: Corporate Trust Department
Facsimile: (214) 754-1303
Telephone: (214) 754-1255
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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<PAGE> 57
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>
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.
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<PAGE> 58
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 (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
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<PAGE> 59
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."
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.
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<PAGE> 60
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 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
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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
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
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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.
(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 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),
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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.
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
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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 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.
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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 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).
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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 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 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
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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.
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
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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.
"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
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(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.
"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 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
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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
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
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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.
"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 (v) 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
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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 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 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
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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;
(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
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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.
"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
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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, 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.
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"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 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.
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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 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
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comments on the 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 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
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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 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)
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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, 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 on 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
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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
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."
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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 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 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
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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 the 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 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
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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.
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
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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 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.
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
81
<PAGE> 86
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.
82
<PAGE> 87
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.
83
<PAGE> 88
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-14
Combined Balance Sheet at March 31, 1997 (unaudited) and December 31, 1996 F-15
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-16
Combined Statements of Cash Flows for the Three Months Ended March 31, 1997
(unaudited) and for the Year Ended December 31, 1996 F-17
Notes to Combined Financial Statements F-18
Independent Auditors' Report on Additional Information F-22
Combined Balance Sheet with Combining Information for the Year Ended
December 31, 1996 F-23
Combined Statement of Operations with Combining Information for the
Year Ended December 31, 1996 F-24
SOUTHWESTERN ICE, INC.
Report of Independent Public Accountants F-25
Balance Sheets at March 31, 1997 (unaudited) and at December 31, 1996 and 1995 F-26
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-27
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-28
Notes to Financial Statements F-29
</TABLE>
F-1
<PAGE> 89
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> 90
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
JUNE 30 DECEMBER 31
1997 1996 1995
------------ ------------ ------------
(UNAUDITED)
<S> <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> 91
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
=========== =========== =========== ===========
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <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> 92
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL
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> 93
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> 94
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.
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.
F-7
<PAGE> 95
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 statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Reclassifications--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.
F-8
<PAGE> 96
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 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>
F-9
<PAGE> 97
The annual maturities of long-term debt as of December 31, 1996 are as follows:
<TABLE>
<S> <C> <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.
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.
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.
F-10
<PAGE> 98
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.
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.
F-11
<PAGE> 99
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.
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)
<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>
F-12
<PAGE> 100
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
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-13
<PAGE> 101
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-14
<PAGE> 102
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
March 31, 1997 December 31, 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-15
<PAGE> 103
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, 1997 December 31, 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-16
<PAGE> 104
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-17
<PAGE> 105
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INCC. (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.
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.
F-18
<PAGE> 106
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 book
value 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 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>
F-19
<PAGE> 107
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).
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:
<TABLE>
<C> <C>
1997 $1,483,228
1998 782,292
1999 584,820
2000 317,328
2001 8,180
----------
$3,175,848
==========
</TABLE>
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.
F-20
<PAGE> 108
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.
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
------- -------- ---------
<C> <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.
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-21
<PAGE> 109
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-22
<PAGE> 110
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
<TABLE>
<CAPTION>
ASSETS
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-18 through F-21.
F-23
<PAGE> 111
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>
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-18 through F-21.
F-24
<PAGE> 112
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-25
<PAGE> 113
SOUTHWESTERN ICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, December 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-26
<PAGE> 114
SOUTHWESTERN ICE, INC.
STATEMENTS OF OPERATIONS AND
CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, 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-27
<PAGE> 115
SOUTHWESTERN ICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED DECEMBER 31,
------------------ ------------------------
MARCH 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-28
<PAGE> 116
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>
F-29
<PAGE> 117
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.
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.
F-30
<PAGE> 118
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.
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:
F-31
<PAGE> 119
<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>
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.
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, 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.
</TABLE>
F-32
<PAGE> 120
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
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%.
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.
F-33
<PAGE> 121
Future minimum lease payments under the Master Equipment Lease are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
- ------------
<S> <C>
1997 $ 385,314
1998 385,314
1999 385,314
2000 385,314
2001 266,509
----------
Total minimum lease payments $1,807,765
==========
</TABLE>
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-34
<PAGE> 122
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 4
Prospectus Summary 5
Disclosure Regarding Forward-Looking Statements 14
Risk Factors 14
The Acquisitions 20
Private Placement 20
Use of Proceeds 20
Dividend Policy 21
Capitalization 22
Unaudited Pro Forma Combined Condensed Financial Statements 23
Selected Historical and Unaudited Pro Forma Combined Financial Data 26
Management's Discussion and Analysis of Financial Condition and
Results of Operations 27
Business 33
Management 39
Principal Shareholders 44
Certain Relationships and Related Transactions 46
The Exchange Offer 48
Description of Notes 53
Registration Rights; Additional Interest 73
Book-Entry; Delivery and Form 74
Transfer Restrictions on Old Notes 75
Plan of Distribution 77
Description of Senior Credit Facility 77
Description of Capital Stock and Warrants 78
Certain Federal Income Tax Considerations 80
Legal Matters 83
Experts 83
Index to Financial Statements F-1
</TABLE>
-------------------------
PROSPECTUS
OFFER TO EXCHANGE
$50,000,000 12% SERIES A SENIOR NOTES DUE 2004
FOR
$50,000,000 12% SERIES B SENIOR NOTES DUE 2004
PACKAGED ICE, INC.
