AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 2, 1998.
REGISTRATION NO. 333-60627
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
PACKAGED ICE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 2097 76-0316492
(STATE OR OTHER (PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL
INCORPORATION OR CLASSIFICATION CODE (I.R.S. EMPLOYER
ORGANIZATION) NUMBER) IDENTIFICATION NO.)
------------------------
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(713) 464-9384
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES F. STUART
CHIEF EXECUTIVE OFFICER
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(713) 464-9384
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ALAN SCHOENBAUM T. MARK KELLY
AKIN, GUMP, STRAUSS, HAUER & FELD, MICHAEL P. FINCH
L.L.P. VINSON & ELKINS L.L.P.
300 CONVENT STREET, SUITE 1500 1001 FANNIN, 2300 FIRST CITY TOWER
SAN ANTONIO, TEXAS 78205 HOUSTON, TEXAS 77002
(210) 281-7234 (713) 758-2222
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
PROPOSED
TITLE OF EACH CLASS OF MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, $.01 par value .............. (1) $143,750,000 $42,406.25
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act, the number of
shares being registered and the proposed maximum offering price per share
are not included in this table.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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>
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
PRELIMINARY PROSPECTUS DATED OCTOBER 2, 1998
PROSPECTUS
[LOGO] [ ] SHARES
PACKAGED ICE, INC.
COMMON STOCK
------------------------
All of the shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby are being sold by Packaged Ice, Inc.
("Packaged Ice" or the "Company").
Of the shares of Common Stock being offered hereby, shares (the
"U.S. Shares") are being offered initially in the United States and Canada
(the "U.S. Offering") by the U.S. Underwriters and shares (the
"International Shares") are being offered initially outside the United States
and Canada (the "International Offering" and, together with the U.S. Offering,
the "Offerings") by the International Managers. The price to public and
underwriting discount per share are identical for both Offerings and the
closings for both Offerings are conditioned upon each other. See
"Underwriting."
Prior to the Offerings, there has been no public market for the Common
Stock. For a discussion of the factors to be considered in determining the
initial public offering price, see "Underwriting." A total of 150,000 shares
of Common Stock are being reserved for sale to certain employees, directors and
business associates of, and certain other persons designated by, the Company, at
the initial public offering price.
The Company intends to apply for quotation of the Common Stock on the
National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market System (the "Nasdaq National Market") under the symbol
"ICED."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
------------------------
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Per share............................ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the U.S. Underwriters and International Managers
options, exercisable within 30 days after the date hereof, to purchase up to
and additional shares of Common Stock, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by the Underwriters
against payment therefor, subject to certain conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York on or about , 1998.
------------------------
JOINT LEAD MANAGERS
MERRILL LYNCH & CO. JEFFERIES & COMPANY, INC.
BOOK-RUNNING MANAGER
------------------------
BEAR, STEARNS & CO. INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
STEPHENS INC.
------------------------
The date of this Prospectus is , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
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, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
AS USED IN THIS PROSPECTUS, THE TERMS "COMPANY" OR "PACKAGED ICE" MEAN
PACKAGED ICE, INC., A TEXAS CORPORATION, AND ITS SUBSIDIARIES, EXCEPT WHERE THE
CONTEXT OTHERWISE REQUIRES. UNLESS OTHERWISE INDICATED, THE INFORMATION, SHARE
AND PER SHARE DATA IN THIS PROSPECTUS ASSUMES (I) THE ACQUISITION (THE "CASSCO
ACQUISITION") OF CASSCO ICE & COLD STORAGE, INC. ("CASSCO"), (II) NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS, (III) THE CONVERSION OF SHARES OF
SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED STOCK
INTO 574,831 SHARES OF COMMON STOCK AND APPROXIMATELY $7.5 MILLION OF 13%
EXCHANGEABLE PREFERRED STOCK PLUS ACCRUED DIVIDENDS OWNED BY SV CAPITAL
PARTNERS, L.P. ("SV") INTO SHARES OF COMMON STOCK UPON CONSUMMATION OF
THE OFFERINGS (COLLECTIVELY, THE "CONVERSIONS") AND (IV) NO EXERCISE OF
OPTIONS OR WARRANTS TO PURCHASE SHARES OF THE COMPANY'S COMMON STOCK.
THE COMPANY
The Company is the largest manufacturer and distributor of packaged ice in
the United States and currently serves over 70,000 customer locations in 26
states. Based on revenues, management believes that the Company is more than
four times larger than its next largest competitor. The Company has grown
primarily through the implementation of its consolidation strategy within the
highly fragmented packaged ice industry. Since April 1997, the Company has
completed 53 acquisitions principally in the southern half of the United States.
These acquisitions have added annual revenues of approximately $196 million and
have enabled the Company to enter new geographic regions, increase its presence
in established markets, gain additional production capacity, realize cost
savings from economies of scale and leverage the acquired companies'
relationships with grocery and convenience store customers. The Company also
installs proprietary machines which produce, package, store and merchandise ice
at the point of sale through an automated, self-contained system (the "Ice
Factory"). As a result of the successful execution of the Company's growth
strategy, revenues have increased from $4.4 million in 1996 to $202.9 million
(pro forma) in 1997, and from $8.1 million for the six months ended June 30,
1997 to $95.1 million (pro forma) for the six months ended June 30, 1998. EBITDA
for such periods has increased from $0.6 million in 1996 to $45.8 million (pro
forma) in 1997, and from $1.6 million for the six months ended June 30, 1997 to
$15.7 million (pro forma) for the six months ended June 30, 1998. EBITDA, which
represents earnings before interest, income taxes, depreciation and
amortization, is not a measure of financial performance under generally accepted
accounting principles ("GAAP"). Net loss before extraordinary items for such
periods has increased from $1.0 million in 1996 to $8.3 million (pro forma) in
1997, and from $1.7 million for the six months ended June 30, 1997 to $11.9
million (pro forma) for the six months ended June 30, 1998. Following the
Offerings, the Company believes that it will have the capital resources
necessary to continue to lead the consolidation of the packaged ice industry.
THE INDUSTRY
The packaged ice industry has attractive fundamental characteristics,
including highly fragmented ownership and stable demand. Additionally, since
retailers generally purchase packaged ice from only one supplier, there is
minimal brand competition at the point of sale. Due to high product
transportation and storage costs, the ice business has historically been a
regional service business and is comprised primarily of smaller privately-owned
packaged ice companies which lack significant capital resources. Traditional ice
manufacturers, including the Company, produce and package ice at
centrally-located facilities and normally distribute to a limited market radius
of 100 miles from the point of production. As a result of these geographic
constraints, success in the ice business depends upon an efficient manufacturing
and distribution system with a critical mass of customer locations and high
density customer distribution routes in a region, high customer concentration
within a market area and the ability to ensure prompt and reliable delivery
1
<PAGE>
during peak seasonal months. The Company believes that its consolidation of
traditional ice manufacturers within a geographic region provides efficiencies
in manufacturing and distribution which gives it an advantage over its
competitors due to higher density of customer sites and the flexibility to shift
production among its manufacturing plants within a region.
The Company believes that packaged ice products are purchased as needed by
consumers and that such purchases are relatively price insensitive due
principally to the low cost of the product and absence of substitute products.
The industry is seasonal, characterized by peak demand occurring during the
warmer months of May through September, with an extended selling season
occurring in the southern United States. On a year-to-year basis, demand remains
stable and is generally only adversely affected by abnormally cool or rainy
weather within a region. Management believes that the Company's geographic
diversification mitigates the potential adverse impact of abnormal weather
patterns in any particular market.
BUSINESS STRATEGY
The Company's business strategy is to strengthen its position as the
leading packaged ice company in the United States and to increase revenues and
profitability through an aggressive acquisition strategy, internal growth,
margin enhancement, and expansion into related businesses. The Company believes
its size, national scope, industry experience, proven ability to complete and
integrate acquisitions, and its proprietary Ice Factory give it significant
competitive advantages in pursuing its business strategy. These advantages have
enabled the Company to develop an efficient regional production and distribution
network and to service national accounts through its expanded geographic
presence. As a result, management believes Packaged Ice competes very
effectively with smaller, local packaged ice companies. The key elements of the
Company's business strategy are to:
ACQUIRE TRADITIONAL ICE MANUFACTURING COMPANIES. Management believes that
the highly fragmented packaged ice industry contains numerous additional
acquisition opportunities. The Company's proven ability to enter new markets
through traditional acquisitions, coupled with its unique combination of ice
delivery systems and significant capital resources, has positioned the Company
to continue to be the leader in the consolidation of the industry. The Company's
acquisition strategy is to target well-managed, traditional ice producers and
distributors with attractive customer bases in both new and existing market
areas. The Company typically retains the former owners and other key personnel
of acquired packaged ice companies in an effort to ensure the continuation of
high quality services and the maintenance of customer relationships.
Packaged Ice has completed 53 acquisitions since April 1997, representing
annual revenues of approximately $196 million. The Company's recent acquisition
of Reddy Ice Corporation ("Reddy") from Suiza Foods Corporation for $180.8
million (the "Reddy Acquisition") added over $85 million in pro forma annual
revenues. Prior to the Reddy Acquisition, Reddy had been active in the
consolidation of the packaged ice industry, having made 28 acquisitions from
January 1997 to April 1997 when it was purchased. The Company's other
acquisitions, except for Cassco, SWI, Mission and STPI (each as defined herein)
have generally been small, single location market leaders and smaller
"tuck-ins" that in total are not as significant as the Reddy Acquisition and
individually are much less significant. The Company's acquisitions have provided
it with (i) a source of increased cash flow, (ii) national scope to better
service large customers, (iii) economies of scale and cost savings through the
consolidation of redundant manufacturing and distribution facilities, and
administration and selling functions and (iv) improved access to key markets and
new customers.
The Company's enhanced service capabilities and geographic presence have
enabled it to satisfy the desire of many of its customers to source products
from one national or regional supplier. The Company has also capitalized on the
decision of certain large retailers to outsource ice production. Since 1997, the
Company has entered into national or regional supply arrangements with Circle K,
Wal-Mart, 7-Eleven, Texaco, Diamond Shamrock, Publix, Albertson's, Safeway,
Von's, Winn Dixie, HEB, L'il Champs,
2
<PAGE>
Randall's and Kroger. As the Company continues to expand its operations into new
markets, management anticipates entering into additional national and regional
supply arrangements with major retailers.
EXPAND MARKET PRESENCE THROUGH THE ICE FACTORY. Through its Ice Factory,
the Company is the only provider of on-site, automated ice manufacturing and
bagging systems at convenience stores and grocery stores. The Ice Factory has
gained strong market acceptance by providing high volume retailers with cost and
service advantages as compared to traditional packaged ice delivery methods.
This proprietary system uses state-of-the-art technology to produce, package and
store up to 40,000 bags of ice per year directly at customer locations. The
Company retains ownership of the Ice Factory and charges customers on a usage
basis.
The Ice Factory, when combined with traditional delivery methods, provides
the Company with numerous unique advantages, including (i) a flexible delivery
system designed to supply high volume locations and capable of cost-effectively
servicing a market in excess of 100 miles from traditional ice manufacturing
facilities, (ii) the ability to redistribute production from its traditional ice
facilities to new customers as well as satisfy seasonal peak demand at stores
with Ice Factories and (iii) higher operating margins, due to significantly
reduced production, storage and distribution costs.
As part of the Company's consolidation strategy, the Ice Factory gives the
Company the ability to develop a customer base in new markets where it does not
currently own traditional ice companies. The Ice Factory has led the Company's
expansion into several markets such as Houston, Dallas, Phoenix and Seattle and
should continue to drive entry into new markets and expansion in existing
markets.
ENHANCE OPERATING MARGINS OF EXISTING AND ACQUIRED BUSINESSES. The
Company's consolidation strategy provides management with significant
opportunities to enhance operating margins of its acquired businesses. Upon
closing an acquisition, the Company seeks to reduce operating costs and working
capital requirements through (i) consolidation of redundant manufacturing and/or
storage facilities, (ii) rationalization of distribution routes and service
operations, (iii) combination of administrative and marketing functions and (iv)
leveraging of economies of scale in purchasing and operations.
PURSUE EXPANSION INTO RELATED BUSINESSES. In connection with certain
acquisitions of traditional ice manufacturers, the Company's business has
expanded into areas which leverage the Company's competitive position and
expertise in the packaged ice industry. Management is currently evaluating the
expansion of its institutional ice machine leasing, public cold storage and
bottled water businesses.
LEVERAGE MANAGEMENT EXPERTISE. 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 A. J. Lewis III, President, who together have more than 20 years of
industry experience. Mr. Stuart is chiefly responsible for the development of
the Ice Factory and, together with Mr. Lewis, has developed and executed the
Company's strategic plan. The Company also benefits from the local operating
knowledge and goodwill developed by the management of the companies it acquires
by retaining a significant number of the principals of such companies.
RECENT ACQUISITION
On July 31, 1998, the Company acquired all of the outstanding stock of
Cassco from WLR Foods, Inc. for approximately $59 million in cash. Cassco is a
leading regional producer and distributor of packaged ice products and
owner/operator of cold storage warehouses in the Mid-Atlantic region, with
revenues of approximately $28.7 million and $12.9 million for the twelve months
ended December 31, 1997 and the six months ended June 30, 1998, respectively.
Cassco's assets include nine separate ice manufacturing facilities, four
distribution facilities and related equipment and rolling stock, all of which
are used to manufacture and distribute ice products. In addition, the Company
acquired 10.3 million cubic feet of public cold storage warehouses at five
separate locations. The Company financed the acquisition of Cassco with cash on
hand and funds available under its credit facility.
3
<PAGE>
THE OFFERINGS
Common Stock offered:
U.S. Offering................ Shares
----------
International Offering....... Shares
----------
Total................... Shares
==========
Common Stock to be outstanding
after the Offerings(1).......... Shares
----------
Use of Proceeds................... To redeem shares of 10% Exchangeable
Preferred Stock, to repay debt under the
Company's current credit facility and for
working capital and general corporate
purposes, including future acquisitions.
To the extent the Underwriters'
over-allotment options are exercised, the
proceeds thereof will be used to redeem in
part shares of 13% Exchangeable Preferred
Stock for 109% of the liquidation
preference thereof. See "Use of
Proceeds."
Proposed Nasdaq National Market
Symbol.......................... "ICED"
- ------------
(1) Gives effect to the Conversions. Excludes (i) 635,811 shares of Common Stock
issuable upon exercise of currently exercisable stock options granted to
officers, employees and consultants at a weighted average exercise price of
$12.48 per share, (ii) 1,871,552 shares of Common Stock issuable upon the
exercise of warrants at an exercise price of $.01 per share, (iii) 1,998,921
shares of Common Stock issuable upon the exercise of Culligan Warrants (as
defined) at an exercise price of $13 per share issued to Culligan Water
Technologies, Inc. ("Culligan") and a private investor and (iv) 100,000
shares of Common Stock issuable upon the exercise of SV Warrants (as
defined) at an exercise price of $14 per share issued to SV.
4
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
FINANCIAL INFORMATION
The following table sets forth for the dates and periods indicated, summary
historical and pro forma financial data of the Company. Such data has been
derived from the information contained in the Selected Historical Financial Data
and the Unaudited Pro Forma Combined Condensed Financial Statements included
elsewhere in this
Prospectus. See "The Company," "Selected Historical Financial Data,"
"Unaudited Pro Forma Combined Condensed Financial Data" and the Company's
consolidated financial statements and the Notes thereto.
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
HISTORICAL ------------------------------
-----------------------------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS
YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------- ------------ --------------
1995 1996 1997 1997 1998 1997(1) 1998(2)
--------- --------- --------- --------- --------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................... $ 2,830 $ 4,427 $ 28,981 $ 8,124 $ 59,416 $ 202,876 $ 95,128
Cost of sales...................... 1,251 2,035 18,724 4,703 35,474 133,195 60,524
Operating expenses................. 1,515 1,981 7,636 2,182 11,763 24,919 19,114
Depreciation and amortization...... 751 1,456 5,130 1,826 6,823 26,292 13,690
--------- --------- --------- --------- --------- ------------ --------------
Income (loss) from operations...... (687) (1,045) (2,509) (587) 5,356 18,470 1,800
Interest expense................... (76) (130) (6,585) (1,519) (8,727) (27,768) (13,884)
Other income....................... 75 185 655 408 146 992 199
--------- --------- --------- --------- --------- ------------ --------------
Net loss before taxes.............. (688) (990) (8,439) (1,698) (3,225) (8,306) (11,885)
Extraordinary loss on
refinancing...................... -- -- -- -- (17,387) -- (17,387)
--------- --------- --------- --------- --------- ------------ --------------
Net loss........................... (688) (990) (8,439) (1,698) (20,612) (8,306) (29,272)
Preferred dividends................ -- -- 198 -- 2,008 4,225 2,112
--------- --------- --------- --------- --------- ------------ --------------
Net loss to common shareholders.... $ (688) $ (990) $ (8,637) $ (1,698) $ (22,620) $ (12,531) $ (31,384)
========= ========= ========= ========= ========= ============ ==============
LOSS PER SHARE OF COMMON STOCK-BASIC
AND DILUTED:
Loss before extraordinary item
available to common
shareholders..................... $ (0.26) $ (0.35) $ (2.40) $ (0.53) $ (1.11) $ ( .) $ ( .)
Extraordinary item................. -- -- -- -- (3.68) -- ( .)
--------- --------- --------- --------- --------- ------------ --------------
Loss to common shareholders........ $ (0.26) $ (0.35) $ (2.40) $ (0.53) $ (4.79) $ ( .) $ ( .)
========= ========= ========= ========= ========= ============ ==============
Weighted average common
shares-basic and diluted(3)...... 2,682,261 2,826,371 3,600,109 3,231,509 4,721,536
------------ --------------
OTHER FINANCIAL DATA:
Cash flows -- operating
activities....................... $ 148 $ 1,094 $ (3,292) $ (1,345) $ (2,532)
Cash flows -- investing
activities....................... (2,961) (5,925) (61,541) (12,402) (240,346)
Cash flows -- financing
activities....................... 3,034 3,968 79,488 29,430 235,364
EBITDA(4).......................... 139 596 3,276 1,647 12,325 $ 45,754 $ 15,689
Ratio of earnings to fixed
charges(7)....................... N/A N/A N/A N/A N/A N/A N/A
</TABLE>
JUNE 30, 1998
--------------------------------------
HISTORICAL PRO FORMA AS ADJUSTED(5)
---------- ------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and equivalents............... $ 7,311 $ 21,991
Working capital.................... 10,874 29,387
Property, net...................... 140,567 164,445
Total assets....................... 392,558 468,902
Total long term obligations, net of
current maturities............... 285,524 271,432
Total preferred stock(6)........... 65,667 29,255
Common stock with put redemption... 1,972 --
Shareholders' equity............... 7,733 134,679
- ------------
(1) Gives effect to (i) the 1997 Acquisitions, (ii) the 1998 Completed
Acquisitions, (iii) the Cassco Acquisition, (iv) the Recapitalization, (v)
the Culligan Investment, (vi) the Offerings and the application of the net
proceeds therefrom and (vii) the Conversions, each as defined, as if they
had occurred on January 1, 1997. See "The Company."
(2) Gives effect to (i) the 1998 Completed Acquisitions, (ii) the Cassco
Acquisition, (iii) the Recapitalization, (iv) the Offerings and the
application of the net proceeds therefrom and (v) the Conversions, as if
they had occurred on January 1, 1997.
(3)
(4) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. The Company has included EBITDA (which is not a measure of
financial performance under GAAP) because it understands that EBITDA is one
measure used by certain investors to determine a company's historical
ability to service its indebtedness. EBITDA should not be considered by an
investor as an alternative to net income, as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity.
(5) Gives effect to (i) the Offerings and the application of the net proceeds
therefrom, (ii) the Conversions, and (iii) the Cassco Acquisition.
(6) Includes (i) the Convertible Preferred Stock (as defined) with put
redemption option, (ii) the 10% Exchangeable Preferred Stock and (iii) the
13% Exchangeable Preferred Stock.
(7) 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 three years ended December 31, 1997 or the six months
ended June 30, 1998 and 1997, to cover fixed charges. On a historical basis,
the deficiencies were $688,000 in 1995, $990,000 in 1996, $8,439,000 in
1997, and $3,224,000 and $1,698,000 for the six months ended June 30, 1998
and 1997, respectively. On a pro forma as adjusted basis, the deficiencies
were $10,216,000 and $12,166,000 for the year ended December 31, 1997 and
the six months ended June 30, 1998, respectively.
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS
WELL AS OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE PURCHASING THE
COMMON STOCK OFFERED HEREBY.
SUBSTANTIAL LEVERAGE AND LACK OF HISTORICAL CASH FLOW TO SERVICE DEBT
The Company is highly leveraged with substantial debt service and planned
capital expenditures. At August 3, 1998, the Company's total indebtedness
(excluding debt discount) was approximately $350 million, consisting primarily
of $270 million of 9 3/4% Senior Notes (as defined) and $79.6 million of
borrowings under the Company's Credit Facility (as defined). See
"Capitalization" and "Selected Historical Financial Data."
The Company's level of indebtedness will have several important effects on
its future operations, and could have important consequences to the holders of
Common Stock, 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 indenture
(the "Indenture") governing the 9 3/4% Senior Notes and in the Credit Facility
will require the Company to meet certain financial tests, and other restrictions
will limit its ability to pay dividends, 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, (iv) the Company's ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general corporate and other
purposes may be limited and (v) upon a change of control of the Company, the
Company may be required to purchase all of the outstanding 9 3/4% Senior Notes
at 101% of the principal amount thereof plus any accrued and unpaid interest
thereon to the date of purchase. The exercise by the holders of the 9 3/4%
Senior Notes of their rights to require the Company to offer to purchase 9 3/4%
Senior Notes upon a change of control could also result in a default under other
indebtedness of the Company, including the Credit Facility.
The Company's ability to meet its debt service obligations and to reduce
its total indebtedness will be dependent upon its future performance, which will
be subject to general economic, industry and competitive conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. If the Company is unable to generate
sufficient cash flow from operations 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
9 3/4% Senior Notes and the Credit Facility, 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.
See "The Company" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RISKS OF ACQUISITIONS
Continued expansion of the Company's business is dependent upon the
Company's ability to acquire other companies, assets and product lines that
either complement or expand its existing business. Future acquisitions, as well
as those acquisitions the Company has already made, involve a number of special
risks, including, without limitation, (i) the diversion of management's
attention to the assimilation of the operations and personnel of the acquired
companies, (ii) potential failure of gaining operating efficiencies and
difficulty of integrating acquisitions into the Company's existing operations,
(iii) unexpected costs or liabilities in the acquired business, (iv) adverse
short-term effects on the Company's operating results (particularly upon the
completion of acquisitions in the off-season) and (v) the amortization of
acquired intangible assets. To the extent future acquisitions are consummated
for cash, a substantial portion of the Company's surplus borrowing capacity and
available cash (including the proceeds of the Offerings) would be allocated to
consummate any such acquisition thereby limiting the ability to utilize cash for
other
6
<PAGE>
purposes. See "Use of Proceeds." There can be no assurance that the Company
will be able to continue to identify additional suitable acquisition
opportunities or successfully complete acquisitions in the future.
In addition, acquisitions often result in the recording of goodwill and
other intangible assets.
o Goodwill arises when an acquirer pays more for a business than the
fair value of the tangible and separately measured intangible net
assets. GAAP requires that this and all other intangible assets be
amortized over the period benefited. Management has determined that
period to be no less than 40 years.
o If management were not to separately recognize a material intangible
asset having a benefit period less than 40 years, or were not to give
effect to shorter benefit periods of factors giving rise to a
material portion of the goodwill, earnings reported in periods
immediately following the acquisition would be overstated. In later
years, the Company would be burdened by a continuing charge against
earnings without the associated benefit to income valued by
management in arriving at the consideration paid for the business.
Earnings in later years also could be significantly affected if
management determined then that the remaining balance of goodwill was
impaired.
o Management has reviewed all of the factors and related future cash
flows which it considered in arriving at the amount incurred to
acquire each of the acquired companies. Management concluded that the
anticipated future cash flows associated with intangible assets
recognized in the acquisitions will continue indefinitely, and there
is no persuasive evidence that any material portion will dissipate
over a period shorter than 40 years.
See "Prospectus Summary," "Unaudited Pro Forma Combined Condensed
Financial Statements" and "Business -- Business Strategy."
SEASONALITY OF ICE BUSINESS AND WEATHER
The Company experiences seasonal fluctuations in its net sales and
profitability with a disproportionate amount of the Company's net sales and a
majority of its net income typically realized in its second and third calendar
quarters (May through September). The Company believes that over 60% of its
revenues will occur during the second and third calendar quarters when the
weather conditions are generally warmer and demand is greater while less than
40% of its revenues will occur during the first and fourth calendar quarters
when the weather is generally cooler. As a result of these seasonal revenue
declines and the lack of proportional corresponding expense decreases, the
Company will most likely experience lower profit margins and possibly experience
losses during the first and fourth calendar quarters. In addition, because the
Company's operating results depend significantly on sales during its peak
season, the Company's quarterly results of operations may fluctuate
significantly as a result of adverse weather during this period (such as an
unusually cool or rainy period). Because inclement weather such as the type
caused by the "El Nino" weather phenomenon is believed to be a primary cause
for decreased volume in the ice industry, the Company could be adversely
affected by this and other weather phenomena. See "-- Substantial Net Operating
Losses" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General Economic Trends and Seasonality."
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. A significant increase in the utilization of
captive commercial ice plants, on-site manufacturing and packaging by operators
of large retail chains the Company serves, or the successful roll out by a
competitor of a machine which duplicates the function of the Ice Factory could
have a material adverse effect on the Company's operations. See
"Business -- The Ice Factory" and "Business -- Competition."
7
<PAGE>
SUBSTANTIAL NET OPERATING LOSSES
Packaged Ice has incurred substantial net operating losses since its
inception. At June 30, 1998, Packaged Ice had an accumulated deficit since
inception of $32.1 million. The Company also anticipates that it will incur net
operating losses during 1998, primarily as a result of the increased interest
expense associated with the 9 3/4% Senior Notes and the Credit Facility and
substantial depreciation and amortization associated with the Company's
acquisitions and capital expenditures. While management believes that it has
developed a plan of operations that, 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. See "The
Company," "Unaudited Pro Forma Combined Condensed Financial Statements,"
"Selected Historical Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the Notes thereto.
DEPENDENCE ON SINGLE MANUFACTURER
The Company's proprietary bagging device used in the Ice Factory is
manufactured by Lancer Corporation ("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.
EFFECTS OF PRICE CHANGES IN RAW MATERIALS
The Company uses large quantities of water and energy in the manufacture
and storage of its packaged ice products. The Company also uses large quantities
of plastic bags. If the prices of such resources should increase 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 along to its customers.
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. There can be no
assurance that significant changes in plastic bag, water, 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 if any of its products are alleged to have resulted
in adverse effects to a user of such products. The Company currently carries
product liability insurance that management believes is adequate under the
Company's current circumstances, although there can be no assurance that such
circumstances will not change and that such insurance will remain available at
reasonable costs, if at all. In the event of an inadequately insured product
liability claim, the Company's business and financial condition could be
materially adversely affected.
LIMITED PATENT PROTECTION
Other than patents which it owns or licenses on the bagging devices used as
a component of the Ice Factory, 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 Ice Factory 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
8
<PAGE>
proprietary technology 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. See "Business -- Intellectual
Property."
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, and A.J. Lewis III,
President. The loss of any of its key members of management could have an
adverse effect on the Company. The Company maintains $2 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. See "Management."
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
(i) the types of environmental laws or regulations that may from time to time be
enacted in the future by federal, state or local governments, (ii) how existing
or future laws or regulations will be interpreted or enforced or (iii) 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.
Although the Company has historically used "freon" refrigerants, which
have been banned from production, several alternate unregulated refrigerants
exist which have similar or better economic basis. The most prominent banned
product used by the Company was R-12 (freon) which is easily exchanged by the
Company's own qualified service personnel during the course of ordinary
servicing of ice merchandising equipment. The Company believes that the
numerous, economically neutral refrigerants available assures that the ban will
have little, if any, effect on the Company's operations or results therefrom.
See "Business -- Environmental Matters."
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 Ice Factories and to control the quality and
quantity of its ice continuously. Compliance with such laws and regulations may
require significant capital expenditures or may increase operating costs.
Although such compliance costs to date have not had a material effect on the
Company, application of these requirements, or adoption of new requirements
could have a material adverse effect on the Company. See
"Business -- Government Regulation."
POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
After the Offerings, the Company will have an aggregate of approximately
shares of Common Stock authorized but unissued and not reserved for
specific purposes. All of such shares may be issued without any action or
approval by the Company's shareholders. Management intends to pursue actively
acquisitions of competitors and related businesses and may issue shares of
Common Stock in connection with these acquisitions. In addition, 1,393,700
shares of Common Stock are reserved for issuance (with respect to which options
on 635,811 shares of Common Stock are outstanding) under the Company's stock
9
<PAGE>
option plans. Likewise, 3,985,473 shares of Common Stock at a weighted average
exercise price of $6.93 per share are reserved for issuance upon the exercise of
outstanding warrants. See "Description of Capital Stock -- Warrants." Any
shares issued in connection with future acquisitions, exercise of stock options
or otherwise would further dilute the percentage ownership of the Company held
by the investors in the Offerings. Further, the Company's ability to obtain
additional capital on favorable terms may be adversely affected because of
potential dilutive effect of the shares granted under the Company's existing
stock option plans. See "Management -- Stock Option Plans" and "Description
of Capital Stock."
Based on an assumed offering price of $ per share, purchasers of Common
Stock in the Offerings will experience immediate and substantial dilution of
$ per share in the net tangible book value of their shares. See "Dilution."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or,
if one develops, that it will be maintained. The initial public offering price
of the Common Stock will be established by negotiation between the Company and
the Underwriters. See "Underwriting" for a discussion of factors to be
considered in determining the initial public offering price. The market price of
the shares of Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors, including general
economic and market conditions. In addition, the stock market in recent years
has experienced and continues to experience extreme price and volume
fluctuations, which have affected the market price of the stock of many
companies and which have been often unrelated or disproportionate to the
operating performances of these companies. These fluctuations, as well as a
shortfall in sales or earnings compared to securities analysts' expectations,
changes in analysts' recommendations or projections or general economic and
market conditions, may adversely affect the market price of the Common Stock. In
the past, securities class action litigation has often been instituted following
periods of volatility in the market price for a company's securities. Such
litigation could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition, cash flows and operating results.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the open market
after the Offerings could adversely affect the trading price of the Common
Stock. Immediately after the Offerings, affiliates and holders of Restricted
Shares (as defined) will hold shares, representing % of the outstanding
shares of Common Stock. A decision by such persons to sell shares of Common
Stock could adversely affect the trading price of the Common Stock. Upon
consummation of the Offerings, the Company will have shares of Common
Stock outstanding ( shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, all shares sold in the Offerings (other
than those sold to affiliates of the Company) will be freely tradable. Of the
remaining 5,047,310 shares, 2,528,140 shares are freely transferable and
2,519,170 shares may not be sold unless the sale is registered under the
Securities Act, or an exemption from registration is available, including the
exemption provided by Rule 144 under the Securities Act ("Rule 144"). A total
of 3,985,473 shares of Common Stock at a weighted average exercise price of
$6.93 per share have been reserved for issuance upon the exercise of outstanding
warrants. All of such shares of Common Stock have the benefit of "demand"
registration rights and will be freely transferable after such registration.
See "Description of Capital Stock -- Registration Rights Agreements." The
executive officers and directors and certain shareholders of the Company have
agreed that, for 180 days following the date of this Prospectus, they will not,
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, offer, sell, grant any option to purchase or otherwise dispose of
Common Stock or any securities convertible into or exchangeable for Common
Stock. A total of 1,393,700 shares of Common Stock have been reserved for
issuance under the stock option plans, 39,200 of which are issuable upon
exercise of options outstanding on August 31, 1998, or that will become
exercisable within 60 days after such date. The Company will register on Form
S-8 under the Securities Act the offering and sale of
10
<PAGE>
Common Stock issuable under its stock option plans. See "Management -- Stock
Option Plans," and "Shares Eligible For Future Sale."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Articles of Incorporation (the
"Articles"), the Company's Bylaws (the "Bylaws") and the Texas Business
Corporation Act ("TBCA") may have the effect of discouraging unsolicited
proposals for acquisition of the Company. Pursuant to the Articles, shares of
preferred stock may be issued by the Company in the future without shareholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
any such preferred stock. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions, financings and
other corporate transactions, could have the effect of discouraging a third
party's acquisition of a majority of the Common Stock. The Company has no
present plans to issue any shares of preferred stock other than as payment of
in-kind dividends. Finally, the TBCA restricts certain business combinations and
provides that directors serving on staggered boards of directors may be removed
only for cause unless the articles of incorporation otherwise provide. The
Company's Articles do not otherwise so provide. See "Description of Capital
Stock -- Anti-Takeover Considerations."
DIVIDEND POLICY AND RESTRICTIONS
The Company has never declared or paid any cash dividends on the Common
Stock. In addition, the Company's Credit Facility, the 13% Exchangeable
Preferred Stock and, in some instances, the Indenture, prohibit the Company from
paying dividends on its Common Stock. Following the Offerings, the Company
intends to retain any future earnings to fund growth and does not anticipate
paying any cash dividends in the foreseeable future. Any future determination as
to the Company's dividend policy will be made at the discretion of the Company's
Board of Directors and will depend on a number of factors, including the
Company's future earnings, capital requirements, financial condition and future
prospects, restrictions on dividend payments pursuant to any of the Company's
credit or other agreements and such other factors as the Board of Directors may
deem relevant. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
CONTROL BY EXISTING SHAREHOLDERS
At the Closing, the Company's officers and directors will beneficially own
up to approximately % of the Common Stock. Because the holders of a majority
of the Common Stock have the ability to appoint a majority or all of the Board
of Directors, and to approve certain fundamental corporate transactions, the
Company's officers and directors will have significant influence over the voting
on such matters. See "Principal Shareholders" and "Description of Capital
Stock."
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 and the effect of unseasonably cool weather. Such
forward-looking statements may be deemed to include plans for, and successful
closing and integration of, future acquisitions, the Company's capacity to
integrate successfully acquisitions that have already been completed and the
adequacy of anticipated sources of cash, including the proceeds from the
Offerings, to fund the Company's future capital requirements. Words such as
"believes," "anticipates," "expects," "intends" and similar expressions
are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. 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
"Prospectus Summary,"
11
<PAGE>
"Summary Historical and Unaudited Pro Forma Combined Financial Data," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Unaudited Pro Forma Combined Condensed Financial
Statements," "Selected Historical Financial Data" and "Business," 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. In addition, the
protections accorded by Section 27A of the Securities Act and Section 21E of the
Exchange Act are not applicable to initial public offerings.
12
<PAGE>
THE COMPANY
The Company is the largest manufacturer and distributor of packaged ice in
the United States and currently serves over 70,000 customer locations in 26
states. The Company has grown primarily through the implementation of its
consolidation strategy within the highly fragmented packaged ice industry and,
to a lesser extent, through the installation of its Ice Factory. The Company has
pursued a strategy of acquiring packaged ice companies, principally in the
southern half of the United States and has completed 53 acquisitions since April
1997. This program has been financed almost exclusively through the incurrence
of debt and the issuance of capital stock.
FINANCINGS
On September 20, 1995, the Company completed the private offering (the
"Norwest Offering") of 450,000 shares of Series A Convertible Preferred Stock
(the "Series A Convertible Preferred Stock") at a price of $5.56 per share and
420,000 shares of Common Stock (the "Put Option Common Stock") for $5 per
share to Norwest Equity Partners V ("Norwest"), a partnership managed by
Norwest Venture Capital Management, Inc., a venture capital firm with over $1
billion under management, and The Food Fund Limited Partnership (the "Food
Fund"). In addition, concurrently with the Norwest Offering, the Company issued
280,000 shares of Common Stock to various investors at a price of $5 per share.
On January 17, 1997, the Company completed the private offering (the "Second
Norwest Offering") of 124,831 shares of Series B Convertible Preferred Stock
(the "Series B Convertible Preferred Stock" and, together with the Series A
Convertible Preferred Stock, the "Convertible Preferred Stock"). Unless a
public offering of Common Stock occurs, such as the one contemplated hereby, the
holders of the Series A Convertible Preferred Stock and the Put Option Common
Stock have a contractual right to require the Company to repurchase such stock
beginning in September 2004.
On April 17, 1997, the Company completed the private offering (the
"Original 12% Note Offering") of $50 million aggregate principal amount of 12%
Senior Notes due 2004 (the "Original 12% Senior Notes") with detachable
warrants to purchase 511,885 shares of Common Stock for $.01 per share. In
connection with the Original 12% Note Offering, the Company issued warrants (the
"Jefferies Warrants") to purchase 127,972 shares of Common Stock for $.01 per
share to Jefferies & Company, Inc. ("Jefferies"). Concurrent with the Original
12% Note Offering, the Company completed the acquisitions (the "SWI, Mission
and STPI Acquisitions") of Southwestern Ice, Inc. ("SWI"), Mission Party Ice,
Inc. ("Mission") and Southwest Texas Packaged Ice, Inc. ("STPI").
On July 17, 1997, the Company completed the private offering to SV of
300,000 shares of Common Stock at a price of $10 per share and a warrant to
purchase 100,000 shares (the "SV Warrants") at an exercise price of $14 per
share until July 17, 2002.
In September 1997, the Company entered into a six-year senior credit
facility with Frost National Bank and Zion's National Bank (the "Old Credit
Facility") which provided for borrowings of up to $20 million.
On October 16, 1997, the Company completed the private offering (the
"Subsequent 12% Note Offering" and, together with the Original 12% Note
Offering, the "12% Note Offerings") of $25 million aggregate principal amount
of 12% Senior Notes due 2004 (the "Subsequent 12% Senior Notes" and, together
with the Original 12% Senior Notes, the "12% Senior Notes") with detachable
warrants to purchase 255,943 shares of Common Stock for $.01 per share
(together, with the detachable warrants to purchase 511,885 shares of Common
Stock, the "12% Senior Note Warrants"). The net proceeds of the Subsequent 12%
Note Offering were used to retire amounts outstanding under the Old Credit
Facility, fund additional acquisitions and for working capital.
On December 2, 1997, (i) Culligan, which U.S. Filter, Inc. has subsequently
acquired, purchased 235,000 shares of 10% Exchangeable Preferred Stock (the
"10% Exchangeable Preferred Stock"), 94 shares of Series C Preferred Stock
(the "Series C Preferred Stock"), and warrants ("Original Culligan
Warrants"), having an exercise price of $13 per share, to purchase 1,807,692
shares of Common Stock, for an aggregate of $23.5 million (the "Culligan
Investment") and (ii) a certain shareholder purchased 15,000 shares of 10%
Exchangeable Preferred Stock, six shares of Series C Preferred Stock and
Original Culligan
13
<PAGE>
Warrants to purchase an aggregate of 115,385 shares of Common Stock, for an
aggregate of $1.5 million. Holders of 10% Exchangeable Preferred Stock are
entitled to receive (i) dividends at the rate of 10% of its liquidation
preference and (ii) if such dividends are paid in kind, additional warrants to
purchase Common Stock for $13 per share (the "In-Kind Culligan Warrants" and,
together with the Original Culligan Warrants, the "Culligan Warrants").
On January 28, 1998, Packaged Ice completed a private offering (the
"Original 9 3/4% Note Offering") of $145 million aggregate principal amount of
9 3/4% Senior Notes due 2005 (the "Original 9 3/4% Senior Notes"). A portion
of the proceeds from the sale of the Original 9 3/4% Senior Notes was used to
repurchase all of the 12% Senior Notes. In connection with the repurchase of the
12% Senior Notes, the Company recorded an extraordinary charge of $17.4 million.
On April 30, 1998, the Company consummated the Reddy Acquisition. In
connection with funding this acquisition, the Company completed on such date (i)
a private offering (the "Subsequent 9 3/4% Note Offering" and, together with
the Original 9 3/4% Note Offering, the "9 3/4% Note Offerings") of $125
million aggregate principal amount of 9 3/4% Senior Notes due 2005 (the
"Subsequent 9 3/4% Senior Notes" and, together with the Original 9 3/4% Senior
Notes, the "9 3/4% Senior Notes") and (ii) a private offering (the "Ares
Equity Investment") of $40 million of 13% Exchangeable Preferred Stock (the
"13% Exchangeable Preferred Stock") and warrants to purchase 975,752 shares of
Common Stock for $0.01 per share to SV and Ares Leveraged Investment Fund, L.P.
("Ares"), a $1.2 billion investment partnership managed by Ares Management,
L.P. Certain of the principals of Ares Management L.P. were founding principals
and remain senior principals of the Apollo Investment Funds. On April 30, 1998,
the Company also entered into an $80 million five-year senior credit facility
(the "Credit Facility") with Antares Leveraged Capital Corporation consisting
of a revolving working capital facility of $15 million and a revolving
acquisition loan facility of $65 million. On such date the Company drew down $15
million under the Credit Facility. The Credit Facility replaced the Old Credit
Facility. The (i) Ares Equity Investment, (ii) 9 3/4% Note Offerings, (iii)
retirement of the 12% Senior Notes, (iv) the entry into the Credit Facility and
(v) the termination of the Old Credit Facility, are collectively referred to as
the "Recapitalization."
ACQUISITIONS
The Company made 33 acquisitions (the "1997 Company Acquisitions") in
1997 including the SWI, Mission and STPI Acquisitions. In addition, in 1997,
Reddy completed 21 acquisitions (the "1997 Reddy Acquisitions" and, together
with the 1997 Company Acquisitions, the "1997 Acquisitions"). From January 1,
1998 through June 30, 1998, the Company completed 19 acquisitions (the "1998
Completed Acquisitions -- Company"), including the Reddy Acquisition. In
addition, prior to its acquisition by the Company, Reddy acquired 7 companies in
1998 (the "1998 Completed Acquisitions -- Reddy" and, together with the 1998
Completed Acquisitions -- Company, the "1998 Completed Acquisitions").
Subsequent to June 30, 1998, the Company completed the Cassco Acquisition on
July 31, 1998.
GENERAL
The Company was incorporated as a Texas corporation and commenced
operations in August 1990. The Company's principal executive office is located
at 8572 Katy Freeway, Suite 101, Houston, Texas 77024. The Company's telephone
number at that address is (713) 464-9384, and its facsimile number is (713)
464-4681.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby are estimated to be approximately $115 million ($132
million if the Underwriters' over-allotment options are exercised in full) based
on an assumed public offering price of $ per share. The Company intends to
apply the proceeds as follows: (i) approximately $26 million to repurchase the
Company's 10% Exchangeable Preferred Stock and accrued dividends thereon; (ii)
approximately $67 million to pay amounts outstanding under the Credit Facility
and (iii) the remainder for general corporate purposes, including working
capital and possible acquisitions. To the extent the Underwriters'
over-allotment options are exercised, the proceeds thereof will be used to
redeem in part shares of 13% Exchangeable Preferred Stock for 109% of the
liquidation preference thereof. Pending such uses, the Company intends to invest
the net proceeds of the Offerings in short-term, investment grade, interest
bearing securities. See "Description of Capital Stock -- 10% Exchangeable
Preferred Stock."
Of the Company's indebtedness under the Credit Facility, which totaled
$79.6 million as of July 31, 1998, $15 million was borrowed on April 30, 1998 to
finance the Reddy Acquisition, $52 million was borrowed on July 31, 1998 to
finance the Cassco Acquisition and $12.6 million was borrowed for working
capital needs. The Credit Facility matures on March 31, 2003. Interest under the
Credit Facility accrues at the Company's option at a fluctuating rate equal to
(i) LIBOR plus 2.75% per annum or (ii) the "prime" rate plus 1.0%, with
interest rates subject to a pricing grid. See "Descripton of Capital
Stock -- 10% Mandatorily Redeemable Preferred Stock" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. In addition, the Company's Credit Facility, the 13% Exchangeable
Preferred Stock and, in some instances, the Indenture, prohibit the Company from
paying dividends on its Common Stock. Following the Offerings, the Company
intends to retain any future earnings to fund growth and does not anticipate
paying any cash dividends in the foreseeable future. Any future determination as
to the Company's dividend policy will be made at the discretion of the Company's
Board of Directors and will depend on a number of factors, including the
Company's future earnings, capital requirements, financial condition and future
prospects, restrictions on dividend payments pursuant to any of the Company's
credit or other agreements and such other factors as the Board of Directors may
deem relevant. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
15
<PAGE>
DILUTION
At June 30, 1998, after giving effect to the Cassco Acquisition and the
Conversions as if they had occurred at such date, the deficit in pro forma
combined net tangible book value of the Company would have been $207.7 million,
or approximately [$ ] per share. The deficit in pro forma combined net
tangible book value is equal to the aggregate net tangible book value (tangible
assets less total liabilities) of the Company after giving effect to the Cassco
Acquisition and the Conversions. The number of shares used for the per share
calculation includes the [4,922,541] shares outstanding prior to the Offerings
and [ ] shares related to the Conversions. After giving effect to the sale
by the Company of the [ ] shares offered hereby (asuming an initial offering
price of [$ ]per share and after deducting underwriting discounts and
commissions), the deficit in pro forma combined net tangible book value of the
Company would have been $92.7 million, or [ ] per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
the existing shareholders and an immediate dilution in net tangible book value
of $ per share to new investors purchasing shares of Common Stock in the
Offerings. The following table illustrates this per share dilution:
Assumed initial public offering
price.............................. $
---------
Net tangible book value per
common share at June 30,
1998........................... $
---------
Increase of net tangible book
value per common share
attributable to new
investors......................
---------
Pro forma combined net tangible book
value per common share after the
Offerings..........................
---------
Dilution of net tangible book value
per common share attributable to
new investors...................... $
---------
The following table summarizes, on a pro forma basis as of June 30, 1998,
after giving effect to the Offerings, the Cassco Acquisition and the
Conversions, the number of shares of Common Stock purchased from the Company,
the total consideration paid therefor and the average price per share paid by
the existing shareholders and by the new investors purchasing shares in the
Offerings:
<TABLE>
<CAPTION>
SHARES OF COMMON TOTAL
STOCK ACQUIRED CONSIDERATION(1) AVERAGE
------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------- ------- -------- ------- ---------
<S> <C> <C>
Existing shareholders................ % $ % $
New investors........................
-------- ------- -------- ------- ---------
Total........................... 100% $ 100% $
======== ======= ======== ======= =========
</TABLE>
- ------------
(1) The computations in the table set forth above exclude (i) 635,811 shares of
Common Stock issuable upon exercise of currently exercisable stock options
granted to officers, employees and consultants at a weighted average
exercise price of $12.48 per share, (ii) 1,871,552 shares of Common Stock
issuable upon exercise of warrants at an exercise price of $.01 per share,
(iii) 1,998,921 shares of Common Stock issuable upon the exercise of the
Culligan Warrants at an exercise price of $13 per share and (iv) 100,000
shares of Common Stock issuable upon the exercise of the SV Warrants at an
exercise price of $14 per share. The amount of Common Stock and price
thereof held by existing shareholders includes shares of Common Stock to be
issued at the closing of the Offerings in the Conversions. To the extent any
of the outstanding options or warrants is exercised, there will be further
dilution to holders of Common Stock. See "Management -- Stock Option
Plans" and "Description of Capital Stock -- Warrants."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as of
June 30, 1998 and (ii) on a pro forma as adjusted basis to give effect to the
Cassco Acquisition and the Offerings and the application of the estimated net
proceeds therefrom.
JUNE 30, 1998
--------------------------
PRO FORMA AS
ACTUAL ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
Cash and equivalents................. $ 7,311 $ 21,991
======== ==============
Long-term obligations, less current
portion:
Credit Facility................. $ 15,000 $--
9 3/4% Senior Notes............. 270,000 270,000
Other indebtedness.............. 787 1,695
Debt discount................... (263) (263)
-------- --------------
Total long-term
obligations............. 285,524 271,432
-------- --------------
Preferred stock:
Series A Convertible Preferred
Stock, $0.01 par value, 450,000
shares authorized, 450,000
shares issued and
outstanding.................... 2,497 --
Series B Convertible Preferred
Stock, $0.01 par value, 200,000
shares authorized, 124,831
shares issued and
outstanding.................... 726 --
10% Exchangeable Preferred
Stock, 500,000 shares
authorized, 259,860 shares
issued and outstanding......... 26,438 --
13% Exchangeable Preferred
Stock, 800,000 shares
authorized,
400,000 shares issued and
outstanding and 325,000 shares
issued
and outstanding, pro forma as
adjusted....................... 36,006 29,255
-------- --------------
Total preferred stock...... 65,667 29,255
-------- --------------
Common stock with put redemption,
420,000 shares outstanding(2)...... 1,972 --
-------- --------------
Shareholders' equity:
Common Stock, $.01 par value,
50,000,000 shares authorized,
4,922,541
shares issued and outstanding;
and shares issued and
outstanding, pro forma as
adjusted(3).................... 49 59
Additional paid-in capital...... 41,322 168,258
Treasury stock (298,231 shares,
at cost)....................... (1,491) (1,491)
Accumulated deficit............. (32,147) (32,147)
-------- --------------
Total shareholders'
equity.................. 7,733 134,679
-------- --------------
Total
capitalization..... $360,896 $435,366
======== ==============
- ------------
(1) Gives effect to (i) the Cassco Acquisition, (ii) the Offerings and the
application of the estimated net proceeds therefrom and (iii) the
Conversions, as if they occurred on June 30, 1998. See "Use of Proceeds."
(2) On completion of the Offerings, the put option will terminate with respect
to the shares and they will be reclassified as Common Stock.
(3) Excludes (i) 621,111 shares of Common Stock issuable upon exercise of stock
options granted to officers, employees and consultants at a weighted average
exercise price of $12.48 per share, (ii) 1,871,552 shares of Common Stock
issuable upon exercise of warrants at an exercise price of $.01 per share
(iii) 1,998,921 shares of Common Stock issuable upon exercise of the
Culligan Warrants at an exercise price of $13 per share and (iv) 100,000
shares of Common Stock issuable upon exercise of the SV Warrants at an
exercise price of $14 per share.
17
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed statement of operations for the
year ended December 31, 1997, gives effect to the (i) 1997 Acquisitions, (ii)
1998 Completed Acquisitions, (iii) Cassco Acquisition, (iv) Recapitalization,
(v) Culligan Investment, (vi) Offerings and the application of the net proceeds
therefrom and (vii) Conversions, as if they had occurred on January 1, 1997. The
unaudited pro forma combined statement of operations for the year ended December
31, 1997 is derived from (a) the audited historical financial statements of
Packaged Ice and Reddy for such year, (b) the unaudited historical financial
statements of Cassco for such year and (c) the unaudited historical financial
statements of the 1997 Acquisitions and the 1998 Completed Acquisitions
(excluding Reddy, and together the "Acquisitions"), of which 76 are
insignificant, for the applicable periods prior to their respective acquisition
dates.
The unaudited pro forma combined condensed statement of operations for the
six months ended June 30, 1998, gives effect to the (i) 1998 Completed
Acquisitions, (ii) Cassco Acquisition, (iii) Recapitalization, (iv) Offerings
and the application of the net proceeds therefrom and (v) Conversions, as if
they had occurred on January 1, 1997. The unaudited pro forma combined condensed
statement of operations for the six months ended June 30, 1998, is derived from
(a) the unaudited historical financial statements of Packaged Ice and Cassco for
such period, (b) the unaudited historical financial statements of Reddy for the
period prior to acquisition and (c) the unaudited financial statements of the
companies purchased in the 1998 Completed Acquisitions (excluding Reddy, the
"1998 Acquisitions"), of which 25 are insignificant, for the applicable
periods prior to their respective acquisition dates.
The unaudited pro forma combined condensed balance sheet as of June 30,
1998, gives effect to (i) the Cassco Acquisition, (ii) the Offerings and the
application of the net proceeds therefrom and (iii) the Conversions, as if they
had occurred on June 30, 1998.
The pro forma adjustments which give effect to the various events described
above are based upon currently available information and upon certain
assumptions that management believes are reasonable. The Company has accounted
for all acquisitions under the purchase method and the resulting assets acquired
and liabilities assumed are recorded at their estimated fair market values at
the respective dates 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. The
Company is in the process of evaluating the allocation of purchase price to
other intangible assets such as customer lists, tradenames and trademarks in
connection with the 1998 acquisitions of Reddy and Cassco. The Company expects
to finalize the allocation during the fourth quarter of 1998 and does not
believe the impact of the final allocation will differ materially from the
preliminary estimates. See "Risk Factors -- Risk of Acquisitions."
The unaudited pro forma combined condensed financial statements do not
purport to be indicative of the results of operations that would 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 integrate the operations of the companies the Company acquires with
its current business successfully and several other factors, many of which are
beyond the Company's control. See "Risk Factors."
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, Reddy and Cassco, including notes thereto,
included elsewhere herein.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL HISTORICAL AND OFFERING PRO FORMA
PACKAGED ICE CASSCO ADJUSTMENTS AS ADJUSTED
------------ ----------- ------------ -----------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and equivalents.................. $ 7,311 $ 118 $ 14,562(a) $ 21,991
Accounts and notes receivable......... 26,082 5,183 (958)(b) 30,307
Inventories........................... 7,664 1,213 8,877
Prepaid expenses and other assets..... 1,478 516 (246)(b) 1,748
------------ ----------- ------------ -----------
Total current assets............... 42,535 7,030 13,358 62,923
Property, net........................... 140,567 23,878 164,445
Other assets, net....................... 13,733 385 14,118
Goodwill................................ 195,723 -- 31,693(b) 227,416
------------ ----------- ------------ -----------
Total assets....................... $392,558 $31,293 $ 45,051 $ 468,902
============ =========== ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations........................ $ 76 $ 798 $ (530)(b) $ 344
Accounts payable...................... 9,644 1,129 10,773
Accrued expenses...................... 21,942 477 22,419
------------ ----------- ------------ -----------
Total current liabilities.......... 31,662 2,404 (530) 33,536
Long-term obligations:
Credit Facility....................... 15,000 -- (15,000)(a)
9 3/4% Senior Notes................... 270,000 1,976 (1,976)(b) 270,000
Other indebtedness.................... 787 908 1,695
Debt discount......................... (263) -- (263)(d)
------------ ----------- ------------ -----------
Total long-term obligations........ 285,524 2,884 (16,976) 271,432
Deferred taxes.......................... -- 1,544 (1,544)(b) --
Mandatorily redeemable preferred stock:
10% exchangeable................... 26,438 (26,438)(a) --
13% exchangeable................... 36,006 (6,751)(d) 29,255
Preferred stock with put redemption
option:
Series A.............................. 2,497 -- (2,497)(c) --
Series B.............................. 726 -- (726)(c) --
Common stock with put redemption
option................................ 1,972 -- (1,972)(c) --
Shareholders' equity:
Common stock.......................... 49 70 (a)(d) 59
10(c)
(70)(b)
Additional paid-in capital............ 41,322 10,614 115,000(a) 168,258
5,185(c)
(10,614)(b)
6,751(d)
Treasury stock........................ (1,491) -- (1,491)
Retained earnings (accumulated
deficit)........................... (32,147) 13,777 (13,777)(b) (32,147)
------------ ----------- ------------ -----------
Total shareholders' equity......... 7,733 24,461 102,485(e) 134,679
------------ ----------- ------------ -----------
Total liabilities and
shareholders' equity....... $392,558 $31,293 $ 45,051 $ 468,902
============ =========== ============ ===========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL HISTORICAL HISTORICAL AND OFFERING PRO FORMA
PACKAGED ICE REDDY CASSCO ACQUISITIONS ADJUSTMENTS AS ADJUSTED
------------ ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 28,981 $ 66,449 $ 28,675 $ 78,771 $202,876
Cost of sales........................ 18,724 41,713 19,547 53,211 133,195
------------ ---------- ---------- ------------ ------------ ------------
Gross profit......................... 10,257 24,736 9,128 25,560 69,681
Operating expenses................... 7,636 10,952 705 8,469 $ (155)(a) 24,919
(1,545)(b)
(446)(c)
(72)(d)
(499)(e)
(126)(f)
Depreciation & amortization.......... 5,130 6,070 3,062 6,719 5,311(g) 26,292
Interest expense..................... 6,585 7,168 217 1,910 11,888(h) 27,768
Other income (expense)............... 655 580 (390) 302 (155)(a) 992
------------ ---------- ---------- ------------ ------------ ------------
Income (loss) before taxes........... (8,439) 1,126 4,754 8,764 (14,511) (8,306)
Income taxes......................... -- 441 1,788 -- (2,229)(j) --
------------ ---------- ---------- ------------ ------------ ------------
Net income (loss) before preferred
dividends.......................... (8,439) 685 2,966 8,764 (12,282) (8,306)
Preferred dividends.................. 198 -- -- -- 4,027(i) 4,225
------------ ---------- ---------- ------------ ------------ ------------
Net income (loss) to common
shareholders....................... $ (8,637) $ 685 $ 2,966 $ 8,764 $(16,309) $(12,531)
============ ========== ========== ============ ============ ============
Net loss per share to common
shareholders....................... $ (2.40) $ ( .)
============ ============
Weighted average number of common
shares outstanding................. 3,600,109
============ ============ ============
</TABLE>
20
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
HISTORICAL REDDY HISTORICAL 1998 AND OFFERING
PACKAGED ICE (PRE-ACQUISITION) CASSCO ACQUISITIONS ADJUSTMENTS
------------ ----------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues............................. $ 59,416 $17,858 $ 12,886 $ 4,968
Cost of sales........................ 35,474 13,871 9,420 1,759
------------ -------- ---------- ------------ --------------
Gross profit......................... 23,942 3,987 3,466 3,209
Operating expenses................... 11,763 4,179 472 2,700
Depreciation & amortization.......... 6,823 3,089 1,593 423 $ 1,762(g)
Interest expense..................... 8,727 4,376 90 281 410(h)
Other income (expense)............... 146 218 (273) 108
------------ -------- ---------- ------------ --------------
Income (loss) before taxes........... (3,225) (7,439) 1,038 (87) (2,172)
Income taxes......................... -- -- 394 -- (394)(j)
------------ -------- ---------- ------------ --------------
Net income (loss) before
extraordinary item and preferred
dividends.......................... (3,225) (7,439) 644 (87) (1,778)
------------ -------- ---------- ------------ --------------
Preferred dividends.................. 2,008 -- -- -- 104(i)
------------ -------- ---------- ------------ --------------
Loss before extraordinary item
available to common shareholders... $ (5,233) $(7,439) $ 644 $ (87) $ (1,882)
============ ======== ========== ============ ==============
Loss per share before extraordinary
item available to common
shareholders....................... $ (1.11)
============
Weighted average number of common
shares outstanding................. 4,721,536
============ ==============
</TABLE>
PRO FORMA
AS ADJUSTED
-------------
Revenues............................. $ 95,128
Cost of sales........................ 60,524
-------------
Gross profit......................... 34,604
Operating expenses................... 19,114
Depreciation & amortization.......... 13,690
Interest expense..................... 13,884
Other income (expense)............... 199
-------------
Income (loss) before taxes........... (11,885)
Income taxes......................... --
-------------
Net income (loss) before
extraordinary item and preferred
dividends.......................... (11,885)
-------------
Preferred dividends.................. 2,112
-------------
Loss before extraordinary item
available to common shareholders... $ (13,997)
=============
Loss per share before extraordinary
item available to common
shareholders....................... $ ( .)
=============
Weighted average number of common
shares outstanding.................
=============
See notes to unaudited pro forma combined condensed financial statements.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Pro forma sources of cash from the Offerings and to fund the Cassco
Acquisition are calculated as follows:
Proceeds from the Offerings (net of
offering costs).................... $ 115,000
Borrowings from Credit Facility for
Cassco Acquisition................. 52,000
----------
Total proceeds.................. 167,000
Less cash used for:
Redemption of 10% Exchangeable
Preferred Stock (includes $452 of
accrued dividends)................. 26,438
Cassco Acquisition.............. 59,000
Repayment of Credit Facility.... 67,000
----------
Total........................... 152,438
----------
Pro forma cash proceeds.............. $ 14,562
==========
The Offering assumes gross proceeds of $125,000.
(b) The excess purchase price over the allocation of the fair value of the
net assets of Cassco will be recorded as goodwill, which is calculated
and based on the following assumptions:
Cassco purchase price................ $ 59,000
Allocation of net assets:
Historical net assets (equity)
of Cassco...................... 24,461
Historical assets of Cassco not
acquired....................... (1,204)
Historical liabilities of Cassco
not assumed.................... 4,050
---------
Total...................... 27,307
---------
Goodwill............................. $ 31,693
=========
The Company has not completed an assessment of the fair value of the net
assets to be acquired for the purpose of allocating the purchase price. To the
extent that such an assessment indicates the fair value of the fixed assets is
in excess of net book value, this excess would be allocated to fixed assets or
other intangible assets and would reduce the goodwill calculated above. Assuming
a weighted average depreciable life for fixed assets of five years, every $500
allocated to fixed assets rather than goodwill would increase depreciation and
amortization expense for the pro forma year ended December 31, 1997 and the
six-months ended June 30, 1998 by $87 and $44, respectively.
(c) Reflects the conversion of the 450,000 shares Series A Convertible
Preferred Stock with a put redemption option and 124,831 shares Series
B Convertible Preferred Stock with a put redemption option into
574,831 shares of Common Stock. In conjunction with the Offerings, the
registration rights underlying the put redemption feature on the
420,000 shares of Common Stock with a put redemption option were
satisfied.
(d) Reflects the conversion of $7,500 of 13% Exchangeable Preferred Stock
plus accrued dividends payable on such preferred stock owned by SV
into Common Stock at 91.75% of the Price to Public on the cover page
of this Prospectus.
(e) Does not reflect $7,031 of additional pro forma undeclared preferred
dividends and $1,713 of additional pro forma accretion on the $40,000
13% Exchangeable Preferred Stock as if the Ares Equity Investment had
occurred on January 1, 1997.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(a) Elimination of intercompany revenues/expenses with respect to
equipment leasing and service agreements between Packaged Ice and
certain acquired companies purchased during 1997.
(b) The decrease in operating expenses reflects the elimination or net
reduction of salaries and related benefits of owners and officers of
certain companies acquired by the Company, whose positions and
salaries have either been eliminated or who have taken positions at
lower salaries pursuant to contractual agreements resulting from the
acquisitions.
(c) Elimination of costs associated with operations not acquired.
(d) Elimination of lease costs related for facilities not contemplated
under the respective acquisition agreements.
(e) As a result of the acquisitions, the Company is no longer required to
pay management fees to the predecessor parent of the acquired
entities.
(f) Reduction of defined contribution plan matching costs to conform with
the Company's existing benefit plans.
(g) The excess of total purchase price for the 1997 Acquisitions, the 1998
Completed Acquisitions and the Cassco Acquisition over the allocation
of fair value to the net assets acquired or to be acquired has been
recorded as goodwill, which is calculated and amortized based on the
following assumptions:
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
Value of common stock
consideration........................ $ 23,362 $ 23,362
Cash consideration................... 330,355 330,355
------------ ----------
Total purchase price....... 353,717 353,717
Total net assets acquired............ 124,790 124,790
------------ ----------
Goodwill............................. 228,927 228,927
============ ==========
Calculated amortization, 40
year estimated life........ 5,723 2,862
Less: historical
amortization............... (412) (1,100)
------------ ----------
Adjustment to
amortization............... $ 5,311 $ 1,762
============ ==========
(h) Interest expense adjustments are as follows:
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ----------
9 3/4% Senior Notes.................. $270,000 $270,000
============ ==========
Pro forma interest expense on 9 3/4%
Senior Notes....................... $ 26,325 $ 13,163
Less: Packaged Ice historical
interest expense..................... (6,585) (8,727)
Reddy historical interest
expense......................... (7,168) (4,376)
Cassco historical interest
expense......................... (217) (90)
Acquisitions historical interest
expense....................... (1,910) (281)
Plus: Additional interest on
amortization of debt issue costs:
Total debt issue costs of
$9,820
Calculated amortization, 7
year life.................. 1,403 701
Amortization of discount on
9 3/4% Senior Notes:
Total discount of $280
Calculated amortization, 7
year life.................. 40 20
------------ ----------
Net adjustment to interest expense... $ 11,888 $ 410
============ ==========
(i) Dividends on the $32,500 13% Exchangeable Preferred Stock and
elimination of dividends on the $25,000 10% Exchangeable Preferred
Stock.
(j) The elimination of Reddy's and Cassco's income tax expense assumes
that the combined Company was in a loss position, therefore the
Company would not incur income tax expense.
23
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data derived
from the audited financial statements of Packaged Ice for each of the five years
in the period ended December 31, 1997 and contains selected financial data
derived from the unaudited financial statements of Packaged Ice for the six
months ended June 30, 1997 and 1998. The unaudited financial statements of
Packaged Ice as of and for the six months ended June 30, 1997 and 1998 reflect
all adjustments necessary in the opinion of management (consisting only of
normal recurring adjustments) for a fair presentation of such financial data.
The following information should be read in conjunction with the Company's
financial statements, including the notes thereto, "The Company,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements, including the
Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
----------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................... $ 155 $ 784 $ 2,830 $ 4,427 $ 28,981 $ 8,124 $ 59,416
Cost of sales...................... 56 352 1,251 2,035 18,724 4,703 35,474
--------- --------- --------- --------- --------- --------- ----------
Gross profit....................... 99 432 1,579 2,392 10,257 3,421 23,942
Operating expenses................. 431 974 1,515 1,981 7,636 2,182 11,763
Depreciation and amortization...... 48 224 751 1,456 5,130 1,826 6,823
Interest expense................... (11) (25) (76) (130) (6,585) (1,519) (8,727)
Other income....................... -- 69 75 185 655 408 146
Extraordinary loss on
refinancing........................ -- -- -- -- -- -- (17,387)
Net loss........................... $ (391) $ (722) $ (688) $ (990) $ (8,439) $ (1,698) $ (20,612)
========= ========= ========= ========= ========= ========= ==========
Net loss to common shareholders.... $ (391) $ (722) $ (688) $ (990) $ (8,637) $ (1,698) $ (22,620)
========= ========= ========= ========= ========= ========= ==========
LOSS PER SHARE OF COMMON STOCK --
BASIC AND DILUTED:
Loss before extraordinary item
available to common
shareholders..................... $ (0.25) $ (0.28) $ (0.26) $ (0.35) $ (2.40) $ (0.53) $ (1.11)
Extraordinary item................. -- -- -- -- -- -- (3.68)
--------- --------- --------- --------- --------- --------- ----------
Loss to common shareholders........ $ (0.25) $ (0.28) $ (0.26) $ (0.35) $ (2.40) $ (0.53) $ (4.79)
========= ========= ========= ========= ========= ========= ==========
OTHER FINANCIAL DATA:
Cash flows -- operating
activities....................... $ (289) $ (647) $ 148 $ 1,094 $ (3,292) $ (1,345) $ (2,532)
Cash flows -- investing
activities....................... (292) (3,497) (2,961) (5,925) (61,541) (12,402) (240,346)
Cash flows -- financing
activities....................... 492 4,897 3,034 3,968 79,488 29,430 235,364
EBITDA(1).......................... (332) (473) 139 596 3,276 1,647 12,325
Ratio of earnings to fixed
charges(3)......................... N/A N/A N/A N/A N/A N/A N/A
Revenue growth..................... 434.5% 405.8% 261.0% 56.4% 554.6% 281.8% 631.4%
BALANCE SHEET DATA:
Cash and equivalents............... $ 58 $ 812 $ 1,033 $ 170 $ 14,825 $ 15,852 7,311
Working capital (deficiency)....... (137) 639 696 (1,228) 16,553 15,656 10,874
Total assets....................... 618 5,513 8,050 11,523 122,300 71,703 392,558
Total long-term obligations, net of
discount........................... 125 566 211 3,582 67,501 44,725 285,524
13% Exchangeable Preferred Stock... -- -- -- -- -- -- 36,006
10% Exchangeable Preferred Stock... -- -- -- -- 25,199 -- 26,438
Convertible Preferred Stock with
put redemption option(2)......... -- -- 2,497 2,497 3,223 3,223 3,223
Common Stock with put redemption
option(2)........................ -- -- 1,972 1,972 1,972 1,972 1,972
Total shareholders' equity......... 247 4,427 2,582 1,597 15,819 16,381 7,733
</TABLE>
- ------------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. The Company has included EBITDA (which is not a measure of
financial performance under GAAP) because it understands that EBITDA is one
measure used by certain investors to determine a company's historical
ability to service its indebtedness. EBITDA should not be considered by an
investor as an alternative to net income, as an indicator of the Company's
operating performance or as an alternative to cash flow as a measure of
liquidity.
(2) The put redemption option will expire at the closing of the Offerings and
such stock will be reclassified as Common Stock.
(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 five years ended December 31, 1997 or the six months
ended June 30, 1998 and 1997, to cover fixed charges. Thge deficiencies were
$391,000 in 1993, $722,000 in 1994, $688,000 in 1995, $990,000 in 1996,
$8,439,000 in 1997, and $3,224,000 and $1,698,000 for the six months ended
June 30, 1998 and 1997, respectively.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED
HISTORICAL FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
INCLUDING NOTES THERETO AND OTHER INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
The Company is the largest manufacturer and distributor of packaged ice in
the United States and currently serves over 70,000 customer locations in 26
states, with Texas, Arizona, California and Florida constituting over 62% of the
Company's sales. The Company services the significant segments of the ice
industry, including supermarket and convenience store retailers, restaurants,
commercial users and the agricultural sector.
The Company derives its revenues primarily from the sale of packaged ice.
Prices for packaged ice have historically been stable with some price variation
between markets based on geography, weather and the customer base. Management
believes that the Company's geographic and customer diversification insulate it
from both price and demand fluctuations due to regional weather conditions. The
Company also derives revenue from other goods and services including cold
storage rental, the manufacturing and sale of bottled water and institutional
ice machine leasing.
The Company operates predominantly in one business segment, the
manufacturing and sale of packaged ice products. These revenues are derived from
the sale of packaged ice through traditional delivery methods, whereby ice is
manufactured, packaged and stored at a central facility and transported to the
retail location when needed, and through its proprietary Ice Factories which
automatically manufacture, package and store ice at the retail location. Such
combination of distribution methods (i) allows the Company to achieve higher
operating margins due to reduced production and distribution costs associated
with the Ice Factories, (ii) provides the Company with a delivery system, in the
Ice Factories, designed to supply high volume locations and capable of
cost-effectively servicing a larger geographical market than the Company's
traditional ice manufacturing facilities and (iii) provides the Company with an
ability to redistribute its traditional ice production to additional customers
and to supplement Ice Factory production during seasonal peak demand.
The Company's cost of sales includes costs associated with both traditional
ice delivery and the Ice Factories. 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 Ice
Factory, ice storage costs and general operating utility costs are eliminated.
The Company's cost of sales also includes the cost of plastic bags, which is
incurred by both the traditional ice manufacturing plants and the Ice Factories.
The cost of the bag used in the Ice Factory is substantially higher than that
used in traditional delivery due to special components and greater thickness.
The Ice Factory eliminates certain costs related to production and distribution
but does require customer service representatives and machine technicians. In
the aggregate, labor, energy and transportation costs associated with the Ice
Factory are substantially lower than such costs associated with traditional ice
manufacturing.
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 for sales
from traditional plants and Ice Factories are similar. These operating expenses
are typically higher when the Company enters new markets, in which it intends to
place Ice Factories, as new marketing programs, accounting systems and office
facilities must be established.
The Company has grown primarily through the implementation of its
consolidation strategy within the highly fragmented packaged ice industry where
it has completed 53 acquisitions since April 1997 for an aggregate purchase
price of $353.7 million and, to a lesser extent, through the installation of Ice
Factories.
25
<PAGE>
The Company's acquisition program has resulted in the recordation of $228.9
million of goodwill and other intangible assets on the Company's books which
will be amortized over a 40-year period. This program has been financed almost
exclusively through the incurrence of debt and the issuance of capital stock. In
connection with the Recapitalization, the Company recorded an extraordinary
charge against earnings of $17.4 million in the first quarter of 1998.
For a more complete discussion of the Company's capital and acquisition
transactions, see "The Company," "Capitalization" and "Description of
Capital Stock."
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, selected
operating data and supplemental data expressed as a percentage of total revenues
at the end of each period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 44.2 46.0 64.6 57.9 59.7
Gross profit....................... 55.8 54.0 35.4 42.1 40.3
Operating expenses(1).............. 53.5 44.7 26.3 26.9 19.8
Depreciation and amortization...... 26.5 32.9 17.7 22.4 11.5
Interest expense................... 2.7 2.9 22.7 18.7 14.7
Other income....................... 2.7 4.2 2.3 5.0 0.3
Loss before extraordinary item and
preferred dividends.............. (24.2) (22.3) (29.0) (20.9) (5.4)
</TABLE>
- ------------
(1) Excludes depreciation and amortization.
HISTORICAL RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased $51.3 million from $8.1 million in the six
months ended June 30, 1997 to $59.4 million in the six months ended June 30,
1998. Revenues increased $48.8 million as a result of revenue contributed by the
acquisitions of traditional ice companies and $2.5 million due to the placement
of additional Ice Factories since June 30, 1997. The unprecedented hot, dry
weather during the second quarter of 1998 throughout the southeastern portion of
the United States and Texas has resulted in much greater sales than anticipated,
and has more than offset the shortfall of sales during the first quarter of
1998.
COST OF SALES. Cost of sales increased $30.8 million from $4.7 million in
the six months ended June 30, 1997 to $35.5 million in the six months ended June
30, 1998. This increase was primarily due to acquisitions of traditional ice
companies. The cost of sales as a percentage of revenues increased from 57.9%
for the six months ended June 30, 1997 to 59.7% for the six months ended June
30, 1998. This increase is a reflection of the greater proportion of sales from
traditional ice, in which cost of sales is a larger percentage of revenues. The
Company anticipates that on an annual basis, the cost of sales as a percentage
of revenues will be consistent with the 1997 historical amounts.
GROSS PROFIT. Gross profit increased $20.5 million from $3.4 million in
the six months ended June 30, 1997 to $23.9 million in the six months ended June
30, 1998. As a percentage of revenues, gross profit decreased from 42.1% at June
30, 1997 to 40.3% at June 30, 1998. Gross margins decreased because of the
higher cost of sales reflected in the traditional ice businesses the Company
acquired. Traditional ice companies experience significantly higher costs of
sales than the lower costs of on-site manufacturing and delivery associated with
the Ice Factories.
26
<PAGE>
OPERATING EXPENSES. Operating expenses increased $9.6 million from $2.2
million in the six months ended June 30, 1997 to $11.8 million in the six months
ended June 30, 1998. This increase was primarily due to acquisitions of
traditional ice companies. As a percentage of revenues, operating expenses
decreased from 26.9% at June 30, 1997 to 19.8% at June 30, 1998. This decrease
was due to greater efficiencies realized by the Company as its general and
administrative expenses were spread over the larger base of revenues resulting
from the Company's acquisitions of traditional ice businesses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$5.0 million from $1.8 million in the six months ended June 30, 1997 to $6.8
million in the six months ended June 30, 1998. As a percentage of revenues,
depreciation and amortization decreased from 22.4% to 11.5%. This decrease was
due primarily to the lower historical depreciation and amortization percentages
of traditional ice businesses the Company has acquired. These percentages
reflect the longer estimated useful lives of traditional ice plant and equipment
as compared to Ice Factories.
INTEREST EXPENSE. Interest expense increased $7.2 million from $1.5
million in the six months ended June 30, 1997 to $8.7 million in the six months
ended June 30, 1998. This increase was a result of higher levels of the
Company's debt outstanding during the six months ended June 30, 1998, resulting
from the debt financing used in connection with the closing of acquisitions the
Company made in 1998.
NET LOSS BEFORE EXTRAORDINARY ITEM. Net loss increased $1.5 million from
$1.7 million in the six months ended June 30, 1997 to $3.2 million in the six
months ended June 30, 1998. The increase in the loss was due to the increases in
depreciation and amortization and interest expense more than offsetting the
increased gross profit from the acquisitions of traditional ice companies.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
REVENUES. Revenues increased $24.6 million from $4.4 million for the year
ended December 31, 1996 to $29.0 million for the year ended December 31, 1997.
Revenues increased $2.7 million due to the placement of additional Ice Factories
(which was the only method of distribution prior to the SWI, Mission and STPI
Acquisitions in April 1997) and $21.9 million as a result of revenues
contributed by acquisitions the Company made in 1997.
COST OF SALES. Cost of sales increased $16.7 million from $2.0 million for
the year ended December 31, 1996 to $18.7 million for the year ended December
31, 1997. This increase was due to the closing of acquisitions the Company made
in 1997. The cost of sales as a percentage of revenues increased from 46.0% in
1996 to 64.6% in 1997. This increase reflects the higher cost associated with
traditional ice production as compared to the Ice Factory.
GROSS PROFIT. Gross profit increased $7.9 million from $2.4 million for
the year ended December 31, 1996 to $10.3 million for the year ended December
31, 1997. Acquisitions the Company completed in 1997 contributed $7.2 million of
the increase in gross profit. As a percentage of revenues, gross profit
decreased from 54.0% at December 31, 1996 to 35.4% at December 31, 1997. Gross
margins decreased because of the higher cost of sales reflected in the
traditional ice businesses acquired in 1997. Traditional ice companies have
higher costs of sales than the costs associated with the on-site manufacturing
and delivery of the Ice Factory.
OPERATING EXPENSES. Operating expenses, exclusive of depreciation and
amortization, increased $5.6 million from $2.0 million for the year ended
December 31, 1996 to $7.6 million for the year ended December 31, 1997. As a
percentage of revenues, operating expenses decreased from 44.7% at December 31,
1996 to 26.3% at December 31, 1997. This decrease was due to greater
efficiencies realized by Packaged Ice as its general and administrative expenses
were spread over the larger base of revenues resulting from the acquisitions the
Company completed in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$3.6 million from $1.5 million for the year ended December 31, 1996 to $5.1
million for the year ended December 31, 1997. As a percentage of revenues,
depreciation and amortization decreased from 32.9% to 17.7%. This decrease was
due primarily to the lower historical depreciation and amortization percentages
resulting from the acquisitions the Company completed in 1997. These percentages
reflect the longer estimated useful lives of
27
<PAGE>
traditional ice plant and equipment as compared to Ice Factories. This decrease
more than offset the increase related to the amortization of goodwill resulting
from such acquisitions.
INTEREST EXPENSE. Interest expense increased $6.5 million from $0.1
million for the year ended December 31, 1996 to $6.6 million for the year ended
December 31, 1997. This increase was a result of higher levels of debt
outstanding during 1997.
NET LOSS. Net loss increased $7.4 million from $1.0 million for the year
ended December 31, 1996 to $8.4 million for the year ended December 31, 1997.
This increase in loss is due to the increases in depreciation and amortization
related to the acquisitions closed in 1997 and interest expense related to the
increased level of debt necessary to close such acquisitions.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
REVENUES. Revenues increased $1.6 million 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 a
master lease arrangement with SWI.
COST OF SALES. Cost of sales increased $0.7 million from $1.3 million for
the year ended December 31, 1995 to $2.0 million for the year ended December 31,
1996. This increase was due principally to the increased number of Ice Factories
in service (from 417 at December 31, 1995 to 658 at December 31, 1996).
GROSS PROFIT. Gross profit increased $0.8 million 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 from 55.8% in fiscal
1995 to 54.0% in fiscal 1996. Gross margins decreased primarily as a result of
purchases of manufactured ice bought from outside vendors to meet increased
demand due to unseasonably hot weather in the Company's primary markets.
Purchases of manufactured ice as a percentage of total revenues increased from
0.6% in fiscal 1995 to 1.9% in fiscal 1996.
OPERATING EXPENSES. Operating expenses increased $0.5 million 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
from 53.5% in fiscal 1995 to 44.7% in fiscal 1996. This decrease was due
primarily to salary-related expenses that, as a percentage of revenues,
decreased from 25.4% in fiscal 1995 to 21.0% in fiscal 1996 as a result of
greater efficiencies realized by the Company from its consolidation of its sales
force in its primary markets.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$0.7 million 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 principally for newly installed Ice
Factories from $2.7 million in fiscal 1995 to $5.7 million in fiscal 1996.
INTEREST EXPENSE. Interest expense increased $0.05 million 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 the Company borrowing $3.5 million from its prior 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.
NET LOSS. Net loss increased $0.3 million from $0.7 million for the year
ended December 31, 1995 to $1.0 million for the year ended December 31, 1996.
This increase in loss is due to increased depreciation and amortization as a
result of the aggressive Ice Factory installation program.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from the sale of packaged ice through
traditional delivery methods, whereby ice is manufactured, packaged and stored
at a central facility and transported to retail locations when needed, and
through Ice Factories, which manufacture, package and store ice in retail
locations. The Company's primary uses of cash are (i) cost of sales, (ii)
operating expenses, (iii) debt service, (iv) capital
28
<PAGE>
expenditures related to acquiring additional Ice Factories and replacing and
modernizing the Company's other capital equipment and (v) acquisitions.
For the six months ended June 30, 1998, net cash used by operating
activities was $2.5 million and net cash used in investing activities was $240.4
million, principally for acquisitions of traditional ice companies ($233.9
million) and property additions ($10.8 million). Net cash provided by financing
activities was $235.4 million, principally from proceeds of the 9 3/4% Senior
Notes net of refinancing the existing 12% Senior Notes and the related costs
($181.1 million), the net proceeds from issuance of stock ($39.2 million) and
the net increase in borrowings under the Credit Facility ($15 million). The
resulting change in cash and equivalents was a decrease of $7.5 million.
For the six months ended June 30, 1997, net cash used by operating
activities was $1.3 million and net cash used by investing activities was $12.4
million, principally for acquisitions of traditional ice companies ($8.4
million) and property additions ($3.5 million). Net cash provided by financing
activities was $29.4 million, principally from net proceeds from the issuance of
the Original 12% Senior Notes ($45.0 million) which was partially offset by
repayment of debt ($12.1 million). The net resulting change to cash and cash
equivalents was an increase of $15.7 million.
The Company intends to pursue a growth oriented strategy, which is to be
implemented through an aggressive acquisition strategy, internal growth, margin
enhancement and expansion into related businesses. The Company is currently
evaluating certain business acquisition and expansion opportunities, but it
currently has no contracts or capital commitments relating to any potential
acquisitions or developments. See "Risk Factors -- Risk of Acquisitions."
The Company at June 30, 1998 had approximately $285 million of debt
outstanding as follows: (i) $270 million of 9 3/4% Senior Notes due 2005 and
(ii) $15 million outstanding under the Company's $80 million Credit Facility,
which, at the Company's option, bears interest at LIBOR plus 2.75% or the
"prime" rate plus 1.00%, with interest rates subject to a pricing grid. The
amounts under the revolving acquisition loan portion of the Credit Facility will
be due beginning June 30, 2000 in 12 equal quarterly installments. The Credit
Facility contains financial covenants which include limitations on capital
expenditures and the maintenance of minimum levels of ratios of EBITDA to fixed
charges, interest coverage and leverage as defined in the agreements and is
secured by all of the Company's assets and the capital stock of all of the
Company's significant subsidiaries. After the Offerings, the Company will also
have two classes of preferred stock outstanding as follows: (a) 100 shares of
$10 per share in liquidation preference of Series C Preferred Stock and (b)
325,000 shares of $100 per share in liquidation preference of 13% Exchangeable
Preferred Stock, which may be optionally redeemed for $113 per share, subject to
certain adjustments. See "Risk Factors -- Substantial Leverage and Ability to
Service Debt."
Capital expenditures for the Company's Ice Factories are expected to be
approximately $4.8 million in 1998 and $5 million in 1999. Capital expenditures
to maintain and expand traditional ice facilities are expected to be
approximately $11.7 million in 1998 and $12 million in 1999.
The Company expects to continue acquiring traditional ice companies using a
combination of cash and common stock. 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. In
connection with such acquisitions, the Company intends to file an "acquisition
shelf" registration statement to register the sale of up to five million shares
of Common Stock.
Although the Company has historically reported negative cash flows from
operations as reflected in the financial statements, the Company believes that
its overall treasury management of cash on hand, together with cash flow from
acquired operations, and available borrowings under the Credit Facility, will be
adequate to meet debt service requirements, fund ongoing capital requirements
and satisfy working capital and general corporate needs through the next twelve
to eighteen months.
The Company may need to raise additional funds through public or private
debt or equity financing to take advantage of opportunities that may become
available to the Company, including acquisitions and more rapid expansion. 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
29
<PAGE>
results of operations. There can be no assurance that sufficient funds will be
available to finance intended acquisitions or capital expenditures to sustain
the Company's recent rate of growth.
YEAR 2000
The Company is exposed to the risk that the year 2000 issue (the "Year
2000 Issue") could cause system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities. As
a result, the Company has determined that it will be necessary to modify
portions of its financial and accounting software, and is currently assessing
other operational systems. The Company believes that with modifications to
existing software, the Year 2000 Issue can be mitigated. However, if such
modifications are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company. The Company does
not currently rely on the systems of other companies; however, there can be no
assurance that the systems of other companies upon any such future acquisition
will be timely converted, or that any such failure to convert any such acquired
system would not have an adverse effect on the Company. Many of the Company's
systems include hardware and packaged software recently purchased from large
vendors who have represented that these systems are already year 2000 compliant.
However, failure of the Company's suppliers or its customers to become year 2000
compliant might have a material impact on the Company's operations. To date, the
amounts incurred and expensed for developing and carrying out the plan have not
had a material effect on the Company's operations. The Company plans to complete
the year 2000 modifications, including testing, by early 1999. The total
remaining cost for addressing the Year 2000 Issue is not expected to be material
to the Company's operations.
GENERAL ECONOMIC TRENDS AND SEASONALITY
The Company's results of operations are generally affected by the economic
trends in its market area but results to date have not been impacted by
inflation. The Company uses large quantities of water and energy in the
manufacture and storage of its packaged ice products. The Company also uses
large quantities of plastic bags. If the prices of such resources should
increase 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 along to its
customers. 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, water, 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 "Risk
Factors -- Effects of Price Changes in Raw Materials."
The Company experiences seasonal fluctuations in its net sales and
profitability with a disproportionate amount of the Company's net sales and a
majority of its net income typically realized in its second and third calendar
quarters (May through September). The Company believes that over 60% of its
revenues will occur during the second and third calendar quarters when the
weather conditions are generally warmer and demand is greater while less than
40% of its revenues will occur during the first and fourth calendar quarters
when the weather is generally cooler. As a result of these seasonal revenue
declines and the lack of proportional corresponding expense decreases, the
Company will most likely experience lower profit margins and possibly experience
losses during the first and fourth calendar quarters. In addition, because the
Company's operating results depend significantly on sales during its peak
season, the Company's quarterly results of operations may fluctuate
significantly as a result of adverse weather during this period (such as an
unusually cool or rainy period). Because inclement weather such as the type
caused by the "El Nino" weather phenomenon is believed to be a primary cause
for decreased volume in the ice industry, the Company could be adversely
affected by this and other weather phenomena. See "Risk Factors -- Seasonality
of Ice Business and Weather."
30
<PAGE>
BUSINESS
COMPANY OVERVIEW
The Company is the largest manufacturer and distributor of packaged ice in
the United States and currently serves over 70,000 customer locations in 26
states. Based on revenues, management believes that the Company is more than
four times larger than its next largest competitor. The Company has grown
primarily through the implementation of its consolidation strategy within the
highly fragmented packaged ice industry. Since April 1997, the Company has
completed 53 acquisitions principally in the southern half of the United States.
These acquisitions have added annual revenues of approximately $196 million and
have enabled the Company to enter new geographic regions, increase its presence
in established markets, gain additional production capacity, realize cost
savings from economies of scale and leverage the acquired companies'
relationships with grocery and convenience store customers. The Company also
installs proprietary Ice Factories. As a result of the successful execution of
the Company's growth strategy, revenues have increased from $4.4 million in 1996
to $202.9 million (pro forma) in 1997, and from $8.1 million for the six months
ended June 30, 1997 to $95.1 million (pro forma) for the six months ended June
30, 1998. EBITDA for such periods has increased from $0.6 million in 1996 to
$45.8 million (pro forma) in 1997, and $1.6 million for the six months ended
June 30, 1997 to $15.7 million (pro forma) for the six months ended June 30,
1998. EBITDA, which represents earnings before interest, income taxes,
depreciation and amortization, is not a measure of financial performance under
GAAP. Net loss before extraordinary items for such periods has increased from
$1.0 million in 1996 to $8.3 million (pro forma) in 1997, and from $1.7 million
for the six months ended June 30, 1997 to $11.9 million (pro forma) for the six
months ended June 30, 1998. Following the Offerings, the Company believes that
it will have the capital resources necessary to continue to lead the
consolidation of the packaged ice industry.
THE INDUSTRY
The packaged ice industry has attractive fundamental characteristics,
including highly fragmented ownership and stable demand. Additionally, since
retailers generally purchase packaged ice from only one supplier, there is
minimal brand competition at the point of sale. Due to high product
transportation and storage costs, the ice business has historically been a
regional service business and is comprised primarily of smaller packaged ice
companies which lack significant capital resources. Traditional ice
manufacturers, including the Company, produce and package ice at
centrally-located facilities and normally distribute to a limited market radius
of 100 miles from the point of production. As a result of these geographic
constraints, success in the ice business depends upon an efficient manufacturing
and distribution system with a critical mass of customer locations and high
density customer distribution routes in a region, high customer concentration
within a market area and the ability to ensure prompt and reliable delivery
during peak seasonal months. The Company believes that its consolidation of
traditional ice manufacturers within a geographic region provides efficiencies
in manufacturing and distribution which gives it an advantage over its
competitors due to higher density of customer sites and the flexibility to shift
production among its manufacturing plants within a region.
The Company believes that packaged ice products are purchased as needed by
consumers and that such purchases are relatively price insensitive due
principally to the low cost of the product and absence of substitute products.
The industry is seasonal, characterized by peak demand occurring during the
warmer months of May through September, with an extended selling season
occurring in the southern United States. On a year-to-year basis, demand remains
stable and is generally only adversely affected by abnormally cool or rainy
weather within a region. Management believes that the Company's geographic
diversification mitigates the potential adverse impact of abnormal weather
patterns in any particular market.
BUSINESS STRATEGY
The Company's business strategy is to strengthen its position as the
leading packaged ice company in the United States and to increase revenues and
profitability through an aggressive acquisition strategy, internal growth,
margin enhancement, and expansion into related businesses. The Company believes
its size, national scope, industry experience, proven ability to complete and
integrate acquisitions, and its
31
<PAGE>
proprietary Ice Factory give it significant competitive advantages in pursuing
its business strategy. These advantages have enabled the Company to develop an
efficient regional production and distribution network and to service national
accounts through its expanded geographic presence. As a result, management
believes Packaged Ice competes very effectively with smaller, local packaged ice
companies. The key elements of the Company's business strategy are to:
ACQUIRE TRADITIONAL ICE MANUFACTURING COMPANIES. Management believes that
the highly fragmented packaged ice industry contains numerous additional
acquisition opportunities. The Company's proven ability to enter new markets
through traditional acquisitions, coupled with its unique significant capital
resources and combination of ice delivery systems through traditional delivery
methods and the proprietary Ice Factory, has positioned the Company to continue
to be the leader in the consolidation of the industry. The Company's acquisition
strategy is to target well-managed, traditional ice producers and distributors
with attractive customer bases in both new and existing market areas. The
Company typically retains the former owners and other key personnel of acquired
packaged ice companies in an effort to ensure the continuation of high quality
services and the maintenance of customer relationships.
Packaged Ice has completed 53 acquisitions since April 1997, representing
annual revenues of approximately $196 million. The Company's recent acquisition
of Reddy from Suiza Foods Corporation for $180.8 million added over $85 million
in pro forma annual revenues. Prior to the Reddy Acquisition, Reddy had been
active in the consolidation of the packaged ice industry, having made 28
acquisitions from January 1997 to April 1997 when it was purchased. The
Company's other acquisitions, except for Cassco, SWI, Mission and STPI have
generally been small, single location market leaders and smaller "tuck-ins"
that in total are not as significant as the Reddy Acquisition and individually
are much less significant. The Company's acquisitions have provided it with (i)
a source of increased cash flow, (ii) national scope to better service large
customers, (iii) economies of scale and cost savings through the consolidation
of redundant manufacturing and distribution facilities, and administration and
selling functions and (iv) improved access to key markets and new customers.
The Company's enhanced service capabilities and geographic presence have
enabled it to satisfy the desire of many of its customers to source products
from one national or regional supplier. The Company has also capitalized on the
decision of certain large retailers to outsource ice production. Since 1997, the
Company has entered into national or regional supply arrangements with Circle K,
Wal-Mart, 7-Eleven, Texaco, Diamond Shamrock, Publix, Albertson's, Safeway,
Von's, Winn Dixie, HEB, L'il Champs, Randall's and Kroger. As the Company
continues to expand its operations into new markets, management anticipates
entering into additional national and regional supply arrangements with major
retailers.
EXPAND MARKET PRESENCE THROUGH THE ICE FACTORY. Through its Ice Factory,
the Company is the only provider of on-site, automated ice manufacturing and
bagging systems at convenience stores and grocery stores. The Ice Factory has
gained strong market acceptance by high volume retailers with cost and service
advantages as compared to traditional packaged ice delivery methods. This
proprietary system uses state-of-the-art technology to produce, package and
store up to 40,000 bags of ice per year directly at customer locations. The
Company retains ownership of the Ice Factory and charges customers on a usage
basis.
The Ice Factory, when combined with traditional delivery methods, provides
the Company with numerous unique advantages, including (i) a flexible delivery
system designed to supply high volume locations and capable of cost-effectively
servicing a market in excess of 100 miles from traditional ice manufacturing
facilities, (ii) the ability to redistribute production from its traditional ice
facilities to new customers as well as satisfy seasonal peak demand at stores
with Ice Factories and (iii) higher operating margins, due to significantly
reduced production, storage and distribution costs.
As part of the Company's consolidation strategy, the Ice Factory gives the
Company the ability to develop a customer base in new markets where it does not
currently own traditional ice companies. The Ice Factory has led the Company's
expansion into several markets such as Houston, Dallas, Phoenix and Seattle and
should continue to drive entry into new markets and expansion in existing
markets.
32
<PAGE>
ENHANCE OPERATING MARGINS OF EXISTING AND ACQUIRED BUSINESSES.The Company's
consolidation strategy provides management with significant opportunities to
enhance operating margins of its acquired businesses. Upon closing an
acquisition, the Company seeks to reduce operating costs and working capital
requirements through (i) consolidation of redundant manufacturing and/or storage
facilities, (ii) rationalization of distribution routes and service operations,
(iii) combination of administrative and marketing functions and (iv) leveraging
of economies of scale in purchasing and operations.
PURSUE EXPANSION INTO RELATED BUSINESSES.In connection with certain
acquisitions of traditional ice manufacturers, the Company's business has
expanded into areas which leverage the Company's competitive position and
expertise in the packaged ice industry. Management is currently evaluating the
expansion of its institutional ice machine leasing, public cold storage and
bottled water businesses.
LEVERAGE MANAGEMENT EXPERTISE.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 A. J. Lewis III, President, who together have more than 20 years of
industry experience. Mr. Stuart is chiefly responsible for the development of
the Ice Factory and, together with Mr. Lewis, has developed and executed the
Company's strategic plan. The Company also benefits from the local operating
knowledge and goodwill developed by the management of the companies it acquires
by retaining a significant number of the principals of such companies.
ACQUISITIONS
The Company's acquisition strategy is focused on expanding its traditional
ice operations and related businesses into new markets across the United States
and increasing its presence in markets it currently serves. In evaluating
specific acquisitions, the Company considers such factors as quality of customer
relationships, market demographics, manufacturing plant efficiency, potential
for expansion and improved profitability and management expertise. In all
acquisitions, the Company requires the seller or its principal shareholders to
enter into a covenant not to compete. In addition, the Company seeks to retain
key management of the acquired companies in most instances. The major factors in
establishing the purchase price for each acquisition are historical operating
results, future prospects of the acquiree and the ability of that business to
complement the services offered by the Company. Consideration for acquisitions
has generally been comprised of cash and, to a lesser extent, Common Stock or a
combination thereof. Since the Company typically attempts to retain the owners
of acquired companies, management believes that the Company's ability to offer
publicly traded common equity as consideration will be attractive to potential
acquisition targets. Accordingly, following the Offerings, the Company intends
to register the sale of up to five million additional shares of Common Stock
under the Securities Act for its use in connection with future acquisitions.
The Company's acquisition of traditional ice companies can generally be
classified into two categories:
MARKET LEADERS. As part of its strategy to expand its traditional ice
operations into new markets and strengthen its national presence, the Company
focuses its acquisition efforts on companies with a leading market share
position in an identified market area. Such acquisitions may represent an
initial entry into a geographic area, or, alternatively, be made subsequent to
the placement of Ice Factories with key customer accounts in a region. Acquiring
a leading competitor gives the Company (i) the critical mass required to provide
a high level of service, (ii) additional customer relationships for the
potential placement of Ice Factories and (iii) a platform to integrate
"tuck-in" acquisitions.
TUCK-INS.Tuck-in acquisitions are smaller acquisitions intended to add
incremental production and/or distribution capabilities in an established
market. Since existing operations can be leveraged, substantial cost savings can
be realized while generating incremental revenues and enhancing the Company's
market presence and ability to service customer accounts. If the tuck-in
acquisition results in redundant ice manufacturing capacity, the related
production equipment can be readily dismantled and redeployed to a region in
need of additional capacity.
33
<PAGE>
THE ICE FACTORY
Through the Ice Factory, a proprietary, state-of-the-art system, the
Company is the only provider of an on-site, automated ice manufacturing and
bagging system to retailers. The Ice Factory is capable of producing, packaging
and storing up to 40,000 bags of ice per year and is most frequently used in
high volume supermarkets and convenience stores and other commercial locations,
such as airport catering facilities, construction staging areas, and large
manufacturing plants. The placement of the Ice Factory at customer locations is
based upon a thorough review of each site, which primarily focuses on 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 Ice Factories the
Company operates. 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 is required at the time of initial installation. Multiple
machines may be installed at a site if warranted. The Company maintains
ownership of the machines and charges its customers for each bag purchased. The
Company will generally pay for all installation costs, while the retailer
provides and pays for the cost of utilities.
The Ice Factory's prices are competitive with prices for delivered bagged
ice. The Company believes that the Ice Factory provides numerous cost and
service advantages to retailers compared to traditional delivery, including (i)
a continuous supply of ice, thus reducing the frequency of product shortages
typical of traditional ice delivery, (ii) a reduction of costs associated with
delivery and storage at the retail location, (iii) the satisfaction of consumer
demand for a higher quality and more sanitary ice than typically found with
traditional ice delivery, (iv) effective management of inventory through
computerized production tracking and dedicated technical support and (v) an
increase in safety by reducing the potential for "slip and fall" accidents
caused by water spills. As a result, the Ice Factory has gained strong market
acceptance. The Company has increased the number of installed Ice Factories from
271 as of December 31, 1994 to 1,566 as of June 30, 1998.
The Ice Factory typically consists of a standard Hoshizaki America, Inc.
("Hoshizaki") ice cuber(s), an ice merchandiser built to Packaged Ice's
specifications by Beverage Air Corporation and a bagging machine, the heart of
the Ice Factory, which Lancer, a Company shareholder, manufactures under an
exclusive original 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. To guard against product contamination
and satisfy consumer demand for high quality, sanitary ice, the Ice Factory has
been engineered to meet all National Sanitation Foundation specifications for
ice production, contains a patented automatic sanitizing system and is U.L.
approved. The Company has obtained patents on certain of the technology used in
the bagging device component of the Ice Factory. The Company believes that these
patents cover all patentable technology of a material nature currently being
used in the bagging device. Accordingly, the Company believes that there are
significant barriers to entry for new and existing competitors with respect to
developing a competitive and reliable machine that performs the same functions
as the Ice Factory.
DISTRIBUTION
Due to high product transportation and shipping costs, the ice business has
historically been a regional service business in which manufacturers produce and
package ice at centrally-located facilities and distribute to a limited market
radius of approximately 100 miles. Due to these geographic constraints and the
limited amount of product differentiation in the packaged ice industry, the
Company focuses on maintaining an efficient service, distribution and pricing
system in each of its markets. The Company delivers ice through both traditional
distribution and the on-site Ice Factory system. Management believes that this
combined distribution platform enables it to redistribute ice production
efficiently from its traditional ice facilities to additional customers and to
supplement Ice Factory production during seasonal peak demand.
TRADITIONAL DISTRIBUTION. The Company produces and bags ice at its
centrally-located manufacturing facilities and subsequently stores the ice or
transports it directly to retail and commercial customers. To
34
<PAGE>
store ice inventory, the Company owns or rents refrigerated facilities and
incurs utility costs to maintain temperatures below freezing. During the peak
summer months, the Company may lease additional trucks and purchase additional
ice from other producers to maintain high service levels and customer goodwill.
The Company currently serves over 70,000 customer locations principally
through, among other things, the use of its approximately 56,000 ice
merchandisers (small cold storage boxes) that are installed at store locations.
The Company's recent growth has allowed it to develop an efficient production
and distribution network by providing it with customer density, additional
production capacity and dedicated distribution centers. Because of this
increasing customer density, the Company has improved routing efficiencies and
reduced its transportation cost which represents its largest cost component. In
addition, the acquisition of additional production capacity in selected markets
has allowed the Company to avoid "stock outs" and lost sales during peak
periods. Further, by acquiring dedicated distribution centers and cold storage
facilities, the Company has reduced its storage costs.
ICE FACTORY. By producing and bagging the ice at the customer's location,
the Ice Factory reduces the Company's distribution, labor and energy costs
because retailers provide and pay for the cost of utilities. The transportation
costs which are characteristic of traditional delivery are also eliminated by
on-site production. As a result of these cost savings, management believes that
the Ice Factory provides the Company with superior operating margins in high
volume locations compared to traditional ice delivery.
The Company believes that providing frequent, regular and reliable service
and support is one of the most important elements in operating its machine
network. Remote communications systems between the Ice Factory and the Company's
national service center enable 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
customer's product and servicing needs. The Company has also implemented a
routine route servicing system, using trained service representatives to perform
the Company's regularly scheduled service procedures. In addition, the Company
maintains 24-hour, toll-free telephone support for responding to customer calls
regarding repairs and maintenance.
PRODUCTS
The Company markets its ice products to satisfy a broad range of customers,
including retailers, commercial users, restaurants and agricultural users under
a variety of brand names, including Reddy, Mission and Crystal Ice. In addition,
through a licensing agreement with Culligan, the Company has obtained the right
to use the name "Ice by CulliganT" in connection with production from the Ice
Factories. Such license will terminate on December 31, 1998. To date, the
Company has not used such license and therefore the Company believes that the
termination of such license will not have a material adverse effect on the
business of the Company.
The Company produces its ice in cube, half-moon, cylindrical and crushed
forms to satisfy customer demands. The Company's primary ice product is cocktail
ice packaged in seven and 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 ten and 300
pound sizes, primarily to commercial, agricultural and industrial customers. The
Company also derives revenues from other goods and services including cold
storage rental, the manufacturing and sale of bottled water and institutional
ice machine leasing.
CUSTOMERS
The Company markets its ice products to a broad range of customers,
including supermarket chains, convenience stores, commercial users, agricultural
buyers, resorts and restaurants, wholesale ice and food distributors and
competitive producers and self-suppliers who experience supply shortages.
Management believes that the Company's geographic diversification and the
superior economics and advantages to the retailer of the Ice Factory have helped
it in developing relationships with certain high volume national supermarket
chains, and will continue to assist in its planned penetration into this market.
35
<PAGE>
Retailers with no internal ice production capacity are the primary
purchasers of the Company's manufactured ice products and users of its Ice
Factory. 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 less than 5% of pro forma sales
in 1998. In addition, the Company has a geographically diversified customer
base, with operations in 26 states throughout the southern and western United
States. Some of the Company's regional and national accounts include Circle K,
Wal-Mart, 7-Eleven, Texaco, Diamond Shamrock, Publix, Albertson's, Safeway,
Von's, Winn Dixie, HEB, Li'l Champs, Randall's and Kroger. The Company believes
the geographic breadth of its customer base helps to protect it from adverse
weather in a particular region, such as abnormally cool or rainy conditions. See
"Risk Factors -- Seasonality of Ice Business and Weather."
COMPETITION
The traditional packaged 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 serves a
retail site, the Company's ice products generally do not face competition within
a particular store. The traditional packaged ice industry in the United States
is led by the Company and several regional, multi-facility competitors, and
includes numerous local and regional companies of varying sizes and competitive
resources.
Competition in the packaged ice industry is based primarily on service,
price and quality. To compete successfully, an ice manufacturer must be able to
increase production and distribution capacity substantially on a seasonal basis
while maintaining cost efficiency. Management believes that the Company's high
quality traditional production facilities, comparatively substantial financial
resources, high regional market share and associated route density and
proprietary ice machine technology provide it with numerous competitive
advantages. See "Risk Factors -- Competition."
INFORMATION SYSTEMS
Internal information systems are critical to the Company's ability to
operate efficiently. Packaged Ice is able to monitor individual manufacturing
plant and Ice Factory performance on a daily basis through automated reporting
systems. This information enables management to track profitability, monitor the
integration of acquired companies, identify opportunities to redistribute
traditional manufacturing capacity among markets, assess the cost-effectiveness
of an Ice Factory at a particular location and analyze market sales trends. In
addition, the Company is currently converting its accounting and financial
reporting functions to the system developed by Reddy. This satellite-based
system, which is expected to be installed in all operating locations other than
Cassco's by December 1998, will facilitate centralized cash management, more
timely financial reporting, a consistent reporting format and improved inventory
tracking. Cassco will be converted to the Company's system in 1999. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
INTELLECTUAL PROPERTY
The Company regards the Ice Factory as proprietary and relies primarily on
a combination of patents, nondisclosure and confidentiality agreements, and
other copyright protection methods to secure and protect its intellectual
property rights. The Company holds or has exclusive rights to several patents
relating to the Ice Factory. In addition, the Company has developed or acquired
a number of trademarks (both registered and common law) and trade names for use
in its ice business, and holds licenses for the use of additional trademarks
from third parties. Although the Company's use of its trademarks has created
goodwill and results in product differentiation, management does not believe
that the loss of any of the Company's trademarks would have a material adverse
effect on its operations. See "Risk Factors -- Limited Patent Protection."
36
<PAGE>
FACILITIES
The Company currently has 80 manufacturing plants located throughout the
United States. These plants, together with the current installed base of 1,566
Ice Factories, have a combined manufacturing capacity of approximately 13,600
tons per day. In addition, the Company has regional service centers for its Ice
Factories located throughout its market areas.
The Company currently owns or leases 80 manufacturing, 39 distribution and
9 cold storage facilities located in 19 states (the Company also services
customer sites in Kansas, Nebraska and Washington through Ice Factories
resulting in a total of 22 states) and the District of Columbia. Certain
manufacturing and distribution facilities may be permanently closed in
conjunction with the Company's continuing acquisition integration plans, while
others may be closed on a seasonal basis depending upon production demand. The
following is a list of the current facilities.
<TABLE>
<CAPTION>
COMBINED
NO. OF NO. OF NO. OF COLD MANUFACTURING
MANUFACTURING DISTRIBUTION STORAGE CAPACITY
FACILITIES(1) FACILITIES(1) FACILITIES (TONS/DAY)
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Alabama................................. 5 2 0 492
Arkansas................................ 2 4 0 240
Arizona................................. 5 1 1 1,136
California.............................. 4 0 1 487
Colorado................................ 1 0 1 200
Florida................................. 13 3 0 1,797
Georgia................................. 4 5 0 1,199
Louisiana............................... 4 4 0 794
Mississippi............................. 1 1 1 60
Maryland................................ 1 0 0 9
New Mexico.............................. 1 1 0 160
Nevada.................................. 1 0 0 140
North Carolina.......................... 0 0 1 0
Oklahoma................................ 4 1 0 500
Tennessee............................... 6 0 0 304
Texas................................... 19 13 0 3,290
Utah.................................... 1 0 0 120
Virginia................................ 6 4 3 912
West Virginia........................... 1 0 1 120
Washington D.C.......................... 1 0 0 98
-- -- -
-------------
Total.............................. 80 39 9 12,058
== == = =============
</TABLE>
- ------------
(1) Includes manufacturing facilities for other than production of ice, such as
bottled water and merchandisers.
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 Ice Factories and to control the quality and
quantity of its ice continuously.