________________, 1997
<PAGE> 123
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is empowered by Art. 2.02-1 of the Texas Business
Corporation Act, subject to the procedures and limitations stated therein, to
indemnify any person who was, is or is threatened to be made a named defendant
or respondent in a proceeding because the person is or was a director or
officer against judgments, penalties (including excise and similar taxes),
fines, settlements and reasonable expenses (including court costs and
attorneys' fees) actually incurred by the person in connection with the
proceeding. The Company is required by Art. 2.02-1 to indemnify a director or
officer against reasonable expenses (including court costs and attorneys' fees)
incurred by him in connection with a proceeding in which he is a named
defendant or respondent because he is or was a director or officer if he has
been wholly successful, on the merits or otherwise, in the defense of the
proceeding. The statute provides that indemnification pursuant to its
provisions is not exclusive of other rights of indemnification to which a
person may be entitled under any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise. The bylaws of the Company provide for
indemnification by the Company of its directors and officers to the fullest
extent permitted by the Texas Business Corporation Act. In addition, the
Company has, pursuant to Article 1302-7.06 of the Texas Miscellaneous
Corporation Laws Act, provided in its articles of incorporation that, to the
fullest extent permitted by applicable law, a director of the Company shall not
be liable to the Company or its shareholders for monetary damages for an act or
omission in a director's capacity as director of the Company.
The Company has obtained an insurance policy providing for
indemnification of officers and directors of the Company and certain other
persons against liabilities and expenses incurred by any of them in certain
stated proceedings and under certain stated conditions. The Company has entered
into separate indemnification agreements with each of its directors which may
require the Company, among other things, to indemnify such directors against
certain liabilities that may arise by reason of their status or service as
directors to the maximum extent permitted under Texas law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
The following instruments and documents are included as Exhibits to
this Registration Statement.
Exhibit No. Description
3.1* Articles of Incorporation of Packaged Ice, Inc. (the "Company")
filed with the Secretary of State of the State of Texas on August
14, 1990.
3.2* Restated Articles of Incorporation of the Company filed with the
Secretary of State of the State of Texas on February 5, 1992.
3.3* Certificate of Designation of Series A Convertible Preferred
Stock of the Company filed with the Secretary of State of the
State of Texas on September 19, 1995.
3.4* Certificate of Designation of Series B Convertible Preferred
Stock of the Company filed with the Secretary of State of the
State of Texas on January 10, 1997.
3.5* Amended and Restated Bylaws of the Company, effective as of
January 20, 1997.
3.6* Articles of Incorporation of Packaged Ice Leasing, Inc. filed
with the Secretary of State of the State of Nevada on December 1,
1992.
II-1
<PAGE> 124
3.7* Amended and Restated Bylaws of Packaged Ice Leasing, Inc.,
effective as of January 20, 1997.
3.8* Articles of Incorporation of Southco Ice, Inc. filed with the
Secretary of State of the State of Texas on November 10, 1994.
3.9* Amended and Restated Bylaws of Southco Ice, Inc., effective as of
January 20, 1997.
3.10* Articles of Incorporation of Packaged Ice Mission, Inc. filed
with the Secretary of State of the State of Texas on March 24,
1997.
3.11* Articles of Merger of Mission Party Ice, Inc., a Texas
corporation, into Packaged Ice Mission, Inc. ("Surviving
Corporation"), with attached Plan of Merger and Articles of
Amendment to the Articles of Incorporation of Surviving
Corporation evidencing name change, filed with the Secretary of
State of the State of Texas on April 17, 1997.
3.12* Bylaws of Mission Party Ice, Inc., effective as of March 24,
1997.
3.13* Articles of Incorporation of Packaged Ice STPI, Inc., Inc. filed
with the Secretary of State of the State of Texas on March 24,
1997.
3.14* Articles of Merger of Southwest Texas Packaged Ice, Inc., a Texas
corporation, into Packaged Ice STPI, Inc. ("Surviving
Corporation"), with attached Plan of Merger and Articles of
Amendment to the Articles of Incorporation of Surviving
Corporation evidencing name change, filed with the Secretary of
State of the State of Texas on April 17, 1997.
3.15* Bylaws of Southwest Texas Packaged Ice, Inc., effective as of
March 24, 1997.
3.16* Articles of Incorporation of Packaged Ice Southwestern, Inc.
filed with the Secretary of State of the State of Texas on March
24, 1997.
3.17* Articles of Merger of Southwestern Ice, Inc., an Arizona
corporation, into Packaged Ice Southwestern, Inc. ("Surviving
Corporation"), with attached Plan of Merger and Articles of
Amendment to the Articles of Incorporation of Surviving
Corporation evidencing name change, filed with the Secretary of
State of the State of Texas on April 17, 1997.
3.18* Bylaws of Southwestern Ice, Inc., effective as of March 24, 1997.
4.1* Indenture, dated April 17, 1997, among the Company, as Issuer,
the guarantors identified therein (the "Guarantors"), and U.S.
Trust Company of Texas, N.A. as Trustee.
4.2* Registration Rights Agreement, dated as of April 17, 1997, among
the Company, the Subsidiary Guarantors, and the purchasers of the
Notes.
4.3* Purchase Agreement, dated April 11, 1997, among the Company, the
Guarantors, and Jefferies & Company , Inc. (the Initial Purchaser
of the Notes).
4.4* Form of the Exchange Note [Series B security].
4.5* Form of the Old Note [Series A security].
4.6* Securityholder's and Registration Rights Agreement, dated as of
April 17, 1997, among the Company and the Initial Purchaser.
II-2
<PAGE> 125
5.1* Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., dated June
16, 1997.
10.1* Agreement and Plan of Merger by and among the Company, Packaged
Ice Mission, Inc., Mission Party Ice, Inc. and A.J. Lewis III,
made as of March 25, 1997.
10.2* Agreement and Plan of Merger by and among the Company, Packaged
Ice STPI, Inc., Southwest Texas Packaged Ice, Inc. and the
Shareholders of Southwest Texas Packaged Ice, Inc., made as of
March 25, 1997.