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 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 additional requirements including 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. Certain of the Company's
Ice Factories and ice manufacturing facilities are subject to routine and random
safety, health and quality inspections. The
37
<PAGE>
Company believes that its facilities, manufacturing practices and Ice Factories
are in substantial 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. These
regulations require the Company to comply with certain manufacturing, health and
safety standards to protect its employees from accidents. See "Risk Factors --
Government Regulation."
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 stricter 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 management 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. See "Risk Factors -- Environmental Matters."
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
been filed and believes that the technology used at its manufacturing facilities
and contained in its machines makes any contamination of the ice manufactured at
its plants or dispensed by its machines unlikely, any significant damage awards
against the Company in excess of the Company's insurance coverage could result
in a material loss to the Company.
EMPLOYEES AND LABOR RELATIONS
At June 30, 1998, the Company had approximately 2,600 employees at its
seasonal peak, of which 73 were represented by a union or were subject to a
collective bargaining agreement. The majority of these employees are full-time
employees. The Company generally has not experienced difficulty in meeting its
seasonal employment needs which may comprise as much as 30% of the total
employees noted above. The Company has never experienced a work stoppage due to
labor difficulties, and management believes its relationship with its employees
is good.
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>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Company has assembled an experienced management team to oversee its
development and operations. 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...................... 56 Chairman of the Board of Directors and Chief Executive Officer
A.J. Lewis III....................... 43 President, Director and Secretary
Jimmy C. Weaver...................... 45 Executive Vice President and Chief Operating Officer
James C. Hazlewood................... 51 Chief Financial Officer
H.D. Wiginton........................ 60 Senior Vice President -- Marketing
Leonard A. Bedell.................... 53 Senior Vice President -- Central Operations
Graham D. Davis...................... 44 Senior Vice President -- Western Operations
Dale M. Johnson...................... 53 Senior Vice President -- Corporate Development
William H. Gibbons................... 55 Treasurer
Steven P. Rosenberg.................. 39 Director
Richard A. Coonrod................... 67 Director
Robert G. Miller..................... 48 Director
Rod J. Sands......................... 49 Director
Arthur E. Biggs, Sr.................. 68 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 of Directors, Chief Executive
Officer and a founder of Packaged Ice, served as President of Packaged Ice from
1990 until January 1997, when he was elected Chairman of the Board of Directors
and Chief Executive Officer.
A.J. LEWIS III became President and Secretary of the Company in January
1997. Mr. Lewis has been a shareholder and director of the Company since 1991,
and until the closing of the Offerings, will have served on the Audit Committee
of the Board of Directors. Mr. Lewis acquired Mission in 1988 and was its
president and the sole director until its acquisition by Packaged Ice. He
founded STPI in 1991 and was its president and a director from inception until
its acquisition by Packaged Ice. Since 1989, Mr. Lewis has been a director and
president of Southwest Texas Equipment Distributors, Inc., which is a
distributor of Hoshizaki ice equipment. See "Certain Transactions."
JIMMY C. WEAVER became Executive Vice President and Chief Operating Officer
of the Company on April 30, 1998. Mr. Weaver joined Reddy in September 1996 and
was President of Reddy prior to its acquisition by Packaged Ice. From May 1993
until August 1996, Mr. Weaver was Vice President of Sales and Marketing of
Booth/Crystal Tips, a manufacturing division of Scotsman Industries based in
Dallas, Texas that produces and sells ice making equipment.
JAMES C. HAZLEWOOD is the Company's Chief Financial Officer. Mr. Hazlewood
joined the Company in October 1997. From September 1996 until October 1997, Mr.
Hazlewood was Chief Financial Officer of Harrison Electronics, Inc., a privately
owned electronics distribution company based in Stafford, Texas. From September
1994 until September 1996, Mr. Hazlewood was Chief Financial Officer at Intile
Designs, Inc., a publicly held, wholesale distributor of floor coverings
headquartered in Houston, Texas. From September 1993 to September 1994, Mr.
Hazlewood was an independent consultant. From April 1993 until September 1993,
Mr. Hazlewood was president of Gulf Environmental Corporation of Kellogg, Idaho,
a wholly owned subsidiary of Gulf U.S.A. Mr. Hazlewood initiated his career with
Arthur Andersen LLP.
H.D. WIGINTON is the Company's Senior Vice President -- Marketing. Mr.
Wiginton joined the Company in November 1996. From September 1991 until he
joined the Company, Mr. Wiginton was Executive Vice President of Tower
Marketing, a Texas-based, regional food brokerage concern.
39
<PAGE>
LEONARD A. BEDELL is the Company's Senior Vice President -- Central
Operations. Mr. Bedell joined the Company effective January 1, 1998. From March
1995 until December 1997, Mr. Bedell was a management consultant specializing in
operations and profitability improvement and merger and acquisition projects for
businesses engaged in the distribution, delivery, equipment rental and event
production industries. From January 1992 until March 1995, Mr. Bedell was
Executive Vice President, Chief Financial Officer and a member of the Board of
Directors of American Medical Technologies, Inc., a Nasdaq reporting company,
and its two principal operating subsidiaries. From March 1990 to December 1991,
Mr. Bedell was President and Chief Executive Officer of Medcon, Inc., a medical
transportation and disposal company.
GRAHAM D. DAVIS became the Company's Senior Vice President -- Western
Operations on April 30, 1998. Mr. Davis joined Reddy, a division of The
Southland Corporation, in 1977 as Controller. For the five years prior to
joining the Company, Mr. Davis was Executive Vice President of Operations of
Reddy.
DALE M. JOHNSON is the Company's Senior Vice President -- Corporate
Development. Mr. Johnson was one of the founders of SWI in January 1992 and
served as Chief Financial Officer from January 1992 until the acquisition by the
Company in April 1997. He has been a consultant and advisor to the Company since
the acquisition.
WILLIAM H. GIBBONS became the Company's Treasurer in July 1998. Prior to
joining the Company, Mr. Gibbons was the President of William H. Gibbons, a sole
proprietorship, providing financial consulting services to domestic and
international oil and gas companies since 1991. His clientele included private
and public companies, with financial consulting services focused on financing,
treasury and reporting activities.
STEVEN P. ROSENBERG has been a shareholder and director of the Company
since 1991 and is a member of the Audit Committee of the Board of Directors.
Since August 1997, Mr. Rosenberg has been Chairman of the Board and Chief
Executive Officer of Nutricept, Inc., a development stage company engaged in the
manufacture and distribution of dietary supplements. From 1992 to February 1997,
Mr. Rosenberg was President of Arrow Industries, now a wholly owned subsidiary
of ConAgra.
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, a shareholder of the Company. Mr.
Coonrod has been a general partner of the Food Fund, 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. See "Certain Transactions -- Voting Agreement."
ROBERT G. MILLER has been a director of the Company since April 1997. Mr.
Miller is a private investor and was Chairman of the Board of Directors of SWI
from February 1992 until its acquisition by Packaged Ice. From 1980 to 1992, Mr.
Miller was President and Chief Executive Officer of Glacier Water, Inc., a
publicly traded water vending company.
ROD J. SANDS is a director of the Company and is a member of the
Compensation Committee of the Board of Directors. Mr. Sands has been a Managing
Director of SV since 1997. 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., a leading producer of picante sauce
products.
ARTHUR E. BIGGS, SR. is a shareholder and director of the Company. Mr.
Biggs has been a private investor since March 1998 and was Chairman of the Board
of Directors of Artic Ice preceding its acquisition by Packaged Ice in March
1998. From 1974 to 1982, Mr. Biggs was Executive Vice President and Chief
Operating Officer of Mobil Chemical Co. and served as President of Mobil
Chemical Co. from 1983 to 1986. Mr. Biggs initiated his career with McKinsey &
Company, Inc. in 1957.
40
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
Chief Executive Officer of the Company and three additional most highly
compensated executive officers for the year ended December 31, 1997 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
---------------------------------- OPTIONS/ ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS SARS COMPENSATION
- ------------------------------------- --------- -------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
James F. Stuart,..................... 1997 $125,000 $ 50,000 30,000 $ 2,500(1)
Chairman, Chief Executive Officer 1996 125,000 -- -- 1,827(1)
1995 75,000 -- -- --
A.J. Lewis III,...................... 1997(2) $ 83,173 $ 50,000 25,000 $ 769(1)
President
James C. Hazlewood,.................. 1997(3) $ 14,873 -- 20,000 $ 738(4)
Chief Financial Officer
H.D. Wiginton,....................... 1997 $110,000 $ 32,810 5,000 $ 6,000(4)
Senior Vice President -- Marketing 1996(5) 18,333 -- 6,000 1,000(4)
</TABLE>
- ------------
(1) Contributions to Packaged Ice's 401(k) plan made by Packaged Ice.
(2) Represents partial year compensation of an annual salary of $125,000. No
compensation is provided for prior years as Mr. Lewis' employment commenced
April 1997.
(3) Represents partial year compensation of an annual salary of $105,000. No
compensation is provided for prior years as Mr. Hazlewood's employment
commenced October 1997.
(4) Automobile allowance.
(5) Represents partial year compensation of an annual salary of $110,000. No
compensation information is provided for prior years as Mr. Wiginton's
employment commenced November 1996.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding the number of
options to purchase shares of the Company's Common Stock granted to the Named
Executive Officers during the year ended December 31, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE ANNUAL RATE OF STOCK
SECURITIES OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS PER SHARE OPTION TERM
OPTIONS GRANTED IN EXERCISE OR EXPIRATION ----------------------
NAME GRANTED FISCAL 1997 BASE PRICE DATE 5% 10%
- ------------------------------------- ----------- ----------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
James F. Stuart...................... 30,000 15.4% $10.00 12/19/2007 $ 188,668 $ 478,123
A.J. Lewis III....................... 25,000 12.9% $10.00 12/19/2007 157,224 398,436
James C. Hazlewood................... 20,000 10.3% $10,00 11/1/2007 125,779 318,748
H.D. Wiginton........................ 5,000 2.6% $10.00 12/19/2007 31,445 79,687
</TABLE>
41
<PAGE>
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
options to purchase shares of the Company's Common Stock during the year ended
December 31, 1997, by the Named Executive Officers, and the fiscal year-end
value of stock options held by such officers.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR END FISCAL YEAR END(1)
ACQUIRED ON ------------------------------ ------------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ------------- ------------ -------------- ------------ --------------
<S> <C> <C>
James F. Stuart...................... -- -- 30,000 -- $ 90,000
A.J. Lewis III....................... -- -- 25,000 -- 75,000
James C. Hazlewood................... -- -- 20,000 -- 60,000
H.D. Wiginton........................ -- 1,200 9,800 $6,875 41,125
</TABLE>
- ------------
(1) Based on a fiscal year end of December 31, 1997, and a fair market value of
$10 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 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, 1997, 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. 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.
COMMITTEES OF THE BOARD OF DIRECTORS; COMPENSATION COMMITTEE INTERLOCKS
The Company has an Audit Committee and a Compensation Committee.
The Audit Committee reviews and reports to the Board of Directors the scope
and results of audits by the Company's outside auditor. The committee also
recommends the firm of certified public accountants to serve as the Company's
independent public accountants, subject to nomination by the Board of Directors
and approval of the stockholders, authorizes all audit and other professional
services rendered by the auditor and periodically review the independence of the
auditor. Membership of the Audit Committee is restricted to those directors who
are not active or retired officers or employees of the Company. Messrs. Lewis
and Rosenberg are members of the Audit Committee. At the closing of the
Offerings, Mr. Biggs will replace Mr. Lewis on the Audit Committee.
The Compensation Committee oversees the compensation of the Company's
senior management and grants under the Stock Option Plans. The Compensation
Committee is currently comprised of Messrs. Sands, Coonrod and Stuart. At the
closing of the Offerings, Mr. Stuart will resign from the Compensation
Committee.
At the closing of the Offering, no member of the Compensation Committee
will be a present or former officer or employee of the Company or any
subsidiary. No executive officer or director of the Company serves as an
executive officer, director, or member of a compensation committee of any other
entity, for which an executive officer, director, or member of such entity is a
member of the board of directors or the Compensation Committee of the Company.
There are no other interlocks.
STOCK OPTION PLANS
1994 STOCK OPTION PLAN. The Company adopted the 1994 Packaged Ice, Inc.
Stock Option Plan on July 26, 1994 (the "1994 Option Plan"), as amended
effective December 1997. Under the 1994 Option Plan, options to purchase up to
400,000 shares of Common Stock may be granted to employees, outside
42
<PAGE>
directors and consultants and advisers to the Company or any subsidiary. The
purposes of the 1994 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 because of exercise) or which are no longer
subject to purchase pursuant to an option granted under the 1994 Option Plan may
be reoptioned thereunder. The 1994 Option Plan is currently administered by the
Compensation Committee which has the authority to set specific terms and
conditions of options granted under the 1994 Option Plan and administer the 1994
Option Plan. Options granted under the 1994 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 1994 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 31, 1998, Packaged Ice had outstanding options for 393,700 shares
of Common Stock at a weighted average exercise price of $10.87 of which 27,600
were exercisable under the 1994 Option Plan. All options granted under the 1994
Option Plan to date have a five-year vesting period, which will be accelerated
upon the Closing of the Offerings. 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, options to
purchase 6,300 shares of Common Stock have been exercised under the 1994 Option
Plan. No more options may be granted under the 1994 Option Plan.
1998 STOCK OPTION PLAN. The Company has adopted the 1998 Stock Option Plan
(the "1998 Option Plan"). One million shares of Common Stock are subject to
issuance under the 1998 Option Plan. The 1998 Option Plan provides for the grant
of stock options (including incentive stock options as defined in Section 422 of
the Internal Revenue Code of 1986, as amended, and non-qualified stock options),
stock appreciation rights ("SARs") and other stock awards (including
restricted stock awards and stock bonuses) to any officer, director or employee
of the Company, its subsidiaries, affiliates or any consultant or advisor
engaged by the Company who renders bona fide services to the Company or the
Company's subsidiaries or affiliates in connection with their businesses;
provided, that such services are not in connection with the offer or sale of
securities in a capital raising transaction. Prior to the date when securities
are first registered pursuant to Section 12 of the Exchange Act, the 1998 Option
Plan will be administered by the Company's Board of Directors. Upon registration
of the Common Stock, the 1998 Option Plan will be administered by the
Compensation Committee which will be comprised of "disinterested persons"
within the meaning of Rule 16b-3 of the Exchange Act. The Company's full Board
of Directors must approve any grant of options to a member of the Compensation
Committee. Such member of the Compensation Committee shall not participate in
the vote approving such grant. Stock options may be granted by the Compensation
Committee on such terms, including vesting and payment forms, as it deems
appropriate in its discretion; provided, that no option may be exercised later
than ten years after its grant, and the purchase price for incentive stock
options and non-qualified stock options shall not be less than 100% and 85% of
the fair market value of the Common Stock at the time of grant, respectively.
SARs may be granted by the Compensation Committee on such terms, including
payment forms, as the Compensation Committee deems appropriate, provided that an
SAR granted in connection with a stock option shall become exercisable and lapse
according to the same vesting schedule and lapse rules established for the stock
option (which shall not exceed ten years from the
43
<PAGE>
date of grant). An SAR shall not be exercisable during the first six months of
its term and only when the fair market value of the underlying Common Stock
exceeds the SAR's exercise price and is exercisable subject to any other
conditions on exercise imposed by the Compensation Committee. Unless terminated
by the Board of Directors, the 1998 Option Plan continues for ten years from the
date of adoption. Upon the occurrence of an event constituting a change in
control of the Company, in the sole discretion of the Compensation Committee,
all options, SARs and other awards will become immediately exercisable in full
for the remainder of their terms and restrictions on stock granted pursuant to a
restricted stock award will lapse. The Board of Directors has authorized the
grant of options to certain officers and key employees to purchase an aggregate
of 242,111 shares of Common Stock under the 1998 Option Plan at an exercise
price of $15 per share.
EMPLOYMENT AND TERMINATION
JAMES F. STUART, the Company's Chairman of the Board of Directors and Chief
Executive Officer, has entered into an employment agreement, effective August 1,
1998, with a term of two years, which establishes a base salary of $225,000 per
year and provides for certain cash bonus incentives relating to the Company's
performance. Mr. Stuart's employment agreement also provides that, in certain
circumstances, he will receive severance payments equal to two years of his then
current base salary upon termination of his employment by the Company. Mr.
Stuart is subject to a non-competition agreement for three years after voluntary
or involuntary termination of his employment.
A.J. LEWIS III, the Company's President and Secretary, has entered into an
employment agreement, effective August 1, 1998, with a term of one year, which
establishes a base salary of $200,000 per year and provides for certain cash
bonus incentives relating to the Company's performance. Mr. Lewis' employment
agreement also provides that, in certain circumstances, he will receive
severance payments equal to one year of his then current base salary upon
termination of his employment by the Company. Mr. Lewis is subject to a
non-competition agreement for three years after voluntary or involuntary
termination of his employment.
JIMMY C. WEAVER, the Company's Executive Vice President and Chief Operating
Officer, has entered into an employment agreement, effective May 1, 1998, with a
term of two years, which establishes a base salary of $185,000 per year,
provides for certain cash bonus incentives relating to the Company's performance
and grants Mr. Weaver the right to purchase 40,000 shares of Common Stock under
the 1994 Option Plan at an exercise price of $14 per share. Mr. Weaver's
employment agreement provides that, in certain circumstances, he will receive
severance payments equal to six months of his then current base salary upon
termination of his employment by the Company. Mr. Weaver is subject to a
non-competition agreement for two years after voluntary or involuntary
termination of his employment.
JAMES C. HAZLEWOOD, the Company's Chief Financial Officer, entered into an
employment agreement effective November 1, 1997, which establishes a base salary
of $105,000 per year. In addition, Mr. Hazlewood is eligible for certain cash
bonus incentives relating to the Company's performance. Mr. Hazlewood's
employment agreement provides that, in certain circumstances, he will receive
severance payments of one year of his then current base salary upon termination
of his employment by the Company. Mr. Hazlewood is subject to a non-competition
agreement for two years after voluntary or involuntary termination of his
employment.
GRAHAM D. DAVIS, the Company's Senior Vice President -- Western Operations,
has entered into an employment agreement, effective May 1, 1998, with a term of
two years, which establishes a base salary of $155,000 per year, provides for
certain cash bonus incentives relating to the Company's performance and grants
Mr. Davis the right to purchase 20,000 shares of Common Stock under the 1994
Option Plan at an exercise price of $14 per share. Mr. Davis' employment
agreement provides that, in certain circumstances, he will receive severance
payments equal to six months of his then current base salary upon termination of
his employment by the Company. Mr. Davis is subject to a non-competition
agreement for two years after voluntary or involuntary termination of his
employment.
44
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of August 31, 1998
with respect to the beneficial ownership of the Company's Common Stock, assuming
conversions of the Convertible Preferred Stock by: (i) each director of the
Company, (ii) each Named Executive Officer, (iii) each other person known to
beneficially own 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, (i) the persons
listed in the table below have sole voting and investment powers with respect to
the shares indicated and (ii) each person's address is 8572 Katy Freeway, Suite
101 Houston, Texas 77024.
SHARES BENEFICIALLY
OWNED % OF OUTSTANDING
------------------- ----------------
James F. Stuart(1)...................... 412,700 4.13%
A. J. Lewis III(2)...................... 448,943 4.85%
Jimmy C. Weaver (3)..................... 40,000 *
James C. Hazlewood(4)................... 20,000 *
H. D. Wiginton(5)....................... 17,000 *
Graham D. Davis(6)...................... 20,000 *
Dale M. Johnson(7)...................... 174,725 1.75%
Steven P. Rosenberg
5430 LBJ Freeway, Suite 1600
Dallas, Texas 75219................... 438,423 4.29%
Richard A. Coonrod(8)
5720 Smetana Drive, Suite 300
Minnetonka, Minnesota 55343........... 91,161 *
Robert G. Miller(9)
4425 West Olive, Suite 310
Glendale, Arizona 85302............... 309,040 3.03%
Rod J. Sands(10)(11)
5121 Broadway
San Antonio, Texas 78204.............. 582,953 5.83%
Arthur E. Biggs, Sr.
3210 St. Charles Place
Boca Raton, Florida 33434............. 233,849 2.34%
Norwest Equity Partners V(12)
222 South Ninth St., Suite 2800
Minneapolis, Minnesota 55402-3388..... 820,449 8.21%
Culligan Water Technologies, Inc.(13)
One Culligan Parkway
Northbrook, IL 60062-6209............. 1,878,760 18.80%
SV Capital Partners, L.P.(11)(14)
200 Concord Plaza, Suite 620
San Antonio, Texas 78216.............. 582,953 5.83%
Ares Leveraged Investment Fund, L.P.(15)
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067......... 792,799 7.93%
All directors and executive officers as
a group
(22 persons).......................... 2,830,032 28.32%
(FOOTNOTES ON FOLLOWING PAGE)
45
<PAGE>
- ------------
* Less than 1%
(1) Includes stock options to purchase 60,000 shares of Common Stock at a
weighted average price of $12.67 per share, all of which will vest upon the
closing of the Offerings.
(2) Includes (i) stock options to purchase 55,000 shares of Common Stock at a
weighted average price of $12.53 per share, all of which will vest upon the
closing of the Offerings, (ii) 2,000 shares of Common Stock held by Mr.
Lewis, as Trustee, (iii) 25,000 shares owned by South Texas Equipment
Distributors, Inc., a corporation owned by Mr. and Mrs. Lewis and (iv)
69,350 shares held by Mr. and Mrs. Lewis as tenants in common.
(3) Includes stock options to purchase 40,000 shares of Common Stock at a
weighted average price of $14.29 per share, all of which will vest upon the
closing of the Offerings.
(4) Includes stock options to purchase 20,000 shares of Common Stock at a
weighted average price of $11.47 per share, all of which will vest upon the
closing of the Offerings.
(5) Includes stock options to purchase 11,000 shares of Common Stock at a
weighted average price of $11.38 per share, all of which will vest upon the
closing of the Offerings.
(6) Includes stock options to purchase 20,000 shares of Common Stock at a
weighted average price of $14.34 per share, all of which will vest upon the
closing of the Offerings.
(7) Includes stock options to purchase 20,000 shares of Common Stock at a
weighted average price of $11.67 per share, all of which will vest upon the
closing of the Offerings.
(8) Mr. Coonrod does not own any shares of record. However, as general partner
of the Food Fund, Mr. Coonrod may be deemed to be the beneficial owner of
the shares held by the Food Fund. Mr. Coonrod disclaims beneficial
ownership of the Common Stock held by the Food Fund.
(9) Includes stock options to purchase 22,500 shares of Common Stock at $10.00
per share, all of which will vest upon the closing of the Offerings.
(10) Comprised of 300,000 shares of Common Stock that SV holds. Mr. Sands, a
limited partner of SV and a member of its investment committee, may be
deemed to have indirect beneficial ownership of the Common Stock that SV
owns. Mr. Sands disclaims any such beneficial ownership.
(11) Includes 282,953 shares of Common Stock subject to warrants currently
exercisable.
(12) Includes 405,000 shares of Series A Convertible Preferred Stock and 37,449
shares of Series B Convertible Preferred Stock.
(13) Includes 1,878,760 shares of Common Stock subject to warrants currently
exercisable.
(14) Christopher Goldsbury, Jr. is a director, majority limited partner and
controlling shareholder of the corporate general partner of SV. As a
result, Mr. Goldsbury may be deemed to have indirect beneficial ownership
of the Common Stock that SV owns.
(15) Includes 792,799 shares of Common Stock subject to currently exercisable
warrants.
46
<PAGE>
CERTAIN TRANSACTIONS
AGREEMENTS WITH A. J. LEWIS III. Mr. Lewis and his wife own Southwest
Texas Equipment Distributors, Inc., an ice equipment sales and rental company,
which has the exclusive right to supply Hoshizaki ice cubers to the Company
under an agreement dated September 9, 1991. Mr. Lewis owns real estate on which
Mission's facilities are located. As part of the Mission and STPI Acquisitions,
the Company leases these facilities from Mr. Lewis for $355,200 per year until
February 28, 2008. Such agreement was made in an arms'-length negotiation
submitted to the disinterested members of the Company's Board of Directors who
voted in favor of the agreement upon review of the relevant information.
INDEMNITY AGREEMENTS. The Company has entered into indemnification
agreements with each of its directors and certain of its executive officers. The
indemnification agreements provide that the Company shall indemnify these
individuals against certain liabilities (including settlements) and expenses
actually and reasonably incurred by them in connection with any threatened or
pending legal action, proceeding or investigation (other than actions brought by
or in the right of the Company) to which any of them is, or is threatened to be,
made a party by reason of their status as a director, officer or agent of the
Company; provided that, with respect to a civil, administrative or investigative
(other than criminal) action, such individual acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal proceedings, he or
she had no reasonable cause to believe his or her conduct was unlawful. With
respect to any action brought by or in the right of the Company, such
individuals may be indemnified, to the extent not prohibited by applicable laws
or as determined by a court of competent jurisdiction, against expenses actually
and reasonably incurred by them in connection with such action if they acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
the best interests of the Company. The agreements also require indemnification
of such individuals for all reasonable expenses incurred in connection with the
successful defense of any action or claim and provide for partial
indemnification in the case of any partially successful defense.
VOTING AGREEMENTS.__Each of the following voting agreements will terminate
at the close of the Offerings. In excess of 80% of the shareholders have entered
into a voting agreement (the "Voting Agreement") which fixes the number of
directors at no more than twelve 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, who initially was Stephen R. Sefton
who has since resigned from the Board of Directors, (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 an as
converted basis, (ii) the completion by the Company of a public offering of its
Common Stock 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. In connection with the
investment in the Company by SV on July 17, 1997, the holders of at least 60% of
the outstanding voting 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 J. Sands to be its board
representative. In addition, holders of Series C Preferred Stock have the right
to elect two directors, such right being effective only at such time or times
that Culligan owns less than 20% of the fully diluted Common Stock.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, of which [ ] shares will be outstanding immediately
following the Offerings and of which 298,231 shares will be held as treasury
stock, and 5,000,000 shares of preferred stock, par value $.01 per share. The
Company's Board of Directors has authorized the designation of 2,750,100 shares
of preferred stock as follows: 450,000 shares as the Series A Convertible
Preferred Stock, all of which are outstanding; 200,000 shares as the Series B
Convertible Preferred Stock, of which 124,831 shares are outstanding; 500,000
shares as the 10% Exchangeable Preferred Stock, of which 259,860 shares are
outstanding; 100 shares as the Series C Preferred Stock, of which 100 shares are
outstanding; and 1,600,000 shares of 13% Exchangeable Preferred Stock, of which
411,500 shares are currently outstanding and 336,500 shares will be outstanding
at the closing of the Offerings. In addition, 400,000 shares and 1,000,000
shares of Common Stock have been reserved for issuance upon exercise of stock
options under the 1994 and 1998 Stock Option Plans, respectively, 574,831 shares
of Common Stock have been reserved for issuance upon conversion of the
Convertible Preferred Stock (such Common Stock will be issued upon the
completion of the Offerings), and 3,985,473 shares have been reserved for
issuance upon exercise of warrants.
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 Convertible 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 Company's Preferred Stock then outstanding. The Company's Articles
of Incorporation deny preemptive rights and cumulative voting. 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.
SERIES A CONVERTIBLE PREFERRED STOCK
The Series A Convertible 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 Convertible Preferred Stock $5.56 per share (an
aggregate of $2.5 million) before any amounts may be paid to the holders of
Common Stock. Holders of Series A Convertible 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 Convertible 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 Convertible Preferred Stock is then
convertible. Upon the closing of the Offerings, each share of Series A
Convertible Preferred Stock will be automatically converted into Common Stock
without payment of additional consideration at a conversion price of $5.56 per
share, subject to anti-dilution adjustments. The Company may not reissue the
Series A Convertible Preferred Stock once it has been converted into Common
Stock.
SERIES B CONVERTIBLE PREFERRED STOCK
The Series B Convertible 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 Convertible 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 Convertible 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 Convertible Preferred Stock entitles the holder thereof to such number of
votes per share as equals
48
<PAGE>
the whole number of shares of Common Stock into which each share of Series B
Convertible Preferred Stock is then convertible. Upon the closing of the
Offerings, each share of Series B Convertible Preferred Stock shall be
automatically converted into Common Stock without payment of additional
consideration at a conversion price of $6.07 per share, subject to anti-dilution
adjustments. The Company may not reissue the Series B Convertible Preferred
Stock once it has been converted into Common Stock.
10% EXCHANGEABLE PREFERRED STOCK
The 10% Exchangeable Preferred Stock has a liquidation preference of $100
per share plus accrued and unpaid dividends thereon. Holders of the 10%
Exchangeable Preferred Stock are entitled to receive dividends equal to $10.00
per share per annum, of the liquidation preference thereof, and all dividends
are fully cumulative and accrue on a daily basis. Dividends may be paid in cash
or in kind by issuing a number of additional shares of 10% Exchangeable
Preferred Stock. If dividends are paid in kind, the Company is also required to
issue additional In-Kind Culligan Warrants to purchase a number of shares of
Common Stock (including fractional shares) in an amount equal to the liquidation
preference of such additional shares of 10% Exchangeable Preferred Stock divided
by the per share exercise price of the Culligan Warrants in effect immediately
prior to such dividend payment date. Holders of the 10% Exchangeable Preferred
Stock have no voting rights other than approval rights with respect to the
issuance of parity or senior securities or amendments to the Certificate of
Resolution establishing the series of 10% Exchangeable Stock which adversely
affect the holders thereof. The Company may exchange the 10% Exchangeable Stock
for subordinated notes in an aggregate principal amount equal to the liquidation
preference of the shares exchanged. The Company may redeem the 10% Exchangeable
Stock at any time at a cash redemption price equal to the liquidation preference
of the shares redeemed. The Company is obligated to redeem the 10% Exchangeable
Stock on April 14, 2005, at the cash redemption price. The Company intends to
redeem the 10% Exchangeable Preferred Stock with the proceeds of these
Offerings.
SERIES C PREFERRED STOCK
The Series C Preferred Stock has a liquidation preference of $10 per share
and was created to provide the holders thereof with the right to vote a number
of shares equal to the number of Culligan Warrants issued to them, such rights
to be effective only at such time or times that Culligan owns less than 20% of
the fully diluted Common Stock. The Company may redeem all (but not less than
all) of the Series C Preferred Stock at such time as the investors cease to own
at least 50% of the Fully Diluted Warrant Common Stock (as defined in the
Certificate of Designation of the Series C Preferred Stock).
13% EXCHANGEABLE PREFERRED STOCK
In April 1998, the Board of Directors authorized the designation of an
aggregate of 1,600,000 shares of the 13% Exchangeable Preferred Stock with a
liquidation preference of $100 per share plus accrued and unpaid dividends
thereon. Holders of the 13% Exchangeable Preferred Stock are entitled to receive
dividends until April 30, 1999 at a rate of $11.50 per share per annum at which
time the dividend rate will increase to $12.25 per share per annum. On May 1,
2000, the dividend rate on the 13% Exchangeable Preferred Stock will increase to
$13.00 per share per annum. Dividends are fully cumulative and payable quarterly
in cash, except that until May 1, 2003 dividends may be paid in kind by issuing
a number of additional shares of 13% Exchangeable Preferred Stock. If the
Company is unable for any reason to pay dividends in cash after May 1, 2003, the
holders of the 13% Exchangeable Preferred Stock have the right to add one
director to the Company's Board of Directors when four unpaid dividends have
accumulated after such date and one additional director upon each accumulation
of two additional unpaid dividends thereafter. In addition, the dividend rate
will be increased by $2.00 per share per annum until the default is cured. Such
increase in dividend rate may also become effective upon certain other defaults
by the Company under the Certificate of Resolution establishing the 13%
Exchangeable Preferred Stock (the "13% Preferred Stock Resolution"), and shall
remain effective until any such default is cured. Holders of the 13%
Exchangeable Preferred Stock have the benefit of certain affirmative and
negative covenants, but do not have voting rights other than as described above
and other than approval rights with respect to the issuance of additional shares
of 13% Exchangeable Preferred Stock or amendments to the 13% Preferred Stock
Resolution which
49
<PAGE>
adversely affect the holders thereof. The Company may redeem the 13%
Exchangeable Preferred Stock at any time after the fourth anniversary of the
issue date, in which case the cash redemption price is $106.50 per share prior
to the fifth anniversary of the issue date and $100.00 per share after such
fifth anniversary, plus, in each case, accumulated and unpaid dividends thereon.
All optional redemptions are subject to contractual and other restrictions with
respect thereto (including the Indenture and the Credit Facility) and to
applicable provisions of the TBCA. The Company is obligated to redeem the 13%
Exchangeable Preferred Stock for cash on May 1, 2005, or, if earlier, upon the
occurrence of certain change of control or asset sale events, in each case
subject to applicable provisions of the TBCA and all the other restrictions
(including the Indenture and the Credit Facility). The Company may exchange the
13% Exchangeable Preferred Stock for subordinated notes in an aggregate
principal amount of the liquidation preference amount of the 13% Exchangeable
Preferred Stock. Upon the closing of the Offerings, $7.5 million of 13%
Exchangeable Preferred Stock (75,000 shares) plus accrued dividends payable on
such preferred stock will be exchanged by the holder thereof for shares of
Common Stock at 91.75% of the Price to Public on the cover page of this
Prospectus. Upon completion of the Offerings, the 13% Exchangeable Preferred
Stock will become redeemable (only with proceeds from the Offering) at $133.00
per share plus accumulated and unpaid dividends thereon. Despite the foregoing,
to the extent the Underwriters' over-allotment options are exercised, the
proceeds thereof will be used to redeem shares of 13% Exchangeable Preferred
Stock held by Ares for 109% of the liquidation preference thereof. In addition,
Ares has agreed to allow the Company to redeem any remaining outstanding 13%
Exchangeable Preferred Stock for 109% of the liquidation preference thereof
until May 1, 1999 and 111% of the liquidation preference thereof until May 1,
2000.
Payment of cash dividends, redemption of the 13% Exchangeable Preferred
Stock and the exchange of the 13% Exchangeable Preferred Stock for subordinated
notes is restricted by covenants under the Indenture and Credit Facility.
WARRANTS
The following table delineates the terms of certain warrants the Company
has outstanding. Among other terms, these warrants contain certain anti-dilution
provisions and certain registration rights. See "-- Registration Rights."
<TABLE>
<CAPTION>
UNDERLYING EXERCISE EXPIRATION
NAME COMMON SHARES PRICE DATE
- ---------------------------------------- ------------- ------------ --------------
<S> <C> <C> <C>
12% Senior Note Warrants(1)............. 767,828 $0.01/Share April 15, 2004
Jefferies Warrants(1)................... 127,972 $0.01/Share April 15, 2004
Culligan Warrants(2).................... 1,998,921 $13.00/Share April 15, 2005(3)
SV Warrants(4).......................... 100,000 $14.00/Share July 17, 2002
Ares Warrants(5)........................ 975,752 $0.01/Share May 1, 2005(6)
Others.................................. 15,000 $15.00/Share June 30, 2003
------------- ------------
Total.............................. 3,985,473 $6.93/Share(7)
============= ============
</TABLE>
- ------------
(1) Issued in connection with the issuance of 12% Senior Notes.
(2) Issued pursuant to warrant agreements entered into in connection with an
issuance of 10% Exchangeable Preferred Stock and Series C Preferred Stock.
(3) Required to be exercised on or before the earlier to occur of April 15, 2005
or (ii) the first anniversary of the last day of the first period of 20
consecutive trading days following the closing of these Offerings during
which the closing price of the Common Stock is above $26 per share.
(4) Issued in connection with the issuance of 300,000 shares of Common Stock.
(5) Issued pursuant to warrant agreements entered into in connection with the
issuance of 13% Exchangeable Preferred Stock.
(6) Required to be exercised on or before the earlier to occur of (i) May 1,
2005 or (ii) 10 business days following the closing of the Offerings.
(7) Weighted average exercise price.
50
<PAGE>
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Company's Articles 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 among 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.
Article 1302-7.06 of the Texas Miscellaneous Corporation Act ("TMCA")
authorizes a Texas corporation to include a provision in its articles of
incorporation limiting or eliminating the personal liability of its directors to
the corporation and its shareholders for monetary damages for breach of
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Absent the
limitations authorized by such provision, directors are accountable to
corporations and their shareholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Although
Article 1302-7.06 of the TMCA does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. Pursuant to such provision, the Articles of
Incorporation limit the personal liability of directors of the Company (in their
capacity as directors but not in their capacity as officers) to the Company or
its shareholders to the fullest extent permitted by the TMCA. Specifically, a
director of the Company will not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for (i) any breach of the director's duty of loyalty to the Company or
its shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases, redemptions or other distributions, and
(iv) any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter shareholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have benefited 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. The Commission has taken the position
that this provision will have no effect on claims arising under the federal
securities laws.
ANTI-TAKEOVER CONSIDERATIONS
ANTI-TAKEOVER STATUTE. On September 1, 1997, the Company became subject to
newly-enacted Part 13 of the TBCA ("Part 13"), which subject to certain
exceptions, prohibits a Texas corporation from engaging in any "business
combination" with an "affiliated shareholder" for three years following the
date that such shareholder became an affiliated shareholder, unless: (i) prior
to such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the shareholder
becoming an affiliated shareholder or (ii) the business combination is
authorized at a meeting of shareholders called not less than six months after
such date by the affirmative vote of at least two-thirds of the outstanding
voting shares not owned by the affiliated shareholder.
Part 13 generally defines a "business combination" to include: (i) any
merger, share exchange or conversion involving the corporation and the
affiliated shareholder, (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 10% or more of the assets of the corporation to
the affiliated shareholder, (iii) subject to certain exceptions, any transaction
that results in the issuance or transfer by the
51
<PAGE>
corporation of any stock of the corporation to the affiliated shareholder, (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate ownership percentage of the stock of any class or series of the
corporation beneficially owned by the affiliated shareholder, (v) any receipt by
the affiliated shareholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation, or
(vi) any adoption of a plan or proposal for the liquidation or dissolution of
the corporation proposed by, or pursuant to any agreement or understanding with,
an affiliated shareholder. In general, Part 13 defines an "affiliated
shareholder" as any entity or person beneficially owning 20% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person. The provisions of
Part 13 could have the effect of delaying, deferring or preventing a change of
control of the Company even if a change of control were in the shareholders'
interests.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
REGISTRATION RIGHTS AGREEMENTS
Approximately 1,810,790 shares of Common Stock, 3,985,473 shares of Common
Stock underlying warrants and 574,831 shares of Common Stock underlying
Convertible Preferred Stock have the benefit of "demand" registration rights
that allow the holder to require the Company at any time, subject to certain
limitations, to file a registration statement under the Securities Act at the
Company's expense covering all or part of such securities. In addition, holders
of these securities and an additional 722,960 shares of Common Stock have the
benefit of "piggyback" registration rights that allow the holders thereof to
require the Company to register the underlying shares of common stock if the
Company files a registration statement under the Securities Act. If such
registration statement is with respect to an underwritten offering, the
underwriter thereof may reduce the amount of "piggyback" shares to be
registered in the underwriting in its discretion. These registration rights
agreements include traditional covenants and indemnification provisions
including the indemnification of the selling shareholders for violations of the
Securities Act.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial number of shares of Common Stock in the
public market could adversely affect trading prices prevailing from time to
time.
Upon completion of the Offerings, the Company will have outstanding
shares of Common Stock. The shares sold in the Offerings will be freely
tradable without restriction under the Securities Act, unless purchased by
"affiliates" of the Company as that term is defined in Rule 144, which is
summarized below. Of the remaining 5,047,310 shares, 2,528,140 shares are freely
transferable and 2,519,170 shares are "restricted securities" as that term is
defined in Rule 144 ("Restricted Shares"). Restricted Shares may be sold in
the public market only if such sale is registered under the Securities Act or if
such sale qualifies for an exemption from registration, such as the one provided
by Rule 144. Sales of the Restricted Shares in the open market, or the
availability of such shares for sale, could adversely affect the trading price
of the Common Stock.
In addition, a total of 3,985,473 shares of Common Stock have been reserved
for issuance upon the exercise of outstanding warrants at a weighted average
exercise price of $6.93 per share with expiration dates ranging from July 2002
to May 2005. See "Description of Capital Stock -- Warrants." A total of
1,393,700 shares of Common Stock have been reserved for issuance under stock
option plans, 39,200 of which are issuable upon exercise of options outstanding
August 31, 1998.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year following the later of the date of the acquisition of such shares
from the issuer or an affiliate of the issuer would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(i) 1% of the number of shares of Common Stock then outstanding (approximately
shares immediately after the Offerings) or (ii) the
52
<PAGE>
average weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
following the later of the date of the acquisition of such shares from the
issuer or an affiliate of the issuer, is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general summary of certain United States federal income
and estate tax consequences expected to result under current law from the
purchase, ownership and taxable disposition of Common Stock by Non-U.S. Holders
of Common Stock. A "Non-U.S. Holder" is any person or entity other than (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any state thereof, (iii) an estate, the income of which is subject to United
States federal income taxation regardless of its source or (iv) a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States fiduciaries who have the authority to
control all substantial decisions of the trust. This summary is for general
information only and does not address all of the United States federal income
and estate tax considerations that may be relevant to Non-U.S. Holders in light
of their particular circumstances or to Non-U.S. Holders that may be subject to
special treatment under United States federal income tax laws. Furthermore, this
summary does not discuss any aspect of state, local or foreign taxation. This
summary is based on current provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations, judicial opinions, published
positions of the United States Internal Revenue Service and other applicable
authorities, all of which are subject to change, possibly with retroactive
effect. Prospective purchasers of Common Stock are advised to consult their tax
advisors regarding the federal, state and local and foreign income and other tax
consequences of acquiring, holding and disposing of Common Stock.
DIVIDENDS
Dividends paid to a Non-U.S. Holder on shares of Common Stock will be
subject to withholding of United States federal income tax at a 30 percent rate
(or such lower rate as may be provided by an applicable income tax treaty
between the United States and a foreign country) unless the dividends are
effectively connected with the conduct of a trade or business of the Non-U.S.
Holder within the United States (or, in the case of an applicable tax treaty,
are attributable to a United States permanent establishment maintained by such
Non-U.S. Holder). Dividends that are effectively connected with the conduct of a
trade or business within the United States (or are attributable to a United
States permanent establishment) will be subject to United States federal income
tax on a net income basis (that is, after allowance for applicable deductions)
which is not collected by withholding provided the Non-U.S. Holder files the
appropriate certification with the Company or its agent. Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30
percent rate or such lower rate as may be specified by an applicable income tax
treaty.
Under United States Treasury Regulations currently in effect, dividends
paid to an address outside the United States will be presumed to be paid to a
resident of the country of address (unless the payor has knowledge to the
contrary) for purposes of the withholding tax rules discussed above and for
purposes of determining the applicability of a tax treaty rate. Under
recently-issued United States Treasury Regulations that are effective for
payments made after December 31, 1999 ("Final Regulations"), a Non-U.S. Holder
of Common Stock who wishes to claim the benefit of a tax treaty rate would be
required to satisfy applicable certification requirements. In addition, under
such Final Regulations, in the case of Common Stock held by a foreign
partnership, (i) the certification requirement generally would be applied to the
partners of the
53
<PAGE>
partnership, and (ii) the partnership would be required to provide certain
information, including a United States taxpayer identification number.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
SALE OR DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other taxable
disposition of Common Stock so long as (i) the gain is not effectively connected
with the conduct of a trade or business of the Non-U.S. Holder in the United
States; (ii) in the case of a Non-U.S. Holder who is an individual and holds the
Common Stock as a capital asset, either (a) such holder is not present in the
United States for 183 or more days in the taxable year of the disposition or (b)
such holder does not have a "tax home" in the United States for United States
federal income tax purposes nor does such holder maintain an office or other
fixed place of business in the United States to which such gain is attributable;
(iii) such Non-U.S. Holder is not subject to tax pursuant to the provisions of
United States federal income tax law applicable to certain United States
expatriates or (iv) the Common Stock continues to be "regularly traded on an
established securities market" for United States federal income tax purposes
and the Non-U.S. Holder has not held, directly or indirectly, at any time during
the five-year period ending on the date of disposition (or, if shorter, the
Non-U.S. Holder's holding period) more than 5 percent of the outstanding Common
Stock.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced by an applicable tax treaty. Copies of these
information returns may also be made available under the provisions of a treaty
or information exchange agreement with the tax authorities in the country in
which the Non-U.S. Holder resides. Under current law, U.S. backup withholding
tax (which is a withholding tax currently imposed at the rate of 31 percent on
certain payments to persons who fail to furnish the information required under
U.S. information reporting requirements) generally will not apply to dividends
paid on Common Stock to a Non-U.S. Holder at an address outside the United
States unless the payor has knowledge that the payee is a United States person.
However, under the Final Regulations described above, dividends paid on Common
Stock after December 31, 1999 may be subject to backup withholding unless
applicable certification requirements are satisfied.
Payments of the proceeds from a sale of Common Stock to or through a U. S.
office of a broker will be subject to information reporting and backup
withholding unless the owner certifies as to its status as a Non-U.S. Holder
under penalties of perjury or otherwise establishes an exemption. Payment of the
proceeds from a sale of Common Stock to or through a non-U.S. office of a broker
generally will not be subject to information reporting or backup withholding;
however, if such broker is (i) a United States person, (ii) a "controlled
foreign corporation," or (iii) a foreign person that derives 50 percent or more
of its gross income from the conduct of a trade or business in the United
States, such payment will be subject to information reporting (but currently not
backup withholding) unless such broker has documentary evidence in its records
that the owner is a Non-U.S. Holder and certain other conditions are met or the
owner otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be credited
against the Non-U.S. Holder's federal income tax liability, if any, or refunded,
provided the required information is furnished to the Internal Revenue Service.
ESTATE TAX
The fair market value of Common Stock owned (or treated as owned) by an
individual at the time of his death will be includible in his gross estate for
U. S. federal estate tax purposes and thus may be subject
54
<PAGE>
to U. S. estate tax, even though the individual at the time of death is neither
a citizen of nor domiciled in the United States, unless an applicable estate tax
treaty provides otherwise.
UNDERWRITING
Subject to the terms and conditions set forth in the U.S. purchase
agreement (the "U.S. Purchase Agreement") among the Company and each of the
underwriters named below (the "U.S. Underwriters"), the Company has agreed to
sell to each of the U.S. Underwriters, and each of the U.S. Underwriters
severally has agreed to purchase from the Company, the number of shares of
Common Stock set forth opposite its name below.
NUMBER
U.S. UNDERWRITER OF SHARES
---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............
Jefferies & Company, Inc................
Bear, Stearns & Co. Inc.................
NationsBanc Montgomery Securities
LLC...................................
Stephens Inc............................
---------
Total......................
=========
The Company has also entered into an international purchase agreement (the
"International Purchase Agreement") with Merrill Lynch International,
Jefferies International Limited, Bear, Stearns International Limited,
NationsBanc Montgomery Securities LLC and Stephens Inc. outside the United
States and Canada (the "International Managers" and, together with the U.S.
Underwriters, the "Underwriters"), for whom Merrill Lynch International is
acting as representative. Subject to the terms and conditions set forth in the
International Purchase Agreement, and concurrently with the sale of
shares of Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase
Agreement, the Company has agreed to sell to the International Managers, and the
International Managers severally have agreed to purchase from the Company, an
aggregate of shares of Common Stock. The public offering price per share
and the total underwriting discount per share are identical under the U.S.
Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such Purchase Agreement if any of such shares being sold pursuant to each
such Purchase Agreement are purchased. Under certain circumstances, the
commitments of the non-defaulting U.S. Underwriters or the International
Managers (as the case may be) may be increased as set forth in the U.S. Purchase
Agreement and the International Purchase Agreement, respectively. The closing
with respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale at the public offering price, less an amount not
greater than the selling concession. Under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are non-United States or non-Canadian persons, and the International
Managers and any dealer to whom they sell shares of Common Stock will not offer
to sell or sell shares of Common Stock to persons who are United States or
Canadian persons or to persons they believe intend to resell to United States or
Canadian persons, except, in each case, for transactions pursuant to the
Intersyndicate Agreement.
55
<PAGE>
The U.S. Underwriters have advised the Company that they propose initially
to offer the shares of Common Stock offered hereby to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The U.S. Underwriters may allow, and such dealers may reallow, a discount
not in excess of $ per share to certain other dealers. After the Offerings,
the public offering price, concession and discount may be changed.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering price
set forth on the cover page hereof, less the underwriting discount. The U.S.
Underwriters may exercise this option to cover over-allotments, if any, made on
the sale of the shares of Common Stock offered hereby. If the U.S. Underwriters
exercise this option, each U.S. Underwriter will have a firm commitment, subject
to certain conditions, to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the shares of Common Stock initially offered
hereby. The Company has also granted an option to the International Managers,
which expires 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock to cover over-allotments, if any, on
terms similar to those granted to the U.S. Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Company, its executive officers and directors, and certain shareholders
of the Company have agreed that for a period of 180 days from the date of this
Prospectus they will not, without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the Underwriters, (i) directly
or indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or file any registration statement under the Securities Act
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing restrictions do not apply, however, to the shares of
Common Stock being sold hereunder, any shares of Common Stock issued by the
Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to herein, any shares of
Common Stock issued or options to purchase Common Stock granted pursuant to
existing employee benefit plans of the Company or any shares of Common Stock or
any securities convertible or exchangeable into Common Stock issued as payment
of any part of the purchase price for businesses which are acquired by the
Company, subject to certain conditions.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the U.S. Underwriters and certain selling group members to bid for and purchase
the Common Stock. As an exception to these rules, the U.S. Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, I.E., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S. Underwriters
may reduce that short position by purchasing Common Stock in the open market.
The U.S. Underwriters may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The U.S. Underwriters may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the U.S. Underwriters purchase
shares of Common Stock in the open market to
56
<PAGE>
reduce the Underwriters' short position or to stabilize the price of the Common
Stock, they may reclaim the amount of the selling concession from the
Underwriters and selling group members who sold those shares as part of the
Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it was
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The U.S. Underwriters have reserved for sale, at the initial public
offering price, up to 150,000 shares of Common Stock for certain employees,
directors and business associates of, and certain other persons designated by,
the Company who have expressed an interest in purchasing such shares of Common
Stock. The number of shares available for sale to the general public in the
Offerings will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered to the general
public on the same basis as other shares offered hereby.
Prior to the Offerings, there has been no established trading market for
the shares of Common Stock. The initial public offering price for the Common
Stock offered hereby has been determined by negotiations between the Company and
the Underwriters. Among the factors considered in making such determination were
the history of and the prospects for the industry in which the Company competes,
an assessment of the Company's management, the past and present operations of
the Company and the Acquisitions, the historical results of operations of the
Company and the Acquisitions and the trend of their revenues and earnings, the
prospects for future earnings of the Company, the general condition of prices of
similar securities of generally comparable companies and other relevant factors.
There can be no assurance that an active trading market will develop for the
Common Stock or that the Common Stock will trade in the public market subsequent
to the Offerings at or above the initial public offering price.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Jefferies has provided financial advisory services to the Company in the
past for which it has received usual and customary compensation, some of which
has been paid in the form of warrants to purchase Common Stock, and may provide
such services to the Company in the future. In particular, Jefferies acted as
(i) the Initial Purchaser in connection with the issuance and sale of the 9 3/4%
Senior Notes, (ii) the Initial Purchaser in connection with the issuance and
sale of the 12% Senior Notes and (iii) financial advisor to the Company with
respect to the Reddy Acquisition. Jefferies has agreed to pay a finder's fee
equal to 10% of the total underwriting discount that it receives in the
Offerings to Williams Financial Group, an NASD member, who will remit 95% of
such finder's fee to James M. Raines, an independent financial consultant to the
Company, who is associated with Williams Financial Group. Mr. Raines
beneficially owns a total of 47,734 shares of Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the sale of the Common Stock
offered hereby are being passed upon for the Company by Akin, Gump, Strauss,
Hauer & Feld, L.L.P. and for the Underwriters by Vinson & Elkins L.L.P.,
Houston, Texas.
Cecil Schenker, a holder of 4,000 shares of Common Stock, is a partner of
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
57
<PAGE>
EXPERTS
The (i) consolidated financial statements of Packaged Ice, Inc. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, (ii) the financial statements of Reddy Ice Corporation as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and (iii) the combined financial statements of Mission Party
Ice, Inc. and Southwest Texas Packaged Ice, Inc. as of and for the year ended
December 31, 1996, included in this Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Cassco Ice and Cold Storage, Inc. as of June
27, 1998 and June 28, 1997 and for the years then ended have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Southwestern Ice, Inc. as of and for the years
ended December 31, 1996 and 1995, included in this Prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement and to the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
necessarily summaries, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. In addition, the Company is subject to the informational requirements
of the Exchange Act, and in accordance therewith the Company files periodic
reports and other information with the Commission relating to its business,
financial statements and other matters. A copy of the Registration Statement 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 its following regional offices: Suite 788, 1375 Peachtree St. N.E.,
Atlanta, Georgia 30367; Citicorp Center, 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60621-2511; and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, or at the Commission's Internet world wide
web site at http://www.sec.gov. In addition, the Common Stock will be listed on
the Nasdaq National Market and copies of the foregoing materials and other
information concerning the Company can be inspected at the offices of the Nasdaq
National Market at 11 Wall Street, 18th Floor, New York, New York 10005-1905.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
PACKAGED ICE, INC. AND SUBSIDIARIES
Independent Auditors' Report....... F-2
Consolidated Balance Sheets at June
30, 1998 (unaudited) and December
31, 1997
and 1996......................... F-3
Consolidated Statements of
Operations for the Six Months
Ended June 30, 1998 and 1997
(unaudited) and for the Years
Ended December 31, 1997, 1996
and 1995......................... F-4
Consolidated Statements of
Shareholders' Equity for the Six
Months Ended June 30, 1998
(unaudited) and for the Years
Ended December 31, 1997, 1996 and
1995.............................. F-5
Consolidated Statements of Cash
Flows for the Six Months Ended
June 30, 1998 and 1997 (unaudited)
and for the Years Ended December
31, 1997, 1996 and 1995........... F-6
Notes to Consolidated Financial
Statements........................ F-7
REDDY ICE CORPORATION
Independent Auditor's Report....... F-19
Balance Sheets at March 31, 1998
(Unaudited) and December 31, 1997
and 1996.......................... F-20
Statements of Operations for the
Three Months Ended March 31, 1998
and 1997 (Unaudited) and for the
Years Ended December 31, 1997,
1996 and 1995..................... F-21
Statements of Shareholders' Deficit
for the Three Months Ended March
31, 1998 (unaudited) and for the
Years Ended December 31, 1997,
1996
and 1995......................... F-22
Statements of Cash Flows for the
Three Months Ended March 31, 1998
and 1997 (Unaudited) and for the
Years Ended December 31, 1997,
1996 and 1995..................... F-23
Notes to Financial Statements...... F-24
CASSCO ICE AND COLD STORAGE, INC.