10.3* Escrow Agreement by and among the Company, Packaged Ice Mission,
Inc., Packaged Ice STPI, Inc., A. J. Lewis III individually and
as a representative of Liza B. Lewis and the Minority
Shareholders, and Texas Commerce Bank National Association as
Escrow Agent, dated as of April 17, 1997.
10.4* Noncompetition Agreement by and among the Company, Packaged Ice
Mission, Inc., Packaged Ice STPI, Inc. and A.J. Lewis III, dated
as of April 17, 1997.
10.5* Registration Rights Agreement by and among the Company, A.J.
Lewis III and Liza B. Lewis, dated as of April 17, 1997.
10.6* Agreement and Plan of Merger by and among the Company, Packaged
Ice Southwestern, Inc., Southwestern Ice, Inc., and the
shareholders of Southwestern Ice, Inc, made as of March 25, 1997.
10.7* Escrow Agreement by and among the Company, Packaged Ice
Southwestern, Inc., and Dale M. Johnson, Robert G. Miller and
Alan Bernstein (collectively, the "Shareholders") and Texas
Commerce Bank National Association as Escrow Agent, dated as of
April 17, 1997.
10.8* Form of Noncompetition Agreement among the Company, Packaged Ice
Southwestern, Inc., and each of Dale Johnson, Alan Bernstein and
Robert Miller individually, dated as of April 17, 1997.
10.9* Registration Rights Agreement by and among the Company, and Dale
Johnson, Alan Bernstein and Robert Miller (collectively the
"Shareholders"), dated as of April 17, 1997.
10.10* Packaged Ice, Inc. Stock Option Plan, dated July 26, 1994
10.11* Form of Stock Option Plan Agreements issued under Stock Option
Plan.
10.12* Warrant Agreement among the Company and U.S. Trust Company of
Texas, N.A., a national banking association, as Warrant Agent,
dated as of April 17, 1997.
10.13* Stock Purchase Agreement among the Company and certain of its
investors, dated December 23, 1993.
10.14* Stock Purchase Agreement among the Company and certain of its
investors (Rosenberg, Jesselson, et al.), dated September 20,
1995.
10.15* Amendment No. 1 to Stock Purchase Agreement of September 20,
1995, and Consent and Waiver of Right to Purchase Additional
Securities, between the Company and certain of its investors
(Rosenberg, Jesselson et al.), dated as of January 10, 1997.
10.16* Amendment No. 2 to Stock Purchase Agreement of September 20,
1995, between the Company and certain of its investors
(Rosenberg, Jesselson et al.), dated as of March 14, 1997.
10.17* Stock Purchase Agreement among the Company and certain of its
investors (Norwest and Food Fund), dated September 20, 1995.
II-3
<PAGE> 126
10.18* Amendment No. 1 to Stock Purchase Agreement of September 20,
1995, and Consent and Waiver of Right to Purchase Additional
Securities, between the Company and certain of its investors
(Norwest, Food Fund), dated as of January 17, 1997.
10.19* Amendment No. 2 to Stock Purchase Agreement of September 20,
1995, between the Company and certain of its investors (Norwest,
Food Fund), dated as of March 14, 1997.
10.20* Stock Purchase Agreement among the Company and certain of its
investors (Norwest, Food Fund and Rosenberg), dated January 17,
1997.
10.21* Registration Rights Agreement between the Company and certain
investors (Norwest and Food Fund), dated September 20, 1995.
10.22* Amendment No. 1 to Registration Rights Agreement between the
Company and certain investors, adding Steven P. Rosenberg as a
party thereto, dated as of January 17, 1997.
10.23* Supplemental Registration Rights Agreement among the Company and
certain investors (Norwest, Food Fund and Rosenberg), dated as of
June 12, 1997.
10.24* Parallel Exit Agreement between the Company, James F. Stuart and
Jack Stazo, dated September 20, 1995.
10.25* Amended and Restated Shareholders Agreement between the Company
and its shareholders, dated September 20, 1995.
10.26* Amendment No. 1 to Amended and Restated Shareholders Agreement,
dated as of January 17, 1997.
10.27* Amendment No. 2 to Amended and Restated Shareholders Agreement,
dated as of March 14, 1997.
10.28* Amended and Restated Voting Agreement, dated September 20, 1995.
10.29* Amendment No. 1 to Amended and Restated Voting Agreement, dated
as of January 17, 1997.
10.30* Amendment No. 2 to Amended and Restated Voting Agreement, dated
as of March 14, 1997.
10.31* Form of Indemnification Agreement entered into by Packaged Ice,
Inc. in favor of members of the Board of Directors.
10.32* Development and Manufacturing Agreement by and between Lancer
Corporation and Packaged Ice, Inc., dated April 13, 1993.
10.33* Lease Agreement by and between Packaged Ice, Inc. and Robert S.
Wilson LLC for facility at 8572 Katy Freeway, Suite 101, Houston,
Texas, dated March 22, 1994.
10.34* Lease Agreement by and between J.K. Neal, Inc. and J. Kenneth
Neal (lessor) and Mission Party Ice, Inc. (lessee), for real
property (land and facilities) located in Bexar, Webb, Tom Green,
Gonzales and Caldwell Counties, Texas, effective March 1, 1988.
10.35* Form of Commercial Lease Agreement, by and between _________
(landlord) and Mission Party Ice, Inc. (tenant) [to be executed].
10.36* Commercial Lease Agreement by and between Robert Grant Miller
(lessor) and Southwestern Ice, Inc. (lessee), for facility at
5925 West Van Buren, Phoenix, Arizona, entered into on March 1,
1992.
II-4
<PAGE> 127
10.37* License Agreement by and among Packaged Ice, Inc., Hoshizaki
Electric Co., Ltd. and Hoshizaki America, Inc., dated May 28,
1993.