Independent Auditors' Report....... F-32
Balance Sheets at June 27, 1998 and
June 28, 1997..................... F-33
Statements of Earnings for the
Years Ended June 27, 1998 and June
28, 1997.......................... F-34
Statements of Shareholder's Equity
for the Years Ended June 27, 1998
and June 28, 1997................. F-35
Statements of Cash Flows for the
Years Ended June 27, 1998 and June
28, 1997.......................... F-36
Notes to Financial Statements...... F-37
MISSION PARTY ICE, INC. AND SOUTHWEST
TEXAS PACKAGED ICE, INC.
Independent Auditor's Report....... F-43
Combined Balance Sheets at March
31, 1997 (unaudited) and at
December 31, 1996................. F-44
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-45
Combined Statements of Cash Flows
for the Three Months Ended March
31, 1997 (Unaudited) and for the
Year Ended December 31, 1996...... F-46
Notes to Combined Financial
Statements........................ F-47
Independent Auditors' Report on
Additional Information............ F-53
Combined Balance Sheet with
Combining Information at December
31, 1996.......................... F-54
Combined Statement of Operations
with Combining Information for the
Year Ended December 31, 1996...... F-55
SOUTHWESTERN ICE, INC.
Report of Independent
Accountants....................... F-56
Balance Sheets at March 31, 1997
(Unaudited) and December 31, 1996
and 1995.......................... F-57
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-58
Statements of Cash Flows for the
Three Months Ended March 31, 1997 X
and 1996 (Unaudited) and for the
Years Ended December 31, 1996 and
1995.............................. F-59
Notes to Financial Statements...... F-60
F-1
<PAGE>
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, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 27, 1998
F-2
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------------
1998 1997 1996
------------- ------------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and equivalents............... $ 7,311,166 $ 14,825,259 $ 169,535
Short-term cash investment......... -- 4,543,552 --
Accounts-receivable:
Trade............................ 26,071,251 4,038,582 213,811
Affiliates....................... 11,167 64,727 119,476
Inventory.......................... 7,664,299 1,347,496 115,825
Prepaid expense.................... 1,477,605 321,492 29,309
------------- ------------- ------------
Total current assets........ 42,535,488 25,141,108 647,956
PROPERTY, net........................ 140,566,600 43,297,449 9,887,687
OTHER ASSETS:
Goodwill, net...................... 195,722,984 44,280,568 --
Debt issuance cost, net............ 9,365,759 6,297,712 144,460
Other.............................. 4,366,946 3,283,617 842,685
------------- ------------- ------------
TOTAL....................... $ 392,557,777 $ 122,300,454 $ 11,522,788
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
obligations........................ $ 76,438 $ -- $ 703,077
Accounts payable................... 9,509,359 1,965,093 324,624
Payable to affiliates.............. 135,363 1,309,083 634,585
Accrued expense.................... 10,363,848 1,461,030 170,750
Accrued interest................... 11,576,456 1,875,972 39,272
Notes payable...................... -- 1,975,968 3,425
------------- ------------- ------------
Total current liabilities... 31,661,464 8,587,146 1,875,733
LONG-TERM OBLIGATIONS................ 285,523,921 67,501,537 2,831,955
CONVERTIBLE NOTES.................... -- -- 750,000
COMMITMENTS AND CONTINGENCIES........
MANDATORILY REDEEMABLE PREFERRED
STOCK:
10%, Exchangeable -- 259,860 shares
issued and
outstanding at June 30, 1998 and
250,000 shares issued and
outstanding at December 31, 1997,
liquidation preference of $100
per share........................ 26,438,356 25,198,630 --
13% Exchangeable, 400,000 shares
issued and outstanding at June 30,
1998, liquidation preference of
$100 per share..................... 36,006,168 -- --
PREFERRED STOCK WITH PUT REDEMPTION
OPTION:
Series A Convertible -- 450,000
shares issued and outstanding at
June 30, 1998 and December 31,
1997 and 1996.................... 2,496,528 2,496,527 2,496,527
Series B Convertible -- 124,831
shares issued and outstanding at
June 30, 1998 and December 31,
1997............................. 726,226 726,226 --
COMMON STOCK WITH PUT REDEMPTION
OPTION, 420,000 shares issued and
outstanding at June 30, 1998 and
December 31, 1997, and 1996........ 1,971,851 1,971,851 1,971,851
SHAREHOLDERS' EQUITY:
Preferred stock, Series C, $.01 par
value, 100 shares
authorized and outstanding at
June 30, 1998.................... -- -- --
Common stock, $.01 par value;
50,000,000 shares authorized;
shares issued of 4,922,541 at
June 30, 1998 and 4,015,981 at
December 31, 1997, and 2,406,371
at December 31, 1996............. 49,225 40,160 24,064
Additional paid-in capital......... 41,321,849 28,804,811 4,669,301
Less: 298,231 shares of treasury
stock, at cost..................... (1,491,155) (1,491,155) --
Accumulated deficit................ (32,146,656) (11,535,279) (3,096,643)
------------- ------------- ------------
Total shareholders'
equity...................... 7,733,263 15,818,537 1,596,722
------------- ------------- ------------
TOTAL....................... $ 392,557,777 $ 122,300,454 $ 11,522,788
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------- --------------------------------------------
1998 1997 1997 1996 1995
--------------- -------------- -------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 59,415,727 $ 8,123,936 $ 28,980,564 $ 4,426,860 $ 2,830,493
Cost of sales........................ 35,473,491 4,702,916 18,723,786 2,034,828 1,251,527
--------------- -------------- -------------- -------------- ------------
Gross profit......................... 23,942,236 3,421,020 10,256,778 2,392,032 1,578,966
Selling, general and
administrative..................... 11,762,724 2,182,420 7,635,538 1,981,278 1,514,542
Depreciation and amortization........ 6,822,376 1,825,857 5,129,879 1,455,693 751,291
--------------- -------------- -------------- -------------- ------------
Income (loss) from operations........ 5,357,136 (587,257) (2,508,639) (1,044,939) (686,867)
Other income, net.................... 144,992 407,597 655,320 184,982 75,314
Interest expense..................... (8,726,612) (1,518,546) (6,585,317) (130,475) (76,929)
--------------- -------------- -------------- -------------- ------------
Loss before income taxes............. (3,224,484) (1,698,206) (8,438,636) (990,432) (688,482)
Income taxes......................... -- -- -- -- --
--------------- -------------- -------------- -------------- ------------
Net loss before extraordinary item... (3,224,484) (1,698,206) (8,438,636) (990,432) (688,482)
Extraordinary loss on refinancing.... (17,386,893) -- -- -- --
--------------- -------------- -------------- -------------- ------------
Net loss............................. $ (20,611,377) $ (1,698,206) $ (8,438,636) $ (990,432) $ (688,482)
=============== ============== ============== ============== ============
Net loss to common shareholders...... $ (22,619,870) $ (1,698,206) $ (8,637,266) $ (990,432) $ (688,482)
=============== ============== ============== ============== ============
Loss per share of common
stock -- basic and diluted:
Net loss before extraordinary item
available to common
shareholders.................... $ (1.11) $ (0.53) $ (2.40) $ (0.35) $ (0.26)
Extraordinary item.............. (3.68) -- -- -- --
--------------- -------------- -------------- -------------- ------------
Net loss to common shareholders.... $ (4.79) $ (0.53) $ (2.40) $ (0.35) $ (0.26)
=============== ============== ============== ============== ============
Weighted average common shares
outstanding........................ $ 4,721,536 $ 3,231,509 $ 3,600,109 $ 2,826,371 2,682,261
=============== ============== ============== ============== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER OF PAR PAID-IN SUBSCRIPTION TREASURY ACCUMULATED
SHARES VALUE CAPITAL RECEIVABLE STOCK DEFICIT
---------- ------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
BALANCE AT December 31, 1994............ 2,626,371 $26,264 $ 5,853,334 $(34,399) $ -- $ (1,417,729)
Issuance of common stock............ 280,000 2,800 1,311,767 29,600 -- --
Repurchase of common stock.......... (500,000) (5,000) (2,495,800) -- -- --
Net loss............................ -- -- -- -- -- (688,482)
---------- ------- ------------- ------------ ----------- ------------
BALANCE AT December 31, 1995............ 2,406,371 24,064 4,669,301 (4,799) -- (2,106,211)
Issuance of common stock............ -- -- -- 4,799 -- --
Net loss............................ -- -- -- -- -- (990,432)
---------- ------- ------------- ------------ ----------- ------------
BALANCE AT December 31, 1996............ 2,406,371 24,064 4,669,301 -- -- (3,096,643)
Issuance of common stock............ 1,609,610 16,096 15,767,822 -- -- --
Issuance of detachable warrants to
purchase common stock............. -- -- 9,422,335 -- -- --
Issuance costs of 10% exchangeable
preferred stock................... -- -- (856,017) -- -- --
Dividends accumulated on 10%
exchangeable preferred stock...... -- -- (198,630) -- -- --
Purchase of treasury stock.......... -- -- -- -- (1,491,155) --
Net loss............................ -- -- -- -- -- (8,438,636)
---------- ------- ------------- ------------ ----------- ------------
BALANCE AT December 31, 1997............ 4,015,981 $40,160 28,804,811 -- (1,491,155) (11,535,279)
Issuance of common stock
(Unaudited)....................... 906,560 9,065 10,565,596 -- -- --
Dividends accumulated on
exchangeable preferred stocks
(unaudited)....................... -- -- (2,008,493) -- -- --
Issuance costs on 13% exchangeable
preferred stock (unaudited)....... -- -- (802,665) -- -- --
Warrants issued in connection with
13% exchangeable preferred stock
(unaudited)....................... -- -- 4,878,760 -- -- --
Amortization of warrants
(unaudited)....................... -- -- (116,160) -- -- --
Net loss (unaudited)................ -- -- -- -- -- (20,611,377)
---------- ------- ------------- ------------ ----------- ------------
BALANCE AT June 30, 1998 (unaudited).... 4,922,541 $49,225 $ 41,321,849 $ -- $(1,491,155) $(32,146,656)
========== ======= ============= ============ =========== ============
</TABLE>
TOTAL
-------------
BALANCE AT December 31, 1994............ $ 4,427,470
Issuance of common stock............ 1,344,167
Repurchase of common stock.......... (2,500,800)
Net loss............................ (688,482)
-------------
BALANCE AT December 31, 1995............ 2,582,355
Issuance of common stock............ 4,799
Net loss............................ (990,432)
-------------
BALANCE AT December 31, 1996............ 1,596,722
Issuance of common stock............ 15,783,918
Issuance of detachable warrants to
purchase common stock............. 9,422,335
Issuance costs of 10% exchangeable
preferred stock................... (856,017)
Dividends accumulated on 10%
exchangeable preferred stock...... (198,630)
Purchase of treasury stock.......... (1,491,155)
Net loss............................ (8,438,636)
-------------
BALANCE AT December 31, 1997............ 15,818,537
Issuance of common stock
(Unaudited)....................... 10,574,661
Dividends accumulated on
exchangeable preferred stocks
(unaudited)....................... (2,008,493)
Issuance costs on 13% exchangeable
preferred stock (unaudited)....... (802,665)
Warrants issued in connection with
13% exchangeable preferred stock
(unaudited)....................... 4,878,760
Amortization of warrants
(unaudited)....................... (116,160)
Net loss (unaudited)................ (20,611,377)
-------------
BALANCE AT June 30, 1998 (unaudited).... $ 7,733,263
=============
See notes to consolidated financial statements.
F-5
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (20,611,377) $ (1,698,206) $ (8,438,636) $ (990,432) $ (688,482)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities
(excluding working capital from
Acquisitions):
Depreciation and amortization.... 6,822,376 1,825,857 5,129,879 1,455,693 751,291
Amortization of debt discount.... 99,971 -- 576,805 -- --
Gain from disposal of assets..... -- (3,915) (4,030) (2,584) --
Extraordinary loss from
refinancing.................... 17,386,893 -- -- -- --
Changes in assets and
liabilities:
Accounts receivable, inventory
and prepaid expenses........ (15,224,837) (1,795,987) (996,731) (26,189) (106,107)
Accounts payable and accrued
expenses.................... 8,994,973 327,514 440,928 657,540 191,181
------------- ------------- ------------ ------------ ------------
Net cash provided by (used
in) operating
activities................ (2,532,001) (1,344,737) (3,291,785) 1,094,028 147,883
------------- ------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions................. (10,809,575) (3,520,402) (10,764,733) (5,744,900) (2,717,444)
Cost of acquisitions............... (233,861,339) (8,396,319) (44,144,926) -- --
Investment in short-term cash
investments...................... 4,543,552 --
Purchase of short-term cash
investments...................... -- -- (4,499,415) -- --
Increase in other assets........... (218,678) (485,390) (2,279,504) (333,918) (243,621)
Proceeds from disposition of
property......................... -- -- 147,776 153,733 --
------------- ------------- ------------ ------------ ------------
Net cash used in investing
activities................ (240,346,040) (12,402,111) (61,540,802) (5,925,085) (2,961,065)
------------- ------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
and preferred stock.............. 39,237,474 71,280 27,100,791 -- 5,812,545
Repurchase of common stock and
preferred stock.................. -- -- (1,491,155) -- (2,500,800)
Proceeds from debt issuance, net... 260,070,557 44,954,082 69,562,179 3,604,403 82,232
Cost of refinancing................ (3,937,500) --
Issuance of preferred stock........ -- (23,774)
Proceeds from issuance and
conversion of convertible demand
notes............................ (23,774) 750,000 --
Borrowings from lines of credit.... 25,000,000 -- 9,900,000 -- --
Repayment of lines of credit....... (10,000,000) (3,485,000) (13,385,000) -- --
Repayment of debt.................. (75,006,583) (12,086,591) (12,174,730) (386,622) (359,510)
------------- ------------- ------------ ------------ ------------
Net cash provided by
financing activities...... 235,363,948 29,429,997 79,488,311 3,967,781 3,034,467
------------- ------------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS........................ (7,514,093) 15,683,149 14,655,724 (863,276) 221,285
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD............................. 14,825,259 169,535 169,535 1,032,811 811,526
------------- ------------- ------------ ------------ ------------
CASH AND EQUIVALENTS, END OF
PERIOD............................. $ 7,311,166 $ 15,852,684 $ 14,825,259 $ 169,535 $ 1,032,811
============= ============= ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments for interest......... $ 2,621,058 $ 162,418 $ 4,748,482 $ 114,383 $ 75,606
============= ============= ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued in
consideration for business
acquisitions..................... $ 10,534,521 $ 9,550,000 $ 12,814,283 $ -- $ --
============= ============= ============ ============ ============
Fair value of warrants issued in
connection with debt and
acquisitions..................... $ 4,762,600 $ 6,735,335 $ 9,422,335 $ -- $ --
============= ============= ============ ============ ============
Demand notes converted to preferred
stock............................ $ -- $ 750,000 $ 750,000 $ -- $ --
============= ============= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Packaged Ice, Inc. and its wholly owned subsidiaries (the "Company")
manufacture and distribute packaged ice by traditional delivery methods and
stand-alone automated merchandising ice systems ("ice systems") installed
primarily in retail locations. The ice systems produce and package bags of cubed
ice at the customer's location. At December 31, 1997, the Company's customers
were located primarily in the southern half of the United States.
2. RECENT EVENTS
On January 28, 1998, the Company completed a private offering of
$145,000,000 aggregate principal amount of its 9 3/4% Series A Senior Notes due
2005 (the "New Senior Notes"). The New Senior Notes are general unsecured
obligations of the Company, senior in right of payment to all existing and
future Subordinated Indebtedness of the Company and PARI PASSU to all senior
indebtedness of the Company except the New Senior Notes will be effectively
subordinated to the Existing Credit Facility and any future credit facility. The
New Senior Notes contain certain covenants that, among other things, limit the
ability of the Company and its restricted subsidiaries to pay any cash dividends
or make distributions with respect to the Company's capital stock, to incur
indebtedness or to create liens. Net proceeds from the sale of the New Senior
Notes were applied to (i) repurchase the Series B Notes and Series C Notes as
(see Note 6), (ii) repay all outstanding obligations under the Existing Credit
Facility, (iii) fund acquisitions of traditional ice companies and (iv) for
working capital and general corporate purposes.
Simultaneous with the issuance of the New Senior Notes, the Company
purchased and retired the $75 million of 12% Senior Notes due 2004 (see Note 6),
the Company will record an extraordinary charge of approximately $18.3 million
for such debt extinguishment relating to the write-off of debt discount, and
associated redemption premiums and issuance costs.
The Company's New Senior Notes are guaranteed, fully, jointly and
severally, and unconditionally, on a senior unsecured basis by each of the
Company's current and future wholly owned subsidiaries. (see Note 11 regarding
condensed financial information on subsidiary guarantors).
From January 1, 1998 through March 27, 1998, the Company has acquired
fifteen (15) traditional ice companies for a total purchase price of $55.9
million. In the aggregate, the Company paid $45.3 million in cash and issued
900,260 shares of stock valued at between $10 and $13 per share. The Company
issued the stock in reliance upon the exemption from registration under Section
4 (2) of the Securities Act of 1933, as amended. Each investor represented to
the Company that the investor acquired the stock for the investor's own account
and not with a view to distribution. The investor had access to all available
material information concerning the Company. The certificates evidencing the
stock bear an appropriate restrictive legend under the Securities Act of 1933,
as amended. The Company has not completed an assessment of the fair value of the
net assets acquired for purposes of allocating the excess of the purchase price
over the net book value of the acquired businesses. In conjunction with the
Company's ongoing assessment of the fair value of the net assets acquired from
the acquisitions discussed above, management has estimated the amortization
period of goodwill to be 40 years. The amortization period reflects management's
current estimate of the ultimate period to be benefited by these intangible
assets. The acquired businesses will be 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.
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.
F-7
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION -- The consolidated
financial statements presented herein at June 30, 1998 and for the six-month
periods ended June 30, 1998 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. At certain interim
reporting dates the Company's inventory includes packaged ice for sale, which is
accounted for at the lower of average cost or market. 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
be expected 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 that
extend the useful lives of the underlying assets are capitalized.
GOODWILL -- Goodwill is being amortized on a straight-line basis, primarily
over 40 years. Accumulated amortization of goodwill was $411,541, $0, and $0 at
December 31, 1997, 1996, and 1995, respectively.
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).
LONG-LIVED ASSETS -- The Company records impairment losses on long-lived
assets, including goodwill, used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets.
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 net
income (loss), after deducting the dividend requirement of preferred stock
($198,630 in 1997), divided by 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. For the years ended December 31, 1997, 1996 and 1995, all
potentially dilutive securities are anti-dilutive and therefore are not included
in the earnings per share calculation.
F-8
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information necessary to calculate basic
earnings per share for the periods indicated, with 1996 and 1995 being restated
to conform to the requirements of the Statement of Financial Accounting
Standards No. 128, Earnings Per Share, described below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Weighted Average Common Shares
Outstanding................... 3,600,109 2,826,371 2,682,261
============== ============ ============
Basic and Diluted Loss Per
Share......................... $ (2.40) $ (0.35) $ (0.26)
============== ============ ============
EARNINGS FOR BASIC AND DILUTED
COMPUTATION
Net Loss........................ $ (8,438,636) $ (990,432) $ (688,482)
Preferred Share Dividends....... (198,630) -- --
-------------- ------------ ------------
Net Loss to Common
Shareholders.................. $ (8,637,266) $ (990,432) $ (688,482)
============== ============ ============
</TABLE>
CASH FLOWS -- The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The Company's financial instruments
consist primarily of cash, accounts receivable, accounts payable and debt
obligations. The carrying amount of cash, trade accounts receivable and trade
accounts payable are representative of their respective fair values due to the
short-term maturity of these instruments. It is not practicable to estimate the
fair values of the affiliate amounts due to their related party nature. The fair
values of the Company's debt obligations (see Note 6) are representative of
their carrying values based upon the variable rate terms for the Senior Credit
Facility and management's opinion that the current rates offered to the Company
for fixed-rate long-term debt with the same remaining maturities and security
structure are equivalent to that of the Company's 12% Senior Notes.
USE OF ESTIMATES -- The preparation of consolidated 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.
STOCK BASED COMPENSATION -- In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation ("SFAS 123"), effective for the
Company on January 1, 1996. SFAS 123 permits, but does not require, a fair value
based method of accounting for employee stock option plans, resulting in
compensation expense being recognized in the results of operations when stock
options are granted. The Company plans to continue the use of its current
intrinsic value based method of accounting for stock option plans where no
compensation expense is recognized.
NEW ACCOUNTING PRONOUNCEMENTS -- In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. SFAS No. 128, which was effective for
periods ending after December 15, 1997, specifies the computation, presentation
and disclosure requirements of earnings per share and supersedes Accounting
Principles Board Opinion No. 15. SFAS No. 128 requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share, which excludes
the impact of potential common share equivalents, replaces primary earnings per
share. Diluted earnings per share, which utilizes the average market price per
share when applying the treasury stock method in determining potential common
share equivalents, replaces fully diluted earnings per share.
F-9
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the FASB also issued SFAS No. 129, Disclosure of
Information about Capital Structure, which establishes standards for disclosing
information about an entity's capital structure. SFAS No. 129 was effective for
periods ending after December 15, 1997. The adoption of SFAS No. 129 did not
impact the Company's capital structure disclosures.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 131 will not impact the Company's financial statements as it reports as
a single segment. SFAS Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997. For the six months ended June 30, 1998, the Company had
no items of comprehensive income, and as a result the Company's reported net
income was the same as comprehensive income.
RECLASSIFICATION -- Certain amounts from previous years have been
reclassified to conform to the current presentation.
4. PROPERTY AND EQUIPMENT
Property and equipment were as follows at December 31:
1997 1996
-------------- --------------
Land................................. $ 1,880,974 $ --
Buildings............................ 5,159,086 --
Ice Systems Equipment................ 19,518,650 11,634,671
Plant Equipment & Machinery.......... 10,662,952 --
Furniture & Fixtures................. 134,455 32,278
Computer equipment................... 481,470 65,725
Vehicles............................. 4,509,823..... 25,492
Leasehold improvements............... 1,400,891 16,526
Merchandisers........................ 4,970,400 --
Construction in Progress............. 253,892 --
-------------- --------------
Total property and equipment......... 48,972,593 11,774,692
Less: accumulated depreciation and
amortization....................... 5,675,144 1,887,005
-------------- --------------
Total........................... $ 43,297,449 $ 9,887,687
============== ==============
Depreciation and amortization expense for the three years ended December
31, 1997 was $3,788,139, $1,147,540, and $502,161, respectively.
5. ACQUISITIONS
Through December 31, 1997, the Company has acquired certain traditional ice
business and certain assets (the "Acquisitions") to compliment its core
business for purchase prices totaling approximately $44.1 million in cash, $13.5
of assumed liabilities paid at closing and $12.8 million in common stock
(approximately 1.3 million shares) reflected at the Company's valuation of
$10.00 per share.
The Acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been preliminarily allocated
to the assets and liabilities acquired based on fair value at the date of the
Acquisitions. As a result of the number of acquisitions and their proximity to
year-end, the Company has not completed the assessment of the fair value of the
net assets acquired for the purposes of allocating the purchase price. The
Acquisitions included at fair value current assets of $4,341,282, property
F-10
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plant and equipment of $26,576,914, and current liabilities of $5,613,070. The
excess of aggregate purchase price over of the fair market value of the net
assets acquired of approximately $44,692,109 was recognized as goodwill and is
being amortized over 40 years. Amortization expense of Goodwill and Other Assets
for the three years ended December 31, 1997 was $1,341,740, $308,153, and
$249,130, respectively.
The operating results of the Acquisitions have been included in the
Company's consolidated financial statements from the date of their respective
purchases. The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Acquisitions had occurred on
January 1, 1997.
Revenue.............................. $ 53,901,660
Net loss............................. 11,564,921
Loss per share....................... 2.81
6. LONG-TERM OBLIGATIONS
In December 1996 the Company received $750,000 in exchange for convertible
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 124,831 shares of Series
B Convertible Preferred Stock (see Note 9) at a conversion price of $6.07 per
share ($726,226 net of expenses).
On April 17, 1997 the Company completed the sale of $50 million 12% Series
A Senior Notes due 2004 (the "Series A Notes") in connection with a private
placement offering. In connection with the debt issuance, detachable warrants to
purchase 511,885 and 127,972 shares, respectively, of the Company's common stock
were issued to Series A note holders and the investment banking firm that
marketed the Series A Notes. The exercise price is $.01 per share. Concurrent
with the sale of the Series A 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. The Company sold the Series A Notes at a price of 96% of the par value,
or $48,000,000, which was used to finance the cash portion plus certain related
expenses of the purchase price for the above acquisitions, repay outstanding
indebtedness, make capital expenditures and provide additional working capital.
The Series A Notes are unconditionally guaranteed, on a senior subordinated
basis by each of the Company's current and future wholly-owned subsidiaries
other than unrestricted subsidiaries (the "Subsidiary Guarantors").
In August 1997, the Company issued 12% Senior Notes ("Series B Notes").
The Company offered to exchange all outstanding Series A Notes for the Series B
Notes which are identical in all material aspects to the form and term of the
Series A Notes except for certain transfer restrictions and registration rights
relating to the Series A Notes. On October 6, 1997, all of the Series A Notes
were exchanged for the Series B Notes. The Series B Notes are unconditionally
guaranteed, on a senior unsecured basis by the Subsidiary Guarantors (See Note
11). The Series B Notes bear an interest rate of 12 percent per annum. The
Series B Notes contain certain covenants that, among other things, limit the
ability of the Company and its
F-11
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries to pay dividends or make distributions with respect to the
Company's capital stock or make certain other payments, to incur indebtedness,
or to create liens.
On October 16, 1997, the Company completed the sale of $25 million
principal amount 12% Series C Senior Notes due 2004 (the "Series C Notes") in
connection with a private placement offering. In connection with the debt
issuance, detachable warrants to purchase 255,943 shares of the Company's common
stock were issued to the holders of the Series C Notes at an exercise price of
$.01 per share. The Series C Notes were issued under the same terms, interest
rates and covenants as the Series A Notes and Series B Notes discussed above.
The net proceeds, after payment of fees and expenses, from the sale of the
Series C Notes were used to repay the outstanding indebtedness under the Senior
Credit Facility and for working capital purposes. The Series C Notes are
unconditionally guaranteed, on a senior subordinated basis by the Subsidiary
Guarantors.
In September 1997, the Company executed a six-year Senior Credit Facility
(the "Existing Credit Facility") with two banks that expires in September
2003. The Existing Credit Facility provides for borrowings of up to $20 million,
subject to a borrowing base limitation (as defined). Interest is payable at the
Company's option at the prime rate plus 1% or the London Interbank Offered Rate,
plus a defined margin. At December 31, 1997, the selected interest rate was
9.5%. There was no principal amount outstanding at that date. The Existing
Credit Facility is secured by substantially all of the Company's assets. In
addition, the Existing Credit Facility contains restrictive covenants that,
among other things, require the maintenance of certain financial ratios and
limits total indebtedness of the Company. All loans under the Existing Credit
Facility are guaranteed by each of the Company's current and future
subsidiaries.
See Note 2 regarding New Senior Notes issued to retire outstanding Series B
and C senior notes at December, 1997. At December 31, 1997 and 1996, long-term
obligations consisted of the following:
1997 1996
-------------- ------------
Senior notes......................... $ 75,000,000 $ --
Less: unamortized debt discount on
detachable warrants issued......... (7,498,463) --
Bank credit facilities............... -- 3,485,000
Other................................ -- 50,032
-------------- ------------
Total........................... 67,501,537 3,535,032
Less: current maturities............. -- 703,077
-------------- ------------
Long-tern debt, net.................. $ 67,501,537 $ 2,831,955
============== ============
There are no principal maturities of long-term obligations for any of the
next five years as of December 31, 1997.
See Note 11 for information regarding subsidiary guarantors of long-term
obligations.
7. INCOME TAXES
The Company incurred losses for each of the three years ended December 31,
1997, 1996 and 1995 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.
F-12
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total provision for income taxes varied from the U.S. federal statutory
rate due to the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Federal income tax benefit at
statutory rate..................... $ (2,869,136) $ (336,747) $ (234,084)
Acquired tax liabilities............. 2,567,710 -- --
Increase in valuation allowance...... 201,006 288,994 240,136
Non-deductible expenses.............. 100,420 5,408 4,037
Other................................ -- 42,345 (10,089)
-------------- ------------ ------------
Total provision for income
taxes......................... $ -- $ -- $ --
============== ============ ============
</TABLE>
Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences were as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Deferred tax liabilities:
Property and equipment.......... $ (4,169,050) $ (780,604)
Deferred tax assets:
Other assets.................... 20,720 91,841
Net operating loss
carryforwards................. 5,354,991 1,694,418
-------------- --------------
Total deferred tax assets....... 5,375,711 1,786,259
-------------- --------------
Net deferred tax assets......... 1,206,661 1,005,655
Valuation allowance............. (1,206,661) (1,005,655)
-------------- --------------
Total deferred taxes............ $ -- $ --
============== ==============
At December 31, 1997, the Company had approximately $15 million of net
operating loss carryforwards that expire between 2006 and 2012.
8. RELATED PARTIES
Certain affiliates of Company shareholders sell equipment and inventory to
the Company. Total expenditures incurred related to these entities were
$4,799,240 in 1997, $4,058,656 in 1996, and $2,527,000 in 1995. At December 31,
1997 and 1996, accrued liabilities to these entities totaled $159,719 and
$605,336, respectively.
Law firms associated with certain Company shareholders provided services
totaling $888,673 in 1997, $67,768 in 1996, and $109,000 in 1995.
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 was amended and exercised in April 1997 at the fair
value of the stock as of the exercise date.
During 1996 the Company entered into a consulting arrangement with an
individual affiliated through ownership with SWI. Under the terms of the
arrangement this individual would be paid $10,000 per month. At December 31,
1996, the Company has accrued $30,000 for these services. This arrangement was
terminated on April 17, 1997.
On April 17, 1997 the Company entered into a consulting arrangement with
another individual affiliated through ownership with SWI. Under the terms of the
arrangement this individual would be paid $125,000 per year. At December 31,
1997 the Company has accrued $88,195 for these services.
F-13
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. 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 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, 420,000
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 Series A Convertible Preferred Stock 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 420,000 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 6).
Series B has no 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 420,000 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".
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. During the first nine months
of 1997, the Company sold 26,899 shares of common stock to other investors not
related to any acquisitions at prices ranging from $7.50 to $10.00 per share.
F-14
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 24, 1997, the Company repurchased, at cost, treasury stock for
approximately $1,491,155 million from a customer.
On December 2, 1997, the Company's Board of Directors authorized the
designation of 500,000 shares of $0.01 par value 10% mandatorily redeemable
preferred stock, and 100 shares of $0.01 par value Series C preferred stock.
Holders of the 10% mandatorily redeemable preferred stock shall be entitled to
receive dividends equal to 10% of the liquidation preference of $100 per share,
and all dividends shall be fully cumulative. Dividends may be paid in cash or in
kind by issuing a number of additional shares of the 10% mandatorily redeemable
preferred stock. If dividends are paid in kind, the Company shall also issue to
holders of the 10% mandatorily redeemable preferred stock, additional warrants
to purchase common stock at an exercise price of $13.00 per share. Holders of
the 10% mandatorily redeemable preferred stock have no voting rights other than
approval rights with respect to the issuance of parity or senior securities. The
Company may redeem or exchange for subordinated rates the 10% mandatorily
redeemable preferred stock at any time subject to contractual and other
restrictions. The Company is obligated to redeem the 10% mandatorily redeemable
preferred stock for cash on April 14, 2005.
On December 2, 1997, the Company entered into a securities purchase
agreement with Culligan Water Technologies, Inc. and an existing shareholder
pursuant to which the Company issued 250,000 shares of the 10% mandatorily
redeemable preferred stock, 100 shares of Series C preferred stock and warrants,
with an exercise price of $13.00 per share, to purchase 1,923,077 shares of the
Company's common stock, in exchange for an aggregate price of $25.0 million less
issuance cost of $856,017. The warrants are valid until the earlier to occur of
(a) April 15, 2005 and (b) the first anniversary of the last day of the first
period of twenty consecutive days following a qualifying IPO, as defined, during
which there is a closing price on each such trading day and the closing price on
each such trading day equals or exceeds the threshold price, as defined. The
Series C preferred stock was created to provide Culligan and the existing
shareholder the right to vote a number of shares equal to the number of warrants
issued to them, such rights to be effective only at such time or times that
Culligan owns less than twenty percent of the fully diluted common stock of the
Company. The Company may redeem the outstanding Series C preferred stock (but
not less than 100%) at such time as the investors cease to own at least 50% of
the warrants.
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.
10. 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 $49,012 and $20,000 to the plan during 1997 and 1996,
respectively.
The Company adopted the Packaged Ice, Inc. Stock Option Plan on July 26,
1994 (the "Option Plan"), as amended effective December 1997. Under the Option
Plan, options to purchase up to 400,000 shares of Common Stock may be granted to
employees, outside directors and consultants and advisers to the Company or any
subsidiary. At December 31, 1997, 144,000 shares were available for future
grants.
F-15
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the two years ended December 31, 1997 is
summarized below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE EXERCISE PRICE
OPTIONS OF SHARES PER SHARE PER SHARE
- ------------------------------------- ---------- -------------- -----------------
<S> <C> <C> <C> <C>
Granted during 1996.................. 6,000 $ 7.50 $ 7.50
Granted during 1997.................. 194,500 $ 10.00 $ 10.00
Outstanding at December 31, 1997..... 256,000 $ 6.22-$10.00 $ 9.28
</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 the Option Plan was 5.3 years at December 31, 1997.
Exercisable stock options at December 31, 1997 and 1996 were 31,200 and 18,500,
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 Option 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 $(8,637,266) and $(2.45) in 1997
and $(1,017,747) and $(0.36) in 1996, 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.
11. SUBSIDIARY GUARANTORS
The Company's Series B Notes and the Series C Notes are guaranteed, fully,
jointly and severally, and unconditionally, on a senior unsecured basis by all
of the Company's current and future, direct and indirect wholly-owned
subsidiaries (the "Subsidiary Guarantors"). The following table sets forth the
"summarized financial information" of the Subsidiary Guarantors. Full
financial statements of the Subsidiary Guarantors are not presented because
management believes they are not material to the investors. There are currently
no restrictions on the ability of the subsidiary guarantors to transfer funds to
the Company in the form of cash dividends, loans or advances.
AS OF DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Balance Sheet Data:
Current Assets.................. $ 6,591,604 $ 184,434
Property and Equipment.......... 32,622,152 5,422,595
Total Assets.................... 71,381,168 6,099,388
Current Liabilities............. 3,904,149 795,913
Long-Term Debt.................. -- 43,814
Total Shareholder's Equity...... 16,707,700 (1,195,995)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- ------------
Operating Data:
Net Revenue................. $ 24,811,023 $ 2,403,516 $ 2,123,701
Gross Profit................ 9,756,164 1,307,557 1,332,591
Net Loss.................... (8,878,049) (235,960) (848,779)
F-16
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. 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 1,253 components.
Beginning June, 1992, 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 is purchased.
Since inception of this agreement, the Company has purchased 1,251
merchandisers.
The Company entered into employment contracts with two executive officers
of the Company. The aggregate annual commitment for base salary under these
agreements is approximately $215,000.
As a result of the Acquisitions during 1997, the Company entered into
certain employment contracts with former employees of the acquired companies
with an aggregate annual commitment of approximately $868,000.
The Company has leased certain facilities in Texas, Arizona and California.
Under these and other operating leases, minimum annual rentals at December 31,
1997 aggregate approximately $1,040,141 in 1998, $889,269 in 1999, $800,419 in
2000, $723,563 in 2001, $687,735 in 2002 and $2,764,529 thereafter. Rent expense
was $751,641, $75,539 and $65,053 for the years ended December 31, 1997, 1996,
and 1995, respectively.
The Company is 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.
On October 31, 1997, the Company entered into a Trademark License Agreement
with Culligan Water (the "TLA") for $1,750,000. The TLA includes automatic
renewals for successive one-year terms through December 31, 2001, subject to
early termination and is being amortized over the automatic renewal period of
fifty months. The Company paid an initial license fee and is required to make
the greater of 1) minimum royalty payments of $0 in 1997, $50,000 in 1998,
$500,000 in 1999, $1,000,000 in 2000 and $1,500,000 in 2001 or 2) 2.5% of all
revenues, as defined.
13. SUBSEQUENT EVENTS (UNAUDITED)
On April 30, 1998 the Company issued an additional $125 million of Senior
Notes (the "Tack-on-Notes") due February 1, 2005. The Tack-on-Notes are of the
same series as the $145 million of New Senior Notes issued January 28, 1998, and
were issued under the indenture dated as of January 28, 1998, amended and
restated as of April 30, 1998, by and among the Company, the Subsidiary
Guarantors (as defined in the indenture) and the U.S. Trust Company of Texas,
N.A., as Trustee. The Tack-on-Notes were issued under the same terms, interest
rates and covenants as the New Senior Notes (See Note 2).
On April 30, 1998 the Company entered into an $80.0 million, five year
senior credit facility (the "New Credit Facility") with Antares Leveraged
Capital Corporation consisting of a revolving working capital facility of $15.0
million and a revolving acquisition loan facility (the "Acquisition Facility")
of $65.0 million. The New Credit Facility replaced the Company's Existing Credit
Facility (See Note 6). The outstanding principal balance under the New Credit
Facility bears interest at the Company's option at a fluctuating rate equal to
(i) LIBOR plus two and three quarters percent (2.75%) per annum, or (ii) the
"prime rate" plus one percent (1.00%) with interest rates subject to a pricing
grid. All amounts outstanding under the Acquisition Facility on the second
anniversary of the New Credit Facility will amortize in 12 equal installments
over the remaining term. The New Credit Facility contains financial covenants
which include limitations on capital expenditures and the maintenance of minimum
levels of certain ratios of earnings before interest, taxes, depreciation and
amortization to fixed charges, and is secured by substantially all of the
Company's assets and the capital stock of all of the Company's significant
subsidiaries.
On April 30, 1998 the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with Ares Leveraged Investment Fund,
L.P. ("Ares") and SV Capital Partners, L.P.
F-17
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("SV") pursuant to which Ares acquired 325,000 shares and SV acquired 75,000
shares of the 13% mandatorily redeemable preferred stock at $100 per share for
an aggregate amount of $40.0 million. Holders of the 13% mandatorily redeemable
preferred stock shall have no voting rights other than approval rights with
respect to the issuance of parity or senior securities. In addition, there are
various situations in which the Company may either elect or be required to
redeem the 13% mandatorily redeemable preferred stock. The Company is obligated
to redeem the 13% mandatorily redeemable preferred stock for cash on May 1,
2005. In connection with the Securities Purchase Agreement, Ares and SV entered
into warrant agreements granting warrants to purchase an aggregate of 975,732
shares of the Company's common stock with an exercise price of $0.01 per share.
The warrants are valid until May 31, 2005 but are exercisable only under certain
conditions, such as an initial public offering of common stock, change of
control, merger, asset sale or default. The 13% mandatorily redeemable preferred
stock bears a dividend rate of 13% per annum; however, during the first twelve
months following issuance the dividend rate will be 11.5% and 12.25% during the
second twelve months. Dividends shall be fully cumulative and payable quarterly
in cash, except that during the first five years after issuance, dividends may
be payable in kind by issuing additional shares of 13% mandatorily redeemable
preferred stock. In the event the Company is unable for any reason to pay
dividends in cash after the fifth anniversary, or in the event of a default, the
holders of the 13% mandatorily redeemable preferred stock will have the right to
add up to two directors to the Board of Directors and the dividend rate will be
increased until the default is cured. The Securities Purchase Agreement contains
certain restrictive administrative covenants and requires a vote of two-thirds
of the Board of Directors before the Company may take certain actions. The
Company may exchange the 13% mandatorily redeemable preferred stock for
subordinated notes at the Company's discretion.
On May 1, 1998, the Company purchased all of the outstanding capital stock
of Reddy Ice Corporation ("Reddy"), a subsidiary of Suiza Foods Corporation,
for total consideration of $180.8 million in cash (the "Reddy Acquisition").
The Reddy Acquisition was accounted for using the purchase method of accounting,
and accordingly, the results of its operations and its cash flows are included
in the consolidated financial statements for the periods subsequent to the date
of acquisition. The approximate $111 million excess of the aggregate purchase
price over the fair market value of the net assets acquired has been allocated
to goodwill and will be amortized over 40 years. The Reddy Acquisition was
funded from the proceeds of the Tack-on-Notes, the New Credit Facility,
Preferred Stock and available cash on hand.
On June 18, 1998 the Company adopted the 1998 Stock Option Plan and
Incentive Plan (the "1998 Option Plan"). The 1998 Option Plan provides for the
grant of stock options, stock appreciation rights and other stock awards to
employees of the Company, its subsidiaries, or affiliates. Pursuant to the 1998
Option Plan, the Company's Board of Directors has reserved for issuance 500,000
of the Company's common stock and has granted to employees 242,111 stock options
with an exercise price of $15.00.
In July 1998, the Company completed an offer to exchange the New Senior
Notes and the Tack-on-Notes (together the "Series 1 Notes") and the 13%
Exchangeable Preferred Stock (the "Series 1 Preferred Stock") with new debt
(the "Series 2 Notes") and new 13% Exchangeable Preferred Stock (the "Series
2 Preferred Stock") registered under the Securities Act of 1933. The form and
term of the Series 2 Notes and Series 2 Preferred Stock are identical in all
material respects to the form and term of the Series 1 Notes and Series 1
Preferred Stock, except for certain transfer restrictions and registration
rights relating to the Series 1 Notes and Series 1 Preferred Stock.
On July 31, 1998, the Company purchased all of the outstanding capital
stock of Cassco Ice & Cold Storage, Inc. ("Cassco"), a subsidiary of WLR, Inc.
for $59.0 million in cash (the "Cassco Acquisition"). The Cassco Acquisition
will be accounted for using the purchase method of accounting, and accordingly,
the results of its operations and its cash flows will be included in the
consolidated financial statements for the periods subsequent to the date of
acquisition. The purchase price will be allocated to the assets acquired and
liabilities assumed based on fair values at the date of acquisition. The excess
of the aggregate purchase price over the fair market value of the net assets
acquired will be recognized as goodwill and will be amortized over 40 years.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder of Reddy Ice Corporation
Dallas, Texas
We have audited the accompanying balance sheets of Reddy Ice Corporation
(the "Company"), a wholly-owned subsidiary of Suiza Foods Corporation, as of
December 31, 1997 and 1996, and the related statements of operations,
shareholder's deficit and cash flows for each of the three years in the period
ended December 31, 1997. 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 financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 14, 1998
F-19
<PAGE>
REDDY ICE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------
1998 1997 1996
------------ --------------- ---------------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,750,000 $ 994,595 $ 438,139
Receivables, net................ 5,706,000 5,451,013 3,076,414
Inventories..................... 3,925,000 2,943,155 1,732,610
Prepaid expenses and other
current assets................ 958,000 142,602 429,123
Deferred tax asset.............. -- 905,958 597,169
------------ --------------- ---------------
Total current assets.......... 12,339,000 10,437,323 6,273,455
PROPERTY, PLANT AND EQUIPMENT, NET... 69,116,000 66,212,840 36,407,092
DEFERRED TAX ASSET................... -- -- 295,808
GOODWILL, NET........................ 32,733,000 30,081,130 1,487,703
INTANGIBLE AND OTHER ASSETS, NET..... 3,157,000 3,892,025 3,482,037
ADVANCES TO SHAREHOLDER, NET......... -- -- 5,114,404
------------ --------------- ---------------
TOTAL................................ $117,345,000 $ 110,623,318 $ 53,060,499
============ =============== ===============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued
expenses...................... 7,180,000 $ 8,657,611 $ 5,143,508
Current portion of long-term
debt.......................... 204,000 220,452 204,248
------------ --------------- ---------------
Total current liabilities..... 7,384,000 8,878,063 5,347,756
ADVANCES FROM SHAREHOLDER, NET....... 124,334,000 42,927,599 --
SHAREHOLDER AND OTHER LONG-TERM
DEBT................................. 241,000 59,600,116 58,270,809
DEFERRED TAX LIABILITY............... -- 716,424 --
COMMITMENTS AND CONTINGENCIES (Note
13)
SHAREHOLDER'S DEFICIT:
Common share, par value $.01 per
share,
100 shares authorized, issued
and outstanding at
December 31, 1997 and 1996.... 1 1 1
Additional paid-in capital...... 1,647,999 10,022,204 1,648,004
Accumulated deficit............. (16,262,000) (11,521,089) (12,206,071)
------------ --------------- ---------------
Total shareholder's deficit... (14,614,000) (1,498,884) (10,558,066)
------------ --------------- ---------------
TOTAL................................ $117,345,000 $ 110,623,318 $ 53,060,499
============ =============== ===============
</TABLE>
See notes to financial statements.
F-20
<PAGE>
REDDY ICE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------
1998 1997 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES............................ $ 11,089,000 $ 8,249,000 $ 66,449,199 $ 52,992,207 $ 50,507,298
COST OF SALES........................ 4,790,000 3,137,000 41,713,350 31,742,587 30,884,846
-------------- -------------- -------------- -------------- --------------
GROSS PROFIT......................... 6,299,000 5,112,000 24,735,849 21,249,620 19,622,452
OPERATING COSTS AND EXPENSES:
Selling, general and
administrative.................. 7,428,000 5,047,000 10,471,877 6,759,323 6,279,524
Depreciation and amortization...... 2,301,000 1,075,000 6,070,256 3,632,204 3,771,540
Shareholder management fee......... -- -- 480,000 480,000 510,000
Merger costs....................... -- -- -- -- 938,538
-------------- -------------- -------------- -------------- --------------
Total operating costs and
expenses................... 9,729,000 6,122,000 17,022,133 10,871,527 11,499,602
-------------- -------------- -------------- -------------- --------------
INCOME FROM OPERATIONS............... (3,430,000) (1,010,000) 7,713,716 10,378,093 8,122,850
OTHER INCOME/EXPENSE:
Shareholder interest expense....... (3,283,000) (1,790,000) (7,119,600) (6,960,000) (5,179,795)
Other interest expense, net........ -- (1,000) (48,371) (48,306) (1,635,629)
Other income....................... 124,000 112,000 580,535 498,966 839,958
-------------- -------------- -------------- -------------- --------------
Total other expense........... (3,159,000) (1,679,000) (6,587,436) (6,509,340) (5,975,466)
-------------- -------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS................. (6,589,000) (2,689,000) 1,126,280 3,868,753 2,147,384
INCOME TAX EXPENSE (BENEFIT)......... -- -- 441,298 1,492,371 (81,776)
-------------- -------------- -------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY LOSS..... (6,589,000) (2,689,000) 684,982 2,376,382 2,229,160
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT............. -- -- -- -- (2,597,778)
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS).................... $ (6,589,000) $ (2,689,000) $ 684,982 $ 2,376,382 $ (368,618)
============== ============== ============== ============== ==============
</TABLE>
See notes to financial statements.
F-21
<PAGE>
REDDY ICE CORPORATION
STATEMENTS OF SHAREHOLDER'S DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE -- JANUARY 1, 1995........... 749,994 $ 7,500 $ 1,640,505 $ (14,213,835) $ (12,565,830)
Reorganization..................... (749,894) (7,499) 7,499 -- --
Net loss........................... -- -- -- (368,618) (368,618)
---------- --------- -------------- --------------- ---------------
BALANCE -- DECEMBER 31,1995.......... 100 1 1,648,004 (14,582,453) (12,934,448)
Net income......................... -- -- -- 2,376,382 2,376,382
---------- --------- -------------- --------------- ---------------
BALANCE -- DECEMBER 31,1996.......... 100 1 1,648,004 (12,206,071) (10,558,066)
Contributions...................... -- -- 8,374,200 -- 8,374,200
Net income......................... -- -- -- 684,982 684,982
---------- --------- -------------- --------------- ---------------
BALANCE -- DECEMBER 31,1997.......... 100 1 10,022,204 (11,521,089) (1,498,884)
Repayment of contributions
(unaudited)..................... -- -- (8,374,205) 1,848,089 (6,526,116)
Net loss (unaudited)............... -- -- -- (6,589,000) (6,589,000)
---------- --------- -------------- --------------- ---------------
BALANCE -- MARCH 31, 1998
(unaudited)........................ 100 $ 1 $ 1,647,999 $ (16,262,000) $ (14,614,000)
========== ========= ============== =============== ===============
</TABLE>
See notes to financial statements.
F-22
<PAGE>
REDDY ICE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (6,589,000) $ (2,689,000) $ 684,982 $ 2,376,382 $ (368,618)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.... 2,301,000 1,076,000 6,070,256 3,632,204 3,771,540
(Gain) loss on sale of assets.... (3,000) (6,000) 23,792 (27,850) (209,187)
Deferred income taxes............ -- -- 703,443 507,667 (1,400,644)
Extraordinary loss from early
extinguishment of debt......... -- -- -- -- 2,597,778
Changes in operating assets and
liabilities, net of
acquisitions:
Receivables.................... 37,000 (915,000) (2,528,000) (86,513) (449,557)
Inventories.................... (923,000) (305,000) (627,024) (302,827) (191,533)
Prepaid expenses and other
assets...................... (434,000) 50,000 286,521 (189,236) 312,840
Accounts payable and accrued
expenses.................... (1,481,000) 1,155,000 3,514,103 (2,014,587) 3,369,297
Other assets................... 15,639,000 11,365,000 (381,362) 9,575 (122,664)
------------ ------------ ------------- ------------ -------------
Net cash provided by operating
activities....................... 8,547,000 9,731,000 7,746,711 3,904,815 7,309,252
------------ ------------ ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant
and equipment.................... (3,170,000) (1,214,000) (9,195,321) (3,749,343) (3,593,762)
Cash outflows for acquisitions..... (4,612,000) (8,925,000) (45,826,967) (5,367,115) (2,233,392)
Proceeds from sale of assets....... 30,000 12,000 112,918 112,846 250,761
------------ ------------ ------------- ------------ -------------
Net cash used in investing
activities....................... (7,752,000) (10,127,000) (54,909,370) (9,003,612) (5,576,393)
------------ ------------ ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of
debt............................. -- -- 77,604 23,568 62,500,000
Repayment of debt.................. (40,000) (35,000) (1,730,492) (232,933) (53,689,889)
Advances to/from shareholder....... -- -- 49,372,003 5,746,301 (15,360,705)
------------ ------------ ------------- ------------ -------------
Net cash provided by (used in)
financing activities............. (40,000) (35,000) 47,719,115 5,536,936 (6,550,594)
------------ ------------ ------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 755,000 (431,000) 556,456 438,139 (4,817,735)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 438,000 995,000 438,139 -- 4,817,735
------------ ------------ ------------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 1,193,000 $ 564,000 $ 994,595 $ 438,139 $ --
============ ============ ============= ============ =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest............. $ 12,053 $ 9,900 $ 7,168,019 $ 7,008,348 $ 8,251,222
============ ============ ============= ============ =============
Net assets acquired by capital
contributions from shareholder... -- -- $ 8,374,200 $ -- $ --
Net assets acquired by assuming
notes payable.................... -- -- 1,668,399 148,383 270,000
Net assets acquired by decrease in
notes receivable................. 40,000 33,000 393,401 -- --
------------ ------------ ------------- ------------ -------------
Total non-cash net asset
additions...................... $ 40,000 $ 33,000 $ 10,436,000 $ 148,383 $ 270,000
============ ============ ============= ============ =============
Advances to shareholder converted
to (from) notes payable to
shareholder...................... $ -- $ -- $ 1,330,000 $ (4,500,000) $ --
============ ============ ============= ============ =============
</TABLE>
See notes to financial statements.
F-23
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Reddy Ice Corporation (the "Company"), a wholly-owned
subsidiary of Suiza Foods Corporation ("Suiza"), manufactures and distributes
packaged and block ice products for retail, commercial and industrial use
through manufacturing facilities located in Texas, Florida, Georgia, Louisiana,
Tennessee, Arizona, New Mexico, Nevada, California, Alabama and Mississippi.
Prior to March 31, 1995, the Company operated as a separate business.
Effective March 31, 1995, the Company was acquired by and merged with Suiza in a
business combination transaction accounted for as a pooling of interests, and
incurred merger costs of $938,000 during 1995 in connection with this merger. As
a result of the merger, the Company repaid certain outstanding indebtedness and
recognized expenses of approximately $2,598,000 (net of income tax benefit of
$1,002,000) of debt issuance, legal and other costs associated with the debt
extinguishment. These amounts have been classified as an extraordinary loss in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 4, "Reporting Gains and Losses From the Extinguishment of
Debt."
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 disclosures 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.
INVENTORIES -- Inventories are stated at the lower of cost, using the
first-in, first-out ("FIFO") method, or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated
at cost. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets, as follows:
ASSET USEFUL LIFE
- ------------------------------------- ---------------
Buildings and improvements........... 10 to 40 years
Machinery and equipment.............. 3 to 20 years
Furniture and fixture................ 5 years
Capitalized lease assets are amortized over the shorter of their lease term
or their estimated useful lives. Expenditures for repairs and maintenance that
do not improve or extend the life of the assets are expensed as incurred.
GOODWILL, INTANGIBLE, AND OTHER ASSETS -- Goodwill and other intangible
assets include the following intangibles that are amortized over their related
useful lives:
INTANGIBLE ASSET USEFUL LIFE
- ----------------------------------------------------------------------------
Goodwill............................... Straight-line method over 20 to 40
years
Identifiable intangible assets:
Customer list..................... Straight-line method over seven to
ten years
Supply contract................... Straight-line method over the terms
of the agreement
Non-competition agreements........ Straight-line method over the terms
of the agreement
IMPAIRMENT -- Company management routinely reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
REVENUE -- Revenue is recognized when the product is shipped to the
customer. Revenue from owned ice systems is recognized based upon the number of
ice packaging bags delivered to and accepted by
F-24
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
customers under contractual terms. Once accepted, there is no right of return
with respect to the bags delivered.
INCOME TAXES -- Prior to March 31, 1995, the Company was organized as a
small business corporation under Subchapter S of the Internal Revenue Code. As a
result, no income taxes were provided in the financial statements since they
were the responsibility of the individual shareholders. However, had these
operations been subject to corporate income taxes, available net operating
losses would have been sufficient to eliminate any corporate income taxes due.
On March 31, 1995, the Company became a wholly owned subsidiary of Suiza
and since that date has been included in Suiza's consolidated tax return.
Federal and state income taxes are provided for in the Company's financial
statements on a separate company basis in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes." Deferred income taxes are provided for
temporary differences in the financial statement and tax basis of assets and
liabilities using current tax rates. Deferred tax assets, including the benefit
of net operating loss carryforwards, are evaluated based on the guidelines for
realization and may be reduced by a valuation allowance. Income taxes payable
are cleared through the intercompany accounts with Suiza.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
2. ACQUISITIONS
During 1997, 1996 and 1995, the Company completed the following
acquisitions, which were accounted for using the purchase method of accounting
as of their respective acquisition dates. Accordingly, only the results of
operations of the acquired companies subsequent to their respective acquisition
dates are included in the financial statements of the Company. These
acquisitions were funded primarily by advances from Suiza, along with the
assumption of certain notes payable of the acquired businesses. At the
acquisition date, the purchase price was allocated to assets acquired, including
identifiable intangibles, and liabilities assumed based on their fair market
values. The excess of the total purchase prices over the fair values of the net
assets acquired represented goodwill.
During 1995, the Company acquired all of the net assets, including customer
lists, patents and other intangible assets of four small ice companies for a
total purchase price of approximately $2,503,000.
During 1996, the Company acquired all of the net assets of ten small ice
companies for a total purchase price of approximately $5,515,000.
During 1997, the Company acquired the approximate net assets of the
following ice companies:
<TABLE>
<CAPTION>
ACQUISITION DATE ACQUIRED COMPANY PURCHASE PRICE
- ------------------------------------- --------------------------------- --------------
<S> <C> <C>
March 13, 1997....................... Pure Ice $ 7,700,000
April 9, 1997........................ Arctic Ice 3,075,000
April 22, 1997....................... Riverside Ice 2,142,000
May 1, 1997.......................... Jackson Ice 4,005,000
August 1, 1997....................... County Ice 5,616,000
September 10, 1997................... Consumer Ice 7,142,000
November 19, 1997.................... MidSouth Ice 19,532,000
December 23, 1997.................... City Ice 2,428,000
Various.............................. 12 other small ice companies 4,623,000
</TABLE>
F-25
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisitions, assets were acquired and liabilities
were assumed as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------------- ------------ ------------
<S> <C> <C> <C>
Purchase price:
Advances from shareholder....... $ 45,826,967 $ 5,367,115 $ 2,233,392
Capital contribution from
shareholder (principally stock
issued by shareholder)........ 8,374,200 -- --
Notes payable assumed........... 1,668,399 148,383 270,000
Decrease in notes receivable.... 393,401 -- --
-------------- ------------ ------------
Total purchase price....... 56,262,967 5,515,498 2,503,392
Fair value of net assets
acquired...................... 27,344,530 4,882,515 2,286,931
-------------- ------------ ------------
Goodwill........................ $ 28,918,437 $ 632,983 $ 216,461
============== ============ ============
</TABLE>
The following table presents unaudited pro forma results of operations of
the Company as if the above described 1997 and 1996 acquisitions had occurred at
the beginning of 1996:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Net sales............................ $ 84,132,384 $ 79,325,616
============== ==============
Net income........................... $ 1,796,894 $ 2,951,656
============== ==============
The unaudited pro forma results of operations are not necessarily
indicative of what the actual results of operations of the Company would have
been had the acquisitions occurred at the beginning of 1996, nor do they purport
to be indicative of the future results of operations of the Company.
3. ACCOUNTS RECEIVABLE
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Trade accounts receivable............ $ 4,913,804 $ 2,809,281
Other................................ 907,714 418,238
------------ ------------
5,821,518 3,227,519
Less allowance for doubtful
accounts........................... (370,505) (151,105)
------------ ------------
$ 5,451,013 $ 3,076,414
============ ============
4. INVENTORIES
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Raw materials and supplies........... $ 2,519,473 $ 1,430,004
Finished goods....................... 423,682 302,606
------------ ------------
$ 2,943,155 $ 1,732,610
============ ============
F-26
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
--------------------------------
1997 1996
--------------- ---------------
Land................................. $ 8,402,135 $ 5,631,592
Buildings and improvements........... 25,205,582 17,023,195
Machinery and equipment.............. 59,340,175 36,174,031
Furniture and fixtures............... 1,234,215 781,691
--------------- ---------------
94,182,107 59,610,509
Less accumulated depreciation........ (27,969,267) (23,203,417)
--------------- ---------------
$ 66,212,840 $ 36,407,092
=============== ===============
6. GOODWILL, INTANGIBLE AND OTHER ASSETS
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Goodwill............................. $ 30,782,684 $ 1,836,787
Identifiable intangibles............. 4,728,496 4,185,396
Deposits and other................... 603,700 117,441
-------------- --------------
36,114,880 6,139,624
Less accumulated amortization........ (2,141,725) (1,169,884)
-------------- --------------
$ 33,973,155 $ 4,969,740
============== ==============
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Accounts payable..................... $ 4,332,808 $ 2,850,286
Accrued payroll and benefits......... 1,309,626 855,642
Accrued insurance.................... 1,642,256 969,386
Other................................ 1,372,921 468,194
------------ ------------
$ 8,657,611 $ 5,143,508
============ ============
8. SHAREHOLDER AND OTHER LONG-TERM DEBT
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Note payable to shareholder.......... $ 59,330,000 $ 58,000,000
Other notes payable.................. 427,359 468,504
Capital lease obligations............ 63,209 6,553
-------------- --------------
59,820,568 58,475,057
Less current portion................. (220,452) (204,248)
-------------- --------------
$ 59,600,116 $ 58,270,809
============== ==============
NOTE PAYABLE TO SHAREHOLDER -- This balance represents a promissory note
payable to Suiza. The note provides for interest at 12% per annum, paid twice a
year in June and December.
F-27
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OTHER NOTES PAYABLE -- Other notes payable include various promissory notes
for the purchase of property, plant, equipment and non-compete agreements. The
various promissory notes payable provide for interest at rates ranging from 6.5%
to 12% and are payable in monthly installments of principal and interest until
maturity, when the remaining principal balances are due.
CAPITAL LEASE OBLIGATIONS -- Capital lease obligations represent machinery
and equipment financing obligations that are payable in monthly installments of
principal and interest and are collateralized by the related assets financed.
The scheduled maturities of long-term debt, which include capitalized lease
obligations, at December 31, 1997, were as follows:
1998................................. $ 220,452
1999................................. 82,904
2000................................. 79,354
2001................................. 72,912
2002................................. 33,080
Thereafter........................... 59,331,866
--------------
$ 59,820,568
==============
9. RELATED PARTY TRANSACTIONS
As necessary, Suiza funds acquisition and other costs for the Company.
These non-interest bearing fundings are recorded as advances to or from
shareholder. On January 1 of each year, the net increase or decrease in the
shareholder advances is converted to debt and added to the balance of the note
payable to shareholder. $49,690,000 and $1,330,000 were converted to debt at
January 1, 1998 and 1997, respectively.
Prior to March 31, 1995, the Company had consulting agreements with its
majority shareholders requiring monthly payments of $50,000. After March 31,
1995, the Company had a management agreement with Suiza to provide financial and
other advisory services which required monthly payments of $40,000. Amounts paid
to majority shareholders and Suiza under these agreements were recorded as
shareholder management fee.
10. INCOME TAXES
The income tax expense (benefit) is composed of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ --------------
Current taxes payable (refundable):
Federal....................... $ (241,448) $ 893,445 $ 1,196,640
State......................... (20,697) 91,259 122,228
Deferred income taxes.............. 703,443 507,667 (1,400,644)
------------ ------------ --------------
$ 441,298 $ 1,492,371 $ (81,776)
============ ============ ==============
F-28
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes reported in the
statements of income:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ------------ --------------
Tax expense at statutory rates....... $ 394,199 $ 1,354,064 $ 1,921,682
State income taxes................... 47,099 138,307 196,286
Tax effect of change from S
Corporation to
C Corporation...................... -- -- (2,199,744)
---------- ------------ --------------
$ 441,298 $ 1,492,371 $ (81,776)
========== ============ ==============
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Deferred income tax assets:
Asset valuation reserves........... $ 84,537 $ 58,289
Nondeductible accruals............. 767,669 495,344
Depreciation and amortization...... -- 295,807
Other.............................. 53,752 43,537
---------- ----------
905,958 892,977
Deferred income tax
liabilities -- depreciation and
amortization....................... (716,424) --
---------- ----------
Net deferred income tax asset........ $ 189,534 $ 892,977
========== ==========
These net deferred income tax assets (liabilities) are classified in the
consolidated balance sheet as follows:
DECEMBER 31,
------------------------
1997 1996
------------ ----------
Current assets....................... $ 905,958 $ 597,169
Noncurrent assets.................... -- 295,808
Noncurrent liabilities............... (716,424) --
------------ ----------
$ 189,534 $ 892,977
============ ==========
11. SHAREHOLDERS' EQUITY
At January 1, 1995, 749,994 shares of Class A common stock were issued and
outstanding. In conjunction with the merger described in Note 1, the Company's
Certificate of Incorporation was amended to change the number of authorized
shares to 100. At the same time, a reverse stock split became effective,
converting the 749,994 shares of common stock issued and outstanding into 100
shares of common stock, which resulted in a decrease of $7,499 in common stock
and a corresponding increase in additional paid-in capital.
12. EMPLOYEE RETIREMENT PLAN
The Company maintains a 401(k) plan for the benefit of its full-time
employees, as defined by the plan. Contributions by the Company are made at the
discretion of the Board of Directors. The Company accrued contributions to the
plan of $60,000, $48,000 and $33,705, for the years ended December 31, 1997,
1996 and 1995, respectively.
F-29
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
LEASES -- The Company leases certain property, plant and equipment used in
its operations under both capital and operating lease agreements. Such leases,
which are primarily for machinery and equipment and vehicles, have lease terms
ranging from one to nine years. Certain of the operating lease agreements
require the payment of additional rentals for maintenance, along with additional
rentals, based on miles driven or units produced. Rent expense, including
additional rent, was $2,231,652, $1,574,184 and $1,338,874 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The composition of capital leases that are reflected as property, plant and
equipment in the balance sheets is as follows:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Machinery and equipment.............. $ 77,604 $ 41,308
Furniture and fixtures............... 19,045 19,045
Vehicles............................. 8,569 8,569
Less accumulated amortization........ (19,720) (24,055)
---------- ----------
$ 85,498 $ 44,867
========== ==========
Future minimum payments at December 31, 1997, under noncancelable capital
and operating leases with terms in excess of one year are summarized below:
CAPITAL OPERATING
LEASES LEASES
---------- ------------
1998................................. $ 18,014 $ 918,601
1999................................. 15,836 847,213
2000................................. 17,245 765,796
2001................................. 18,802 696,052
2002................................. 10,025 576,928
Thereafter........................... -- 400,445
---------- ------------
Total minimum lease payments......... 79,922 $ 4,205,035
============
Less amount representing interest.... (16,713)
----------
Present value of capital lease
obligations........................ $ 63,209
==========
LITIGATION -- The Company is a party, in the ordinary course of business,
to certain claims and litigation. In management's opinion, the settlement of
such matters is not expected to have a material impact on the financial
statements.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-30
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carrying value of cash and cash equivalents, accounts receivable, and
accounts payable and accrued expenses approximates fair value due to the
relatively short-term nature of the financial instruments. The carrying value of
the other notes payable and capital lease obligations approximates fair value
because the weighted average interest rate on the notes and obligations
approximates current interest rates to be received on similar installments. The
fair value of advances to or from shareholder and note payable to shareholder is
not practicable to estimate due to the lack of similar financial instruments to
develop fair values.
15. MAJOR CUSTOMERS
The Company has a supply contract with one customer which requires certain
of the customer's retail sites to purchase their ice requirements from the
Company at defined prices. This supply contract, which requires market pricing,
is renewable annually. Sales to this customer under the supply contract
approximated $7,422,000, or 11% of net sales, for the year ended December 31,
1997; $7,327,000, or 14% of net sales, for the year ended December 31, 1996; and
$7,997,440, or 16% of net sales, for the year ended December 31, 1995.
16. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company completed the acquisition of
substantially all of the assets of five small ice companies for a total purchase
price of approximately $5,100,000 which resulted in recorded goodwill of
approximately $2,928,000. These acquisitions were financed by funding from
Suiza.
On March 27, 1998, Suiza signed a stock purchase agreement to sell the
Company to privately held Packaged Ice, Inc. of Houston, Texas, for
approximately $172.5 million in cash.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Cassco Ice and Cold Storage, Inc.:
We have audited the accompanying balance sheets of Cassco Ice and Cold
Storage, Inc. (a wholly-owned subsidiary of WLR Foods, Inc.) as of June 27, 1998
and June 28, 1997 and the related statements of earnings, shareholder's equity,
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 Cassco Ice and Cold Storage,
Inc. as of June 27, 1998 and June 28, 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Richmond, Virginia
July 24, 1998
F-32
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
BALANCE SHEETS
JUNE 27, 1998 AND JUNE 28, 1997
1998 1997
--------------- --------------
ASSETS
Current Assets:
Cash............................ $ 118,362 143,326
Accounts receivable (notes 9 and
10):
Parent company................ 1,025,650 1,093,940
Other......................... 3,189,307 2,813,858
--------------- --------------
4,214,957 3,907,798
Notes receivable (note 2)....... 9,761 35,675
Inventories (note 3)............ 1,212,610 1,124,925
Deferred income taxes (note
5)............................ 246,347 205,861
Prepaid expenses................ 269,407 172,115
Due from parent company (note
10)........................... 957,919 --
--------------- --------------
Total current assets................. 7,029,363 5,589,700
--------------- --------------
Property, plant and equipment, net
(notes 4, 6 and 8)................. 23,878,030 24,626,766
Other assets......................... 385,337 399,235
--------------- --------------
Total assets......................... $ 31,292,730 30,615,701
=============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current installments of
long-term debt (note 6) 529,487 519,125
Current installments of
obligations under capital
leases (note 8)............... 268,678 110,699
Accounts payable................ 1,128,644 1,322,998
Accrued expenses................ 476,919 449,891
Due to parent company (note
10)........................... -- 1,356,999
--------------- --------------
Total current liabilities............ 2,403,728 3,759,712
--------------- --------------
Long-term debt, excluding current
installments (note 6).............. 1,975,701 2,506,616
Obligations under capital leases,
excluding current installations
(note 8)........................... 797,825 686,148
Deferred income taxes (note 5)....... 1,543,947 1,647,935
Other long-term liabilities.......... 110,734 140,364
--------------- --------------
Total liabilities.................... 6,831,935 8,740,775
=============== ==============
Shareholder's equity:
Common stock, $1,000 par value.
Authorized 5,000 shares;
issued and outstanding 70
shares........................ 70,000 70,000
Additional paid-in capital...... 10,613,855 10,513,855
Retained earnings............... 13,776,940 11,291,071
--------------- --------------
Total shareholder's equity........... 24,460,795 21,874,926
Commitments (note 8).................
--------------- --------------
Total liabilities and shareholder's
equity............................. $ 31,292,730 30,615,701
=============== ==============
See accompanying notes to financial statements.
F-33
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
STATEMENTS OF EARNINGS
YEARS ENDED JUNE 27, 1998 AND JUNE 28, 1997
1998 1997
-------------- ------------
Operating revenues (notes 9 and 10):
Parent company.................. $ 7,297,937 7,053,271
Other........................... 22,079,856 19,130,471
-------------- ------------
29,377,793 26,183,742
-------------- ------------
Operating expenses................... 16,996,578 15,885,712
-------------- ------------
Gross profit......................... 12,381,215 10,298,030
Selling, general and administrative
expenses........................... 7,636,595 6,232,423
-------------- ------------
Operating income..................... 4,744,620 4,065,607
Other expense (income):
Interest expense................ 73,065 272,195
Interest income................. (9,797) (8,797)
Other, net...................... 239,594 75,516
-------------- ------------
Total other expense.................. 302,862 338,914
-------------- ------------
Income before income taxes........... 4,441,758 3,726,693
Provision for income taxes (note
5)................................. 1,725,139 1,401,401
-------------- ------------
Net income........................... $ 2,716,619 2,325,292
============== ============
See accompanying notes to financial statements.
F-34
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JUNE 27, 1998 AND JUNE 28, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at June 29, 1996............ 70 $70,000 9,940,105 9,211,732 19,221,837
Net income........................... -- -- -- 2,325,292 2,325,292
Dividends declared:
$3,513.61/share.................... -- -- -- (245,953) (245,953)
Issuance of WLR Foods, Inc. stock for
business acquisition (note 11)..... -- -- 573,750 -- 573,750
------- ------- ----------- ------------ ------------
Balances at June 28, 1997............ 70 $70,000 10,513,855 11,291,071 21,874,926
Net income........................... -- -- -- 2,716,619 2,716,619
Dividends declared:
$3,296.43/share.................... -- -- -- (230,750) (230,750)
Issuance of WLR Foods, Inc. stock for
business acquisition (note 11)..... -- -- 100,000 -- 100,000
------- ------- ----------- ------------ ------------
Balances at June 27, 1998............ 70 $70,000 10,613,855 13,776,940 24,460,795
======= ======= =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 27, 1998 AND JUNE 28, 1997
1998 1997
-------------- --------------
Cash flows from operating activities:
Net income......................... $ 2,716,619 2,325,292
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and
amortization............... 3,401,617 3,111,198
Deferred income taxes......... (144,474) (167,968)
Loss on sales of property,
plant and equipment........ 153,034 76,018
Change in assets and
liabilities:
Increase in accounts
receivable.............. (307,159) (470,392)
Increase in inventories.... (65,205) (47,425)
Increase in prepaid
expenses................ (97,292) (4,159)
Increase in other assets... 94,840 (278,737)
Decrease in accounts
payable and accrued
expenses................ (654,753) (498,043)
Change in due from/due to
parent company.......... (1,827,491) (2,686,972)
Decrease in other long-term
liabilities............. (29,630) (32,585)
-------------- --------------
Net cash provided by operating
activities......................... 3,240,106 1,326,227
-------------- --------------
Cash flows from investing activities:
Capital expenditures............... (1,683,293) (1,956,549)
Acquisition of businesses (note
11)............................. (650,000) (195,000)
Proceeds from sales of property,
plant and equipment............. 24,665 95,899
Payments from notes receivable..... 25,914 55,115
Proceeds from lease financing...... -- 1,761,078
-------------- --------------
Net cash used in investing
activities......................... (2,282,714) (239,457)
-------------- --------------
Cash flows from financing activities:
Principal payments on long-term
debt............................ (520,553) (511,757)
Principal payments under capital
lease obligations............... (231,053) (109,498)
Principal payments on notes payable
to bank......................... -- (300,000)
Dividends paid..................... (230,750) (245,953)
-------------- --------------
Net cash used in financing
activities......................... (982,356) (1,167,208)
-------------- --------------
Net decrease in cash................. (24,964) (80,438)
Cash at beginning of year............ 143,326 223,764
-------------- --------------
Cash at end of year.................. $ 118,362 143,326
============== ==============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................ $ 262,484 273,657
============== ==============
Income taxes.................... $ 1,628,880 1,317,163
============== ==============
Supplemental schedule of non-cash
investing and financing activities:
During 1998, the Company recorded
additional paid-in capital as a
result of WLR Foods, Inc. stock
valued at $100,000 issued to
acquire a business (note 11).
During 1998, the Company recorded
capital lease obligations of
$500,709 related to the
acquisition of transportation
equipment.
During 1997, the Company recorded
additional paid-in capital as a
result of WLR Foods, Inc. stock
valued at $573,750 issued to
acquire a business (note 11).
During 1997, the Company recorded
capital lease obligations of
$582,843 related to the
acquisition of transportation
equipment.
See accompanying notes to financial statements.
F-36
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998 AND JUNE 28, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cassco Ice and Cold Storage, Inc.'s (Cassco or the Company) operations are
devoted primarily to refrigerated warehousing and to the manufacturing,
packaging and sale of ice. Cassco operates primarily in the Mid-Atlantic region.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to June 30. Fiscal
years 1998 and 1997 ended on June 27 and June 28, respectively, and included 52
weeks in each year.
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of
packaging materials and packaged ice is determined by a method that approximates
the first-in, first-out (FIFO) method. The cost of icemaking systems and parts
is determined by the specific identification method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Equipment under capital
leases are stated at the present value of minimum lease payments. Equipment held
under capital leases are amortized straight line over the shorter of the lease
term or estimated useful life of the asset. Depreciation on property, plant and
equipment is computed using the straight-line method and useful lives of the
respective assets are as follows:
Land improvements.................... 10-15 years
Buildings and improvements........... 15-20 years
Machinery and equipment.............. 3-5 years
Transportation equipment............. 4-6 years
The costs of maintenance and repairs are charged to operations, while costs
associated with renewals, improvements and major replacements are capitalized.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company is included in the consolidated federal income tax return and
certain consolidated state income tax returns of WLR Foods, Inc. The Company
provides income taxes on a separate company basis.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
F-37
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, notes receivable, due
from/to parent company, accounts payable and accrued expenses approximate fair
value due to their short maturities. The fair value of long-term debt is
calculated by discounting scheduled cash flows through maturity using estimated
rates currently offered for debt with similar terms and average maturities. The
carrying amount of long-term debt approximates fair value.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
INTANGIBLES
Intangibles, primarily agreements not to compete, are stated at cost less
accumulated amortization and are included in other assets in the accompanying
balance sheets. Amortization is computed on the straight-line method over
periods of 3 to 5 years.
(2) NOTES RECEIVABLE
Notes receivable consist of the following:
1998 1997
--------- ---------
8.5% note receivable, due December
1996 (amended to August 1997)...... $ -- 30,272
8.5% note receivable, due August
1997............................... -- 5,403
12% note receivable, due July 23,
1998............................... 3,667 --
10% note receivable, due August 15,
1998............................... 6,094 --
--------- ---------
Total notes receivable............... $ 9,761 35,675
========= =========
(3) INVENTORIES
A summary of inventories follows:
1998 1997
------------ -----------
Packaging materials.................. $ 860,958 586,589
Package ice.......................... 235,978 417,079
Ice maker systems and parts.......... 105,505 120,139
Fuel and other....................... 10,169 1,118
------------ -----------
Total inventories.................... $ 1,212,610 1,124,925
============ ===========
F-38
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment was as follows:
1998 1997
-------------- --------------
Land and improvements................ $ 2,931,282 2,930,878
Buildings and improvements........... 15,813,389 15,738,256
Machinery and equipment.............. 28,477,175 26,614,563
Transportation equipment............. 4,998,416 4,412,380
Construction in progress............. 13,041 430,426
-------------- --------------
52,233,303 50,126,503
Less accumulated depreciation and
amortization......................... 28,355,273 25,499,737
-------------- --------------
Total property, plant and equipment,
net................................ $ 23,878,030 24,626,766
============== ==============
(5) INCOME TAXES
The provision for income taxes was as follows for fiscal years 1998 and
1997:
1998 1997
------------ ------------
Current:
Federal......................... $ 1,646,703 1,360,235
State........................... 222,910 209,134
------------ ------------
Total current........................ 1,869,613 1,569,369
Deferred:
Federal......................... (137,440) (160,127)
State........................... (7,034) (7,841)
------------ ------------
Total deferred....................... (144,474) (167,968)
------------ ------------
Total income tax provision........... $ 1,725,139 1,401,401
============ ============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets (liabilities) at June 27, 1998 and June 28, 1997
are listed below:
1998 1997
-------------- ------------
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences
in depreciation and
amortization................... $ (1,943,504) (1,980,911)
-------------- ------------
Gross deferred tax liabilities....... (1,943,504) (1,980,911)
Deferred tax assets:
Obligations under capital
leases......................... 415,936 310,771
Insurance accruals.............. 60,060 68,857
Tax credits..................... 27,016 27,016
Accrual of compensated
absences....................... 122,286 91,491
Other........................... 20,606 40,702
-------------- ------------
Gross deferred tax assets............ 645,904 538,837
-------------- ------------
Net deferred tax liability........... $ (1,297,600) (1,442,074)
============== ============
F-39
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that some or all of the deferred
tax assets will not be realized. The ultimate realization of the deferred tax
assets is dependent on the generation of future taxable income, during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based on
the level of historical operating results and expectations of future taxable
income and reversals of deferred tax liabilities, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences as reflected at June 27, 1998 and June 28, 1997.
(6) LONG-TERM DEBT
Long-term debt as June 27, 1998 and June 28, 1997 consisted of the
following obligations:
1998 1997
------------ -----------
Industrial Revenue Development Bond,
due December 2001, payable in
initial monthly installments of
$3,305 plus interest (with annual
increases in monthly payments to
$11,598 plus interest by 2001) at
70% of the bank's prime lending
rate (year-end rate 7.163%).
Secured by property, plant and
equipment.......................... $ 397,846 500,396
Unsecured Bank Term Note, due June
2003, payable in monthly
installments of $33,389 plus
interest at 30 day LIBOR +85 basis
points (year-end rate 6.54%)....... 2,003,342 2,404,012
Unsecured Note Payable, due September
2003, payable in annual
installments of $17,333 plus
interest (year-end rate 7.5%)...... 104,000 121,333
------------ -----------
Total long-term debt................. 2,505,188 3,025,741
Less current installments............ 529,487 519,125
------------ -----------
Total long-term, excluding current
installments....................... $ 1,975,701 2,506,616
============ ===========
The net book value of all property, plant and equipment encumbered under
long-term debt agreements at June 27, 1998 and June 28, 1997 was approximately
$6,968,000 and $7,081,000, respectively.
The Company had no agreements to maintain compensating balances.
Required annual principal repayments of long-term debt are as follows:
FISCAL AMOUNT
- ------------------------------------- ----------
1999................................. $ 529,487
2000................................. 538,953
2001................................. 550,300
2002................................. 451,113
2003................................. 418,002
(7) EMPLOYEE BENEFITS
The Company participates in WLR Foods, Inc.'s Profit Sharing and Salary
Savings Plan that is available to substantially all employees who meet certain
age and service requirements. Participants may elect to make contributions of up
to 15% of their salary. For each employee dollar contributed (limited to the
first 4% of an employee's compensation), the Company is required to contribute a
matching amount of 50 cents. The Company can also make additional contributions
at its discretion. Cassco's total contributions under this plan were
approximately $94,000 for fiscal 1998 and $78,000 for fiscal 1997.
F-40
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) LEASES
The Company is obligated under various capital leases for certain
transportation equipment that expire at various dates during the next five
years. At June 27, 1998 and June 28, 1997, the gross amount of equipment and
related accumulated amortization recorded under capital leases were as follows:
1998 1997
------------ ------------
Transportation equipment............. $ 1,458,484 957,775
Less accumulated amortization........ 433,450 184,358
------------ ------------
$ 1,025,034 773,417
============ ============
Amortization of assets held under capital leases is included with
depreciation expenses.
The Company has also entered into various noncancelable operating leases
for machinery and equipment. The leases are noncancelable and expire on various
dates through fiscal 2003. Total rent expense was approximately $897,000 and
$872,000 for the years ended June 27, 1998 and June 28, 1997, respectively.
Future minimum lease payments under noncancelable operating leases and future
minimum capital lease payments as of June 27, 1998 are:
CAPITAL OPERATING
FISCAL LEASES LEASES
------ ---------- ---------
1999................................. $ 333,012 344,592
2000................................. 333,012 62,112
2001................................. 228,561 3,180
2002................................. 183,030 1,440
2003................................. 146,813 120
---------- ---------
Total minimum lease payments......... 1,224,428 $ 411,444
=========
Less amount representing interest (at
rates ranging from 6.29% to
7.31%)............................. 157,925
----------
Present value of net minimum capital
lease payments..................... 1,066,503
Less current installments of
obligations under capital leases... 268,678
----------
Obligations under capital leases,
excluding current installments..... $ 797,825
==========
(9) CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Most of the Company's customers are located in the Mid-Atlantic states.
Five customers, one of which is a related party, accounted for approximately 55%
of the Company's revenues in fiscal 1998. Four customers, one of which is a
related party, accounted for approximately 55% of the Company's revenues in
fiscal 1997. Three customers, one of which is a related party, accounted for 45%
of the Company's accounts receivable as of June 27, 1998. Six customers, one of
which is a related party, accounted for 66% of the Company's accounts receivable
as of June 28, 1997.
(10) RELATED PARTY TRANSACTIONS
Cassco is a 100% owned subsidiary of WLR Foods, Inc. (the Parent). The
Parent performs certain services for the Company. These services include cash
management, preparation of all income tax returns, information systems services
and the administration of worker's compensation, health and property insurance
and savings plans. The Company is charged a management fee for these services
provided by the Parent.
F-41
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management fees paid to WLR Foods, Inc. were $434,000 and $309,760 for
fiscal 1998 and 1997, respectively. The Company provides refrigerated warehouse
services and sells ice to the Parent. The intercompany account is interest
bearing at a rate of 6.25% at June 27, 1998.
In management's opinion, all related party transactions are conducted under
normal business conditions, with no preferential treatment given to related
parties.
(11) BUSINESS ACQUISITIONS
On March 10, 1998, the Company acquired substantially all of the assets of
Mt. Joy Ice Company (Mt. Joy) for $400,000 cash and $100,000 (15,534 shares) of
WLR Foods, Inc. common stock. The assets included primarily ice merchandisers.
This transaction has been accounted for as a purchase, and accordingly, the
financial statements include the assets acquired at fair value and the results
of operations of Mt. Joy from the acquisition date.
On March 30, 1998, the Company acquired substantially all of the assets of
Copes Ice Company (Copes) for $250,000 in cash. The assets included primarily
ice merchandisers. This transaction has been accounted for as a purchase, and
accordingly, the financial statements include the assets acquired at fair value
and the results of operations of Copes from the acquisition date.
In the fiscal 1997, the Company acquired substantially all of the assets of
Jennings Ice Company (Jennings) for $573,750 (45,000 shares) of WLR Foods, Inc.
common stock. The assets included primarily ice merchandisers and refrigeration
equipment. This transaction has been accounted for as a purchase, and
accordingly, the financial statements include the assets acquired at fair value
and the results of operations of Jennings from the acquisition date.
The Company also acquired substantially all of the assets of The Ice Plant,
Inc. for $195,000 in cash in fiscal 1997. The assets included primarily ice
merchandisers. This transaction has been accounted for as a purchase, and
accordingly, the financial statements include the assets acquired at fair value
and the results of operations of The Ice Plant, Inc. from the acquisition date.
(12) SUBSEQUENT EVENT
WLR Foods, Inc. has entered a letter of intent to sell its stock in Cassco
Ice and Cold Storage, Inc. to Packaged Ice, Inc. of Houston, Texas. Closing for
the transaction is subject to certain conditions, including the completion of
customary due diligence by the purchasers and regulatory approvals.
F-42
<PAGE>
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-43
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
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........................... -- 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
=========== ============
See notes to combined financial statements.
F-44
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED 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......................... -- --
--------------------- -------------------
Income (loss) from continuing
operations......................... (567,971) 341,770
Income from discontinued
operations......................... -- 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-45
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 1997 DECEMBER 31, 1996
--------------------- -------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing
operations.................... $(567,971) $ 341,770
Adjustments to reconcile income
from continuing operations to
net cash provided by 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.............. -- 447,319
--------------------- -------------------
Net cash provided by
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.................... -- 4,347
--------------------- -------------------
Net cash provided by
financing
activities............ 435,163 586,190
--------------------- -------------------
NET INCREASE 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-46
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Mission Party Ice, Inc. ("Mission") and Southwest Texas Packaged Ice,
Inc. ("STPI") (collectively, the "Company" or "Companies") were
incorporated to do business in Texas in 1988 and 1991, respectively. Mission
owns and operates ice manufacturing facilities in San Antonio, Corpus Christi
and Gonzales, Texas. STPI owns and operates stand-alone automated merchandising
ice systems ("ice systems") installed primarily in retail grocery locations.
These ice systems produce and package bags of cubed ice at the customer's
location. The Company operates in the South Texas region.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION -- Both Mission and STPI are controlled through
ownership by the same stockholder and are under common management. As a result
the 1996 financial statements and related footnote disclosures are presented on
a combined basis. All significant intercompany accounts and transactions have
been eliminated upon combination.
PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION -- The combined
financial statements presented herein at March 31, 1997 and for the three-month
periods ended March 31, 1997 are unaudited; however, all adjustments which are,
in the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods covered have been
made and are of a normal, recurring nature. Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end. The
results of the interim periods are not necessarily indicative of results to
expect for the full year.
INVENTORIES -- Inventories are valued at the lower of first-in first-out
cost or market basis and consisted of the following at December 31, 1996:
Manufactured ice..................... $ 33,547
Ice packaging bags................... 75,804
Parts and supplies................... 54,662
----------
Total inventory...................... $ 164,013
==========
PROPERTY -- Property is carried at cost and is being depreciated on a
straight-line basis over estimated lives of five to seven years. Maintenance and
repairs are charged to expense as incurred, while capital improvements which
extend the useful lives of the underlying assets are capitalized.
OTHER ASSETS -- Other assets, consisting primarily of costs associated with
the acquisition of competitors' ice manufacturing facilities and ice system
location contracts, are being amortized over three to five years (see Note 5).
Accumulated amortization was $210,398 at December 31, 1996.
IMPAIRMENT OF LONG-LIVED ASSETS -- In 1996 the Companies adopted Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires that long-lived assets be reviewed for impairment whenever events
or circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS No. 121 did not result in a charge to earnings
in the accompanying combined financial statements.
INCOME TAXES -- Mission and STPI are not subject to income taxes as both
have elected, under applicable provisions of the Internal Revenue Code, to be
treated as a Subchapter S corporation. Accordingly, the proportionate share of
each Company's taxable income or loss is reported in the respective
stockholder's individual tax return. Therefore, no liability for federal income
taxes has been recorded in the accompanying combined financial statements.
F-47
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION -- Mission's revenues are recognized upon the delivery
and acceptance of ice products to customer locations. Revenue is recognized by
STPI in accordance with contracted terms based upon the number of ice packaging
bags delivered to and accepted by customers. Once accepted, there is no right of
return with respect to the bags delivered.
CASH FLOWS -- The Company considers all highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The Company's financial instruments
include certain current assets and liabilities where carrying value approximates
fair value. In addition, the carrying value of financial instruments related to
long-term debt approximate fair value based on management's opinion that stated
interest rates are representative of rates currently available to the Companies
for comparable borrowings. It is not practicable to estimate the fair value of
the related party balances due to the instruments' nature.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
3. DISCONTINUED OPERATIONS
In December 1996, Mission entered into formal negotiations to sell Mission
Ice Equipment Company ("MIECO"), a division of Mission, to Southwest Texas
Equipment Distributors ("STED"). STED is affiliated with Mission through
common ownership. MIECO's business involves the sale or lease of commercial food
service equipment to retail establishments. The net assets of MIECO were sold on
January 2, 1997 for a price of $316,520, which equaled their net 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:
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
============
Depreciation expense for the year ended December 31, 1996 was $893,485.
F-48
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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:
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
============
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
F-49
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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:
1997................................. $ 1,483,228
1998................................. 782,292
1999................................. 584,820
2000................................. 317,328
2001................................. 8,180
------------
$ 3,175,848
============
7. RELATED PARTIES
STPI entered into a distributor agreement (the "Distributor Agreement")
to purchase ice systems machinery and equipment from Packaged Ice, Inc.
("Packaged Ice"), an entity affiliated through common ownership. Under
provisions of the Distributor Agreement, STPI has exclusive purchasing rights in
certain Texas counties for a period of ten years effective May 19, 1994. STPI
purchases each ice system at an agreed upon price and pays a royalty, as
defined. Packaged Ice has the right to repurchase all of the ice systems at a
price defined in the Distributor Agreement. STPI's purchases under the
Distributor Agreement were $147,613 for the year ended December 31, 1996. No
amounts were payable related to these transactions at December 31, 1996.
Certain affiliates of the Companies' shareholders sell ice merchandisers to
Mission. During 1996, Mission incurred approximately $100,000 of capital
expenditures related to these entities.
F-50
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Companies, from time to time, advance and receive funds from affiliates
in the normal course of operations for working capital purposes. Such
transactions are reflected in accounts receivable-affiliates and accounts
payable-affiliates on the combined balance sheet in the respective amounts of
$360,589 and $49,856 at December 31, 1996. In addition, Mission has $105,552 of
8.75% interest bearing demand notes due affiliates and $19,030 of employee
receivables at December 31, 1996.
The Companies lease certain property from individuals affiliated through
ownership. Total payments under these leases were $87,600 in 1996. See Note 9
for additional information regarding noncancellable lease commitments.
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:
PAYMENT SUBLEASE NET
-------- -------- ----------
1997................................. $330,000 $ 12,000 $ 318,000
1998................................. 74,000 2,000 72,000
1999................................. 16,000 -- 16,000
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.
F-51
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 ("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-52
<PAGE>
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-53
<PAGE>
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>
SOUTHWEST
MISSION TEXAS
PARTY ICE PACKAGED COMBINING COMBINED
INC. ICE, INC. ADJUSTMENTS BALANCE
------------ ------------ ----------- -----------
ASSETS
<S> <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-47 through F-52.
F-54
<PAGE>
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-47 through F-53.
F-55
<PAGE>
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-56
<PAGE>
SOUTHWESTERN ICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
MARCH 31, 1997 1996 1995
-------------- -------------- --------------
(UNAUDITED)
ASSETS
<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 and March
31, 1997...................... 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-57
<PAGE>
SOUTHWESTERN ICE, INC.
STATEMENTS OF OPERATIONS AND CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ------------------------------
1997 1996 1996 1995
------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES................................ $ 2,206,840 $ 2,350,481 $ 14,050,305 $ 13,933,266
COST OF SALES........................ 2,066,527 2,053,176 10,270,979 10,414,557
------------ ------------ -------------- --------------
Gross profit.................... 140,313 297,305 3,779,326 3,518,709
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 688,063 579,291 2,640,271 2,464,654
------------ ------------ -------------- --------------
Income (loss) from operations... (547,750) (281,986) 1,139,055 1,054,055
------------ ------------ -------------- --------------
OTHER (INCOME) EXPENSE:
Interest expense................ 226,730 194,952 920,136 798,316
Other (income) expense.......... (172,086) 9,034 (14,682) (238,406)
------------ ------------ -------------- --------------
Total other expense, net... 54,644 203,986 905,454 559,910
------------ ------------ -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM..... (602,394) (485,972) 233,601 494,145
EXTRAORDINARY ITEM:
Gain from extinguishment of
debt.......................... -- -- 830,042 --
------------ ------------ -------------- --------------
NET (LOSS) INCOME.................... (602,394) (485,972) 1,063,643 494,145
RETAINED EARNINGS, beginning
balance............................ 1,673,087 609,444 609,444 115,299
------------ ------------ -------------- --------------
RETAINED EARNINGS, ending balance.... $ 1,070,693 $ 123,472 $ 1,673,087 $ 609,444
============ ============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
SOUTHWESTERN ICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------
1997 1996 1996 1995
------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................. $ (602,394) $ (485,972) $ 1,063,643 $ 494,145
Adjustments to reconcile net (loss)
income to net cash 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) provided by
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-59
<PAGE>
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:
Land................................. $ 155,506
Buildings............................ 110,149
----------
$ 265,655
==========
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.
1996
--------------
Revenues............................. $ 13,839,730
Gross profit......................... 3,793,418
Income from operations............... 1,204,780
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
F-60
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
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
==============
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SHORT-TERM INVESTMENTS
Short-term investments consist of certificates of deposits with a financial
institution which have original maturities in excess of three months and are
carried at cost, which approximate market.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. The Company's inventory consists of wet ice and bags for the
transportation and storage of ice.
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
F-61
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
ESTIMATED
ASSET DESCRIPTION LIFE
- ------------------------------------- ------------
Buildings and improvements........... 31 years
Machinery and equipment.............. 7-12 years
Furniture and fixtures............... 7-12 years
Vehicles............................. 5 years
Property, plant and equipment at December 31 consists of the following:
1996 1995
-------------- --------------
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
============== ==============
F-62
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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:
1996 1995
-------------- --------------
Senior note payable to bank
collateralized by personal
property, real estate, capital
stock and a shareholder certificate
of deposit, payable in monthly
installments of $65,775 including
interest at prime (8.25% at
December 31, 1996), plus 1.5%
through June 2006.................. $ 4,606,854 $ --
Secondary note payable to bank
collateralized by personal
property, real estate, capital
stock and a shareholder certificate
of deposit, payable in monthly
installments of interest only at
prime plus 1.5% through June
2006............................... 3,000,000 --
Note payable to bank collateralized
by accounts receivable and
equipment, payable in monthly
installments of $106,060 including
interest at 8.25% per annum, paid
in full in July 1996............... -- 4,188,471
Subordinated note payable to SEPSCO,
payable in annual installments of
$120,000 plus interest at 5% per
annum, beginning April 1996 and
1995, paid in full in July 1996.... -- 3,880,767
Installment note payable to bank
collateralized by accounts
receivable and equipment and
personally guaranteed by a
shareholder, payable in monthly
installments of $13,911 plus
interest at prime plus 2%, paid in
full in July 1996.................. -- 430,636
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
============== ==============
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
F-63
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
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
============
(4) COMMITMENTS AND CONTINGENCIES:
Pursuant to the Purchase Agreement with SEPSCO, the Company set forth a
remediation plan for all environmental contamination at all real properties
acquired. As a result of the Company refinancing its debt and accrued
liabilities to SEPSCO, the Company was relieved of its remaining remediation
liability by SEPSCO in July 1996. The Company's maximum liability was
$1,500,000. Costs paid by the Company in excess of $500,000 reduced
dollar-for-dollar the principal balance of the note payable to SEPSCO up to a
maximum reduction of $500,000. As of the refinancing date, the Company had paid
approximately $795,000 in remediation costs which resulted in a forgiveness of
$500,000 in accrued remediation liability which is included in the calculation
of the gain from the debt extinguishment.
In September 1996, the Company entered into an option agreement (the
Agreement) with another corporation (the Buyer) whereby the Company granted the
Buyer a five-year option to purchase its assets. The purchase price set forth in
the Agreement is calculated from the Company's earnings before interest, taxes,
depreciation and amortization (EBITDA) with a valuation premium, as defined in
the Agreement. This option may be exercised by the Buyer on or before September
2001 by giving written notice to the Company. Payment of the agreed-upon price
must be in the form of a combination of cash and common stock of the Buyer
issued in conjunction with an initial public offering. Certain personal and real
property are excluded from the option. No consideration was received from the
Buyer in exchange for the option.
The Company also entered into a Master Equipment Lease Agreement in
September 1996 with the Buyer to lease various ice manufacturing and
merchandising systems for retail and commercial use. The lease agreement is for
an initial term of five years with an option to renew for an additional
five-year term. The annual per unit lease rate is equal to 25% of the Buyer's
cost to manufacture and install the ice merchandising systems. The Company has
agreed to lease 157 systems as of September 1997 and an additional 100 systems
per year thereafter.
Future minimum lease payments under the Master Equipment Lease are as
follows:
YEAR ENDED
DECEMBER 31,
-------------
1997............................... $ 385,314
1998............................... 385,314
1999............................... 385,314
2000............................... 385,314
2001............................... 266,509
------------
Total minimum lease payments....... $1,807,765
============
F-64
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the lease agreement, the Company entered into a service
agreement with the Buyer whereby the Company will pay a monthly management fee
of $10,000 for the Buyer to have primary responsibility for marketing the ice
merchandising systems and oversight responsibility for installing, operating,
managing and servicing the systems. In addition, the Company is required to
reimburse the Buyer for all costs relating to activities under the agreement
including all costs associated with the operation, repair and maintenance of the
systems. The Company also must pay directly or through reimbursement to the
Buyer, all salaries, wages and other compensation and benefits of all personnel
employed by the Buyer and involved with the operation of the Company's leased
systems. The term of the agreement is for ten years or the termination of the
Master Equipment Lease Agreement.
Effective September 1994, the Company adopted a 401(k) profit sharing plan
(the "Plan") for all employees who are 21 years of age or older and have
completed one year of service. The Plan provides for a mandatory matching
contribution equal to 25% of the amount of the employee's salary deduction not
to exceed 5% of an employee's 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-65
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERINGS COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................... 1
Risk Factors............................ 6
Disclosure Regarding Forward-Looking
Statements............................ 11
The Company............................. 13
Use of Proceeds......................... 15
Dividend Policy......................... 15
Dilution................................ 16
Capitalization.......................... 17
Unaudited Pro Forma Combined Condensed
Financial Statements.................. 18
Selected Historical Financial Data...... 24
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................ 25
Business................................ 31
Management.............................. 39
Principal Shareholders.................. 45
Certain Transactions.................... 47
Description of Capital Stock............ 48
Shares Eligible for Future Sale......... 52
Certain United States Federal Tax
Consequences to Non-U.S. Holders...... 53
Underwriting............................ 55
Legal Matters........................... 57
Experts................................. 58
Additional Information.................. 58
Financial Statements.................... F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[ ] SHARES
[LOGO]
PACKAGED ICE, INC.
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
MERRILL LYNCH & CO.
JEFFERIES & COMPANY, INC.
------------------------------
BEAR, STEARNS & CO. INC.
NATIONSBANC MONTGOMERY
SECURITIES LLC
STEPHENS INC.
, 1998
================================================================================
<PAGE>
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.
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 2, 1998
PROSPECTUS
[LOGO] [ ] SHARES
PACKAGED ICE, INC.
COMMON STOCK
------------------------
All of the shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby are being sold by Packaged Ice, Inc.
("Packaged Ice" or the "Company").
Of the shares of Common Stock being offered hereby, shares (the
"International Shares") are being offered initially outside the United States
and Canada (the "International Offering") by the International Managers and
shares (the "U.S. Shares") are being offered initially in the United
States and Canada (the "U.S. Offering" and, together with the International
Offering, the "Offerings") by the U.S. Underwriters. The price to public and
underwriting discount per share are identical for both Offerings and the
closings for both Offerings are conditioned upon each other. See
"Underwriting."
Prior to the Offerings, there has been no public market for the Common
Stock. For a discussion of the factors to be considered in determining the
initial public offering price, see "Underwriting." A total of 150,000 shares
of Common Stock are being reserved for sale to certain employees, directors and
business associates of, and certain other persons designated by, the Company, at
the initial public offering price.
The Company intends to apply for quotation of the Common Stock on the
National Association of Securities Dealers Automated Quotation ("Nasdaq")
National Market System (the "Nasdaq National Market") under the symbol
"ICED."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
------------------------
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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
Per share............................ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)............................. $ $ $
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the International Managers and U.S. Underwriters
options, exercisable within 30 days after the date hereof, to purchase up to
and additional shares of Common Stock, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by the Underwriters
against payment therefor, subject to certain conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York on or about , 1998.
------------------------
JOINT LEAD MANAGERS
MERRILL LYNCH INTERNATIONAL JEFFERIES INTERNATIONAL LIMITED
BOOK-RUNNING MANAGER
------------------------
BEAR, STEARNS INTERNATIONAL LIMITED
NATIONSBANC MONTGOMERY SECURITIES LLC
STEPHENS INC.
------------------------
The date of this Prospectus is , 1998.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS.]
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
FOR UNITED KINGDOM PURCHASERS: THESE SHARES OF COMMON STOCK MAY NOT BE
OFFERED OR SOLD IN THE UNITED KINGDOM OTHER THAN TO PERSONS WHOSE ORDINARY
ACTIVITIES INVOLVE THEM IN ACQUIRING, HOLDING, MANAGING OR DISPOSING OF
INVESTMENTS, WHETHER AS PRINCIPAL OR AGENT (EXCEPT IN CIRCUMSTANCES THAT DO NOT
CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING OF THE PUBLIC OFFERS OF
SECURITIES REGULATIONS 1995 OR THE FINANCIAL SERVICES ACT 1986), AND THIS
PROSPECTUS MAY ONLY BE ISSUED OR PASSED ON TO ANY PERSON IN THE UNITED KINGDOM
IF THAT PERSON IS OF A KIND DESCRIBED IN ARTICLE 11(3) OF THE FINANCIAL SERVICES
ACT 1986 (INVESTMENT ADVERTISEMENTS) (EXEMPTIONS) ORDER 1996 OR IS A PERSON TO
WHOM THE PROSPECTUS MAY OTHERWISE LAWFULLY BE PASSED ON.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions set forth in the international purchase
agreement (the "International Purchase Agreement") among the Company and each
of the underwriters named below (the "International Managers"), the Company
has agreed to sell to each of the International Managers, and each of the
International Managers severally has agreed to purchase from the Company, the
number of shares of Common Stock set forth opposite its name below.
NUMBER
INTERNATIONAL MANAGER OF SHARES
- ---------------------------------------- ---------
Merrill Lynch International.............
Jefferies International Limited.........
Bear, Stearns International Limited.....
NationsBanc Montgomery Securities
LLC...................................
Stephens Inc............................
---------
Total.....................
=========
The Company has also entered into a U.S. purchase agreement (the "U.S.
Purchase Agreement") with Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Jefferies & Company, Inc., Bear, Stearns & Co. Inc., NationsBanc Montgomery
Securities LLC and Stephens Inc. in the United States and Canada (the "U.S.
Underwriters" and, together with the International Managers, the
"Underwriters"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Company has agreed to sell to the U.S. Underwriters, and the U.S.
Underwriters severally have agreed to purchase from the Company, an aggregate of
shares of Common Stock. The public offering price per share and the
total underwriting discount per share are identical under the International
Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such Purchase Agreement if any of such shares being sold pursuant to each
such Purchase Agreement are purchased. Under certain circumstances, the
commitments of the non-defaulting International Managers or the U.S.
Underwriters (as the case may be) may be increased as set forth in the
International Purchase Agreement and the U.S. Purchase Agreement, respectively.
The closing with respect to the sale of shares of Common Stock to be purchased
by the International Managers and the U. S. Underwriters are conditioned upon
one another.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale at the public offering price, less an amount not
greater than the selling concession. Under the terms of the Intersyndicate
Agreement, the International Managers and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are United States or Canadian persons or to persons they believe intend to
resell to persons who are United States or Canadian persons, and the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-United
States or non-Canadian persons or to persons they believe intend to resell to
non-United States or non-Canadian persons, except, in each case, for
transactions pursuant to the Intersyndicate Agreement.
Merrill Lynch International (the "Lead Manager") has advised the Company
that the International Managers propose initially to offer the shares of Common
Stock offered hereby to the public at the initial public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such price
less a concession not in excess of $ per share. The International Managers
may allow, and such dealers may
54
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
reallow, a discount not in excess of $ per share to certain other dealers.
After the Offerings, the public offering price, concession and discount may be
changed.
The Company has granted to the International Managers an option,
exercisable by the Lead Manager for 30 days after the date of this Prospectus,
to purchase up to an aggregate of additional shares of Common Stock at
the initial public offering price set forth on the cover page hereof, less the
underwriting discount. The International Managers may exercise this option to
cover over-allotments, if any, made on the sale of the shares of Common Stock
offered hereby. If the International Managers exercise this option, each
International Manager will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the foregoing
table bears to the shares of Common Stock initially offered hereby. The
Company has also granted an option to the U.S. Underwriters, which expires 30
days after the date of this Prospectus, to purchase up to additional
shares of Common Stock to cover over-allotments, if any, on terms similar to
those granted to the International Managers.
The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Company, its executive officers and directors, and certain shareholders
of the Company have agreed that for a period of 180 days from the date of this
Prospectus they will not, without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated on behalf of the Underwriters, (i) directly
or indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or file any registration statement under the Securities Act
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing restrictions do not apply, however, to the shares of
Common Stock being sold hereunder, any shares of Common Stock issued by the
Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to herein, any shares of
Common Stock issued or options to purchase Common Stock granted pursuant to
existing employee benefit plans of the Company or any shares of Common Stock or
any securities convertible or exchangeable into Common Stock issued as payment
of any part of the purchase price for businesses which are acquired by the
Company, subject to certain conditions.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the U. S. Underwriters are
permitted to engage in certain transactions that stabilize the price of the
Common Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, I.E., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U. S. Underwriters
may reduce that short position by purchasing Common Stock in the open market.
The U. S. Underwriters may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The U. S. Underwriters may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U. S.
Underwriters purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
55
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it was
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U. S.
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The U.S. Underwriters have reserved for sale, at the initial public
offering price, up to 150,000 shares of Common Stock for certain employees,
directors and business associates of, and certain other persons designated by,
the Company who have expressed an interest in purchasing such shares of Common
Stock. The number of shares available for sale to the general public in the
Offerings will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered to the general
public on the same basis as other shares offered hereby.
Prior to the Offerings, there has been no established trading market for
the shares of Common Stock. The initial public offering price for the Common
Stock offered hereby has been determined by negotiations between the Company and
the Underwriters. Among the factors considered in making such determination were
the history of and the prospects for the industry in which the Company competes,
an assessment of the Company's management, the past and present operations of
the Company and the Acquisitions, the historical results of operations of the
Company and the Acquisitions and the trend of their revenues and earnings, the
prospects for future earnings of the Company, the general condition of prices of
similar securities of generally comparable companies and other relevant factors.
There can be no assurance that an active trading market will develop for the
Common Stock or that the Common Stock will trade in the public market subsequent
to the Offerings at or above the initial public offering price.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Each International Manager represents and agrees that (a) it has not
offered or sold and prior to the expiration of six months from the date hereof,
will not offer or sell any shares of Common Stock to persons in the United
Kingdom, except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities Regulations 1995, (b) it
has complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the Common
Stock in, from or otherwise involving the United Kingdom and (c) it has only
issued or passed on and will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the issue or sale of the
Common Stock if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or is a person to whom such document otherwise may lawfully be issued or passed
on.
Jefferies has provided financial advisory services to the Company in the
past for which it has received usual and customary compensation, some of which
has been paid in the form of warrants to purchase Common Stock, and may provide
such services to the Company in the future. In particular, Jefferies acted as
(i) the Initial Purchaser in connection with the issuance and sale of the 9 3/4%
Senior Notes, (ii) the Initial Purchaser in connection with the issuance and
sale of the 12% Senior Notes and (iii) financial advisor to the Company with
respect to the Reddy Acquisition.