10.38** Stock Purchase Agreement, dated as of July 17, 1997, by and
between Packaged Ice, Inc. and SV Capital Partners, L.P.
10.39** Common Stock Purchase Warrant No. SV-1, dated July 17, 1997,
executed by Packaged Ice, Inc. for the benefit of SV Capital
Partners, L.P.
10.40** Voting Agreement, dated July 17, 1997, by and among Packaged Ice,
Inc., SV Capital Partners, L.P. and substantially all of the
shareholders of Packaged Ice, Inc.
10.41** Registration Rights Agreement, dated as of July 17, 1997, by and
between Packaged Ice, Inc. and SV Capital Partners, L.P.
10.42** Parallel Exit Agreement, dated July 17, 1997, by and among
Packaged Ice, Inc., SV Capital Partners, L.P., and certain of
Packaged Ice, Inc.'s shareholders (James F. Stuart, A.J. Lewis
III and Steven P. Rosenberg).
10.43** Indemnification Agreement, dated July 17, 1997, by and between
Packaged Ice, Inc. and Rod Sands, indemnifying Mr. Sands as a
director of Packaged Ice, Inc.
11.1*** Statement of earnings per share.
12.1*** Historical statement of ratio of earnings to fixed charges.
12.2*** Proforma statement of ratio of earnings to fixed charges.
21.1* List of subsidiaries.
23.1* Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
the opinion filed as Exhibit 5.1 above).
23.2*** Consent of Deloitte & Touche LLP.
23.3*** Consent of Arthur Andersen, L.L.P.
24.1* Power of Attorney (included on signature page of Registration
Statement on Form S-4).
25.1* Statement of Eligibility and Qualification on Form T-1 under the
Trust Indenture Act of 1939, made by U.S. Trust Company of Texas,
N.A. as Trustee under the Indenture relating to the 12% Senior
Notes.
25.2* Report of Financial Condition of Trustee (Exhibit T-1.6 to
Statement of Eligibility filed as Exhibit 25.1 above).
27.1* Financial data schedule.
99.1* Form of Letter of Transmittal for Exchange Offer.
* Contained in exhibits to the Registration Statement No. 333-29357 on Form
S-4 filed with the Securities and Exchange Commission on June 16, 1997.
** Contained in exhibits to Amendment No. 1 to the Registration Statement No.
333-29357 on Form S-4 filed with the Securities and Exchange Commission on
July 29, 1997.
*** Filed herewith. Replaces and supersedes document filed as an exhibit to the
Registration Statement No. 333-29357 on Form S-4 filed with the Securities
and Exchange Commission on June 16, 1997.
(b) Financial Statement Schedules
None. All Schedules are omitted because the required information
is not present in amounts sufficient to require submission of the Schedule or
because the information required is included in the financial statements or
notes thereto.
II-5
<PAGE> 128
ITEM 22. UNDERTAKINGS
The undersigned registrants hereby undertake:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or event arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, present fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(d) If the registrant is a foreign private issuer, to file a post-
effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of this chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the prospectus, by means
of a post-effective amendment, financial statements required pursuant to this
paragraph (d) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial statements
and information are contained in periodic reports filed with or furnished to
the commission by the registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the Form
F-3.
(e) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(f) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
(g) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form
with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other Items of the applicable
form.
(h) that every prospectus (i) that is filed pursuant to paragraph
(g) immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being offered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act, and will be governed
by the final adjudication of such issue.
II-6
<PAGE> 129
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Houston, the State of Texas, on August 22, 1997.
PACKAGED ICE, INC.
By: /s/ James F. Stuart
-----------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ James F. Stuart Chairman of the Board and August 22, 1997
- ----------------------------- Chief Executive Officer
James F. Stuart
/s/ A.J. Lewis III Principal Executive Officer, President and August 22, 1997
- ----------------------------- Chief Operating Officer, Director
A.J. Lewis III
/s/ Steven P. Rosenberg* Vice Chairman of the Board August 22, 1997
- -----------------------------
Steven P. Rosenberg
/s/ Stephen R. Sefton* Director August 22, 1997
- -----------------------------
Stephen R. Sefton
/s/ Richard A. Coonrod* Director August 22, 1997
- -----------------------------
Richard A. Coonrod
/s/ Robert G. Miller* Director August 22, 1997
- -----------------------------
Robert G. Miller
/s/ Diana F. Rice* Principal Financial Officer, August 22, 1997
- ----------------------------- Principal Accounting Officer,
Diana F. Rice Treasurer, Controller, and Secretary
</TABLE>
* By A.J. Lewis III, attorney-in-fact pursuant
to a Power of Attorney previously filed.
II-7
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Houston, the State of Texas, on August 22, 1997.
PACKAGED ICE LEASING, INC.
By: /s/ James F. Stuart
-----------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, to this
Amendment No. 2 to this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ James F. Stuart Chairman of the Board and August 22, 1997
- ----------------------------- Chief Executive Officer
James F. Stuart
/s/ A.J. Lewis III Principal Executive Officer, President and August 22, 1997
- ----------------------------- Chief Operating Officer, Director
A.J. Lewis III
/s/ Steven P. Rosenberg* Vice Chairman of the Board August 22, 1997
- -----------------------------
Steven P. Rosenberg
/s/ Stephen R. Sefton* Director August 22, 1997
- -----------------------------
Stephen R. Sefton
/s/ Richard A. Coonrod* Director August 22, 1997
- -----------------------------
Richard A. Coonrod
/s/ Robert G. Miller* Director August 22, 1997
- -----------------------------
Robert G. Miller
/s/ Diana F. Rice* Principal Financial Officer, August 22, 1997
- ----------------------------- Principal Accounting Officer,
Diana F. Rice Treasurer, Controller, and Secretary
</TABLE>
* By A.J. Lewis III, attorney-in-fact pursuant
to a Power of Attorney previously filed.