56
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERINGS COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................... 1
Risk Factors............................ 6
Disclosure Regarding Forward-Looking
Statements............................ 11
The Company............................. 13
Use of Proceeds......................... 15
Dividend Policy......................... 15
Dilution................................ 16
Capitalization.......................... 17
Unaudited Pro Forma Combined Condensed
Financial Statements.................. 18
Selected Historical Financial Data...... 24
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................ 25
Business................................ 31
Management.............................. 39
Principal Shareholders.................. 45
Certain Transactions.................... 47
Description of Capital Stock............ 48
Shares Eligible for Future Sale......... 52
Certain United States Federal Tax
Consequences to Non-U.S. Holders...... 53
Underwriting............................ 55
Legal Matters........................... 57
Experts................................. 58
Additional Information.................. 58
Financial Statements.................... F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[ ] SHARES
[LOGO]
PACKAGED ICE, INC.
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
MERRILL LYNCH INTERNATIONAL
JEFFERIES INTERNATIONAL LIMITED
------------------------------
BEAR, STEARNS INTERNATIONAL LIMITED
NATIONSBANC MONTGOMERY
SECURITIES LLC
STEPHENS INC.
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are set forth in the following table. The Company shall pay the
estimated expenses of issuance and distribution in proportion to the respective
number of shares sold by it in the Offerings. Each amount, except for the
Commission and National Association of Securities Dealers, Inc. ("NASD") fees,
is estimated.
Commission registration fees............ $ 42,406
NASD filing fees........................ $ 14,875
Nasdaq National Market application and
listing fees.......................... $ 91,000
Transfer agent's and registrar's fees
and expenses.......................... $ *
Printing and engraving expenses......... $ *
Legal fees and expenses................. $ *
Accounting fees and expenses............ $ *
Blue sky fees and expenses.............. $ *
Miscellaneous........................... $ *
---------
Total.............................. $
=========
- ------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is empowered by Art. 2.02-1 of the Texas Business Corporation
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 Articles and
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 entered into indemnification agreements with each of its
directors and certain of its executive officers. The indemnification agreements
provide that the Company shall indemnify these individuals against certain
liabilities (including settlements) and expenses actually and reasonably
incurred by them in connection with any threatened or pending legal action,
proceeding or investigation (other than actions brought by or in the right of
the Company) to which any of them is, or is threatened to be, made a party by
reason of their status as a director, officer or agent of the Company; PROVIDED
that, with respect to a civil, administrative or investigative (other than
criminal) action, such individual acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
Company, and with respect to any criminal proceedings, he or she had no
reasonable cause to believe his or her conduct was unlawful. With respect to any
action brought by or in the right of the Company, such individuals may
II-1
<PAGE>
be indemnified, to the extent not prohibited by applicable laws or as determined
by a court of competent jurisdiction, against expenses actually and reasonably
incurred by them in connection with such action if they acted in good faith and
in a manner they reasonably believed to be in, or not opposed to, the best
interests of the Company. The agreements also require indemnification of such
individuals for all reasonable expenses incurred in connection with the
successful defense of any action or claim and provide for partial
indemnification in the case of any partially successful defense.
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 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1995, the Company issued and sold the following unregistered
securities:
(1) On September 20, 1995, the Company issued 450,000 shares of
Series A Convertible Preferred Stock to Food Fund and Norwest for $5.56 per
share. This issuance was exempt from registration under Section 4(2) of the
Securities Act.
(2) On September 20, 1995, the Company issued 700,000 shares of
Common Stock to Food Fund, Norwest and other accredited investors for $5.00
per share. This issuance was exempt from registration under Section 4(2) of
the Securities Act.
(3) On January 17, 1997, the Company issued 124,831 shares of Series
B Convertible Preferred Stock to Food Fund, Norwest and an accredited
investor for $6.07 per share. This issuance was exempt from registration
under Section 4(2) of the Securities Act.
(4) On February 18, 1997, the Company issued 6,000 shares of Common
Stock to an employee for $7.50 per share. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(5) On April 17, 1997, the Company issued a total of 995,020 shares
of Common Stock valued at $10 per share to the former shareholders of
Southwest Texas Packaged Ice, Inc., Mission Party Ice, Inc. and
Southwestern Ice, Inc. in connection with the Company's acquisition of
Southwest Texas Packaged Ice, Inc., Mission Party Ice, Inc. and
Southwestern Ice, Inc. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(6) On April 17, 1997, the Company issued $50 million of 12% Senior
Notes due 2004 with detachable warrants to purchase 511,855 shares of
Common Stock for $0.01 per share. In connection with such issuance, the
Company issued warrants to purchase $127,972 shares of Common Stock for
$0.01 per share to Jefferies, the initial purchaser of 12% Senior Notes.
These issuances were exempt from registration under Section 4(2) of the
Securities Act.
(7) On May 22, 1997, in connection with its acquisition of various
assets of The Pipkin Company (d/b/a The Ice Company), the Company issued to
H.O. Pipkin and Joy E. Pipkin a total of 2,500 shares of Common Stock
valued at $10 per share. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(8) On May 22, 1997, the company issued to James M. Raines 18,271
shares of Common Stock in exchange for the return of warrants entitling
James M. Raines to purchase 43,296 shares of Common Stock at an exercise
price of $5.78 per share. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(9) On May 30, 1997, in connection with its acquisition of various
assets of Apache Ice Company, the Company issued 4,500 shares of Common
Stock valued at $10 per share to an
II-2
<PAGE>
accredited investor. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(10) On June 2, 1997, the company issued 2,628 shares of Common Stock
to Lancer Corporation for $10 per share. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(11) On July 17, 1997, the Company issued 300,000 shares of Common
Stock to SV for $10 per share. In connection with such issuance, the
Company also issued a warrant to purchase up to 100,000 shares of Common
Stock for $14 per share. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(12) On August 21, 1997, in connection with its acquisition of
various assets of Whitted Ice Service, the Company issued a total of 15,411
shares of Common Stock valued at $10 per share to the former shareholders
of Whitted Ice Service. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(13) On September 3, 1997, the Company issued a total of 15,000
shares of Common Stock valued at $10 per share to the former shareholders
of First Ice Company and Codorus Leasing Company in connection with the
Company's acquisition of both First Ice Company and Codorus Leasing
Company. This issuance was exempt from registration under Section 4(2) of
the Securities Act.
(14) On September 4, 1997, in connection with its acquisition of
various assets of A-Alaska Ice, Inc., the Company issued to A-Alaska, Inc.
a total of 56,500 shares of Common Stock. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(15) On September 10, 1997, the Company issued a total of 15,000
shares of Common Stock valued at $10 per share to the former shareholders
of McGehee-Neutze, Inc. in connection with the Company's acquisition of
McGehee-Neutize, Inc. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(16) On September 12, 1997, the Company issued a total of 51,000
shares of Common Stock valued at $10 per share to the former shareholders
of Century Ice of Tulsa, Inc. and Ice Cold Enterprises, Inc. in connection
with the Company's acquisition of both Century Ice of Tulsa, Inc. and Ice
Cold Enterprises, Inc. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(17) On September 27, 1997, in connection with its acquisition of
various assets of A-Arctic Inc, the Company issued to Donald S. Olsen and
Christopher S. Olsen a total of 30,000 shares of Common Stock valued at $10
per share. This issuance was exempt from registration under Section 4(2) of
the Securities Act.
(18) On October 19, 1997, in connection with its acquisition of
various assets of Ed's Refrigeration, Inc., the Company issued to Edmond
Paques and True Dee Paques a total of 10,000 shares of Common Stock valued
at $10 per share. This issuance was exempt from registration under Section
4(2) of the Securities Act.
(19) On October 16, 1997, the Company issued to Jefferies, the
initial purchaser, $25 million of 12% Senior Notes due 2004 with detachable
warrants to purchase 255,943 shares of Common Stock for $0.01 per share.
This issuance was exempt from registration under Section 4(2) of the
Securities Act.
(20) On October 27, 1977, the Company issued a total of 127,800
shares of Common Stock valued at $10 per share to the former shareholders
of Central Arkansas Cold Storage, Inc. and Golden Eagle Ice Company in
connection with the Company's acquisition of both Central Arkansas Cold
Storage, Inc. and Golden Eagle Ice Company. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
II-3
<PAGE>
(21) On December 2, 1997, the Company issued to Culligan 100,000
shares of 10% Exchangeable Preferred Stock, 40 shares of Series C Preferred
Stock, and warrants, having an exercise price of $13 per share, to purchase
1,807,692 shares of Common Stock, for an aggregate of $10 million. On the
same date, the Company issued to an accredited investor 15,000 shares of
10% Mandatorily Redeemable Preferred Stock, 6 shares of Series C Preferred
Stock and warrants to purchase an aggregate of 115,385 shares of Common
Stock, for an aggregate of $1.5 million. These issuances were exempt from
registration under Section 4(2) of the Securities Act.
(22) On December 15, 1997 the Company issued to Culligan 135,000
shares of 10% Exchangeable Preferred Stock and 54 shares of Series C
Preferred Stock for an aggregate purchase price of $13.5 million. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(23) On January 15, 1998, the Company issued 4,500 shares of Common
Stock for $6.22 per share and issued 1,800 shares of Common Stock for $6.75
per share upon exercise of options by a former employee. These issuances
were exempt from registration under Section 3(a)(1) of the Securities Act.
(24) On Januay 28, 1998, the Company issued to Jefferies, the initial
purchaser, $145 million of 9 3/4% Series A Senior Notes due 2005. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(25) On February 6, 1998, the Company issued 10,000 shares of Common
Stock valued at $10 per share to the former shareholders of Fiesta Fun Ice
Co. in connection with the Company's acqisition of Fiesta Fun Ice Co. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(26) On February 13, 1998, the Company issued a total of 188,308
shares of Common Stock valued at $13 per share to the former shareholders
of Scianna's Party Ice, Inc. in connection with the Company's acquisition
of Scianna's Party Ice, Inc. This issuance was exempt from registration
under Section 4(2) of the Securities Act.
(27) On March 5, 1998, the Company issued a total of 38,400 shares of
Common Stock valued at $13.00052 per share to the former shareholders of
Party Time Ice, Co. in connection with the Company's acquisition of Party
Time Ice, Co. This issuance was exempt from registration under Section 4(2)
of the Securities Act.
(28) On March 6, 1998, the Company issued a total of 91,565 shares of
Common Stock valued at $13 per share to the former shareholders of J.P.
Albert Ice, Co., in connection with the Company's acquisition of J.P.
Albert Ice, Co. This issuance was exempt from registration under Section
4(2) of the Securities Act.
(29) On March 11, 1998, the Company issued to Arthur Biggs, Charlotte
Biggs and other accredited investors a total of 120,770 shares of Common
valued at $10 per share in connection with the Company's acquisition of
Artic Ice Corporation. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(30) On March 24, 1998, the Company issued a total of 192,308 shares
of Common Stock valued at $13 per share to the former shareholders of
Anniston Ice & Coal Company, Inc. in connection with the Company's
acquisition of Anniston Ice & Coal Company, Inc. This issuance was exempt
from registration under Section 4(2) of the Securities Act.
(31) On April 30, 1998, the Company issued to Jefferies, the initial
purchaser, $125 million of 9 3/4% Series A Senior Notes due 2005. On the
same date, the Company issued to Ares and SV 400,000 shares of Series A 13%
Preferred Stock for $10.00 per share and warrants to purchase 975,752
shares of Common Stock for $0.01 per share. These issuances were exempt
from registration under Section 4(2) of the Securities Act.
II-4
<PAGE>
(32) On May 1, 1998, the Company issued 9,859.72 shares of 10%
Exchangeable Preferred Stock as payment in kind dividends, and in
connection therewith issued warrants to purchase 75,844 shares of Common
Stock, with an exxercise price of $13.00 per share. These issuances were
exempt from registration under Section 2(3) of the Securities Act.
(33) On June 30, 1998, the Company issued to Tim D. Davis a warrant
to purchase 15,000 shares of Common Stock at an exercise price of $15 per
share in connection with the Company's acquisition of Clinton Ice Company,
Inc. This issuance was exempt from registration under Section 4(2) of the
Securities Act.
(34) On July 29, 1998, the Company issued 3,000 shares of Common
Stock valued at $10 per share to Carroll E. Summers, Jr. in connection with
the Company's acquisition of a certain track of real property located at
4301 Loop 20, Laredo, Webb County, Texas. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The following is a list of exhibits filed as part of this Registration
Statement. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference.
EXHIBIT NO. DESCRIPTION
- ----------------------------------------------------------------
1.1 -- Form of Underwriting Agreement.`
1.2 -- Form of International Underwriting
Agreement.`
3.1 -- Restated Articles of Incorporation of
the Company filed with the Secretary of
State of the State of Texas on February
5, 1992. (Exhibit 3.2)(1)
3.2 -- Articles of Amendment to the Restated
Articles of Incorporation of the Company
filed with the Secretary of State of the
State of Texas on August 11, 1998.`
3.3 -- Amended and Restated Bylaws of the
Company, effective as of January 20,
1997. (Exhibit 3.5)(1)
4.1 -- Securityholder's and Registration Rights
Agreement, dated as of October 16, 1997,
among the Company and the Initial
Purchaser. (Exhibit 4.6)(1)
4.2 -- Certificate of Designation of Series C
Preferred Stock. (Exhibit 4.1)(5)
4.3 -- Certificate of Designation of 10%
Exchangeable Preferred Stock. (Exhibit
4.2)(5)
4.4 -- Certificate of Designation of 13%
Exchangeable Preferred Stock Series A.
(Exhibit 4.10)(9)
4.5 -- Amended and Restated Certificate of
Designation of 10% Exchangeable
Preferred Stock. (Exhibit 4.12)(9)
4.6 -- Purchase Agreement dated January 22,
1998 by and among Packaged Ice and
Jefferies. (Exhibit 4.2)(6)
4.7 -- Registration Rights Agreement dated
January 28, 1998 by and among Packaged
Ice, the Subsidiary Guarantors and
Jefferies. (Exhibit 4.3)(6)
4.8 -- Indenture by and among Packaged Ice, as
Issuer, the Subsidiary Guarantors and
U.S. Trust Company of Texas, N.A. as
Trustee dated as of January 28, 1998,
Amended and Restated as of April 30,
1998. (Exhibit 4.1)(9)
4.9 -- Purchase Agreement among the Company,
its subsidiaries and Jefferies as
Initial Purchaser ($125,000,000 Senior
Notes Offering) dated April 23, 1998.
(Exhibit 4.2)(9)
4.10 -- Registration Rights Agreement by and
among Packaged Ice, the Subsidiary
Guarantors and Jefferies dated January
28, 1998 and Amended and Restated as of
April 30, 1998. (Exhibit 4.3)(9)
4.11 -- Securities Purchase Agreement dated
April 30, 1998 by and among Packaged
Ice, Ares Leveraged Investment Fund,
L.P., and SV. (Exhibit 4.4)(9)
4.12 -- Warrant Agreement by and among Packaged
Ice and Ares Leveraged Investment Fund,
L.P. dated April 30, 1998. (Exhibit
4.5)(9)
II-5
<PAGE>
4.13 -- Warrant Agreement by and among Packaged
Ice and SV dated April 30, 1998.
(Exhibit 4.6)(9)
4.14 -- Exchange Offer Registration Rights
Agreement dated April 30, 1998 by and
among Packaged Ice, Ares Leveraged
Investment Fund, L.P. and SV. (Exhibit
4.7)(9)
4.15 -- Registration Rights Agreement dated
April 30, 1998 by and among Packaged Ice
and Ares Leveraged Investment Fund, L.P.
and SV. (Exhibit 4.8)(9)
4.16 -- Registration Rights Agreement Dated
April 30, 1998 by and among Packaged Ice
and SV (Exhibit 4.9)(9)
4.17 -- Common Stock Purchase Warrant, dated
July 17, 1997, executed by the Company
for the benefit of SV Capital Partners,
L.P. (Exhibit 10.39)(2)
5.1 -- Opinion of Akin, Gump, Strauss, Hauer &
Feld, L.L.P. *
10.1 -- Agreement and Plan of Merger by and
among the Company, Packaged Ice Mission,
Inc., Mission and A. J. Lewis III, made
as of March 25, 1997. (Exhibit 10.1)(1)
10.2 -- Agreement and Plan of Merger by and
among the Company, Packaged Ice STPI,
Inc., STPI and the Shareholders of STPI,
made as of March 25, 1997. (Exhibit
10.2)(1)
10.3 -- 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.
(Exhibit 10.4)(1)
10.4 -- Registration Rights Agreement by and
among the Company, A. J. Lewis III and
Liza B. Lewis, dated as of April 17,
1997. (Exhibit 10.5)(1)
10.5 -- Agreement and Plan of Merger by and
among the Company, Packaged Ice South-
western, Inc., SWI and the shareholders
of SWI, made as of March 25, 1997.
(Exhibit 10.6)(1)
10.6 -- 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. (Exhibit 10.8)(1)
10.7 -- Registration Rights Agreement by and
among the Company, and Dale Johnson,
Alan Bernstein and Robert Miller, dated
as of April 17, 1997. (Exhibit 10.9)(1)
10.8 -- 1994 Stock Option Plan, dated July 26,
1994 (Exhibit 10.10)(1)
10.9 -- Form of Stock Option Plan Agreements
issued under Stock Option Plan. (Exhib-
it 10.11)(1)
10.10 -- 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.
(Exhibit 10.12)(1)
10.11 -- Form of Indemnification Agreement
entered into by the Company in favor of
members of the Board of Directors.
(Exhibit 10.31)(1)
10.12 -- Development and Manufacturing Agreement
by and between Lancer Corporation and
the Company, dated April 13, 1993.
(Exhibit 10.32)(1)
10.13 -- License Agreement by and among the
Company, Hoshizaki Electric Co., Ltd.
and Hoshizaki America, Inc., dated May
28, 1993. (Exhibit 10.37)(1)
10.14 -- Registration Rights Agreement, dated as
of July 17, 1997, by and between the
Company and SV Capital Partners, L.P.
(Exhibit 10.41)(2)
10.15 -- Warrant Agreement among the Company and
U.S. Trust Company of Texas, N.A., a
national banking association, as Warrant
Agent, dated as of October 16, 1997.
(Exhibit 10.7)(4)
10.16 -- Trademark License Agreement between
Culligan International Company and the
Company dated as of October 31, 1997.
(Exhibit 10.40)(4)
10.17 -- Securities Purchase Agreements with
Culligan Water Technologies, Inc. dated
December 2, 1997. (Exhibit 10.1)(5)
10.18 -- Common Stock Purchase Warrant Agreement
issued by the Company and issued to
Culligan Water Technologies, Inc.
issuing 1,807,692 fully paid and
nonassessable shares of the Company's
common stock at an exercise price of
$13.00 per share dated December 2, 1997.
(Exhibit 10.3)(5)
II-6
<PAGE>
10.19 -- Registration Rights Agreement by and
among the Company, Culligan Water Tech-
nologies, Inc. and Erica Jesselson.
(Exhibit 10.5)(5)
10.20 -- Culligan Voting Agreement by and among
the Company and Culligan Water
Technologies, Inc. dated December 2,
1997. (Exhibit 10.6)(5)
10.21 -- Letter Agreement dated December 2, 1997.
(Exhibit 10.7)(5)
10.22 -- Option Agreement. (Exhibit 10.12)(5)
10.23 -- Credit Agreement dated April 30, 1998 by
and among the Company and Antares
Leveraged Capital Corp., individually,
and as agent for The Other Financial
Institutions. (Exhibit 10.1)(9)
10.24 -- Security Agreement dated April 30, 1998,
by and among the Company and Antares
Leveraged Capital Corp. (Exhibit
10.2)(9)
10.25 -- Security Agreement dated April 30, 1998,
by and among Reddy Ice Corporation,
Golden Eagle Ice-Texas, Inc., Packaged
Ice, Southeast, Inc., Packaged Ice
Leasing, Inc., Southco Ice, Inc.,
Southwest Texas the Company,
Southwestern Ice, Inc., Southern Bottled
Water Company, Inc., Mission Party Ice,
Inc. and Antares Leveraged Capital Corp.
(Exhibit 10.3)(9)
10.26 -- Guaranty dated April 30, 1998 by and
among Reddy Ice Corporation, Mission
Party Ice, Inc., Southwest Texas the
Company, Southwestern Ice, Inc., Golden
Eagle Ice-Texas. Inc., Packaged Ice
Southeast, Inc., Packaged Ice Leasing,
Inc., Southern Bottled Water Company,
Inc., and Southco Ice, Inc. (Exhibit
10.4)(9)
10.27 -- Stock Purchase Agreement between the
Company and Suiza Foods Corporation
dated March 27, 1998. (Exhibit 2.1)(9)
10.28-- Recapitalization Agreement dated August
4, 1998 between SV and the Company.`
10.29 -- Employment Agreement of James F. Stuart
dated effective August 1, 1998.`
10.30 -- Employment Agreement of A.J. Lewis III
dated effective August 1, 1998.`
10.31 -- Employment Agreement of Jimmy C. Weaver
dated effective May 1, 1998.`
10.32 -- Employment Agreement of James C.
Hazlewood dated effective November 1,
1997.`
10.33 -- Employment Agreement of Graham Davis
dated effective May 1, 1998.`
11.1 -- Statement of earnings per share.`
12.1 -- Historical statement of ratios of
earnings to fixed charges.`
12.2 -- Pro forma statement of ratios 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).
23.2 -- Consent of Deloitte & Touche LLP.(12)
23.3 -- Consent of KPMG Peat Marwick LLP.(12)
23.4 -- Consent of Arthur Andersen LLP.(12)
24.1 -- Power of Attorney (included on signature
page of Registration Statement on Form
S-1 filed herein)(12)
27.1 -- Financial Information Schedule (included
in Commission-filed copy only).(12)
- ------------
* To be filed by amendment.
` Filed herewith.
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(File No. 333-29357), filed with the Commission on June 16, 1997.
(2) Filed as an Exhibit to the Amendment No. 1 to the Company's Registration
Statement No. 333-29357 on Form S-4 with the Commission on July 29, 1997.
(3) Filed as an Exhibit to the Amendment No. 2 to the Company's Registration
Statement No. 333-29357 on Form S-4 with the Commission on August 22,
1997.
II-7
<PAGE>
(4) Filed as an Exhibit to the Company's Third Quarter Disclosure on Form 10-Q
with the Commission on November 14, 1997.
(5) Filed as an Exhibit to Form 8-K filed on behalf of the Company with the
Commission on December 15, 1997.
(6) Filed as an Exhibit to Form 8-K filed on behalf of the Company with the
Commission on February 9, 1997.
(7) Filed as an Exhibit to the Company's Fourth Quarter Disclosure on Form
10-K filed with the Commission on March 30, 1998.
(8) Filed as an Exhibit to Form 8-K filed on behalf of the Company with the
Commission on April 2, 1998.
(9) Filed as an Exhibit to Form 8-K/A filed on behalf of the Company with the
Commission on May 12, 1998.
(10) Filed as an Exhibit to the Company's First Quarter Disclosure on Form 10-Q
filed with the Commission on May 15, 1998.
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(File No. 333-581111), filed with the Commission on June 30, 1998.
(12) Previously filed.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to Item 14 herein, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange 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 such 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
registered, 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 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offerings of such securities at that time shall be
deemed to be the initial bona fide Offerings thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on October 2, 1998.
PACKAGED ICE, INC.
By: /s/ JAMES F. STUART
JAMES F. STUART,
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act this Registration
Statement has been signed by the following persons in the capacities indicated
on , 1998:
NAME TITLE DATE
- -------------------------- ------------------------------- ------------------
/s/JAMES F. STUART Chief Executive Officer and
JAMES F. STUART Director (principal executive
officer) October 2, 1998
* President and Director
A.J. LEWIS III October 2, 1998
* Chief Financial Officer
JAMES C. HAZLEWOOD (principal accounting officer) October 2, 1998
* Director
RICHARD A. COONROD October 2, 1998
* Director
ROBERT G. MILLER October 2, 1998
* Director
ROD J. SANDS October 2, 1998
* Director
STEVEN P. ROSENBERG October 2, 1998
* Director
ARTHUR E. BIGGS, SR. October 2, 1998
/s/JAMES F. STUART
*ATTORNEY-IN-FACT October 2, 1998
II-9
EXHIBIT 1.1
- ------------------------------------------------------------------------------
PACKAGED ICE, INC.
(A TEXAS CORPORATION)
_________ SHARES OF COMMON STOCK
U. S. PURCHASE AGREEMENT
Dated: o, 1998
- ------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. Representations and Warranties...................................3
(a) Representations and Warranties by the Company....................3
(i) Compliance with Registration Requirements..................3
(ii) Independent Accountants....................................3
(iii) Financial Statements.......................................4
(iv) No Material Adverse Change in Business.....................4
(v) Good Standing of the Company...............................4
(vi) Good Standing of Subsidiaries..............................4
(vii) Capitalization.............................................5
(viii)Authorization of Agreement.................................5
(ix) Authorization and Description of Securities................5
(x) Absence of Defaults and Conflicts..........................5
(xi) Absence of Labor Dispute...................................6
(xii) Absence of Proceedings.....................................6
(xiii)Accuracy of Exhibits.......................................6
(xiv) Possession of Intellectual Property........................6
(xv) Absence of Further Requirements............................6
(xvi) Possession of Licenses and Permits.........................7
(xvii)Title to Property..........................................7
(xviii)Compliance with Cuba Act..................................7
(xix) Investment Company Act.....................................7
(xx) Environmental Laws.........................................7
(xxi) Registration Rights........................................8
(xxii)Tax Returns................................................8
(xxiii)Insurance.................................................8
(xxiv)ERISA......................................................8
(xxv) Related Party Transactions.................................8
(xxvi)Reserved Shares............................................8
(b) Officer's Certificates...........................................8
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing..................8
(a) Initial Securities...............................................8
(b) Option Securities................................................9
(c) Payment..........................................................9
(d) Denominations; Registration......................................9
SECTION 3. Covenants of the Company........................................10
(a) Compliance with Securities Regulations and Commission Requests..10
(b) Filing of Amendments............................................10
(c) Delivery of Registration Statements.............................10
(d) Delivery of Prospectuses........................................10
(e) Continued Compliance with Securities Laws.......................10
(f) Blue Sky Qualifications.........................................11
(g) Rule 158........................................................11
(h) Use of Proceeds.................................................11
(i) Listing.........................................................11
(j) Restriction on Sale of Securities...............................11
-i-
<PAGE>
(k) Reporting Requirements..........................................12
(l) Compliance with NASD Rules......................................12
(m) Compliance with Rule 463........................................12
SECTION 4. Payment of Expenses.............................................12
(a) Expenses........................................................12
(b) Termination of Agreement........................................12
SECTION 5. Conditions of U.S. Underwriters' Obligations....................13
(a) Effectiveness of Registration Statement.........................13
(b) Opinion of Counsel for the Company..............................13
(c) Opinion of Counsel for U.S. Underwriters........................13
(d) Officers' Certificate...........................................13
(e) Accountant's Comfort Letter.....................................14
(f) Bringdown Comfort Letters.......................................14
(g) Approval of Listing.............................................14
(h) No Objection....................................................14
(i) Lockup Agreements...............................................14
(j) Purchase of Initial International Securities....................14
(k) Conditions to Purchase of U.S. Option Securities................14
(i) Officers' Certificate.....................................14
(ii) Opinion of Counsel for Company............................14
(iii) Opinion of Counsel for U.S. Underwriters..................14
(iv) Bringdown Comfort Letters.................................15
(l) Additional Documents............................................15
(m) Termination of Agreement........................................15
SECTION 6. Indemnification.................................................15
(a) Indemnification of U.S. Underwriters............................15
(b) Indemnification of Company, Directors and Officers..............16
(c) Actions against Parties; Notification...........................16
(d) Settlement without Consent if Failure to Reimburse..............17
(e) Indemnification for Reserved Securities.........................17
SECTION 7. Contribution....................................................17
SECTION 8. Representations, Warranties and Agreements to Survive Delivery..18
SECTION 9. Termination of Agreement........................................18
(a) Termination; General............................................18
(b) Liabilities.....................................................19
SECTION 10. Default by One or More of the U.S. Underwriters................19
SECTION 11. Notices........................................................19
SECTION 12. Parties........................................................19
SECTION 13. GOVERNING LAW AND TIME.........................................20
SECTION 14. Effect of Headings.............................................20
-ii-
<PAGE>
SCHEDULE A - List of Underwriters
SCHEDULE B - Pricing Information
SCHEDULE C - Persons Subject to Lockup
EXHIBIT A - Form of Opinion of Company Counsel EXHIBIT B - Form of Lockup
Agreement
-iii-
<PAGE>
PACKAGED ICE, INC.
(a Texas corporation)
_________ Shares of Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
o, 1998
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Jefferies & Company, Inc.
Bear, Stearns & Co. Inc.
NationsBanc Montgomery Securities LLC
Stephens Inc.
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Packaged Ice, Inc., a Texas Corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in
Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), with respect to the issue and sale by the Company and the purchase by
the U.S. Underwriters, acting severally and not jointly, of the respective
numbers of shares of Common Stock, par value $.01 per share, of the Company
("Common Stock") set forth in said Schedule A, and with respect to the grant by
the Company to the U.S. Underwriters, acting severally and not jointly, of the
option described in Section 2(b) hereof to purchase all or any part of _______
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid _________ shares of Common Stock (the "Initial U.S. Securities") to be
purchased by the U.S. Underwriters and all or any part of the _______ shares of
Common Stock subject to the option described in Section 2(b) hereof (the "U.S.
Option Securities") are hereinafter called, collectively, the "U.S. Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of an aggregate of _________ shares of
Common Stock (the "Initial International Securities") through arrangements with
Merrill Lynch International, Jefferies & Company, Inc., Bear, Stearns
International Limited, NationsBanc Montgomery Securities LLC, and Stephens Inc.
(the "International Managers") and the grant by the Company to the International
Managers, acting severally and not jointly, of an option to purchase all or any
part of the International Managers' pro rata portion of up to _______ additional
shares of Common Stock solely to cover over-allotments, if any (the
"International Option Securities" and, together with the U.S. Option Securities,
the "Option Securities"). The Initial International Securities and the
International Option Securities are hereinafter called the "International
Securities". It is understood that the Company is not obligated to sell and
-1-
<PAGE>
the U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities
unless all of the Initial International Securities are contemporaneously
purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities, and the International Securities
are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a
public offering of the U.S. Securities as soon as they deem advisable after this
Agreement has been executed and delivered.
The Company and the U.S. Underwriters agree that up to 150,000 shares of
the Initial U.S. Securities to be purchased by the U.S. Underwriters (the
"Reserved Securities") shall be reserved for sale by the Underwriters to certain
eligible employees and persons having business relationships with the Company,
as part of the distribution of the Securities by the Underwriters, subject to
the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such eligible employees and
persons having business relationships with the Company by the end of the first
business day after the date of this Agreement, such Reserved Securities may be
offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-60627) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the U.S. Securities (the "Form of U.S.
Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of International Prospectus is identical to
the Form of U.S. Prospectus, except for the front cover and back cover pages and
the information under the caption "Underwriting." The information included in
any such prospectus or in any such Term Sheet, as the case may be, that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of U.S. Prospectus and Form of International
Prospectus used by the Underwriters in connection with offering the Securities
before such registration statement became effective, and any prospectus that
omitted, as applicable, the Rule 430A Information or the Rule 434 Information,
that was used after such effectiveness and prior to the execution and delivery
of this Agreement, is herein called a "preliminary prospectus." Such
registration statement, including the exhibits thereto and schedules thereto at
the time it became effective and including the Rule 430A Information and the
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933
Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration
-2-
<PAGE>
Statement. The final Form of U.S. Prospectus and the final Form of International
Prospectus in the forms used to confirm sales of the Securities are herein
called the "U.S. Prospectus" and the "International Prospectus," respectively,
and collectively, the "Prospectuses." For purposes of this Agreement, all
references to the Registration Statement, any preliminary prospectus, the U.S.
Prospectus, the International Prospectus or any Term Sheet or any amendment or
supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company represents
and warrants to each U.S. Underwriter as of the date hereof, as of the Closing
Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if
any) referred to in Section 2(b), hereof and agrees with each U.S. Underwriter,
as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. Neither of the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any amendments or
supplements thereto were issued and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery), included or
will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectuses shall not be "materially
different", as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the U.S.
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any U.S. Underwriter expressly for
use in the Registration Statement or the U.S.
Prospectus.
Each preliminary prospectus and the prospectuses filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when
so filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
-3-
<PAGE>
(iii) FINANCIAL STATEMENTS. The financial statements included in the
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly the financial position of the Company,
Reddy Ice Corporation ("Reddy"), Cassco Ice & Cold Storage, Inc.
("Cassco"), Southwestern Ice, Inc. ("Southwestern"), and their respective
consolidated subsidiaries, and the combined financial position of Mission
Party Ice, Inc. and Southwest Texas Packaged Ice, Inc. ("Mission/SW") at
the dates indicated, and the statements of operations, stockholders'
equity and cash flows of the Company, Reddy, Cassco, Southwestern,
Mission/SW and their consolidated subsidiaries for the periods specified;
said financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectuses present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the related
notes thereto included in the Registration Statement and the Prospectuses
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been
no material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects, properties or assets
of the Company and its Subsidiaries (as defined below) considered as one
enterprise, whether or not arising in the ordinary course of business (a
"Material Adverse Effect"), (B) there have been no transactions entered
into by the Company or its Subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company and its
Subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company
on any class of its capital stock or by Reddy or Cassco on any class of
its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Texas and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under this Agreement. The Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. Each direct or indirect
subsidiary of the Company (each a "Subsidiary" and, collectively, the
"Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the
Prospectuses and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse
Effect. Except as otherwise disclosed in the Registration Statement, all
of the issued and outstanding capital stock of each Subsidiary has been
duly authorized and validly issued, is fully paid and non-assessable, and
is owned by the Company, directly or through Subsidiaries, free and clear
of any security interest, mortgage, pledge,
-4-
<PAGE>
lien, encumbrance, claim or equity. None of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any security holder of such Subsidiary. Exhibit 21 to
the Registration Statement sets forth a complete list of the Subsidiaries,
except to the extent permitted by the rules and regulations of the
Commission.
(vii) CAPITALIZATION. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses or pursuant to the exercise of convertible securities,
warrants or options referred to in the Prospectuses). The shares of issued
and outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any security holder of the
Company.
(viii)AUTHORIZATION OF AGREEMENT. This Agreement and the
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities to
be purchased by the U.S. Underwriters and the International Managers from
the Company have been duly authorized for issuance and sale to the U.S.
Underwriters pursuant to this Agreement and the International Managers
pursuant to the International Purchase Agreement, respectively, and, when
issued and delivered by the Company pursuant to this Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth herein and the International Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable. The
Common Stock conforms to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in the
instruments defining the same. No holder of the Securities will be subject
to personal liability by reason of being such a holder. The issuance of
the Securities is not subject to the preemptive or other similar rights of
any security holder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor any
of the Subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of the Subsidiaries is a party or
by which it or any of them may be bound, or to which any of the property
or assets of the Company or any Subsidiary is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect. The execution, delivery and
performance of this Agreement and the International Purchase Agreement and
the consummation of the transactions contemplated in this Agreement, the
International Purchase Agreement and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectuses
under the caption "Use of Proceeds") and compliance by the Company with
its obligations under this Agreement and the International Purchase
Agreement have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any Subsidiary pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any Subsidiary
or any applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any Subsidiary or any of
their assets, properties or operations. As
-5-
<PAGE>
used herein, a "Repayment Event" means any event or condition which gives
the holder of any note, debenture or other evidence of indebtedness (or
any person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any Subsidiary.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the employees
of the Company or any Subsidiary exists or, to the knowledge of the
Company, is imminent, and neither the Company nor any Subsidiary is aware
of any existing or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers, customers or contractors, which,
in either case, may reasonably be expected to result in a Material Adverse
Effect.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
Subsidiary, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the consummation of the
transactions contemplated in this Agreement or the International Purchase
Agreement or the performance by the Company of its obligations hereunder
or thereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or any Subsidiary is a party or of which
any of their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xiii)ACCURACY OF EXHIBITS. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and the
Subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of the Subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of the Subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding)
or invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities under this Agreement and the International Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement or the International Purchase Agreement, except such as have
been already obtained or as may be required under the 1933 Act or the 1933
Act Regulations and foreign or state securities or blue sky laws.
-6-
<PAGE>
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and the
Subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them except where the
failure to possess such Governmental Licenses would not result in a
Material Adverse Effect. The Company and the Subsidiaries are in
compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in
the aggregate, have a Material Adverse Effect. All of the Governmental
Licenses are valid and in full force and effect, except when the
invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect. Neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.
(xvii)TITLE TO PROPERTY. The Company and the Subsidiaries have good
and marketable title to all real property owned by them and good title to
all other properties owned by them, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the
Prospectuses or (b) do not, singly or in the aggregate, materially affect
the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company or any of the
Subsidiaries. All of the leases and subleases material to the business of
the Company or any of the Subsidiaries, considered as one enterprise, and
under which the Company or any of the Subsidiaries holds properties
described in the Prospectuses, are in full force and effect, and neither
the Company nor any of the Subsidiaries has any notice of any material
claim of any sort that has been asserted by anyone adverse to the rights
of the Company or any Subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or
such Subsidiary to the continued possession of the leased or subleased
premises under any such lease or sublease.
(xviii)COMPLIANCE WITH CUBA ACT. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as
Section 517.075 of the Florida statutes, and the rules and regulations
thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(xix) INVESTMENT COMPANY ACT. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated, the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) ENVIRONMENTAL LAWS. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any Subsidiary is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution
or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and the Subsidiaries have all
permits, authorizations and approvals required under any applicable
-7-
<PAGE>
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or, to the Company's knowledge, threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, written notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of the Subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of the Subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxi) REGISTRATION RIGHTS. There are no persons with registration
rights or other similar rights to have any securities registered pursuant
to the Registration Statement by the Company under the 1933 Act which have
not been appropriately waived.
(xxii)TAX RETURNS. The Company and each Subsidiary have filed all
Federal, state, local and foreign income tax returns which have been
required to be filed and have paid all taxes indicated by said returns and
all assessments received by it or any of them to the extent that such
taxes have become due and are not being contested in good faith, except
for the filing of those returns, and the paying of those taxes, the
failure to file or pay, respectively, individually or in the aggregate,
would not have a Material Adverse Effect. All tax liabilities have been
adequately provided for in the financial statements of the Company or the
applicable Subsidiary.
(xxiii)INSURANCE. The Company and the Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
reasonably adequate for the conduct of their respective businesses and the
value of their respective properties and as is customary for companies in
the Company's industry.
(xxiv)ERISA. The Company and the Subsidiaries are in compliance in
all material respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA").
(xxv) RELATED PARTY TRANSACTIONS. No relationship, direct or
indirect, exists between or among the Company or any Subsidiary, on the
one hand, and the directors, officers, shareholders, customers or
suppliers of the Company or any Subsidiary on the other hand, which is
required to be described in the Prospectuses which is not so described.
(xxvi)RESERVED SHARES. Each of the persons identified by the Company
to the Underwriters to receive Reserved Shares is a citizen of the United
States and currently is a resident of one of the United States.
(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the U.S.
Underwriters or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company to each U.S. Underwriter as to the
matters covered thereby.
SECTION 2. SALE AND DELIVERY TO U.S. UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each U.S. Underwriter, severally and not jointly, and
each U.S. Underwriter, severally and not jointly, agrees to purchase from the
Company, at the price per share set forth in Schedule B, the number of Initial
U.S. Securities set forth in
-8-
<PAGE>
Schedule A opposite the name of such U.S. Underwriter, plus any additional
number of Initial U.S. Securities which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the U.S. Underwriters,
severally and not jointly, to purchase up to an additional _______ shares of
Common Stock at the price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial U.S. Securities but not payable on the U.S. Option
Securities. The option hereby granted will expire 30 days after the date hereof
and may be exercised in whole or in part from time to time only for the purpose
of covering over-allotments which may be made in connection with the offering
and distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Company setting forth the number of U.S. Option Securities as
to which the several U.S. Underwriters are then exercising the option and the
time and date of payment and delivery for such U.S. Option Securities. Any such
time and date of delivery for the U.S. Option Securities (a "Date of Delivery")
shall be determined by the Global Coordinator, but shall not be later than seven
full business days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined. If the option is exercised as to all
or any portion of the U.S. Option Securities, each of the U.S. Underwriters,
acting severally and not jointly, will purchase that proportion of the total
number of U.S. Option Securities then being purchased which the number of
Initial U.S. Securities set forth in Schedule A opposite the name of such U.S.
Underwriter bears to the total number of Initial U.S. Securities, subject in
each case to such adjustments as the Global Coordinator in its discretion shall
make to eliminate any sales or purchases of fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Vinson
& Elkins L.L.P., 1001 Fannin, Houston, Texas, or at such other place as shall be
agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern
time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time)
on any given day) business day after the date hereof (unless postponed in
accordance with the provisions of Section 10), or such other time not later than
ten business days after such date as shall be agreed upon by the Global
Coordinator and the Company (such time and date of payment and delivery being
herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option Securities
are purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the U.S. Underwriters for their respective accounts of certificates for the U.S.
Securities to be purchased by them. Merrill Lynch, individually and not as
representative of the U.S. Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial U.S. Securities or the U.S.
Option Securities, if any, to be purchased by any U.S. Underwriter whose funds
have not been received by the Closing Time or the relevant Date of Delivery, as
the case may be, but such payment shall not relieve such U.S. Underwriter from
its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Underwriters may request
in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Underwriters in The City of New York
not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
-9-
<PAGE>
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each U.S.
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Global Coordinator immediately,
and confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectuses or any amended Prospectuses shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take such
steps as it deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectuses,
will furnish the Global Coordinator with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Global Coordinator
or counsel for the U.S.
Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or will
deliver to the U.S. Underwriters and counsel for the U.S. Underwriters, without
charge, signed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the U.S. Underwriters, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the U.S. Underwriters. The
copies of the Registration Statement and each amendment thereto furnished to the
U.S. Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus as
such U.S. Underwriter reasonably requested, and the Company hereby consents to
the use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each U.S. Underwriter, without charge, during the period when the
U.S. Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the U.S.
Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably
request. The U.S. Prospectus and any amendments or supplements thereto furnished
to the U.S. Underwriters will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement, the
International Purchase Agreement and in the Prospectuses. If at any time when a
prospectus is required by the 1933 Act to be delivered in connection with sales
of the Securities, any
-10-
<PAGE>
event shall occur or condition shall exist as a result of which it is necessary,
in the opinion of counsel for the U.S. Underwriters or for the Company, to amend
the Registration Statement or amend or supplement any Prospectus in order that
the Prospectuses will not include any untrue statements of a material fact or
omit to state a material fact necessary in order to make the statements therein
not misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectuses comply with such requirements, and the Company
will furnish to the U.S. Underwriters such number of copies of such amendment or
supplement as the U.S. Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the U.S. Underwriters, to qualify the Securities for offering
and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Global Coordinator may designate and
to maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its security
holders as soon as practicable an earnings statement for the purposes of, and to
provide the benefits contemplated by, the last paragraph of Section 11(a) of the
1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds."
(i) LISTING. The Company will use its best efforts to effect and maintain
the quotation of the Securities on the Nasdaq National Market and will file with
the Nasdaq National Market all documents and notices required by the Nasdaq
National Market of companies that have securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, or any securities convertible into or
exercisable or exchangeable for Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder or under the
International Purchase Agreement, (B) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to employee benefit plans of
the Company referred to in the Prospectuses or shares issuable upon the
conversion of preferred stock or the exercise of warrants or (C) shares of
Common Stock issued in connection
-11-
<PAGE>
with acquisitions by the Company of other businesses, provided that, (except
with respect to shares issued in transactions in which the issuance or resale of
such shares will not be registered under the 1933 Act) the recipients of such
shares agree in writing for the benefit of the U.S. Underwriters not to take any
action described in clauses (i) or (ii) above with respect to such shares until
the expiration of 180 days from the date of the Prospectuses.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to the
1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) COMPLIANCE WITH NASD RULES. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. The Underwriters will notify the
Company as to which persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) COMPLIANCE WITH RULE 463. The Company will comply with Rule 463 of the
1933 Act Regulations with respect to reporting its use of the proceeds from its
sale of the Securities.
SECTION 4. PAYMENT OF EXPENSES.(a) EXPENSES. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters and the
transfer of the Securities between the U.S. Underwriters and the International
Managers, (iv) the fees and disbursements of the Company's counsel, accountants
and other advisors, (v) the qualification of the Securities under securities
laws in accordance with the provisions of Section 3(f) hereof, including filing
fees and the reasonable fees and disbursements of counsel for the Underwriters
in connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of any transfer
agent or registrar for the Securities, (ix) the filing fees incident to the
review by the NASD of the terms of the sale of the Securities, (x) the fees and
expenses incurred in connection with the inclusion of the Securities in the
Nasdaq National Market and (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Securities which are designated
by the Company for sale to employees and others.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the U.S.
Underwriters in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Company shall reimburse the U.S. Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the U.S. Underwriters.
-12-
<PAGE>
SECTION 5. CONDITIONS OF U.S. UNDERWRITERS' OBLIGATIONS. The obligations
of the several U.S. Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company delivered pursuant to the
provisions hereof, to the performance by the Company of its covenants and other
obligations hereunder, and to the following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
the Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) OPINION OF COUNSEL FOR THE COMPANY. At Closing Time, the U.S.
Underwriters shall have received the favorable opinion, dated as of Closing
Time, of Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the Company, in
form and substance satisfactory to the U.S. Underwriters, together with signed
or reproduced copies of such letter for each of the other U.S. Underwriters to
the effect set forth in Exhibit A hereto and to such further effect as counsel
to the U.S. Underwriters may reasonably request. In giving such opinion such
counsel may rely, as to all matters governed by the laws of jurisdictions other
than the law of the States of Texas and New York, the federal law of the United
States and the General Corporation Law of the State of Delaware, upon the
opinions of counsel satisfactory to the U.S. Underwriters. Such counsel may also
state that, insofar as such opinion involves factual matters, they have relied,
to the extent they deem proper, upon certificates of officers of the Company and
its subsidiaries and certificates of public officials.
(c) OPINION OF COUNSEL FOR U.S. UNDERWRITERS. At Closing Time, the U.S.
Underwriters shall have received the favorable opinion, dated as of Closing
Time, of Vinson & Elkins L.L.P., counsel for the U.S. Underwriters, together
with signed or reproduced copies of such letter for each of the other U.S.
Underwriters with respect to the matters set forth in clauses (i), (iv), (v)
(solely as to preemptive or other similar rights arising by operation of law or
under the charter or by-laws of the Company), (vi) through (ix), inclusive, (xi)
(solely as to the information in the Prospectus under "Description of Capital
Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto. In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the States of Texas and New York,
the federal law of the United States and the General Corporation Law of the
State of Delaware, upon the opinions of counsel satisfactory to the U.S.
Underwriters. Such counsel may also state that, insofar as such opinion involves
factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.
(d) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and the Subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the U.S.
Underwriters shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending the
effectiveness of
-13-
<PAGE>
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or to the Company's knowledge are pending or are
contemplated by the Commission.
(e) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the U.S. Underwriters shall have received from Deloitte & Touche LLP
and KPMG Peat Marwick LLP letters dated such date, in form and substance
satisfactory to the U.S. Underwriters, together with signed or reproduced copies
of such letters for each of the other U.S. Underwriters containing statements
and information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectuses.
(f) BRINGDOWN COMFORT LETTERS. At Closing Time, the U.S. Underwriters
shall have received from Deloitte & Touche LLP and KPMG Peat Marwick LLP
letters, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letters furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not more
than three business days prior to Closing Time.
(g) APPROVAL OF LISTING. At Closing Time, the Securities shall have been
approved for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(h) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements contemplated hereby.
(i) LOCKUP AGREEMENTS. At the date of this Agreement, the U.S.
Underwriters shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule C hereto.
(j) PURCHASE OF INITIAL INTERNATIONAL SECURITIES. Contemporaneously with
the purchase by the U.S. Underwriters of the Initial U.S. Securities under this
Agreement, the International Managers shall have purchased the Initial
International Securities under the International Purchase Agreement.
(k) CONDITIONS TO PURCHASE OF U.S. OPTION SECURITIES. In the event that
the U.S. Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the U.S. Option Securities, the representations
and warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company hereunder
shall be true and correct as of each Date of Delivery and, at the relevant Date
of Delivery, the U.S. Underwriters shall have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the Chairman of the Board or the President of the Company and
of the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant to
Section 5(d) hereof remains true and correct as of such Date of Delivery.
(ii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of Akin,
Gump, Strauss, Hauer & Feld, L.L.P., counsel for the Company, in form and
substance satisfactory to the U.S. Underwriters, dated such Date of
Delivery, relating to the U.S. Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinions required
by Section 5(b) hereof.
(iii) OPINION OF COUNSEL FOR U.S. UNDERWRITERS. The favorable
opinion of Vinson & Elkins L.L.P., counsel for the U.S. Underwriters,
dated such Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(c) hereof.
-14-
<PAGE>
(iv) BRINGDOWN COMFORT LETTERS. Letters from Deloitte & Touche LLP
and KPMG Peat Marwick LLP, in form and substance satisfactory to the U.S.
Underwriters and dated such Date of Delivery, substantially in the same
form and substance as the letters furnished to the U.S. Underwriters
pursuant to Section 5(f) hereof, except that the "specified date" in the
letter furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(l) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery,
counsel for the U.S. Underwriters shall have been furnished with such documents
and opinions as they may require for the purpose of enabling them to pass upon
the issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the U.S.
Underwriters and counsel for the U.S. Underwriters.
(m) TERMINATION OF AGREEMENT. IF ANY CONDITION SPECIFIED IN THIS SECTION
SHALL NOT HAVE BEEN FULFILLED WHEN AND AS REQUIRED TO BE FULFILLED, THIS
AGREEMENT, OR, IN THE CASE OF ANY CONDITION TO THE PURCHASE OF U.S. OPTION
SECURITIES ON A DATE OF DELIVERY WHICH IS AFTER THE CLOSING TIME, THE
OBLIGATIONS OF THE SEVERAL U.S. UNDERWRITERS TO PURCHASE THE RELEVANT OPTION
SECURITIES, MAY BE TERMINATED BY THE U.S. UNDERWRITERS BY NOTICE TO THE COMPANY
AT ANY TIME AT OR PRIOR TO CLOSING TIME OR SUCH DATE OF DELIVERY, AS THE CASE
MAY BE, AND SUCH TERMINATION SHALL BE WITHOUT LIABILITY OF ANY PARTY TO ANY
OTHER PARTY EXCEPT AS PROVIDED IN SECTION 4 AND EXCEPT THAT SECTIONS 1, 6, 7 AND
8 SHALL SURVIVE ANY SUCH TERMINATION AND REMAIN IN FULL FORCE AND EFFECT.
SECTION 6. INDEMNIFICATION.
(A) INDEMNIFICATION OF U.S. UNDERWRITERS. THE COMPANY AGREES TO INDEMNIFY
AND HOLD HARMLESS EACH U.S. UNDERWRITER AND EACH PERSON, IF ANY, WHO CONTROLS
ANY U.S. UNDERWRITER WITHIN THE MEANING OF SECTION 15 OF THE 1933 ACT OR SECTION
20 OF THE 1934 ACT AS FOLLOWS:
(I) AGAINST ANY AND ALL LOSS, LIABILITY, CLAIM, DAMAGE AND EXPENSE
WHATSOEVER, AS INCURRED, ARISING OUT OF ANY UNTRUE STATEMENT OR ALLEGED
UNTRUE STATEMENT OF A MATERIAL FACT CONTAINED IN THE REGISTRATION
STATEMENT (OR ANY AMENDMENT THERETO), INCLUDING THE RULE 430A INFORMATION
AND THE RULE 434 INFORMATION, IF APPLICABLE, OR THE OMISSION OR ALLEGED
OMISSION THEREFROM OF A MATERIAL FACT REQUIRED TO BE STATED THEREIN OR
NECESSARY TO MAKE THE STATEMENTS THEREIN NOT MISLEADING OR ARISING OUT OF
ANY UNTRUE STATEMENT OR ALLEGED UNTRUE STATEMENT OF A MATERIAL FACT
INCLUDED IN ANY PRELIMINARY PROSPECTUS OR THE PROSPECTUSES (OR ANY
AMENDMENT OR SUPPLEMENT THERETO), OR THE OMISSION OR ALLEGED OMISSION
THEREFROM OF A MATERIAL FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS
THEREIN, IN THE LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING;
(II) AGAINST ANY AND ALL LOSS, LIABILITY, CLAIM, DAMAGE AND EXPENSE
WHATSOEVER, AS INCURRED, TO THE EXTENT OF THE AGGREGATE AMOUNT PAID IN
SETTLEMENT OF ANY LITIGATION, OR ANY INVESTIGATION OR PROCEEDING BY ANY
GOVERNMENTAL AGENCY OR BODY, COMMENCED OR THREATENED, OR OF ANY CLAIM
WHATSOEVER BASED UPON ANY SUCH UNTRUE STATEMENT OR OMISSION, OR ANY SUCH
ALLEGED UNTRUE STATEMENT OR OMISSION; PROVIDED THAT (SUBJECT TO SECTION
6(D) BELOW) ANY SUCH SETTLEMENT IS EFFECTED WITH THE WRITTEN CONSENT OF
THE COMPANY; AND
(III) AGAINST ANY AND ALL EXPENSE WHATSOEVER, AS REASONABLY INCURRED
(INCLUDING (SUBJECT TO SECTION 6(C), BELOW) THE FEES AND DISBURSEMENTS OF
COUNSEL CHOSEN BY MERRILL LYNCH), IN INVESTIGATING, PREPARING OR DEFENDING
AGAINST ANY LITIGATION, OR ANY INVESTIGATION OR PROCEEDING BY ANY
GOVERNMENTAL AGENCY OR BODY, COMMENCED OR THREATENED, OR ANY CLAIM
WHATSOEVER BASED UPON ANY SUCH UNTRUE STATEMENT OR OMISSION, OR ANY SUCH
ALLEGED UNTRUE STATEMENT OR OMISSION, TO THE EXTENT THAT ANY SUCH EXPENSE
IS NOT PAID UNDER (I) OR (II) ABOVE;
-15-
<PAGE>
PROVIDED, HOWEVER, THAT THIS INDEMNITY AGREEMENT SHALL NOT APPLY TO ANY LOSS,
LIABILITY, CLAIM, DAMAGE OR EXPENSE TO THE EXTENT ARISING OUT OF ANY UNTRUE
STATEMENT OR OMISSION OR ALLEGED UNTRUE STATEMENT OR OMISSION MADE IN RELIANCE
UPON AND IN CONFORMITY WITH WRITTEN INFORMATION FURNISHED TO THE COMPANY BY ANY
U.S. UNDERWRITER EXPRESSLY FOR USE IN THE REGISTRATION STATEMENT (OR ANY
AMENDMENT THERETO), INCLUDING THE RULE 430A INFORMATION AND THE RULE 434
INFORMATION, IF APPLICABLE, OR ANY PRELIMINARY PROSPECTUS OR THE U.S. PROSPECTUS
(OR ANY AMENDMENT OR SUPPLEMENT THERETO); AND PROVIDED FURTHER THAT THE COMPANY
WILL NOT BE LIABLE TO ANY U.S. UNDERWRITER WITH RESPECT TO ANY PROSPECTUS TO THE
EXTENT THAT THE COMPANY SHALL SUSTAIN THE BURDEN OF PROVING THAT ANY SUCH LOSS,
LIABILITY, CLAIM, DAMAGE OR EXPENSE RESULTED FROM THE FACT THAT SUCH U.S.
UNDERWRITER, IN CONTRAVENTION OF A REQUIREMENT OF THIS AGREEMENT OR APPLICABLE
LAW, SOLD SECURITIES TO A PERSON TO WHOM SUCH U.S. UNDERWRITER FAILED TO SEND OR
GIVE, AT OR PRIOR TO THE CLOSING DATE, A COPY OF THE U.S. PROSPECTUS, AS THEN
AMENDED OR SUPPLEMENTED IF: (I) THE COMPANY HAS PREVIOUSLY FURNISHED COPIES
THEREOF (SUFFICIENTLY IN ADVANCE OF THE CLOSING DATE TO ALLOW FOR DISTRIBUTION
BY THE CLOSING DATE) TO THE U.S. UNDERWRITER AND THE LOSS, LIABILITY, CLAIM,
DAMAGE OR EXPENSE OF SUCH U.S. UNDERWRITER RESULTED FROM AN UNTRUE STATEMENT OR
OMISSION OF A MATERIAL FACT CONTAINED IN OR OMITTED FROM THE PRELIMINARY
PROSPECTUS WHICH WAS CORRECTED IN THE U.S. PROSPECTUS AS, IF APPLICABLE, AMENDED
OR SUPPLEMENTED PRIOR TO THE CLOSING DATE AND SUCH U.S. PROSPECTUS WAS REQUIRED
BY LAW TO BE DELIVERED AT OR PRIOR TO THE WRITTEN CONFIRMATION OF SALE TO SUCH
PERSON AND (II) SUCH FAILURE TO GIVE OR SEND SUCH U.S. PROSPECTUS BY THE CLOSING
DATE TO THE PARTY OR PARTIES ASSERTING SUCH LOSS, LIABILITY, CLAIM, DAMAGE OR
EXPENSE WOULD HAVE CONSTITUTED THE SOLE DEFENSE TO THE CLAIM ASSERTED BY SUCH
PERSON.
(B) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. EACH U.S.
UNDERWRITER SEVERALLY AGREES TO INDEMNIFY AND HOLD HARMLESS THE COMPANY, ITS
DIRECTORS, EACH OF ITS OFFICERS WHO SIGNED THE REGISTRATION STATEMENT, AND EACH
PERSON, IF ANY, WHO CONTROLS THE COMPANY WITHIN THE MEANING OF SECTION 15 OF THE
1933 ACT OR SECTION 20 OF THE 1934 ACT AGAINST ANY AND ALL LOSS, LIABILITY,
CLAIM, DAMAGE AND EXPENSE DESCRIBED IN THE INDEMNITY CONTAINED IN SUBSECTION (A)
OF THIS SECTION, AS INCURRED, BUT ONLY WITH RESPECT TO UNTRUE STATEMENTS OR
OMISSIONS, OR ALLEGED UNTRUE STATEMENTS OR OMISSIONS, MADE IN THE REGISTRATION
STATEMENT (OR ANY AMENDMENT THERETO), INCLUDING THE RULE 430A INFORMATION AND
THE RULE 434 INFORMATION, IF APPLICABLE, OR ANY PRELIMINARY PROSPECTUS OR THE
U.S. PROSPECTUS (OR ANY AMENDMENT OR SUPPLEMENT THERETO) IN RELIANCE UPON AND IN
CONFORMITY WITH WRITTEN INFORMATION FURNISHED TO THE COMPANY BY SUCH U.S.
UNDERWRITER EXPRESSLY FOR USE IN THE REGISTRATION STATEMENT (OR ANY AMENDMENT
THERETO) OR SUCH PRELIMINARY PROSPECTUS OR THE U.S.
PROSPECTUS (OR ANY AMENDMENT OR SUPPLEMENT THERETO).
(C) ACTIONS AGAINST PARTIES; NOTIFICATION. EACH INDEMNIFIED PARTY SHALL
GIVE NOTICE AS PROMPTLY AS REASONABLY PRACTICABLE TO EACH INDEMNIFYING PARTY OF
ANY ACTION COMMENCED AGAINST IT IN RESPECT OF WHICH INDEMNITY MAY BE SOUGHT
HEREUNDER, BUT FAILURE TO SO NOTIFY AN INDEMNIFYING PARTY SHALL NOT RELIEVE SUCH
INDEMNIFYING PARTY FROM ANY LIABILITY HEREUNDER TO THE EXTENT IT IS NOT
MATERIALLY PREJUDICED AS A RESULT THEREOF AND IN ANY EVENT SHALL NOT RELIEVE IT
FROM ANY LIABILITY WHICH IT MAY HAVE OTHERWISE THAN ON ACCOUNT OF THIS INDEMNITY
AGREEMENT. IN THE CASE OF PARTIES INDEMNIFIED PURSUANT TO SECTION 6(A) ABOVE,
COUNSEL TO THE INDEMNIFIED PARTIES SHALL BE SELECTED BY MERRILL LYNCH, AND, IN
THE CASE OF PARTIES INDEMNIFIED PURSUANT TO SECTION 6(B) ABOVE, COUNSEL TO THE
INDEMNIFIED PARTIES SHALL BE SELECTED BY THE COMPANY. AN INDEMNIFIED PARTY SHALL
HAVE THE RIGHT TO EMPLOY SEPARATE COUNSEL IN ANY SUCH ACTION AND PARTICIPATE IN
THE DEFENSE THEREOF, BUT THE FEES AND EXPENSES OF SUCH COUNSEL SHALL BE AT THE
EXPENSE OF THE INDEMNIFIED PARTY UNLESS (I) THE EMPLOYMENT OF SUCH COUNSEL SHALL
HAVE BEEN SPECIFICALLY AUTHORIZED IN WRITING BY THE INDEMNIFYING PARTY, (II) THE
INDEMNIFYING PARTY SHALL HAVE FAILED TO ASSUME THE DEFENSE OF SUCH ACTION OR
EMPLOY COUNSEL REASONABLY SATISFACTORY TO THE INDEMNIFIED PARTY OR (III) THE
NAMED PARTIES TO ANY SUCH ACTION (INCLUDING ANY IMPLEADED PARTIES) INCLUDE BOTH
THE INDEMNIFIED PARTY AND THE INDEMNIFYING PARTY, AND THE INDEMNIFIED PARTY
SHALL HAVE BEEN ADVISED IN WRITING BY SUCH COUNSEL THAT THERE MAY BE ONE OR MORE
LEGAL DEFENSES AVAILABLE TO IT THAT ARE DIFFERENT FROM OR ADDITIONAL TO THOSE
AVAILABLE TO THE INDEMNIFYING PARTY. IN NO EVENT SHALL THE INDEMNIFYING PARTIES
BE LIABLE FOR FEES AND EXPENSES OF MORE THAN ONE COUNSEL (IN ADDITION TO ANY
LOCAL COUNSEL) SEPARATE FROM THEIR OWN COUNSEL FOR ALL INDEMNIFIED PARTIES IN
CONNECTION WITH ANY ONE ACTION OR SEPARATE BUT SIMILAR OR RELATED ACTIONS IN THE
SAME JURISDICTION ARISING OUT OF THE SAME GENERAL ALLEGATIONS OR CIRCUMSTANCES.
NO
-16-
<PAGE>
INDEMNIFYING PARTY SHALL, WITHOUT THE PRIOR WRITTEN CONSENT OF THE INDEMNIFIED
PARTIES, SETTLE OR COMPROMISE OR CONSENT TO THE ENTRY OF ANY JUDGMENT WITH
RESPECT TO ANY LITIGATION, OR ANY INVESTIGATION OR PROCEEDING BY ANY
GOVERNMENTAL AGENCY OR BODY, COMMENCED OR THREATENED, OR ANY CLAIM WHATSOEVER IN
RESPECT OF WHICH INDEMNIFICATION OR CONTRIBUTION COULD BE SOUGHT UNDER THIS
SECTION 6 OR SECTION 7 HEREOF (WHETHER OR NOT THE INDEMNIFIED PARTIES ARE ACTUAL
OR POTENTIAL PARTIES THERETO), UNLESS SUCH SETTLEMENT, COMPROMISE OR CONSENT (I)
INCLUDES AN UNCONDITIONAL RELEASE OF EACH INDEMNIFIED PARTY FROM ALL LIABILITY
ARISING OUT OF SUCH LITIGATION, INVESTIGATION, PROCEEDING OR CLAIM AND (II) DOES
NOT INCLUDE A STATEMENT AS TO OR AN ADMISSION OF FAULT, CULPABILITY OR A FAILURE
TO ACT BY OR ON BEHALF OF ANY INDEMNIFIED PARTY.
(D) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. IF AT ANY TIME AN
INDEMNIFIED PARTY SHALL HAVE REQUESTED AN INDEMNIFYING PARTY TO REIMBURSE THE
INDEMNIFIED PARTY FOR FEES AND EXPENSES OF COUNSEL, SUCH INDEMNIFYING PARTY
AGREES THAT IT SHALL BE LIABLE FOR ANY SETTLEMENT OF THE NATURE CONTEMPLATED BY
SECTION 6(A)(II) EFFECTED WITHOUT ITS WRITTEN CONSENT IF (I) SUCH SETTLEMENT IS
ENTERED INTO MORE THAN 45 DAYS AFTER RECEIPT BY SUCH INDEMNIFYING PARTY OF THE
AFORESAID REQUEST, (II) SUCH INDEMNIFYING PARTY SHALL HAVE RECEIVED NOTICE OF
THE TERMS OF SUCH SETTLEMENT AT LEAST 30 DAYS PRIOR TO SUCH SETTLEMENT BEING
ENTERED INTO AND (III) SUCH INDEMNIFYING PARTY SHALL NOT HAVE REIMBURSED SUCH
INDEMNIFIED PARTY IN ACCORDANCE WITH SUCH REQUEST PRIOR TO THE DATE OF SUCH
SETTLEMENT.
(E) INDEMNIFICATION FOR RESERVED SECURITIES. IN CONNECTION WITH THE OFFER
AND SALE OF THE RESERVED SECURITIES, THE COMPANY AGREES, PROMPTLY UPON A REQUEST
IN WRITING TO INDEMNIFY AND HOLD HARMLESS THE UNDERWRITERS FROM AND AGAINST ANY
AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES AND EXPENSES INCURRED BY THEM AS A
RESULT OF THE FAILURE OF ANY PERSON OR ENTITY TO WHOM RESERVED SECURITIES ARE
OFFERED TO PAY FOR AND ACCEPT DELIVERY OF RESERVED SECURITIES WHICH, BY THE END
OF THE FIRST BUSINESS DAY FOLLOWING THE DATE OF THIS AGREEMENT, WERE SUBJECT TO
A PROPERLY CONFIRMED AGREEMENT TO PURCHASE.
SECTION 7. CONTRIBUTION. IF THE INDEMNIFICATION PROVIDED FOR IN SECTION 6
HEREOF IS FOR ANY REASON UNAVAILABLE TO OR INSUFFICIENT TO HOLD HARMLESS AN
INDEMNIFIED PARTY IN RESPECT OF ANY LOSSES, LIABILITIES, CLAIMS, DAMAGES OR
EXPENSES REFERRED TO THEREIN, THEN EACH INDEMNIFYING PARTY SHALL CONTRIBUTE TO
THE AGGREGATE AMOUNT OF SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES AND EXPENSES
INCURRED BY SUCH INDEMNIFIED PARTY, AS INCURRED, (I) IN SUCH PROPORTION AS IS
APPROPRIATE TO REFLECT THE RELATIVE BENEFITS RECEIVED BY THE COMPANY ON THE ONE
HAND AND THE U.S. UNDERWRITERS ON THE OTHER HAND FROM THE OFFERING OF THE
SECURITIES PURSUANT TO THIS AGREEMENT OR (II) IF THE ALLOCATION PROVIDED BY
CLAUSE (I) IS NOT PERMITTED BY APPLICABLE LAW, IN SUCH PROPORTION AS IS
APPROPRIATE TO REFLECT NOT ONLY THE RELATIVE BENEFITS REFERRED TO IN CLAUSE (I)
ABOVE BUT ALSO THE RELATIVE FAULT OF THE COMPANY ON THE ONE HAND AND OF THE U.S.
UNDERWRITERS ON THE OTHER HAND IN CONNECTION WITH THE STATEMENTS OR OMISSIONS
WHICH RESULTED IN SUCH LOSSES, LIABILITIES, CLAIMS, DAMAGES OR EXPENSES, AS WELL
AS ANY OTHER RELEVANT EQUITABLE CONSIDERATIONS.
THE RELATIVE BENEFITS RECEIVED BY THE COMPANY ON THE ONE HAND AND THE U.S.
UNDERWRITERS ON THE OTHER HAND IN CONNECTION WITH THE OFFERING OF THE U.S.
SECURITIES PURSUANT TO THIS AGREEMENT SHALL BE DEEMED TO BE IN THE SAME
RESPECTIVE PROPORTIONS AS THE TOTAL NET PROCEEDS FROM THE OFFERING OF THE U.S.
SECURITIES PURSUANT TO THIS AGREEMENT (BEFORE DEDUCTING EXPENSES) RECEIVED BY
THE COMPANY AND THE TOTAL UNDERWRITING DISCOUNT RECEIVED BY THE U.S.
UNDERWRITERS, IN EACH CASE AS SET FORTH ON THE COVER OF THE U.S. PROSPECTUS, OR,
IF RULE 434 IS USED, THE CORRESPONDING LOCATION ON THE TERM SHEET, BEAR TO THE
AGGREGATE INITIAL PUBLIC OFFERING PRICE OF THE U.S. SECURITIES AS SET FORTH ON
SUCH COVER.
THE RELATIVE FAULT OF THE COMPANY ON THE ONE HAND AND THE U.S.
UNDERWRITERS ON THE OTHER HAND SHALL BE DETERMINED BY REFERENCE TO, AMONG OTHER
THINGS, WHETHER ANY SUCH UNTRUE OR ALLEGED UNTRUE STATEMENT OF A MATERIAL FACT
OR OMISSION OR ALLEGED OMISSION TO STATE A MATERIAL FACT RELATES TO INFORMATION
SUPPLIED BY THE COMPANY OR BY THE U.S. UNDERWRITERS AND THE PARTIES' RELATIVE
INTENT, KNOWLEDGE, ACCESS TO INFORMATION AND OPPORTUNITY TO CORRECT OR PREVENT
SUCH STATEMENT OR OMISSION.
-17-
<PAGE>
THE COMPANY AND THE U.S. UNDERWRITERS AGREE THAT IT WOULD NOT BE JUST AND
EQUITABLE IF CONTRIBUTION PURSUANT TO THIS SECTION 7 WERE DETERMINED BY PRO RATA
ALLOCATION (EVEN IF THE U.S. UNDERWRITERS WERE TREATED AS ONE ENTITY FOR SUCH
PURPOSE) OR BY ANY OTHER METHOD OF ALLOCATION WHICH DOES NOT TAKE ACCOUNT OF THE
EQUITABLE CONSIDERATIONS REFERRED TO ABOVE IN THIS SECTION 7. THE AGGREGATE
AMOUNT OF LOSSES, LIABILITIES, CLAIMS, DAMAGES AND EXPENSES INCURRED BY AN
INDEMNIFIED PARTY AND REFERRED TO ABOVE IN THIS SECTION 7 SHALL BE DEEMED TO
INCLUDE ANY LEGAL OR OTHER EXPENSES REASONABLY INCURRED BY SUCH INDEMNIFIED
PARTY IN INVESTIGATING, PREPARING OR DEFENDING AGAINST ANY LITIGATION, OR ANY
INVESTIGATION OR PROCEEDING BY ANY GOVERNMENTAL AGENCY OR BODY, COMMENCED OR
THREATENED, OR ANY CLAIM WHATSOEVER BASED UPON ANY SUCH UNTRUE OR ALLEGED UNTRUE
STATEMENT OR OMISSION OR ALLEGED OMISSION.
NOTWITHSTANDING THE PROVISIONS OF THIS SECTION 7, NO U.S. UNDERWRITER
SHALL BE REQUIRED TO CONTRIBUTE ANY AMOUNT IN EXCESS OF THE AMOUNT BY WHICH THE
TOTAL PRICE AT WHICH THE U.S. SECURITIES UNDERWRITTEN BY IT AND DISTRIBUTED TO
THE PUBLIC WERE OFFERED TO THE PUBLIC EXCEEDS THE AMOUNT OF ANY DAMAGES WHICH
SUCH U.S. UNDERWRITER HAS OTHERWISE BEEN REQUIRED TO PAY BY REASON OF ANY SUCH
UNTRUE OR ALLEGED UNTRUE STATEMENT OR OMISSION OR ALLEGED OMISSION.
NO PERSON GUILTY OF FRAUDULENT MISREPRESENTATION (WITHIN THE MEANING OF
SECTION 11(F) OF THE 1933 ACT) SHALL BE ENTITLED TO CONTRIBUTION FROM ANY PERSON
WHO WAS NOT GUILTY OF SUCH FRAUDULENT MISREPRESENTATION.
FOR PURPOSES OF THIS SECTION 7, EACH PERSON, IF ANY, WHO CONTROLS A U.S.
UNDERWRITER WITHIN THE MEANING OF SECTION 15 OF THE 1933 ACT OR SECTION 20 OF
THE 1934 ACT SHALL HAVE THE SAME RIGHTS TO CONTRIBUTION AS SUCH U.S.
UNDERWRITER, AND EACH DIRECTOR OF THE COMPANY, EACH OFFICER OF THE COMPANY WHO
SIGNED THE REGISTRATION STATEMENT, AND EACH PERSON, IF ANY, WHO CONTROLS THE
COMPANY WITHIN THE MEANING OF SECTION 15 OF THE 1933 ACT OR SECTION 20 OF THE
1934 ACT SHALL HAVE THE SAME RIGHTS TO CONTRIBUTION AS THE COMPANY. THE U.S.
UNDERWRITERS' RESPECTIVE OBLIGATIONS TO CONTRIBUTE PURSUANT TO THIS SECTION 7
ARE SEVERAL IN PROPORTION TO THE NUMBER OF INITIAL U.S. SECURITIES SET FORTH
OPPOSITE THEIR RESPECTIVE NAMES IN SCHEDULE A HERETO AND NOT JOINT.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
ALL REPRESENTATIONS, WARRANTIES AND AGREEMENTS CONTAINED IN THIS AGREEMENT OR IN
CERTIFICATES OF OFFICERS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES SUBMITTED
PURSUANT HERETO, SHALL REMAIN OPERATIVE AND IN FULL FORCE AND EFFECT, REGARDLESS
OF ANY INVESTIGATION MADE BY OR ON BEHALF OF ANY U.S. UNDERWRITER OR CONTROLLING
PERSON, OR BY OR ON BEHALF OF THE COMPANY, AND SHALL SURVIVE DELIVERY OF THE
SECURITIES TO THE U.S. UNDERWRITERS.
SECTION 9. TERMINATION OF AGREEMENT.
(A) TERMINATION; GENERAL. THE U.S. UNDERWRITERS MAY TERMINATE THIS
AGREEMENT, BY NOTICE TO THE COMPANY, AT ANY TIME AT OR PRIOR TO CLOSING TIME (I)
IF THERE HAS BEEN, SINCE THE TIME OF EXECUTION OF THIS AGREEMENT OR SINCE THE
RESPECTIVE DATES AS OF WHICH INFORMATION IS GIVEN IN THE U.S. PROSPECTUS, ANY
MATERIAL ADVERSE CHANGE IN THE CONDITION, FINANCIAL OR OTHERWISE, OR IN THE
EARNINGS, BUSINESS AFFAIRS OR BUSINESS PROSPECTS OF THE COMPANY AND THE
SUBSIDIARIES CONSIDERED AS ONE ENTERPRISE, WHETHER OR NOT ARISING IN THE
ORDINARY COURSE OF BUSINESS, OR (II) IF THERE HAS OCCURRED ANY MATERIAL ADVERSE
CHANGE IN THE FINANCIAL MARKETS IN THE UNITED STATES OR THE INTERNATIONAL
FINANCIAL MARKETS, ANY OUTBREAK OF HOSTILITIES OR ESCALATION THEREOF OR OTHER
CALAMITY OR CRISIS OR ANY CHANGE OR DEVELOPMENT INVOLVING A PROSPECTIVE CHANGE
IN NATIONAL OR INTERNATIONAL POLITICAL, FINANCIAL OR ECONOMIC CONDITIONS, IN
EACH CASE THE EFFECT OF WHICH IS SUCH AS TO MAKE IT, IN THE JUDGMENT OF THE U.S.
UNDERWRITERS, IMPRACTICABLE TO MARKET THE SECURITIES OR TO ENFORCE CONTRACTS FOR
THE SALE OF THE SECURITIES, OR (III) IF TRADING IN ANY SECURITIES OF THE COMPANY
HAS BEEN SUSPENDED OR MATERIALLY LIMITED BY THE COMMISSION OR THE NASDAQ
NATIONAL MARKET, OR IF TRADING GENERALLY ON THE AMERICAN STOCK EXCHANGE OR THE
NEW YORK STOCK EXCHANGE OR IN THE NASDAQ NATIONAL MARKET HAS BEEN SUSPENDED OR
MATERIALLY LIMITED, OR MINIMUM OR MAXIMUM PRICES FOR TRADING HAVE BEEN FIXED, OR
MAXIMUM RANGES FOR PRICES HAVE BEEN REQUIRED, BY ANY OF SAID EXCHANGES OR BY
SUCH SYSTEM OR BY ORDER OF THE COMMISSION, THE NATIONAL
-18-
<PAGE>
ASSOCIATION OF SECURITIES DEALERS, INC. OR ANY OTHER GOVERNMENTAL AUTHORITY, OR
(IV) IF A BANKING MORATORIUM HAS BEEN DECLARED BY EITHER FEDERAL OR NEW YORK
AUTHORITIES.
(B) LIABILITIES. IF THIS AGREEMENT IS TERMINATED PURSUANT TO THIS SECTION,
SUCH TERMINATION SHALL BE WITHOUT LIABILITY OF ANY PARTY TO ANY OTHER PARTY
EXCEPT AS PROVIDED IN SECTION 4 HEREOF, AND PROVIDED FURTHER THAT SECTIONS 1, 6,
7 AND 8 SHALL SURVIVE SUCH TERMINATION AND REMAIN IN FULL FORCE AND EFFECT.
SECTION 10. DEFAULT BY ONE OR MORE OF THE U.S. UNDERWRITERS. IF ONE OR
MORE OF THE U.S. UNDERWRITERS SHALL FAIL AT CLOSING TIME OR A DATE OF DELIVERY
TO PURCHASE THE SECURITIES WHICH IT OR THEY ARE OBLIGATED TO PURCHASE UNDER THIS
AGREEMENT (THE "DEFAULTED SECURITIES"), THE U.S. UNDERWRITERS SHALL HAVE THE
RIGHT, WITHIN 24 HOURS THEREAFTER, TO MAKE ARRANGEMENTS FOR ONE OR MORE OF THE
NON-DEFAULTING U.S. UNDERWRITERS, OR ANY OTHER UNDERWRITERS, TO PURCHASE ALL,
BUT NOT LESS THAN ALL, OF THE DEFAULTED SECURITIES IN SUCH AMOUNTS AS MAY BE
AGREED UPON AND UPON THE TERMS HEREIN SET FORTH; IF, HOWEVER, THE U.S.
UNDERWRITERS SHALL NOT HAVE COMPLETED SUCH ARRANGEMENTS WITHIN SUCH 24-HOUR
PERIOD, THEN:
(A) IF THE NUMBER OF DEFAULTED SECURITIES DOES NOT EXCEED 10% OF THE
NUMBER OF U.S. SECURITIES TO BE PURCHASED ON SUCH DATE, EACH OF THE
NON-DEFAULTING U.S. UNDERWRITERS SHALL BE OBLIGATED, SEVERALLY AND NOT JOINTLY,
TO PURCHASE THE FULL AMOUNT THEREOF IN THE PROPORTIONS THAT THEIR RESPECTIVE
UNDERWRITING OBLIGATIONS HEREUNDER BEAR TO THE UNDERWRITING OBLIGATIONS OF ALL
NON-DEFAULTING U.S. UNDERWRITERS, OR
(B) IF THE NUMBER OF DEFAULTED SECURITIES EXCEEDS 10% OF THE NUMBER OF
U.S. SECURITIES TO BE PURCHASED ON SUCH DATE, THIS AGREEMENT OR, WITH RESPECT TO
ANY DATE OF DELIVERY WHICH OCCURS AFTER THE CLOSING TIME, THE OBLIGATION OF THE
U.S. UNDERWRITERS TO PURCHASE AND OF THE COMPANY TO SELL THE OPTION SECURITIES
TO BE PURCHASED AND SOLD ON SUCH DATE OF DELIVERY SHALL TERMINATE WITHOUT
LIABILITY ON THE PART OF ANY NON-DEFAULTING U.S. UNDERWRITER.
NO ACTION TAKEN PURSUANT TO THIS SECTION SHALL RELIEVE ANY DEFAULTING U.S.
UNDERWRITER FROM LIABILITY IN RESPECT OF ITS DEFAULT.
IN THE EVENT OF ANY SUCH DEFAULT WHICH DOES NOT RESULT IN A TERMINATION OF
THIS AGREEMENT OR, IN THE CASE OF A DATE OF DELIVERY WHICH IS AFTER THE CLOSING
TIME, WHICH DOES NOT RESULT IN A TERMINATION OF THE OBLIGATION OF THE U.S.
UNDERWRITERS TO PURCHASE AND THE COMPANY TO SELL THE RELEVANT U.S. OPTION
SECURITIES, AS THE CASE MAY BE, EITHER THE U.S. UNDERWRITERS OR THE COMPANY
SHALL HAVE THE RIGHT TO POSTPONE THE CLOSING TIME OR THE RELEVANT DATE OF
DELIVERY, AS THE CASE MAY BE, FOR A PERIOD NOT EXCEEDING SEVEN DAYS IN ORDER TO
EFFECT ANY REQUIRED CHANGES IN THE REGISTRATION STATEMENT OR PROSPECTUS OR IN
ANY OTHER DOCUMENTS OR ARRANGEMENTS. AS USED HEREIN, THE TERM "U.S. UNDERWRITER"
INCLUDES ANY PERSON SUBSTITUTED FOR A U.S. UNDERWRITER UNDER THIS SECTION 10.
SECTION 11. NOTICES. ALL NOTICES AND OTHER COMMUNICATIONS HEREUNDER SHALL
BE IN WRITING AND SHALL BE DEEMED TO HAVE BEEN DULY GIVEN IF MAILED OR
TRANSMITTED BY ANY STANDARD FORM OF TELECOMMUNICATION. NOTICES TO THE U.S.
UNDERWRITERS SHALL BE DIRECTED TO THE U.S. UNDERWRITERS, C/O MERRILL LYNCH AT
NORTH TOWER, WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10281-1201, ATTENTION OF
_______________; AND NOTICES TO THE COMPANY SHALL BE DIRECTED TO IT AT 8572 KATY
FREEWAY, SUITE 101, HOUSTON, TEXAS 77024, ATTENTION OF JAMES F. STUART.
SECTION 12. PARTIES. THIS AGREEMENT SHALL EACH INURE TO THE BENEFIT OF AND
BE BINDING UPON THE U.S. UNDERWRITERS AND THE COMPANY AND THEIR RESPECTIVE
SUCCESSORS. NOTHING EXPRESSED OR MENTIONED IN THIS AGREEMENT IS INTENDED OR
SHALL BE CONSTRUED TO GIVE ANY PERSON, FIRM OR CORPORATION, OTHER THAN THE U.S.
UNDERWRITERS AND THE COMPANY AND THEIR RESPECTIVE SUCCESSORS AND THE CONTROLLING
PERSONS AND OFFICERS AND DIRECTORS REFERRED TO IN SECTIONS 6 AND 7 AND THEIR
HEIRS AND LEGAL REPRESENTATIVES, ANY LEGAL OR EQUITABLE RIGHT, REMEDY OR CLAIM
UNDER OR IN RESPECT OF THIS AGREEMENT OR ANY PROVISION HEREIN CONTAINED. THIS
AGREEMENT AND
-19-
<PAGE>
ALL CONDITIONS AND PROVISIONS HEREOF ARE INTENDED TO BE FOR THE SOLE AND
EXCLUSIVE BENEFIT OF THE U.S. UNDERWRITERS AND THE COMPANY AND THEIR RESPECTIVE
SUCCESSORS, AND SAID CONTROLLING PERSONS AND OFFICERS AND DIRECTORS AND THEIR
HEIRS AND LEGAL REPRESENTATIVES, AND FOR THE BENEFIT OF NO OTHER PERSON, FIRM OR
CORPORATION. NO PURCHASER OF SECURITIES FROM ANY U.S. UNDERWRITER SHALL BE
DEEMED TO BE A SUCCESSOR BY REASON MERELY OF SUCH PURCHASE.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY IN THIS AGREEMENT REFER TO NEW YORK CITY TIME.
SECTION 14. EFFECT OF HEADINGS. THE ARTICLE AND SECTION HEADINGS HEREIN
AND THE TABLE OF CONTENTS ARE FOR CONVENIENCE ONLY AND SHALL NOT AFFECT THE
CONSTRUCTION HEREOF.
-20-
<PAGE>
IF THE FOREGOING IS IN ACCORDANCE WITH YOUR UNDERSTANDING OF OUR
AGREEMENT, PLEASE SIGN AND RETURN TO THE COMPANY A COUNTERPART HEREOF, WHEREUPON
THIS INSTRUMENT, ALONG WITH ALL COUNTERPARTS, WILL BECOME A BINDING AGREEMENT
BETWEEN THE U.S. UNDERWRITERS AND THE COMPANY IN ACCORDANCE WITH ITS TERMS.
VERY TRULY YOURS,
PACKAGED ICE, INC.
BY:___________________________
TITLE:________________________
CONFIRMED AND ACCEPTED,
AS OF THE DATE FIRST ABOVE WRITTEN:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
JEFFERIES & COMPANY, INC.
BEAR, STEARNS & CO. INC.
NATIONSBANC MONTGOMERY SECURITIES LLC
STEPHENS INC.
BY: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BY:_______________________________________
AUTHORIZED SIGNATORY
-21-
<PAGE>
SCHEDULE A
NUMBER OF
INITIAL U.S.
NAME OF U.S. UNDERWRITER SECURITIES
- --------------------------------------- ------------------------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED.....................
JEFFERIES & COMPANY, INC...............
BEAR, STEARNS & CO. INC................
NATIONSBANC MONTGOMERY SECURITIES LLC..
STEPHENS INC........................... ___________
TOTAL............................
===========
Sch A-1
<PAGE>
SCHEDULE B
PACKAGED ICE, INC.
_________ SHARES OF COMMON STOCK
(PAR VALUE $.01 PER SHARE)
1. THE INITIAL PUBLIC OFFERING PRICE PER SHARE FOR THE SECURITIES,
DETERMINED AS PROVIDED IN SAID SECTION 2, SHALL BE $O.
2. THE PURCHASE PRICE PER SHARE FOR THE U.S. SECURITIES TO BE PAID BY THE
SEVERAL U.S. UNDERWRITERS SHALL BE $O, BEING AN AMOUNT EQUAL TO THE INITIAL
PUBLIC OFFERING PRICE SET FORTH ABOVE LESS $O PER SHARE; PROVIDED THAT THE
PURCHASE PRICE PER SHARE FOR ANY U.S. OPTION SECURITIES PURCHASED UPON THE
EXERCISE OF THE OVER-ALLOTMENT OPTION DESCRIBED IN SECTION 2(B) SHALL BE REDUCED
BY AN AMOUNT PER SHARE EQUAL TO ANY DIVIDENDS OR DISTRIBUTIONS DECLARED BY THE
COMPANY AND PAYABLE ON THE INITIAL U.S. SECURITIES BUT NOT PAYABLE ON THE U.S.
OPTION SECURITIES.
Sch B-1
<PAGE>
SCHEDULE C
PERSONS SUBJECT TO LOCK-UP
Sch C-1
<PAGE>
EXHIBIT A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(B)(I)
(I) EACH OF THE COMPANY AND THE SUBSIDIARIES HAS BEEN DULY INCORPORATED
AND IS VALIDLY EXISTING AS A CORPORATION IN GOOD STANDING UNDER THE LAWS OF ITS
RESPECTIVE JURISDICTION OF INCORPORATION AND HAS ALL REQUISITE CORPORATE POWER
AND AUTHORITY TO OWN, LEASE AND OPERATE ITS PROPERTIES AND TO CONDUCT ITS
BUSINESS AS DESCRIBED IN THE PROSPECTUSES AND TO ENTER INTO AND PERFORM ITS
OBLIGATIONS UNDER THE U.S. PURCHASE AGREEMENT AND THE INTERNATIONAL PURCHASE
AGREEMENT.
(II) EACH OF THE COMPANY AND THE SUBSIDIARIES IS DULY QUALIFIED AS A
FOREIGN CORPORATION TO TRANSACT BUSINESS AND IS IN GOOD STANDING IN EACH
JURISDICTION IN WHICH SUCH QUALIFICATION IS REQUIRED, WHETHER BY REASON OF THE
OWNERSHIP OR LEASING OF PROPERTY OR THE CONDUCT OF BUSINESS, EXCEPT WHERE THE
FAILURE SO TO QUALIFY OR TO BE IN GOOD STANDING WOULD NOT RESULT IN A MATERIAL
ADVERSE EFFECT.
(III) THE AUTHORIZED, ISSUED AND OUTSTANDING CAPITAL STOCK OF THE COMPANY
IS AS SET FORTH IN THE PROSPECTUS IN THE COLUMN ENTITLED "ACTUAL" UNDER THE
CAPTION "CAPITALIZATION" (EXCEPT FOR SUBSEQUENT ISSUANCES, IF ANY, PURSUANT TO
THE U.S. PURCHASE AGREEMENT AND THE INTERNATIONAL PURCHASE AGREEMENT OR PURSUANT
TO RESERVATIONS, AGREEMENTS OR EMPLOYEE BENEFIT PLANS REFERRED TO IN THE
PROSPECTUSES OR PURSUANT TO THE EXERCISE OF CONVERTIBLE SECURITIES OR OPTIONS
REFERRED TO IN THE PROSPECTUSES); THE SHARES OF ISSUED AND OUTSTANDING CAPITAL
STOCK HAVE BEEN DULY AUTHORIZED AND VALIDLY ISSUED AND ARE FULLY PAID AND
NON-ASSESSABLE; AND NONE OF THE OUTSTANDING SHARES OF CAPITAL STOCK OF THE
COMPANY WAS ISSUED IN VIOLATION OF ANY PREEMPTIVE RIGHTS AFFORDED BY THE
COMPANY'S ARTICLES OF INCORPORATION OR BYLAWS OR BY STATUTE OR, TO OUR
KNOWLEDGE, ANY OTHER SIMILAR RIGHTS OF ANY SECURITYHOLDER OF THE COMPANY.
(IV) THE SECURITIES TO BE PURCHASED BY THE U.S. UNDERWRITERS AND THE
INTERNATIONAL MANAGERS FROM THE COMPANY HAVE BEEN DULY AUTHORIZED FOR ISSUANCE
AND SALE TO THE UNDERWRITERS PURSUANT TO THE U.S. PURCHASE AGREEMENT AND THE
INTERNATIONAL PURCHASE AGREEMENT, RESPECTIVELY, AND, WHEN ISSUED AND DELIVERED
BY THE COMPANY PURSUANT TO THE U.S. PURCHASE AGREEMENT AND THE INTERNATIONAL
PURCHASE AGREEMENT, RESPECTIVELY, AGAINST PAYMENT OF THE CONSIDERATION SET FORTH
IN THE U.S. PURCHASE AGREEMENT AND THE INTERNATIONAL PURCHASE AGREEMENT, WILL BE
VALIDLY ISSUED AND FULLY PAID AND NON-ASSESSABLE AND NO HOLDER OF THE SECURITIES
IS OR WILL BE SUBJECT TO PERSONAL LIABILITY BY REASON OF BEING SUCH A HOLDER.
(V) THE ISSUANCE OF THE SECURITIES IS NOT SUBJECT TO THE PREEMPTIVE RIGHTS
AFFORDED BY THE COMPANY'S ARTICLES OF INCORPORATION OR BYLAWS OR BY STATUTE OR,
TO OUR KNOWLEDGE, ANY OTHER SIMILAR RIGHTS OF ANY SECURITY HOLDER OF THE
COMPANY.
(VI) THE U.S. PURCHASE AGREEMENT AND THE INTERNATIONAL PURCHASE AGREEMENT
HAVE BEEN DULY AUTHORIZED, EXECUTED AND DELIVERED BY THE COMPANY.
(VII) THE REGISTRATION STATEMENT, INCLUDING ANY RULE 462(B) REGISTRATION
STATEMENT, HAS BEEN DECLARED EFFECTIVE UNDER THE 1933 ACT; ANY REQUIRED FILING
OF THE PROSPECTUSES PURSUANT TO RULE 424(B) HAS BEEN MADE IN THE MANNER AND
WITHIN THE TIME PERIOD REQUIRED BY RULE 424(B); AND, TO OUR KNOWLEDGE, NO STOP
ORDER SUSPENDING THE EFFECTIVENESS OF THE REGISTRATION STATEMENT OR ANY RULE
462(B) REGISTRATION STATEMENT HAS BEEN ISSUED UNDER THE 1933 ACT AND NO
PROCEEDINGS FOR THAT PURPOSE HAVE BEEN INSTITUTED OR ARE PENDING OR THREATENED
BY THE COMMISSION.
A-1
<PAGE>
(VIII)THE REGISTRATION STATEMENT, INCLUDING ANY RULE 462(B) REGISTRATION
STATEMENT, AND THE RULE 430A INFORMATION, AS APPLICABLE, THE PROSPECTUSES AND
EACH AMENDMENT OR SUPPLEMENT TO THE REGISTRATION STATEMENT AND THE PROSPECTUSES
AS OF THEIR RESPECTIVE EFFECTIVE OR ISSUE DATES (OTHER THAN THE FINANCIAL
STATEMENTS AND SUPPORTING SCHEDULES INCLUDED THEREIN OR OMITTED THEREFROM, AS TO
WHICH WE EXPRESS NO OPINION) COMPLIED AS TO FORM IN ALL MATERIAL RESPECTS WITH
THE REQUIREMENTS OF THE 1933 ACT AND THE 1933 ACT REGULATIONS.
(IX) THE FORM OF CERTIFICATE USED TO EVIDENCE THE COMMON STOCK COMPLIES IN
ALL MATERIAL RESPECTS WITH ALL APPLICABLE STATUTORY REQUIREMENTS, WITH ANY
APPLICABLE REQUIREMENTS OF THE CHARTER AND BY-LAWS OF THE COMPANY AND THE
REQUIREMENTS OF THE NASDAQ NATIONAL MARKET.
(X) TO OUR KNOWLEDGE, THERE IS NOT PENDING OR THREATENED ANY ACTION, SUIT,
PROCEEDING, INQUIRY OR INVESTIGATION, TO WHICH THE COMPANY OR ANY SUBSIDIARY IS
A PARTY, OR TO WHICH THE PROPERTY OF THE COMPANY OR ANY SUBSIDIARY IS SUBJECT,
BEFORE OR BROUGHT BY ANY COURT OR GOVERNMENTAL AGENCY OR BODY, DOMESTIC OR
FOREIGN, WHICH WOULD REASONABLY BE EXPECTED TO RESULT IN A MATERIAL ADVERSE
EFFECT, OR WHICH WOULD REASONABLY BE EXPECTED TO MATERIALLY AND ADVERSELY AFFECT
THE PROPERTIES OR ASSETS THEREOF OR THE CONSUMMATION OF THE TRANSACTIONS
CONTEMPLATED IN THE U.S. PURCHASE AGREEMENT OR THE INTERNATIONAL PURCHASE
AGREEMENT OR THE PERFORMANCE BY THE COMPANY OF ITS OBLIGATIONS THEREUNDER.
(XI) THE INFORMATION IN THE PROSPECTUSES UNDER THE HEADINGS "MANAGEMENT --
STOCK OPTION PLAN," "--1998 STOCK OPTION PLAN," "--EMPLOYMENT AND TERMINATION;"
"CERTAIN TRANSACTIONS;" "DESCRIPTION OF CAPITAL STOCK," "CERTAIN UNITED STATES
TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS" AND "SHARES ELIGIBLE FOR
FUTURE SALE," AND IN THE REGISTRATION STATEMENT UNDER ITEM 14, TO THE EXTENT
THAT IT CONSTITUTES MATTERS OF LAW, SUMMARIES OF LEGAL MATTERS, THE COMPANY'S
CHARTER AND BYLAWS OR LEGAL CONCLUSIONS, HAS BEEN
REVIEWED BY US AND IS CORRECT IN ALL MATERIAL RESPECTS.
(XII) TO OUR KNOWLEDGE, THERE ARE NO STATUTES OR REGULATIONS THAT ARE
REQUIRED TO BE DESCRIBED IN THE PROSPECTUSES THAT ARE NOT DESCRIBED AS REQUIRED.
(XIII)ALL DESCRIPTIONS IN THE PROSPECTUSES OF CONTRACTS AND OTHER
DOCUMENTS TO WHICH THE COMPANY OR ANY SUBSIDIARY IS A PARTY ARE ACCURATE IN ALL
MATERIAL RESPECTS; TO OUR KNOWLEDGE, THERE ARE NO FRANCHISES, CONTRACTS,
INDENTURES, MORTGAGES, LOAN AGREEMENTS, NOTES, LEASES OR OTHER INSTRUMENTS
REQUIRED TO BE DESCRIBED OR REFERRED TO IN THE REGISTRATION STATEMENT OR TO BE
FILED AS EXHIBITS THERETO OTHER THAN THOSE DESCRIBED OR REFERRED TO THEREIN OR
FILED OR INCORPORATED BY REFERENCE AS EXHIBITS THERETO, AND THE DESCRIPTIONS
THEREOF OR REFERENCES THERETO ARE CORRECT IN ALL MATERIAL RESPECTS.
(XIV) NO FILING WITH, OR AUTHORIZATION, APPROVAL, CONSENT, LICENSE, ORDER,
REGISTRATION, QUALIFICATION OR DECREE OF, ANY COURT OR GOVERNMENTAL AUTHORITY OR
AGENCY, DOMESTIC OR FOREIGN (OTHER THAN UNDER THE 1933 ACT AND THE 1933 ACT
REGULATIONS, WHICH HAVE BEEN OBTAINED, OR AS MAY BE REQUIRED UNDER THE
SECURITIES OR BLUE SKY LAWS OF THE VARIOUS STATES, AS TO WHICH WE EXPRESS NO
OPINION) IS NECESSARY OR REQUIRED IN CONNECTION WITH THE DUE AUTHORIZATION,
EXECUTION AND DELIVERY OF THE U.S. PURCHASE AGREEMENT AND THE INTERNATIONAL
PURCHASE AGREEMENT OR FOR THE OFFERING, ISSUANCE, SALE OR DELIVERY OF THE
SECURITIES.
(XV) THE EXECUTION, DELIVERY AND PERFORMANCE OF THE U.S. PURCHASE
AGREEMENT AND THE INTERNATIONAL PURCHASE AGREEMENT AND THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED IN THE U.S. PURCHASE AGREEMENT, THE INTERNATIONAL
PURCHASE AGREEMENT AND IN THE REGISTRATION STATEMENT (INCLUDING THE ISSUANCE AND
SALE OF THE SECURITIES, AND THE USE OF THE PROCEEDS FROM THE SALE OF THE
SECURITIES AS DESCRIBED IN THE PROSPECTUSES UNDER THE CAPTION "USE OF PROCEEDS")
AND COMPLIANCE BY THE COMPANY WITH ITS OBLIGATIONS UNDER THE U.S. PURCHASE
AGREEMENT AND THE INTERNATIONAL PURCHASE AGREEMENT DO NOT AND WILL NOT, WHETHER
WITH OR WITHOUT THE GIVING OF NOTICE OR LAPSE OF TIME OR BOTH, CONFLICT WITH OR
CONSTITUTE A BREACH OF, OR DEFAULT OR REPAYMENT EVENT (AS DEFINED IN SECTION
1(A)(X) OF THE PURCHASE AGREEMENTS) UNDER OR RESULT IN THE CREATION
A-2
<PAGE>
OR IMPOSITION OF ANY LIEN, CHARGE OR ENCUMBRANCE UPON ANY PROPERTY OR ASSETS OF
THE COMPANY OR ANY SUBSIDIARY PURSUANT TO ANY CONTRACT, INDENTURE, MORTGAGE,
DEED OF TRUST, LOAN OR CREDIT AGREEMENT, NOTE, LEASE OR ANY OTHER AGREEMENT OR
INSTRUMENT, KNOWN TO US, TO WHICH THE COMPANY OR ANY SUBSIDIARY IS A PARTY OR BY
WHICH IT OR ANY OF THEM MAY BE BOUND, OR TO WHICH ANY OF THE PROPERTY OR ASSETS
OF THE COMPANY OR ANY SUBSIDIARY IS SUBJECT (EXCEPT FOR SUCH CONFLICTS, BREACHES
OR DEFAULTS OR LIENS, CHARGES OR ENCUMBRANCES THAT WOULD NOT HAVE A MATERIAL
ADVERSE EFFECT), NOR WILL SUCH ACTION RESULT IN ANY VIOLATION OF THE PROVISIONS
OF THE CHARTER, BY-LAWS OR OTHER GOVERNING DOCUMENTS OF THE COMPANY OR ANY
SUBSIDIARY OR ANY APPLICABLE LAW, STATUTE, RULE, REGULATION APPLICABLE TO THE
TRANSACTIONS OF THE TYPE CONTEMPLATED BY THIS AGREEMENT OR ANY JUDGMENT, ORDER,
WRIT OR DECREE, KNOWN TO US, OF ANY GOVERNMENT, GOVERNMENT INSTRUMENTALITY OR
COURT, DOMESTIC OR FOREIGN, HAVING JURISDICTION OVER THE COMPANY OR ANY
SUBSIDIARY OR ANY OF THEIR RESPECTIVE PROPERTIES, ASSETS OR OPERATIONS.
(XVI) TO OUR KNOWLEDGE, EXCEPT AS SET FORTH IN THE PROSPECTUSES, THERE ARE
NO PERSONS WITH REGISTRATION RIGHTS OR OTHER SIMILAR RIGHTS TO HAVE ANY
SECURITIES REGISTERED PURSUANT TO THE REGISTRATION STATEMENT OR OTHERWISE
REGISTERED BY THE COMPANY UNDER THE 1933 ACT.
(XVII)THE COMPANY IS NOT, AND WILL NOT BE AFTER APPLICATION OF THE
PROCEEDS OF THE OFFERING OF THE SECURITIES AS SET FORTH IN THE PROSPECTUSES, AN
"INVESTMENT COMPANY" OR AN ENTITY "CONTROLLED" BY AN "INVESTMENT COMPANY," AS
SUCH TERMS ARE DEFINED IN THE 1940 ACT.
NOTHING HAS COME TO OUR ATTENTION THAT WOULD LEAD US TO BELIEVE THAT THE
REGISTRATION STATEMENT OR ANY AMENDMENT THERETO, INCLUDING THE RULE 430A
INFORMATION, (EXCEPT FOR FINANCIAL STATEMENTS AND SCHEDULES AND OTHER FINANCIAL
DATA INCLUDED THEREIN OR OMITTED THEREFROM, AS TO WHICH WE MAKE NO STATEMENT),
AT THE TIME SUCH REGISTRATION STATEMENT OR ANY SUCH AMENDMENT BECAME EFFECTIVE,
CONTAINED AN UNTRUE STATEMENT OF A MATERIAL FACT OR OMITTED TO STATE A MATERIAL
FACT REQUIRED TO BE STATED THEREIN OR NECESSARY TO MAKE THE STATEMENTS THEREIN
NOT MISLEADING OR THAT THE PROSPECTUSES OR ANY AMENDMENT OR SUPPLEMENT THERETO
(EXCEPT FOR FINANCIAL STATEMENTS AND SCHEDULES AND OTHER FINANCIAL DATA INCLUDED
THEREIN OR OMITTED THEREFROM, AS TO WHICH WE MAKE NO STATEMENT), AT THE TIME THE
PROSPECTUSES WERE ISSUED, AT THE TIME ANY SUCH AMENDED OR SUPPLEMENTED
PROSPECTUS WAS ISSUED OR AT THE CLOSING TIME, INCLUDED OR INCLUDES AN UNTRUE
STATEMENT OF A MATERIAL FACT OR OMITTED OR OMITS TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS THEREIN, IN THE LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING.
IN RENDERING OPINIONS SET FORTH ABOVE WITH RESPECT TO MATTERS CONCERNING
THE SUBSIDIARIES; SUCH COUNSEL MAY RELY (A) AS TO MATTERS INVOLVING THE
APPLICATION OF THE LAWS OF THE JURISDICTION OF INCORPORATION OR ORGANIZATION OF
EACH SUBSIDIARY, UPON THE OPINION OF COUNSEL TO EACH SUBSIDIARY (WHICH OPINION
SHALL BE DATED AND FURNISHED TO THE U.S. UNDERWRITERS AT THE CLOSING TIME, SHALL
BE SATISFACTORY IN FORM AND SUBSTANCE TO COUNSEL FOR THE U.S. UNDERWRITERS AND
SHALL EXPRESSLY STATE THAT THE U.S. UNDERWRITERS MAY RELY ON SUCH OPINION AS IF
IT WERE ADDRESSED TO THEM), PROVIDED THAT SUCH COUNSEL SHALL STATE IN THEIR
OPINION THAT THEY BELIEVE THAT THEY AND THE U.S. UNDERWRITERS ARE JUSTIFIED IN
RELYING UPON SUCH OPINION, AND (B), AS TO MATTERS OF FACT (BUT NOT AS TO LEGAL
CONCLUSIONS), TO THE EXTENT THEY DEEM PROPER, ON CERTIFICATES OF OFFICERS OF THE
COMPANY AND PUBLIC OFFICIALS. SUCH OPINION SHALL NOT STATE THAT IT IS TO BE
GOVERNED OR QUALIFIED BY, OR THAT IT IS OTHERWISE SUBJECT TO, ANY TREATISE,
WRITTEN POLICY OR OTHER DOCUMENT RELATING TO LEGAL OPINIONS, INCLUDING, WITHOUT
LIMITATION, THE LEGAL OPINION ACCORD OF THE ABA SECTION OF BUSINESS LAW (1991).
A-3
<PAGE>
EXHIBIT B
o, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
Jefferies & Company, Inc.
Bear, Stearns & Co. Inc.
NationsBanc Montgomery Securities LLC
Stephens Inc.
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Packaged Ice. Inc.
Dear Sirs:
The undersigned, a stockholder and/or an officer and/or director of
Packaged Ice, Inc., a Texas corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), Jefferies & Company, Inc.; Bear, Stearns & Co. Inc.;
NationsBanc Montgomery Securities LLC and Stephens Inc. propose to enter into a
U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company
providing for the public offering of shares (the "Securities") of the Company's
common stock, par value $.01 per share (the "Common Stock"). In recognition of
the benefit that such an offering will confer upon the undersigned as a
shareholder and an officer and/or director of the Company, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the undersigned agrees with each underwriter to be named in the
U.S. Purchase Agreement that, during a period of 180 days from the date of the
U.S. Purchase Agreement, the undersigned will not, without the prior written
consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of, or
otherwise dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.
Very truly yours,
Signature:___________________________
Print Name:__________________________
B-1
PACKAGED ICE, INC.
(A TEXAS CORPORATION)
______________ SHARES OF COMMON STOCK
INTERNATIONAL PURCHASE AGREEMENT
Dated: o, 1998
i
<PAGE>
TABLE OF CONTENTS
PAGE
SECTION 1. Representations and Warranties...................................3
(a) Representations and Warranties by the Company....................3
(b) Officer's Certificates...........................................8
SECTION 2. Sale and Delivery to International Managers; Closing.............8
(a) Initial Securities...............................................8
(b) Option Securities................................................9
(c) Payment..........................................................9
(d) Denominations; Registration......................................9
SECTION 3. Covenants of the Company........................................10
(a) Compliance with Securities Regulations and Commission Requests..10
(b) Filing of Amendments............................................10
(c) Delivery of Registration Statements.............................10
(d) Delivery of Prospectuses........................................10
(e) Continued Compliance with Securities Laws.......................11
(f) Blue Sky Qualifications.........................................11
(g) Rule 158........................................................11
(h) Use of Proceeds.................................................11
(i) Listing.........................................................11
(j) Restriction on Sale of Securities...............................11
(k) Reporting Requirements..........................................12
(l) Compliance with NASD Rules......................................12
(m) Compliance with Rule 463........................................12
SECTION 4. Payment of Expenses.............................................12
(a) Expenses........................................................12
(b) Termination of Agreement........................................13
SECTION 5. Conditions of International Managers' Obligations...............13
(a) Effectiveness of Registration Statement.........................13
(b) Opinion of Counsel for the Company..............................13
(c) Opinion of Counsel for International Managers...................13
(d) Officers' Certificate...........................................14
(e) Accountant's Comfort Letter.....................................14
(f) Bringdown Comfort Letter........................................14
(g) Approval of Listing.............................................14
(h) No Objection....................................................14
(i) Lockup Agreements...............................................14
(j) Purchase of Initial U.S. Securities.............................14
(k) Conditions to Purchase of International Option Securities.......14
(l) Additional Documents............................................15
(m) Termination of Agreement........................................15
i
<PAGE>
SECTION 6. Indemnification.................................................15
(a) Indemnification of International Managers.......................15
(b) Indemnification of Company, Directors and Officers..............16
(c) Actions against Parties; Notification...........................16
(d) Settlement without Consent if Failure to Reimburse..............17
(e) Indemnification for Reserved Securities.........................17
SECTION 7. Contribution....................................................17
SECTION 8. Representations, Warranties and Agreements to Survive Delivery..18
SECTION 9. Termination of Agreement........................................19
(a) Termination; General............................................19
(b) Liabilities.....................................................19
SECTION 10. Default by One or More of the International Managers............19
SECTION 11. Notices.........................................................20
SECTION 12. Parties.........................................................20
SECTION 13. GOVERNING LAW AND TIME..........................................20
SECTION 14. Effect of Headings..............................................20
SCHEDULES
Schedule A -List of International Managers
Schedule B -Pricing Information
Schedule C -List of Persons subject to Lock-up
EXHIBITS
Exhibit A Form of Opinion of Company's Counsel
Exhibit B Form of Lock-up Letter
ii
<PAGE>
PACKAGED ICE, INC.