II-8
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Houston, the State of Texas, on August 22, 1997.
SOUTHCO ICE, INC.
By: /s/ James F. Stuart
-----------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to this Registration Statement has been signed by the
or Amendment persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ James F. Stuart Chairman of the Board and August 22, 1997
- ----------------------------- Chief Executive Officer
James F. Stuart
/s/ A.J. Lewis III Principal Executive Officer, President and August 22, 1997
- ----------------------------- Chief Operating Officer, Director
A.J. Lewis III
/s/ Steven P. Rosenberg* Vice Chairman of the Board August 22, 1997
- -----------------------------
Steven P. Rosenberg
/s/ Stephen R. Sefton* Director August 22, 1997
- -----------------------------
Stephen R. Sefton
/s/ Richard A. Coonrod* Director August 22, 1997
- -----------------------------
Richard A. Coonrod
/s/ Robert G. Miller* Director August 22, 1997
- -----------------------------
Robert G. Miller
/s/ Diana F. Rice* Principal Financial Officer, August 22, 1997
- ----------------------------- Principal Accounting Officer,
Diana F. Rice Treasurer, Controller, and Secretary
</TABLE>
* By A.J. Lewis III, attorney-in-fact pursuant
to a Power of Attorney previously filed.
II-9
<PAGE> 132
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Houston, the State of Texas, on August 22, 1997.
SOUTHWESTERN ICE, INC.
By: /s/ James F. Stuart
-----------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to this Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ James F. Stuart Chairman of the Board and August 22, 1997
- ----------------------------- Chief Executive Officer
James F. Stuart
/s/ A.J. Lewis III Principal Executive Officer, President and August 22, 1997
- ----------------------------- Chief Operating Officer, Director
A.J. Lewis III
/s/ Steven P. Rosenberg* Vice Chairman of the Board August 22, 1997
- -----------------------------
Steven P. Rosenberg
/s/ Stephen R. Sefton* Director August 22, 1997
- -----------------------------
Stephen R. Sefton
/s/ Richard A. Coonrod* Director August 22, 1997
- -----------------------------
Richard A. Coonrod
/s/ Robert G. Miller* Director August 22, 1997
- -----------------------------
Robert G. Miller
/s/ Diana F. Rice* Principal Financial Officer, August 22, 1997
- ----------------------------- Principal Accounting Officer,
Diana F. Rice Treasurer, Controller, and Secretary
</TABLE>
* By A.J. Lewis III, attorney-in-fact pursuant
to a Power of Attorney previously filed.
II-10
<PAGE> 133
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Houston, the State of Texas, on August 22, 1997.
MISSION PARTY ICE, INC.
By: /s/ James F. Stuart
-----------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ James F. Stuart Chairman of the Board and August 22, 1997
- ----------------------------- Chief Executive Officer
James F. Stuart
/s/ A.J. Lewis III Principal Executive Officer, President and August 22, 1997
- ----------------------------- Chief Operating Officer, Director
A.J. Lewis III
/s/ Steven P. Rosenberg* Vice Chairman of the Board August 22, 1997
- -----------------------------
Steven P. Rosenberg
/s/ Stephen R. Sefton* Director August 22, 1997
- -----------------------------
Stephen R. Sefton
/s/ Richard A. Coonrod* Director August 22, 1997
- -----------------------------
Richard A. Coonrod
/s/ Robert G. Miller* Director August 22, 1997
- -----------------------------
Robert G. Miller
/s/ Diana F. Rice* Principal Financial Officer, August 22, 1997
- ----------------------------- Principal Accounting Officer,
Diana F. Rice Treasurer, Controller, and Secretary
</TABLE>
* By A.J. Lewis III, attorney-in-fact pursuant
to a Power of Attorney previously filed.
II-11
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Houston, the State of Texas, on August 22, 1997.
SOUTHWEST TEXAS PACKAGED ICE, INC.
By: /s/ James F. Stuart
-----------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to this Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ James F. Stuart Chairman of the Board and August 22, 1997
- ----------------------------- Chief Executive Officer
James F. Stuart
/s/ A.J. Lewis III Principal Executive Officer, President and August 22, 1997
- ----------------------------- Chief Operating Officer, Director
A.J. Lewis III
/s/ Steven P. Rosenberg* Vice Chairman of the Board August 22, 1997
- -----------------------------
Steven P. Rosenberg
/s/ Stephen R. Sefton* Director August 22, 1997
- -----------------------------
Stephen R. Sefton
/s/ Richard A. Coonrod* Director August 22, 1997
- -----------------------------
Richard A. Coonrod
/s/ Robert G. Miller* Director August 22, 1997
- -----------------------------
Robert G. Miller
/s/ Diana F. Rice* Principal Financial Officer, August 22, 1997
- ----------------------------- Principal Accounting Officer,
Diana F. Rice Treasurer, Controller, and Secretary
</TABLE>
* By A.J. Lewis III, attorney-in-fact pursuant
to a Power of Attorney previously filed.
II-12
<PAGE> 135
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
<S> <C>
3.1* Articles of Incorporation of Packaged Ice, Inc. (the "Company")
filed with the Secretary of State of the State of Texas on August
14, 1990.
3.2* Restated Articles of Incorporation of the Company filed with the
Secretary of State of the State of Texas on February 5, 1992.
3.3* Certificate of Designation of Series A Convertible Preferred
Stock of the Company filed with the Secretary of State of the
State of Texas on September 19, 1995.
3.4* Certificate of Designation of Series B Convertible Preferred
Stock of the Company filed with the Secretary of State of the
State of Texas on January 10, 1997.
3.5* Amended and Restated Bylaws of the Company, effective as of
January 20, 1997.
3.6* Articles of Incorporation of Packaged Ice Leasing, Inc. filed
with the Secretary of State of the State of Nevada on December 1,
1992.
3.7* Amended and Restated Bylaws of Packaged Ice Leasing, Inc.,
effective as of January 20, 1997.
3.8* Articles of Incorporation of Southco Ice, Inc. filed with the
Secretary of State of the State of Texas on November 10, 1994.
3.9* Amended and Restated Bylaws of Southco Ice, Inc., effective as of
January 20, 1997.
3.10* Articles of Incorporation of Packaged Ice Mission, Inc. filed
with the Secretary of State of the State of Texas on March 24,
1997.
3.11* Articles of Merger of Mission Party Ice, Inc., a Texas
corporation, into Packaged Ice Mission, Inc. ("Surviving
Corporation"), with attached Plan of Merger and Articles of
Amendment to the Articles of Incorporation of Surviving
Corporation evidencing name change, filed with the Secretary of
State of the State of Texas on April 17, 1997.
3.12* Bylaws of Mission Party Ice, Inc., effective as of March 24,
1997.
3.13* Articles of Incorporation of Packaged Ice STPI, Inc., Inc. filed
with the Secretary of State of the State of Texas on March 24,
1997.
3.14* Articles of Merger of Southwest Texas Packaged Ice, Inc., a Texas
corporation, into Packaged Ice STPI, Inc. ("Surviving
Corporation"), with attached Plan of Merger and Articles of
Amendment to the Articles of Incorporation of Surviving
Corporation evidencing name change, filed with the Secretary of
State of the State of Texas on April 17, 1997.
3.15* Bylaws of Southwest Texas Packaged Ice, Inc., effective as of
March 24, 1997.
3.16* Articles of Incorporation of Packaged Ice Southwestern, Inc.
filed with the Secretary of State of the State of Texas on March
24, 1997.
3.17* Articles of Merger of Southwestern Ice, Inc., an Arizona
corporation, into Packaged Ice Southwestern, Inc. ("Surviving
Corporation"), with attached Plan of Merger and Articles of
Amendment to the Articles of Incorporation of Surviving
Corporation evidencing name change, filed with the Secretary of
State of the State of Texas on April 17, 1997.
</TABLE>
<PAGE> 136
<TABLE>
<S> <C>
3.18* Bylaws of Southwestern Ice, Inc., effective as of March 24, 1997.
4.1* Indenture, dated April 17, 1997, among the Company, as Issuer,
the guarantors identified therein (the "Guarantors"), and U.S.
Trust Company of Texas, N.A. as Trustee.
4.2* Registration Rights Agreement, dated as of April 17, 1997, among
the Company, the Subsidiary Guarantors, and the purchasers of the
Notes.
4.3* Purchase Agreement, dated April 11, 1997, among the Company, the
Guarantors, and Jefferies & Company , Inc. (the Initial Purchaser
of the Notes).
4.4* Form of the Exchange Note [Series B security]
4.5* Form of the Old Note [Series A security].
4.6* Securityholder's and Registration Rights Agreement, dated as of
April 17, 1997, among the Company and the Initial Purchaser.
5.1* Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., dated June
16, 1997.
10.1* Agreement and Plan of Merger by and among the Company, Packaged
Ice Mission, Inc., Mission Party Ice, Inc. and A.J. Lewis III,
made as of March 25, 1997.
10.2* Agreement and Plan of Merger by and among the Company, Packaged
Ice STPI, Inc., Southwest Texas Packaged Ice, Inc. and the
Shareholders of Southwest Texas Packaged Ice, Inc., made as of
March 25, 1997.
10.3* Escrow Agreement by and among the Company, Packaged Ice Mission,
Inc., Packaged Ice STPI, Inc., A. J. Lewis III individually and
as a representative of Liza B. Lewis and the Minority
Shareholders, and Texas Commerce Bank National Association as
Escrow Agent, dated as of April 17, 1997.
10.4* Noncompetition Agreement by and among the Company, Packaged Ice
Mission, Inc., Packaged Ice STPI, Inc. and A.J. Lewis III, dated
as of April 17, 1997.
10.5* Registration Rights Agreement by and among the Company, A.J.
Lewis III and Liza B. Lewis, dated as of April 17, 1997.
10.6* Agreement and Plan of Merger by and among the Company, Packaged
Ice Southwestern, Inc., Southwestern Ice, Inc., and the
shareholders of Southwestern Ice, Inc, made as of March 25, 1997.
10.7* Escrow Agreement by and among the Company, Packaged Ice
Southwestern, Inc., and Dale M. Johnson, Robert G. Miller and
Alan Bernstein (collectively, the "Shareholders") and Texas
Commerce Bank National Association as Escrow Agent, dated as of
April 17, 1997.
10.8* Form of Noncompetition Agreement among the Company, Packaged Ice
Southwestern, Inc., and each of Dale Johnson, Alan Bernstein and
Robert Miller individually, dated as of April 17, 1997.
10.9* Registration Rights Agreement by and among the Company, and Dale
Johnson, Alan Bernstein and Robert Miller (collectively the
"Shareholders"), dated as of April 17, 1997.
10.10* Packaged Ice, Inc. Stock Option Plan, dated July 26, 1994
</TABLE>
<PAGE> 137
<TABLE>
<S> <C>
10.11* Form of Stock Option Plan Agreements issued under Stock Option
Plan.
10.12* Warrant Agreement among the Company and U.S. Trust Company of
Texas, N.A., a national banking association, as Warrant Agent,
dated as of April 17, 1997.
10.13* Stock Purchase Agreement among the Company and certain of its
investors, dated December 23, 1993.
10.14* Stock Purchase Agreement among the Company and certain of its
investors (Rosenberg, Jesselson, et al.), dated September 20,
1995.
10.15* Amendment No. 1 to Stock Purchase Agreement of September 20,
1995, and Consent and Waiver of Right to Purchase Additional
Securities, between the Company and certain of its investors
(Rosenberg, Jesselson et al.), dated as of January 10, 1997.
10.16* Amendment No. 2 to Stock Purchase Agreement of September 20,
1995, between the Company and certain of its investors
(Rosenberg, Jesselson et al.), dated as of March 14, 1997.
10.17* Stock Purchase Agreement among the Company and certain of its
investors (Norwest and Food Fund), dated September 20, 1995.
10.18* Amendment No. 1 to Stock Purchase Agreement of September 20,
1995, and Consent and Waiver of Right to Purchase Additional
Securities, between the Company and certain of its investors
(Norwest, Food Fund), dated as of January 17, 1997.
10.19* Amendment No. 2 to Stock Purchase Agreement of September 20,
1995, between the Company and certain of its investors (Norwest,
Food Fund), dated as of March 14, 1997.
10.20* Stock Purchase Agreement among the Company and certain of its
investors (Norwest, Food Fund and Rosenberg), dated January 17,
1997.
10.21* Registration Rights Agreement between the Company and certain
investors (Norwest and Food Fund), dated September 20, 1995.
10.22* Amendment No. 1 to Registration Rights Agreement between the
Company and certain investors, adding Steven P. Rosenberg as a
party thereto, dated as of January 17, 1997.
10.23* Supplemental Registration Rights Agreement among the Company and
certain investors (Norwest, Food Fund and Rosenberg), dated as of
June 12, 1997.
10.24* Parallel Exit Agreement between the Company, James F. Stuart and
Jack Stazo, dated September 20, 1995.
10.25* Amended and Restated Shareholders Agreement between the Company
and its shareholders, dated September 20, 1995.
10.26* Amendment No. 1 to Amended and Restated Shareholders Agreement,
dated as of January 17, 1997.
10.27* Amendment No. 2 to Amended and Restated Shareholders Agreement,
dated as of March 14, 1997.
10.28* Amended and Restated Voting Agreement, dated September 20, 1995.
10.29* Amendment No. 1 to Amended and Restated Voting Agreement, dated
as of January 17, 1997.
</TABLE>
<PAGE> 138
<TABLE>
<S> <C>
10.30* Amendment No. 2 to Amended and Restated Voting Agreement, dated
as of March 14, 1997.
10.31* Form of Indemnification Agreement entered into by Packaged Ice,
Inc. in favor of members of the Board of Directors.
10.32* Development and Manufacturing Agreement by and between Lancer
Corporation and Packaged Ice, Inc., dated April 13, 1993.
10.33* Lease Agreement by and between Packaged Ice, Inc. and Robert S.
Wilson LLC for facility at 8572 Katy Freeway, Suite 101, Houston,
Texas, dated March 22, 1994.
10.34* Lease Agreement by and between J.K. Neal, Inc. and J. Kenneth
Neal (lessor) and Mission Party Ice, Inc. (lessee), for real
property (land and facilities) located in Bexar, Webb, Tom Green,
Gonzales and Caldwell Counties, Texas, effective March 1, 1988.
10.35* Form of Commercial Lease Agreement, by and between _________
(landlord) and Mission Party Ice, Inc. (tenant) [to be executed].
10.36* Commercial Lease Agreement by and between Robert Grant Miller
(lessor) and Southwestern Ice, Inc. (lessee), for facility at
5925 West Van Buren, Phoenix, Arizona, entered into on March 1,
1992.
10.37* License Agreement by and among Packaged Ice, Inc., Hoshizaki
Electric Co., Ltd. and Hoshizaki America, Inc., dated May 28,
1993.
10.38** Stock Purchase Agreement, dated as of July 17, 1997, by and
between Packaged Ice, Inc. and SV Capital Partners, L.P.
10.39** Common Stock Purchase Warrant No. SV-1, dated July 17, 1997,
executed by Packaged Ice, Inc. for the benefit of SV Capital
Partners, L.P.
10.40** Voting Agreement, dated July 17, 1997, by and among Packaged Ice,
Inc., SV Capital Partners, L.P. and substantially all of the
shareholders of Packaged Ice, Inc.
10.41** Registration Rights Agreement, dated as of July 17, 1997, by and
between Packaged Ice, Inc. and SV Capital Partners, L.P.
10.42** Parallel Exit Agreement, dated July 17, 1997, by and among
Packaged Ice, Inc., SV Capital Partners, L.P., and certain of
Packaged Ice, Inc.'s shareholders (James F. Stuart, A.J. Lewis
III and Steven P. Rosenberg).
10.43** Indemnification Agreement, dated July 17, 1997, by and between
Packaged Ice, Inc. and Rod Sands, indemnifying Mr. Sands as a
director of Packaged Ice, Inc.
11.1*** Statement of earnings per share.
12.1*** Historical statement of ratio of earnings to fixed charges.
12.2*** Pro forma statement of ratio of earnings to fixed charges.
21.1* List of subsidiaries.
23.1* Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
the opinion filed as Exhibit 5.1 above).
23.2*** Consent of Deloitte & Touche LLP.
23.3*** Consent of Arthur Andersen, L.L.P.
24.1* Power of Attorney (included on signature page of Registration
Statement on Form S-4).
25.1* Statement of Eligibility and Qualification on Form T-1 under the
Trust Indenture Act of 1939, made by U.S. Trust Company of Texas,
N.A. as Trustee under the Indenture relating to the 12% Senior
Notes.
25.2* Report of Financial Condition of Trustee (Exhibit T-1.6 to
Statement of Eligibility filed as Exhibit 25.1 above).
27.1* Financial data schedule.
99.1* Form of Letter of Transmittal for Exchange Offer.
</TABLE>
* Contained in exhibits to the Registration Statement No. 333-29357 on Form
S-4 filed with the Securities and Exchange Commission on June 16, 1997.
** Contained in exhibits to Amendment No. 1 to the Registration Statement No.
333-29357 on Form S-4 filed with the Securities and Exchange Commission on
July 29, 1997.
*** Filed herewith. Replaces and supersedes document filed as an exhibit to the
Registration Statement No. 333-29357 on Form S-4 filed with the Securities
and Exchange Commission on June 16, 1997.
<PAGE> 1
EXHIBIT 11.1
PACKAGED ICE, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON EQUIVALENT SHARE
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Three Months Six Months Year Ended
Ended June 30, Ended June 30, December 31,
------------------------------------------------------------------------------------
1997(a) 1996 1997(a) 1996(a) 1996(a) 1995(a) 1994(a)
------- ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net loss $(1,106,029) $ 85,871 $(1,698,206) $(342,649) $(990,432) $(688,482) $(721,913)
Add interest expense on convertible
demand notes 505 6,236
Less dividends on preferred stock:
Series A
Series B
------------------------------------------------------------------------------------
Loss applicable to common stock $(1,106,029) $ 85,871 $(1,697,701) $(342,649) $(984,196) $(688,482) $(721,913)
====================================================================================
Weighted average common shares outstanding 3,631,038 2,826,371 3,231,789 2,826,371 2,826,371 2,682,261 2,614,681
Incremental shares attributable to
conversion of demand notes 5,814 8,550
Incremental shares attributable to
outstanding stock options and warrants 796,972 272,769 530,406 272,769 272,822 174,293 124,724
------------------------------------------------------------------------------------
As adjusted for fully diluted calculation 4,428,010 3,099,140 3,768,010 3,099,140 3,107,743 2,856,554 2,739,405
Loss per common and common ====================================================================================
equivalent share:
Primary $ (0.30) $ (0.03) $ (0.53) $ (0.12) $ (0.35) $ (0.26) $ (0.28)
Fully-Diluted (0.25) (0.03) (0.45) (0.11) (0.32) (0.24) (0.26)
</TABLE>
(a) This calculation is submitted in accordance with Regulation S-K; although
it is contrary to paragraphs 14, 30 and 40 of Accounting Principles Board
Opinion No. 15 because it produces an antidilutive result.
<PAGE> 1
EXHIBIT
12.1
PACKAGED ICE, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED
CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------
Year
Ended Six Months
December 31, Ended June 30,
1992 1993 1994 1995 1996 1997
--------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES AS DEFINED:
(1) Interest on long-term
debt $1 $11 $25 $76 $130 $1,519
-------------------------------------------------------------
(2) Total Fixed Charges $1 $11 $25 $76 $130 $1,519
=============================================================
EARNINGS AS DEFINED:
(3) Loss from continuing ($166) ($391) ($722) ($688) ($990) ($1,698)
operations
(4) Income taxes for
continuing operations
(5) Total Fixed Charges 1 11 25 76 130 1,519
-------------------------------------------------------------
(6) Loss From Continuing
Operations Before
Income Taxes and ($165) ($380) ($697) ($612) ($860) ($179)
Fixed Charges
=============================================================
RATIO OF EARNINGS TO FIXED CHARGES
(line 6 divided by line 2) (a) N/A N/A N/A N/A N/A N/A
=============================================================
COVERAGE DEFICIENCY: ($166) ($391) ($722) ($688) ($990) ($1,698)
=============================================================
(a) Earnings are
inadequate to
cover fixed
charges
</TABLE>
<PAGE> 1
EXHIBIT 12.2
PACKAGED ICE, INC. AND
SUBSIDIARIES
COMPUTATION OF RATIOS OF
EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
Unaudited Proforma Combined
------------------------------------
Six Months
Year Ended Ended
December 31, 1996 June 30, 1997
------------------------------------
<S> <C> <C>
FIXED CHARGES AS DEFINED:
(1) Interest on $7,534 $3,635
long-term debt
------------------------------------
(2) Total Fixed $7,534 $3,635
Charges
====================================
EARNINGS AS DEFINED:
(3) Loss from ($7,517) ($5,344)
continuing
operations
(4) Income taxes for
continuing
operations
(5) Total Fixed 7,534 3,635
Charges
------------------------------------
(6) Income From
Continuing
Operations Before
Income $17 (1,709)
Taxes and Fixed
Charges
====================================
RATIO OF EARNINGS TO FIXED
CHARGES
(line 6 divided by line 2) (a) 0.00 N/A
====================================
COVERAGE DEFICIENCY: $(7,517) $(5,344)
====================================
</TABLE>
(a) Earnings are
inadequate to
cover fixed
charges
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-29357 of Packaged Ice, Inc. and subsidiaries (the "Company") on Form S-4 of
our reports dated March 21, 1997, appearing in the Prospectus, which is part of
this Registration Statement, with respect to (i) the consolidated financial
statements of the Company as of December 31, 1996 and 1995 and for each of the
three years in the period ended December 31, 1996 and (ii) the combined
financial statements as of and for the year ended December 31, 1996 of Mission
Party Ice, Inc. (a S corporation) and Southwest Texas Packaged Ice, Inc. (an
affiliated S corporation) with additional combining information as of and for
the year ended December 31, 1996.
We also consent to the reference to us under the heading "Experts" in this
Registration Statement.
DELOITTE & TOUCHE LLP
Houston, Texas
August 21, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSON LLP
Phoenix, Arizona
August 21, 1997