(a Texas corporation)
_________ Shares of Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
o, 1998
Merrill Lynch International
Jefferies International Limited
Bear, Stearns International Limited
NationsBanc Montgomery Securities LLC
Stephens Inc.
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Packaged Ice, Inc., a Texas corporation (the "Company"), confirms its
agreement with Merrill Lynch International ("Merrill Lynch") and each of the
other international underwriters named in Schedule A hereto (collectively, the
"International Managers", which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), with respect to the
issue and sale by the Company and the purchase by the International Managers,
acting severally and not jointly, of the respective numbers of shares of Common
Stock, par value $.01 per share, of the Company ("Common Stock") set forth in
said Schedule A, and with respect to the grant by the Company to the
International Managers, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of __________
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid __________ shares of Common Stock (the "Initial International
Securities") to be purchased by the International Managers and all or any part
of the __________ shares of Common Stock subject to the option described in
Section 2(b) hereof (the "International Option Securities") are hereinafter
called, collectively, the "International Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of an aggregate of __________ shares of Common Stock
(the "Initial U.S. Securities") through arrangements with Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Jefferies & Company, Inc., Bear, Stearns & Co.
Inc., NationsBanc Montgomery Securities LLC, and Stephens Inc. (the "U.S.
Underwriters") and the grant by the Company to the U.S. Underwriters, acting
severally and not jointly, of an option to purchase all or any part of the U.S.
Underwriters' pro rata portion of up to __________ additional shares of Common
Stock solely to cover overallotments, if any (the "U.S. Option Securities" and,
together with the International Option Securities, the "Option Securities"). The
Initial U.S. Securities and the U.S. Option Securities are hereinafter called
the "U.S. Securities". It is understood that the Company is not obligated to
sell and the International Managers are not obligated to purchase, any Initial
International Securities unless all of the Initial U.S. Securities are
contemporaneously purchased by the U.S. Underwriters.
1
<PAGE>
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities, and the U.S. Securities are
hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to make a
public offering of the International Securities as soon as they deem advisable
after this Agreement has been executed and delivered.
The Company and the International Managers agree that up to 150,000 shares
of the Initial U.S. Securities to be purchased by the U.S. Underwriters (the
"Reserved Securities") shall be reserved for sale by the Underwriters to certain
eligible employees and persons having business relationships with the Company,
as part of the distribution of the Securities by the Underwriters, subject to
the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such eligible employees and
persons having business relationships with the Company by the end of the first
business day after the date of this Agreement, such Reserved Securities may be
offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-60627) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form of
U.S. Prospectus"). The Form of International Prospectus is identical to the Form
of U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting". The information included in any
such prospectus or in any such Term Sheet, as the case may be, that was omitted
from such registration statement at the time it became effective but that is
deemed to be part of such registration statement at the time it became effective
(a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of International Prospectus and Form of U.S.
Prospectus used by the Underwriters in connection with offering the Securities
before such registration statement became effective, and any prospectus that
omitted, as applicable, the Rule 430A Information or the Rule 434 Information,
that was used after such effectiveness and prior to the execution and delivery
of this Agreement, is herein called a "preliminary prospectus." Such
registration statement, including the exhibits thereto and schedules thereto at
the time it became effective and including the Rule 430A Information and the
Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933
Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final Form of International
Prospectus and the final Form of U.S. Prospectus in the forms used to confirm
sales of the Securities are herein called the "International Prospectus" and the
"U.S. Prospectus," respectively, and collectively, the "Prospectuses." For
purposes of this Agreement,
2
<PAGE>
all references to the Registration Statement, any preliminary prospectus, the
International Prospectus, the U.S. Prospectus or any Term Sheet or any amendment
or supplement to any of the foregoing shall be deemed to include the copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company represents
and warrants to each International Manager as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each International
Manager, as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. Neither of the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any amendments or
supplements thereto were issued and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery), included or
will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectuses shall not be "materially
different", as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply to
statements in or omissions from the Registration Statement or the U.S.
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any U.S. Underwriter expressly for
use in the Registration Statement or the U.S.
Prospectus.
Each preliminary prospectus and the prospectuses filed as part of
the Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when
so filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
3
<PAGE>
(iii) FINANCIAL STATEMENTS. The financial statements included in the
Registration Statement and the Prospectuses, together with the related
schedules and notes, present fairly the financial position of the Company,
Reddy Ice Corporation ("Reddy"), Cassco Ice & Cold Storage, Inc.
("Cassco"), Southwestern Ice, Inc. ("Southwestern"), and their respective
consolidated subsidiaries, and the combined financial position of Mission
Party Ice, Inc. and Southwest Texas Packaged Ice, Inc. ("Mission/SW") at
the dates indicated, and the statements of operations, stockholders'
equity and cash flows of the Company, Reddy, Cassco, Southwestern,
Mission/SW and their consolidated subsidiaries for the periods specified;
said financial statements have been prepared in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectuses present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the related
notes thereto included in the Registration Statement and the Prospectuses
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been
no material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects, properties or assets
of the Company and its Subsidiaries (as defined below) considered as one
enterprise, whether or not arising in the ordinary course of business (a
"Material Adverse Effect"), (B) there have been no transactions entered
into by the Company or its Subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company and its
Subsidiaries considered as one enterprise, and (C) there has been no
dividend or distribution of any kind declared, paid or made by the Company
on any class of its capital stock or by Reddy or Cassco on any class of
its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Texas and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under this Agreement. The Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect.
(vi) GOOD STANDING OF SUBSIDIARIES. Each direct or indirect
subsidiary of the Company (each a "Subsidiary" and, collectively, the
"Subsidiaries") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the
Prospectuses and is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse
Effect. Except as otherwise disclosed in the Registration Statement, all
of the issued and outstanding capital stock of each Subsidiary has been
duly authorized and validly issued, is fully paid and non-assessable, and
is owned by the Company, directly or through Subsidiaries, free and clear
of any security interest, mortgage, pledge,
4
<PAGE>
lien, encumbrance, claim or equity. None of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any security holder of such Subsidiary. Exhibit 21 to
the Registration Statement sets forth a complete list of the Subsidiaries,
except to the extent permitted by the rules and regulations of the
Commission.
(vii) CAPITALIZATION. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectuses or pursuant to the exercise of convertible securities,
warrants or options referred to in the Prospectuses). The shares of issued
and outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any security holder of the
Company.
(viii)AUTHORIZATION OF AGREEMENT. This Agreement and the
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The Securities to
be purchased by the U.S. Underwriters and the International Managers from
the Company have been duly authorized for issuance and sale to the U.S.
Underwriters pursuant to this Agreement and the International Managers
pursuant to the International Purchase Agreement, respectively, and, when
issued and delivered by the Company pursuant to this Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth herein and the International Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable. The
Common Stock conforms to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in the
instruments defining the same. No holder of the Securities will be subject
to personal liability by reason of being such a holder. The issuance of
the Securities is not subject to the preemptive or other similar rights of
any security holder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the Company nor any
of the Subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of the Subsidiaries is a party or
by which it or any of them may be bound, or to which any of the property
or assets of the Company or any Subsidiary is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect. The execution, delivery and
performance of this Agreement and the International Purchase Agreement and
the consummation of the transactions contemplated in this Agreement, the
International Purchase Agreement and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectuses
under the caption "Use of Proceeds") and compliance by the Company with
its obligations under this Agreement and the International Purchase
Agreement have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any Subsidiary pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any Subsidiary
or any applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any Subsidiary or any of
their assets, properties or operations. As
5
<PAGE>
used herein, a "Repayment Event" means any event or condition which gives
the holder of any note, debenture or other evidence of indebtedness (or
any person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any Subsidiary.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with the employees
of the Company or any Subsidiary exists or, to the knowledge of the
Company, is imminent, and neither the Company nor any Subsidiary is aware
of any existing or imminent labor disturbance by the employees of any of
its principal suppliers, manufacturers, customers or contractors, which,
in either case, may reasonably be expected to result in a Material Adverse
Effect.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
Subsidiary, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the consummation of the
transactions contemplated in this Agreement or the International Purchase
Agreement or the performance by the Company of its obligations hereunder
or thereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or any Subsidiary is a party or of which
any of their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xiii)ACCURACY OF EXHIBITS. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company and the
Subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of the Subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of the Subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding)
or invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities under this Agreement and the International Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement or the International Purchase Agreement, except such as have
been already obtained or as may be required under the 1933 Act or the 1933
Act Regulations and foreign or state securities or blue sky laws.
6
<PAGE>
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company and the
Subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them except where the
failure to possess such Governmental Licenses would not result in a
Material Adverse Effect. The Company and the Subsidiaries are in
compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or in
the aggregate, have a Material Adverse Effect. All of the Governmental
Licenses are valid and in full force and effect, except when the
invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect. Neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.
(xvii)TITLE TO PROPERTY. The Company and the Subsidiaries have good
and marketable title to all real property owned by them and good title to
all other properties owned by them, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the
Prospectuses or (b) do not, singly or in the aggregate, materially affect
the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company or any of the
Subsidiaries. All of the leases and subleases material to the business of
the Company or any of the Subsidiaries, considered as one enterprise, and
under which the Company or any of the Subsidiaries holds properties
described in the Prospectuses, are in full force and effect, and neither
the Company nor any of the Subsidiaries has any notice of any material
claim of any sort that has been asserted by anyone adverse to the rights
of the Company or any Subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or
such Subsidiary to the continued possession of the leased or subleased
premises under any such lease or sublease.
(xviii) COMPLIANCE WITH CUBA ACT. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as
Section 517.075 of the Florida statutes, and the rules and regulations
thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(xix) INVESTMENT COMPANY ACT. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated, the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) ENVIRONMENTAL LAWS. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any Subsidiary is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to pollution
or protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or
to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and the Subsidiaries have all
permits, authorizations and approvals required under any applicable
7
<PAGE>
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or, to the Company's knowledge, threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, written notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of the Subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of the Subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxi) REGISTRATION RIGHTS. There are no persons with registration
rights or other similar rights to have any securities registered pursuant
to the Registration Statement by the Company under the 1933 Act which have
not been appropriately waived.
(xxii)TAX RETURNS. The Company and each Subsidiary have filed all
Federal, state, local and foreign income tax returns which have been
required to be filed and have paid all taxes indicated by said returns and
all assessments received by it or any of them to the extent that such
taxes have become due and are not being contested in good faith, except
for the filing of those returns, and the paying of those taxes, the
failure to file or pay, respectively, individually or in the aggregate,
would not have a Material Adverse Effect. All tax liabilities have been
adequately provided for in the financial statements of the Company or the
applicable Subsidiary.
(xxiii) INSURANCE. The Company and the Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
reasonably adequate for the conduct of their respective businesses and the
value of their respective properties and as is customary for companies in
the Company's industry.
(xxiv)ERISA. The Company and the Subsidiaries are in compliance in
all material respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA").
(xxv) RELATED PARTY TRANSACTIONS. No relationship, direct or
indirect, exists between or among the Company or any Subsidiary, on the
one hand, and the directors, officers, shareholders, customers or
suppliers of the Company or any Subsidiary on the other hand, which is
required to be described in the Prospectuses which is not so described.
(xxvi) RESERVED SHARES. Each of the persons identified by the
Company to the Underwriters to receive Reserved Shares is a citizen of the
United States and currently is a resident of one of the United States.
(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the
International Managers or to counsel for the International Managers shall be
deemed a representation and warranty by the Company to each International
Manager as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO INTERNATIONAL MANAGERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each International Manager, severally and not jointly,
and each International Manager, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number of
Initial International Securities set forth in Schedule A opposite the name of
such International Manager, plus any additional number of Initial
8
<PAGE>
International Securities which such International Manager may become obligated
to purchase pursuant to the provisions of Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the International Managers,
severally and not jointly, to purchase up to an additional __________ shares of
Common Stock at the price per share set forth in Schedule B, less an amount per
share equal to any dividends or distributions declared by the Company and
payable on the Initial International Securities but not payable on the
International Option Securities. The option hereby granted will expire 30 days
after the date hereof and may be exercised in whole or in part from time to time
only for the purpose of covering over-allotments which may be made in connection
with the offering and distribution of the Initial International Securities upon
notice by the Global Coordinator to the Company setting forth the number of
International Option Securities as to which the several International Managers
are then exercising the option and the time and date of payment and delivery for
such International Option Securities. Any such time and date of delivery for the
International Option Securities (a "Date of Delivery") shall be determined by
the Global Coordinator, but shall not be later than seven full business days
after the exercise of said option, nor in any event prior to the Closing Time,
as hereinafter defined. If the option is exercised as to all or any portion of
the International Option Securities, each of the International Managers, acting
severally and not jointly, will purchase that proportion of the total number of
International Option Securities then being purchased which the number of Initial
International Securities set forth in Schedule A opposite the name of such
International Manager bears to the total number of Initial International
Securities, subject in each case to such adjustments as the Global Coordinator
in its discretion shall make to eliminate any sales or purchases of fractional
shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Vinson
& Elkins L.L.P., 1001 Fannin, Houston, Texas, or at such other place as shall be
agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern
time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time)
on any given day) business day after the date hereof (unless postponed in
accordance with the provisions of Section 10), or such other time not later than
ten business days after such date as shall be agreed upon by the Global
Coordinator and the Company (such time and date of payment and delivery being
herein called "Closing Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the International Managers for their respective accounts of certificates for the
International Securities to be purchased by them. Merrill Lynch, individually
and not as representative of the International Managers, may (but shall not be
obligated to) make payment of the purchase price for the Initial International
Securities or the International Option Securities, if any, to be purchased by
any International Manager whose funds have not been received by the Closing Time
or the relevant Date of Delivery, as the case may be, but such payment shall not
relieve such International Manager from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the International
Managers may request in writing at least one full business day before the
Closing Time or the relevant Date of Delivery, as the case may be. The
certificates for the Initial International Securities and the International
Option Securities, if any, will be made available for examination and packaging
by the
9
<PAGE>
International Managers in The City of New York not later than 10:00 A.M.
(Eastern time) on the business day prior to the Closing Time or the relevant
Date of Delivery, as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
International Manager as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Global Coordinator immediately,
and confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectuses or any amended Prospectuses shall have been filed, (ii) of the
receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take such
steps as it deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Global Coordinator
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectuses,
will furnish the Global Coordinator with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case may
be, and will not file or use any such document to which the Global Coordinator
or counsel for the International Managers shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or will
deliver to the International Managers and counsel for the International
Managers, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the International
Managers, without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each of
the International Managers. The copies of the Registration Statement and each
amendment thereto furnished to the International Managers will be identical to
the electronically transmitted copies thereof filed with the Commission pursuant
to EDGAR, except to the extent permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the 1933
Act. The Company will furnish to each International Manager, without charge,
during the period when the International Prospectus is required to be delivered
under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"), such
number of copies of the International Prospectus (as amended or supplemented) as
such International Manager may reasonably request. The International Prospectus
and any amendments or supplements thereto furnished to the International
Managers will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
10
<PAGE>
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement, the U.S.
Purchase Agreement and in the Prospectuses. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of which
it is necessary, in the opinion of counsel for the International Managers or for
the Company, to amend the Registration Statement or amend or supplement any
Prospectus in order that the Prospectuses will not include any untrue statements
of a material fact or omit to state a material fact necessary in order to make
the statements therein not misleading in the light of the circumstances existing
at the time it is delivered to a purchaser, or if it shall be necessary, in the
opinion of such counsel, at any such time to amend the Registration Statement or
amend or supplement any Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and
file with the Commission, subject to Section 3(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectuses comply with such requirements, and
the Company will furnish to the International Managers such number of copies of
such amendment or supplement as the International Managers may reasonably
request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the International Managers, to qualify the Securities for
offering and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Global Coordinator may designate and
to maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its security
holders as soon as practicable an earnings statement for the purposes of, and to
provide the benefits contemplated by, the last paragraph of Section 11(a) of the
1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds".
(i) LISTING. The Company will use its best efforts to effect and maintain
the quotation of the Securities on the Nasdaq National Market and will file with
the Nasdaq National Market all documents and notices required by the Nasdaq
National Market of companies that have securities that are traded in the
over-the-counter market and quotations which are reported by the Nasdaq National
Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above
11
<PAGE>
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (A) the Securities to be
sold hereunder or under the U.S. Purchase Agreement or in connection with the
Combination as described in the Prospectuses, (B) any shares of Common Stock
issued or options to purchase Common Stock granted pursuant to employee benefit
plans of the Company referred to in the Prospectuses or shares issuable upon the
conversion of preferred stock or the exercise of warrants or (C) shares of
Common Stock issued in connection with acquisitions by the Company of other
businesses, provided that, (except with respect to shares issued in transactions
in which the issuance or resale of such shares will not be registered under the
1933 Act) the recipients of such shares agree in writing for the benefit of the
International Managers not to take any action described in clauses (i) or (ii)
above with respect to such shares until the expiration of 180 days from the date
of the Prospectuses.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to the
1934 Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
(l) COMPLIANCE WITH NASD RULES. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. The Underwriters will notify the
Company as to which persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) COMPLIANCE WITH RULE 463. The Company will comply with Rule 463 of the
1933 Act Regulations with respect to reporting its use of the proceeds from its
sale of the Securities.
SECTION 4. PAYMENT OF EXPENSES.
(a) EXPENSES. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may be
required in connection with the offering, purchase, sale, issuance or delivery
of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer of
the Securities between the U.S. Underwriters and the International Managers,
(iv) the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of any transfer
agent or registrar for the Securities, (ix) the filing fees incident to the
review by the NASD of the terms of the sale of the Securities, (x) the fees and
expenses incurred in connection with the inclusion of the Securities in the
Nasdaq National Market and (xi) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the
12
<PAGE>
Underwriters, in connection with matters related to the Reserved Securities
which are designated by the Company for sale to employees and others.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
International Managers in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the International Managers for all
of their out-of-pocket expenses, including the reasonable fees and disbursements
of counsel for the International Managers.
SECTION 5. CONDITIONS OF INTERNATIONAL MANAGERS' OBLIGATIONS. The
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company delivered
pursuant to the provisions hereof, to the performance by the Company of its
covenants and other obligations hereunder, and to the following further
conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
the Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the International Managers. A prospectus
containing the Rule 430A Information shall have been filed with the Commission
in accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) OPINION OF COUNSEL FOR THE COMPANY. At Closing Time, the International
Managers shall have received the favorable opinion, dated as of Closing Time, of
Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the Company, in form and
substance satisfactory to counsel for the International Managers, together with
signed or reproduced copies of such letter for each of the other International
Managers to the effect set forth in Exhibit A-1 hereto and to such further
effect as counsel to the International Managers may reasonably request. In
giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the States of Texas and New York,
the federal law of the United States and the General Corporation Law of the
State of Delaware, upon the opinions of counsel satisfactory to the
International Managers. Such counsel may also state that, insofar as such
opinion involves factual matters, they have relied, to the extent they deem
proper, upon certificates of officers of the Company and its subsidiaries and
certificates of public officials.
(c) OPINION OF COUNSEL FOR INTERNATIONAL MANAGERS. At Closing Time, the
International Managers shall have received the favorable opinion, dated as of
Closing Time, of Vinson & Elkins L.L.P., counsel for the International Managers,
together with signed or reproduced copies of such letter for each of the other
International Managers with respect to the matters set forth in clauses (i),
(iv), (v) (solely as to preemptive or other similar rights arising by operation
of law or under the charter or by-laws of the Company), (vi) through (ix),
inclusive, (xi) (solely as to the information in the Prospectus under
"Description of Capital Stock --Common Stock") and the penultimate paragraph of
Exhibit A hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the States
of Texas and New York, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the International Managers. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to the
extent they deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
13
<PAGE>
(d) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and the Subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the International
Managers shall have received a certificate of the President or a Vice President
of the Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has been no such
material adverse change, (ii) the representations and warranties in Section 1(a)
hereof are true and correct with the same force and effect as though expressly
made at and as of Closing Time, (iii) the Company has complied with all
agreements and satisfied all conditions on its part to be performed or satisfied
at or prior to Closing Time, and (iv) no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or to the Company's knowledge are pending or are
contemplated by the Commission.
(e) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the International Managers shall have received from Deloitte & Touche
LLP and KPMG Peat Marwick LLP letters dated such date, in form and substance
satisfactory to the International Managers, together with signed or reproduced
copies of such letter for each of the other International Managers containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectuses.
(f) BRING-DOWN COMFORT LETTER. At Closing Time, the International Managers
shall have received from Deloitte & Touche LLP and KPMG Peat Marwick LLP
letters, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not more
than three business days prior to Closing Time.
(g) APPROVAL OF LISTING. At Closing Time, the Securities shall have been
approved for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(h) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) LOCK-UP AGREEMENTS. At the date of this Agreement, the International
Managers shall have received an agreement substantially in the form of Exhibit B
hereto signed by the persons listed on Schedule C hereto.
(j) PURCHASE OF INITIAL U.S. SECURITIES. Contemporaneously with the
purchase by the International Managers of the Initial International Securities
under this Agreement, the U.S. Underwriters shall have purchased the Initial
U.S. Securities under the U.S. Purchase Agreement.
(k) CONDITIONS TO PURCHASE OF INTERNATIONAL OPTION SECURITIES. In the
event that the International Managers exercise their option provided in Section
2(b) hereof to purchase all or any portion of the International Option
Securities, the representations and warranties of the Company contained herein
and the statements in any certificates furnished by the Company or any
subsidiary of the Company hereunder shall be true and correct as of each Date of
Delivery and, at the relevant Date of Delivery, the International Managers shall
have received:
(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(d)
hereof remains true and correct as of such Date of Delivery.
14
<PAGE>
(ii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of Akin,
Gump, Hauer & Feld, L.L.P., counsel for the Company, in form and substance
satisfactory to the International Managers, dated such Date of Delivery,
relating to the International Option Securities to be purchased on such
Date of Delivery and otherwise to the same effect as the opinions required
by Section 5(b) hereof.
(iii) OPINION OF COUNSEL FOR INTERNATIONAL MANAGERS. The favorable
opinion of Vinson & Elkins L.L.P., counsel for the International Managers,
dated such Date of Delivery, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(c) hereof.
(iv) BRING-DOWN COMFORT LETTER. Letters from Deloitte & Touche LLP
and KPMG Peat Marwick LLP, in form and substance satisfactory to the
International Managers and dated such Date of Delivery, substantially in
the same form and substance as the letter furnished to the International
Managers pursuant to Section 5(f) hereof, except that the "specified date"
in the letter furnished pursuant to this paragraph shall be a date not
more than five days prior to such Date of Delivery.
(l) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery
counsel for the International Managers shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
International Managers and counsel for the International Managers.
(m) TERMINATION OF AGREEMENT. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of International
Option Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several International Managers to purchase the relevant
Option Securities may be terminated by the International Managers by notice to
the Company at any time at or prior to Closing Time or such Date of Delivery, as
the case may be, and such termination shall be without liability of any party to
any other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF INTERNATIONAL MANAGERS. The Company agrees to
indemnify and hold harmless each International Manager and each person, if any,
who controls any International Manager within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectuses (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
15
<PAGE>
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of
the Company; and
(iii) against any and all expense whatsoever, as reasonably incurred
(including (subject to Section 6(c), below) the fees and disbursements of
counsel chosen by Merrill Lynch), in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under (i) or (ii) above;
PROVIDED, HOWEVER, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager expressly for use in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary prospectus or the International
Prospectus (or any amendment or supplement thereto); and provided further that
the Company will not be liable to any International Manager with respect to any
Prospectus to the extent that the Company shall sustain the burden of proving
that any such loss, liability, claim, damage or expense resulted from the fact
that such International Manager, in contravention of a requirement of this
Agreement or applicable law, sold Securities to a person to whom such
International Manager failed to send or give, at or prior to the Closing Date, a
copy of the International Prospectus, as then amended or supplemented if: (i)
the Company has previously furnished copies thereof (sufficiently in advance of
the Closing Date to allow for distribution by the Closing Date) to the
International Manager and the loss, liability, claim, damage or expense of such
International Manager resulted from an untrue statement or omission of a
material fact contained in or omitted from the preliminary prospectus which was
corrected in the International Prospectus as, if applicable, amended or
supplemented prior to the Closing Date and such International Prospectus was
required by law to be delivered at or prior to the written confirmation of sale
to such person and (ii) such failure to give or send such International
Prospectus by the Closing Date to the party or parties asserting such loss,
liability, claim, damage or expense would have constituted the sole defense to
the claim asserted by such person.
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each International
Manager severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary international
prospectus or the International Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information furnished
to the Company by such International Manager expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the International Prospectus (or any amendment or supplement thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this
16
<PAGE>
indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)
above, counsel to the indemnified parties shall be selected by Merrill Lynch,
and, in the case of parties indemnified pursuant to Section 6(b) above, counsel
to the indemnified parties shall be selected by the Company. An indemnified
party shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the indemnified party unless (i) the employment of
such counsel shall have been specifically authorized in writing by the
indemnifying party, (ii) the indemnifying party shall have failed to assume the
defense of such action or employ counsel reasonably satisfactory to the
indemnified party or (iii) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the indemnifying
party, and the indemnified party shall have been advised in writing by such
counsel that there may be one or more legal defenses available to it that are
different from or additional to those available to the indemnifying party. In no
event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) INDEMNIFICATION FOR RESERVED SECURITIES. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of the failure of any person or entity to whom Reserved Securities are
offered to pay for and accept delivery of Reserved Securities which, by the end
of the first business day following the date of this Agreement, were subject to
a properly confirmed agreement to purchase.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section 6
hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the International Managers on the other hand from the offering of the
Securities pursuant to this Agreement or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
International Managers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
17
<PAGE>
The relative benefits received by the Company on the one hand and the
International Managers on the other hand in connection with the offering of the
International Securities pursuant to this Agreement shall be deemed to be in the
same respective proportions as the total net proceeds from the offering of the
International Securities pursuant to this Agreement (before deducting expenses)
received by the Company and the total underwriting discount received by the
International Managers, in each case as set forth on the cover of the
International Prospectus, or, if Rule 434 is used, the corresponding location on
the Term Sheet, bear to the aggregate initial public offering price of the
International Securities as set forth on such cover.
The relative fault of the Company on the one hand and the International
Managers on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the International Managers and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the International Managers agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the International Managers were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 7. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 7 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International Manager
shall be required to contribute any amount in excess of the amount by which the
total price at which the International Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such International Managers has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial International
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY.
All representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any International Manager or
controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities to the International Managers.
18
<PAGE>
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The International Managers may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the International
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and the Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the International Managers, impracticable to market the Securities
or to enforce contracts for the sale of the Securities, or (iii) if trading in
any securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq National
Market has been suspended or materially limited, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE INTERNATIONAL MANAGERS. If one
or more of the International Managers shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the International Managers
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting International Managers, or any other underwriters,
to purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the International Managers shall not have completed such arrangements within
such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of International Securities to be purchased on such date, each of the
non-defaulting International Managers shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
International Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the International Managers to purchase and of the Company to sell
the Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting International
Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the International
Managers or the Company shall have the right to postpone Closing
19
<PAGE>
Time or the relevant Date of Delivery, as the case may be, for a period not
exceeding seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. As used
herein, the term "International Manager" includes any person substituted for an
International Manager under this Section 10.
SECTION 11. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the International Managers, c/o
Merrill Lynch at North Tower, World Financial Center, New York, New York
10281-1201 attention of o; and notices to the Company shall be directed to it at
8572 Katy Freeway, Suite 101, Houston, Texas 77024 attention of James F. Stuart.
SECTION 12. PARTIES. This Agreement shall each inure to the benefit of and
be binding upon the International Managers and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
International Managers and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are intended
to be for the sole and exclusive benefit of the International Managers and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any International Manager shall be deemed to be a successor by reason merely of
such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY IN THIS AGREEMENT REFER TO NEW YORK CITY TIME.
SECTION 14. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
20
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the International Managers and the Company in accordance with its terms.
Very truly yours,
PACKAGED ICE, INC.
By:
Title:
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH INTERNATIONAL
JEFFERIES INTERNATIONAL LIMITED
BEAR, STEARNS INTERNATIONAL LIMITED
NATIONSBANC MONTGOMERY SECURITIES LLC
STEPHENS INC.
By: MERRILL LYNCH INTERNATIONAL
By:
Authorized Signatory
21
<PAGE>
SCHEDULE A
NUMBER OF
INITIAL
INTERNATIONAL
SECURITIES
NAME OF INTERNATIONAL MANAGER
Merrill Lynch International...................................
Jefferies International Limited...............................
Bear, Stearns International Limited...........................
NationsBanc Montgomery Securities LLC.........................
Stephens Inc.................................................. ___________
Total...................................................
===========
Sch A - 1
<PAGE>
SCHEDULE B
PACKAGED ICE, INC.
__________ Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $l.
2. The purchase price per share for the International Securities to be
paid by the several International Managers shall be $l, being an amount equal to
the initial public offering price set forth above less $l per share; provided
that the purchase price per share for any International Option Securities
purchased upon the exercise of the over-allotment option described in Section
2(b) shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Initial International
Securities but not payable on the International Option Securities.
Sch B - 1
<PAGE>
SCHEDULE C
PERSONS SUBJECT TO LOCK-UP
Sch C - 1
<PAGE>
EXHIBIT A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
(i) Each of the Company and the Subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of its
respective jurisdiction of incorporation and has all requisite corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and to enter into and perform its
obligations under the U.S. Purchase Agreement and the International Purchase
Agreement.
(ii) Each of the Company and the Subsidiaries is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a Material
Adverse Effect.
(iii) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus in the column entitled "Actual" under the
caption "Capitalization" (except for subsequent issuances, if any, pursuant to
the U.S. Purchase Agreement and the International Purchase Agreement or pursuant
to reservations, agreements or employee benefit plans referred to in the
Prospectuses or pursuant to the exercise of convertible securities or options
referred to in the Prospectuses); the shares of issued and outstanding capital
stock have been duly authorized and validly issued and are fully paid and
non-assessable; and none of the outstanding shares of capital stock of the
Company was issued in violation of any preemptive rights afforded by the
Company's Articles of Incorporation or Bylaws or by statute or, to our
knowledge, any other similar rights of any securityholder of the Company.
(iv) The Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for issuance
and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement, respectively, and, when issued and delivered
by the Company pursuant to the U.S. Purchase Agreement and the International
Purchase Agreement, respectively, against payment of the consideration set forth
in the U.S. Purchase Agreement and the International Purchase Agreement, will be
validly issued and fully paid and non-assessable and no holder of the Securities
is or will be subject to personal liability by reason of being such a holder.
(v) The issuance of the Securities is not subject to the preemptive rights
afforded by the Company's Articles of Incorporation or Bylaws or by statute or,
to our knowledge, any other similar rights of any security holder of the
Company.
(vi) The U.S. Purchase Agreement and the International Purchase Agreement
have been duly authorized, executed and delivered by the Company.
(vii) The Registration Statement, including any Rule 462(b) Registration
Statement, has been declared effective under the 1933 Act; any required filing
of the Prospectuses pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); and, to our knowledge, no stop
order suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or threatened
by the Commission.
A1-1
<PAGE>
(viii)The Registration Statement, including any Rule 462(b) Registration
Statement, and the Rule 430A Information, as applicable, the Prospectuses and
each amendment or supplement to the Registration Statement and the Prospectuses
as of their respective effective or issue dates (other than the financial
statements and supporting schedules included therein or omitted therefrom, as to
which we express no opinion) complied as to form in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations.
(ix) The form of certificate used to evidence the Common Stock complies in
all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Company and the
requirements of the Nasdaq National Market.
(x) To our knowledge, there is not pending or threatened any action, suit,
proceeding, inquiry or investigation, to which the Company or any Subsidiary is
a party, or to which the property of the Company or any Subsidiary is subject,
before or brought by any court or governmental agency or body, domestic or
foreign, which would reasonably be expected to result in a Material Adverse
Effect, or which would reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the transactions
contemplated in the U.S. Purchase Agreement or the International Purchase
Agreement or the performance by the Company of its obligations thereunder.
(xi) The information in the Prospectuses under the headings "Management --
Stock Option Plan," "--1998 Stock Option Plan," "--Employment and Termination;"
"Certain Transactions;" "Description of Capital Stock," "Certain United States
Tax Considerations for Non-United States Holders" and "Shares Eligible For
Future Sale," and in the Registration Statement under Item 14, to the extent
that it constitutes matters of law, summaries of legal matters, the Company's
charter and bylaws or legal conclusions, has been reviewed by us and is correct
in all material respects.
(xii) To our knowledge, there are no statutes or regulations that are
required to be described in the Prospectuses that are not described as required.
(xiii)All descriptions in the Prospectuses of contracts and other
documents to which the Company or any Subsidiary is a party are accurate in all
material respects; to our knowledge, there are no franchises, contracts,
indentures, mortgages, loan agreements, notes, leases or other instruments
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed or incorporated by reference as exhibits thereto, and the descriptions
thereof or references thereto are correct in all material respects.
(xiv) No filing with, or authorization, approval, consent, license, order,
registration, qualification or decree of, any court or governmental authority or
agency, domestic or foreign (other than under the 1933 Act and the 1933 Act
Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we express no
opinion) is necessary or required in connection with the due authorization,
execution and delivery of the U.S. Purchase Agreement and the International
Purchase Agreement or for the offering, issuance, sale or delivery of the
Securities.
(xv) The execution, delivery and performance of the U.S. Purchase
Agreement and the International Purchase Agreement and the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the International
Purchase Agreement and in the Registration Statement (including the issuance and
sale of the Securities, and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of Proceeds")
and compliance by the Company with its obligations under the U.S. Purchase
Agreement and the International Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined in Section
1(a)(x) of the Purchase Agreements) under or result in the creation
A1-2
<PAGE>
or imposition of any lien, charge or encumbrance upon any property or assets of
the Company or any Subsidiary pursuant to any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or any other agreement or
instrument, known to us, to which the Company or any Subsidiary is a party or by
which it or any of them may be bound, or to which any of the property or assets
of the Company or any Subsidiary is subject (except for such conflicts, breaches
or defaults or liens, charges or encumbrances that would not have a Material
Adverse Effect), nor will such action result in any violation of the provisions
of the charter, by-laws or other governing documents of the Company or any
Subsidiary or any applicable law, statute, rule, regulation applicable to the
transactions of the type contemplated by this Agreement or any judgment, order,
writ or decree, known to us, of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any
Subsidiary or any of their respective properties, assets or operations.
(xvi) To our knowledge, except as set forth in the Prospectuses, there are
no persons with registration rights or other similar rights to have any
securities registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xvii)The Company is not, and will not be after application of the
proceeds of the offering of the Securities as set forth in the Prospectuses, an
"investment company" or an entity "controlled" by an "investment company," as
such terms are defined in the 1940 Act.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information, (except for financial statements and schedules and other financial
data included therein or omitted therefrom, as to which we make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectuses or any amendment or supplement thereto
(except for financial statements and schedules and other financial data included
therein or omitted therefrom, as to which we make no statement), at the time the
Prospectuses were issued, at the time any such amended or supplemented
prospectus was issued or at the Closing Time, included or includes an untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering opinions set forth above with respect to matters concerning
the Subsidiaries; such counsel may rely (A) as to matters involving the
application of the laws of the jurisdiction of incorporation or organization of
each Subsidiary, upon the opinion of counsel to each Subsidiary (which opinion
shall be dated and furnished to the U.S. Underwriters at the Closing Time, shall
be satisfactory in form and substance to counsel for the U.S. Underwriters and
shall expressly state that the U.S. Underwriters may rely on such opinion as if
it were addressed to them), provided that such counsel shall state in their
opinion that they believe that they and the U.S. Underwriters are justified in
relying upon such opinion, and (B), as to matters of fact (but not as to legal
conclusions), to the extent they deem proper, on certificates of officers of the
Company and public officials. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
A1-3
<PAGE>
EXHIBIT B
o, 1998
MERRILL LYNCH INTERNATIONAL
Jefferies & Company, Inc.
Bear, Stearns International Limited
NationsBanc Montgomery Securities LLC
Stephens Inc.
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC24 9L4
England
Re: PROPOSED PUBLIC OFFERING BY PACKAGED ICE, INC.
Dear Sirs:
The undersigned, a stockholder and/or an officer and/or director of
Packaged Ice, Inc., a Texas corporation (the "Company"), understands that
Merrill Lynch International ("Merrill Lynch"), Jefferies & Company, Inc.; Bear,
Stearns International Limited; NationsBanc Montgomery Securities LLC and
Stephens Inc. propose to enter into an International Purchase Agreement (the
"International Purchase Agreement") with the Company providing for the public
offering of shares (the "Securities") of the Company's common stock, par value
$.01 per share (the "Common Stock"). In recognition of the benefit that such an
offering will confer upon the undersigned as a stockholder and an officer and/or
director of the Company, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the undersigned agrees
with each underwriter to be named in the International Purchase Agreement that,
during a period of 180 days from the date of the International Purchase
Agreement, the undersigned will not, without the prior written consent of
Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant for the sale of, or otherwise
dispose of or transfer any shares of the Company's Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or hereafter acquired by the undersigned or with respect to
which the undersigned has or hereafter acquires the power of disposition, or
file any registration statement under the Securities Act of 1933, as amended,
with respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Common Stock, whether
any such swap or transaction is to be settled by delivery of Common Stock or
other securities, in cash or otherwise.
Very truly yours,
Signature: ___________________________
Print Name:___________________________
B-1
EXHIBIT 3.2
ARTICLES OF AMENDMENT
TO THE RESTATED ARTICLES OF INCORPORATION
OF PACKAGED ICE, INC.
Pursuant to the provisions of article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following articles of
amendment to its restated articles of incorporation:
ARTICLE ONE
The name of the corporation is PACKAGED ICE, INC.
ARTICLE TWO
The following amendments to the restated articles of incorporation were
adopted by the shareholders of the corporation on August 4, 1998. The first
amendment provides that directors and officers of the Company shall be
indemnified by the Company against all expense, liability and loss reasonably
incurred and to the extent allowed by the Texas Business Corporation Act. The
second amendment provides that, pursuant to Article 2.28D of the Texas Business
Corporation Act, any action by the shareholders of the Company shall be taken by
the vote of a simple majority rather than a two-thirds majority, as otherwise
required by the Texas Business Corporation Act.
The first amendment is an addition to the restated articles of
incorporation and the full text of the provision added is as follows:
"ARTICLE ELEVEN
Any person who was, is, or is threatened to be made, a named defendant or
respondent in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, arbitrative, investigative or administrative, any
appeal in such action suit or proceeding, and any inquiry or investigation that
could lead to such an action, suit or proceeding (collectively, a "proceeding"),
by reason of the fact that he or she is or was a director or officer of the
Corporation, or, while a director or officer of the Corporation, is or was
serving at the request of the Corporation as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, shall be
indemnified by the Corporation to the fullest extent authorized by the Texas
Business Corporation Act, as the same exists or may hereafter be amended (but in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, court costs,
fines, penalties, excise taxes, and amounts
<PAGE>
paid in settlement) reasonably incurred or suffered in connection therewith and
such indemnification shall continue as to any such person who has ceased to be a
director or officer and shall inure to the benefit of such persons' heirs,
executors and administrators. The right to indemnification conferred in this
Article shall be a contract right and shall include the right to be paid by the
Corporation the expenses (court costs and attorneys' fees) incurred in defending
any such proceeding in advance of its final disposition; provided, the
applicable requirements of the Texas Business Corporation Act are met prior to
such advancement.
The right to indemnification and to the advancement of expenses conferred
in this Article shall not be exclusive of, nor shall it be construed to limit,
any other right which any person may have or hereafter acquire under any
statute, these Articles of Incorporation, bylaws, agreement, vote of
shareholders or otherwise, subject to any special voting rights conferred upon
the holders of any preferred stock."
The second amendment is an addition to the restated articles of
incorporation and the full text of the provision added is as follows:
"ARTICLE TWELVE
Notwithstanding anything in the Texas Business Corporation Act or the
Texas Miscellaneous Corporation Laws to the contrary, pursuant to Article 2.28D
of the Texas Business Corporation Act, any action to be taken by the
shareholders of the Corporation may be taken by the vote or concurrence of the
holders of a majority of the outstanding shares of the Corporation and a larger
number shall not be required."
ARTICLE THREE
The number of shares of the corporation outstanding at the time of such
adoption was an aggregate of 5,622,241 shares, consisting of 5,047,310 shares of
Common Stock, 450,000 shares of Class A Preferred Stock, 124,831 shares of Class
B Preferred Stock and 1,883,536 votes represented by warrants held by the
shareholders of 100 shares of Class C Preferred Stock holders.
ARTICLE FOUR
The number of shares voted for the first amendment was 5,622,241; and the
number of shares voted against the first amendment was 0. The number of shares
voted for the second amendment was 5,622,241; and the number of shares voted
against the second amendment was 0.
[SIGNATURE PAGE TO FOLLOW]
2
<PAGE>
[SIGNATURE PAGE TO ARTICLES OF AMENDMENT
TO ARTICLES OF INCORPORATION]
Dated: August 7, 1998.
PACKAGED ICE, INC.
By:__________________________________________
A.J. Lewis III, President
4
EXHIBIT 10.28
RECAPITALIZATION AGREEMENT
This Recapitalization Agreement (this "AGREEMENT") is entered into on
August 4, 1998, among Packaged Ice, Inc., a Texas corporation (the "Company"),
and SV Capital Partners, L.P., a Texas limited partnership ("SVCP").
RECITALS
A. Whereas as of the date of this Agreement, SVCP holds 75,000 shares of
13% Exchangeable Preferred Stock, Series A (the "SVCP PREFERRED STOCK").
B. Whereas SVCP and the Company each desire to recapitalize and reorganize
the Company in a transaction intended to qualify as a reorganization under
section 368(a)(1)(E) of the Internal Revenue Code (the "Code"), by which SVCP
shall convert its shares of SVCP Preferred Stock into shares of Common Stock
concurrently with the consummation of an IPO (as defined below) by the Company.
C. Whereas SVCP desires to have demand and "piggy back" registration
rights with respect to shares of Common Stock issued upon conversion of the SVCP
Preferred Stock (such shares being referred to herein as the "CONVERSION
SHARES").
D. Whereas the consummation of the transactions contemplated herein are
conditioned upon the consummation of an IPO by the Company and satisfaction of
the other requirements set forth below.
AGREEMENTS
NOW THEREFORE, in consideration of the foregoing and the promises and
covenants contained herein, the sufficiency of which is hereby acknowledged, the
parties agree as follows:
ARTICLE 1
CERTAIN DEFINITIONS
In addition to the terms defined elsewhere in this Agreement, the
following terms used herein shall have the following meanings:
"ARES LETTER" shall mean that letter agreement dated August 4, 1998,
between Ares and the Company.
"CLOSING" shall mean the closing of the conversion of the SVCP Preferred
Stock into the Conversion Shares as contemplated herein.
"COMMON STOCK" means the Common Stock of the Company, par value $.01.
<PAGE>
"IPO" means a bona fide firm commitment underwritten initial public
offering of shares of the Company's Common Stock made through a nationally
recognized underwriting firm pursuant to an effective registration statement
under the Securities Act in which the price to public of the Common Stock is not
less than $16.00 per share and which results in gross public offering proceeds
to the Company of not less than $90 million.
"PURCHASE AGREEMENT" shall mean the Securities Purchase Agreement dated
April 30, 1998, between the Company and the investors set forth on Schedule I
thereto.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
ARTICLE 2
CONVERSION
2.1 CONVERSION OF SVCP PREFERRED STOCK. Upon the closing of the Company's
IPO, SVCP shall convert (the "CONVERSION") the SVCP Preferred Stock into a
number of shares of Common Stock equal to the liquidation preference ($7.5
million) plus all accumulated and unpaid dividends on the SVCP Preferred Stock
as of the date of Closing, divided by 91.75% of the price per share of Common
Stock to public in the Company's IPO, rounded up to the nearest whole number,
which stock shall be duly authorized, fully paid and non-assessable. At Closing,
SVCP shall deliver to the Company certificates representing the SVCP Preferred
Stock, duly endorsed in blank or accompanied by duly executed stock powers in
blank, and in proper form for transfer, and the Company, in conversion thereof,
shall issue to SVCP the number of shares of Common Stock described above.
2.2 CLOSING. The Closing of the Conversion shall take place at the time
and place as the closing of the IPO or other mutually acceptable time and place
upon the satisfaction of all conditions to Closing.
ARTICLE 3
CONDITIONS TO CLOSING
3.1 The obligations of the parties to consummate the transactions
contemplated by this Agreement are expressly conditioned upon satisfaction of
each of the following conditions on or before October 31, 1998 (the "Termination
Date"):
(a) The receipt of any required consents and waivers to this transaction
as may be required under any contract or undertaking to which the Company is a
party, or as may otherwise be required under applicable law. Specifically, a
written waiver of Ares Leveraged Investment Fund, L.P. ("Ares") to this
2
<PAGE>
transaction shall have been received. The Company and SVCP shall each give at
Closing any such consents and waivers that may be required of them, and each
shall cause any entity they control to give any such consent and waiver.
(b) As a condition to the Company's obligations, (i) SVCP shall have
complied in all respects with its obligations set forth in this Agreement, and
(ii) the representations and warranties of SVCP contained in this Agreement are
true and correct as of the Closing with the same effect as though made on and as
of such date, and SVCP shall have confirmed in writing at Closing that such
representations and warranties are true and correct.
(c) As a condition to SVCP's obligations, (i) the representations and
warranties of the Company contained in this Agreement are true and correct as of
the Closing with the same effect as though made on and as of such date, and the
Company shall have confirmed in writing at Closing that such representations and
warranties are true and correct as of the Closing, and (ii) the Company shall
have complied in all respects with its obligations set forth in this Agreement.
(d) At the Closing, the Company shall have delivered to SVCP stock
certificates evidencing the number of shares of Common Stock calculated in
Section 2.1 above, and SVCP shall have delivered to the Company the SVCP
Preferred Shares in the form set forth in Section 2.1 above.
(e) As a condition to SVCP's obligations, the Company shall have delivered
to SVCP the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P., dated the date
of Closing, substantially in the form of EXHIBIT A attached hereto.
(f) On the date of Closing, the Company shall have executed and delivered
the Registration Rights Agreement (the "Registration Rights Agreement") in the
form of EXHIBIT B attached hereto.
(g) As a condition to SVCP's obligations, the Company shall have closed
the IPO on or before the Termination Date, the Company shall not have split,
subdivided or combined its shares of capital stock, whether by stock split,
dividend or otherwise, SVCP shall not have entered into a lock-up agreement in
connection with the IPO with a duration greater than 180 days, and the Company
and Ares shall not have entered into any agreement with respect to Ares debt or
equity holdings of the Company other than those set forth in the Ares Letter.
If the conditions set forth above are not satisfied or waived on or before
the Termination Date, this Agreement shall automatically terminate and become
null and void and neither party shall have any liability to the other party
arising out of this Agreement.
3
<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 SVCP GENERAL REPRESENTATIONS.
(a) SVCP represents and warrants to the Company that the following
statements are true and correct: (i) the SVCP Preferred Stock is owned by SVCP
free and clear of all liens and encumbrances, other than those contemplated in
the Amended and Restated Shareholders Agreement dated September 25, 1995, among
the Company and other signatories thereto, as amended, (ii) SVCP will convey to
the Company good title to the SVCP Preferred Stock free and clear of all liens
and encumbrances, (iii) this Agreement, when executed and delivered by SVCP,
will have been duly authorized, executed and delivered by and on behalf of SVCP,
and will constitute the valid and binding agreement of SVCP, enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (iv) SVCP has the requisite power and authority to enter into
this Agreement and to perform its obligations hereunder; (v) SVCP is acquiring
the Conversion Shares for investment purposes only, for its own account and not
with a view to, or for resale in connection with, any distribution thereof in
violation of applicable securities laws; (vi) SVCP has been advised that the
Conversion Shares being issued hereunder have not been registered under the
Securities Act of 1933, as amended ("Securities Act"), or applicable state
securities laws and that such shares must be held indefinitely unless the offer
and sale thereof are subsequently registered under the Securities Act or an
exemption from such registration is available; (vii) SVCP (a) has knowledge,
skill and experience in financial, business and investment matters, that it is
capable of evaluating the merits and risks of the receipt of the Conversion
Shares, (b) is an "accredited investor" as that term is defined in Rule 501(a)
of Regulation D promulgated under the Securities Act, and (c) has the ability to
bear the risk of losing its entire position in the Conversion Shares; and (viii)
SVCP acknowledges and agrees that the certificates evidencing the Conversion
Shares will bear a restrictive legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAW AND THEY MAY
NOT BE OFFERED FOR SALE OR SOLD IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT THEREUNDER OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
(b) SVCP hereby consents to (i) the redemption of all of the 10%
Mandatorily Redeemable Preferred Stock held by Culligan Water Technologies, Inc.
and Erica Jesselson with the proceeds of the Company's IPO, and (ii) the
transactions between the Company and Ares contemplated in the Ares Letter.
4
<PAGE>
4.2 COMPANY GENERAL REPRESENTATIONS.
(a) The Company represents and warrants to SVCP that the following
statements are true and correct: (i) upon issuance and delivery to SVCP of the
Conversion Shares pursuant to this Agreement, such shares will be validly
issued, fully paid and non-assessable, and free and clear of all claims, liens,
pledges, options, charges, security interests, mortgages, deeds of trust,
encumbrances or rights of any third party of any nature whatsoever, (ii) the
issuance and sale of the Conversion Shares will not give rise to any preemptive
rights or rights of first refusal which have not been duly waived by the holders
thereof and will not violate any laws to which the Company or any of its assets
are subject, (iii) this Agreement, when executed and delivered by the Company,
will have been duly authorized, executed and delivered by and on behalf of the
Company, and will constitute the valid and binding agreement of the Company,
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (iv) the Company has the requisite corporate power
and authority to enter into this Agreement and to perform its obligations
hereunder, and (v) neither the execution and delivery of this Agreement and the
other agreements required to be executed and delivered pursuant to the terms and
conditions of this Agreement nor the consummation of the transactions
contemplated thereby will (a) conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default under, (x) the Articles of
Incorporation or bylaws of the Company or any of its subsidiaries, (y) any
agreement or instrument to which the Company or any of its subsidiaries is now a
party or by which any of them is bound, or (z) any provision of any judgment,
decree, order, statute, rule or regulation applicable to or binding on the
Company or any of its subsidiaries or (b) result in the creation of any
mortgage, pledge, lien, encumbrance, or charge upon any of the properties or
assets of the Company or any of its subsidiaries. Neither the issuance and sale
of the Conversion Shares, the execution, delivery and performance by the Company
of this Agreement or the Registration Rights Agreements, nor the consummation by
the Company of the transactions contemplated hereby or thereby requires any
consent, approval, authorization or other order of or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official, or any other third party, other than Ares.
(b) Each representation and warranty of the Company and its
subsidiaries contained in the underwriting agreement entered into in connection
with the IPO among the Company, its subsidiaries and the several underwriters
named therein is incorporated herein and made a part hereof for all purposes and
such representations and warranties are hereby ratified, confirmed and made for
the benefit of SVCP to the extent related to the business, properties,
operations, condition (financial or otherwise) or results of operations of the
Company and its subsidiaries, and to the extent otherwise applicable.
5
<PAGE>
4.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The foregoing
representations and warranties shall survive the execution of this Agreement and
the conversion contemplated herein.
ARTICLE 5
MISCELLANEOUS
5.1 ENTIRE AGREEMENT. This Agreement and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.
5.2 NOTICE. All notices and other communications required or permitted
hereunder shall be sent in accordance with Section 9.1 of the Purchase
Agreement.
5.3 SUCCESSORS AND ASSIGNS. This Agreement and the rights and obligations
of the parties hereunder shall inure to the benefit of, and be binding upon,
their respective successors, assigns and legal representatives.
5.4 AMENDMENTS. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated other than by written instrument signed by the
party against whom enforcement of any such amendment, waiver, discharge or
termination is sought.
5.5 FACSIMILE SIGNATURES. Any signature page delivered by a fax machine or
telecopy machine shall be binding to the same extent as an original signature
page, with regard to any agreement subject to the terms hereof or any amendment
thereto. Any party who delivers such a signature page agrees to later deliver an
original counterpart to any party which requests it.
5.6 CAPTIONS. The table of contents and captions and section headings
appearing herein are included solely for convenience of reference and are not
intended to affect the interpretation of any provision of this Agreement.
5.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one instrument, and each of
which may be executed by less than all of the parties to this Agreement.
5.8 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision. In such event, the parties shall negotiate, in good
faith, a valid, legal and enforceable substitute provision which most nearly
effects the intent of the parties in entering into this Agreement.
5.9 TAX TREATMENT. The Company and SVCP shall treat the transaction
6
<PAGE>
as a reorganization described in Section 368(a)(1)(E) of the Code and each shall
make all filings, notices and reports as required by the Code, the Treasury
Regulations or rulings related thereto.
5.10 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. EACH OF THE PARTIES HEREBY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND STATE COURTS OF THE
STATE OF TEXAS FOR ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. NON-EXCLUSIVE VENUE FOR ANY
ACTION RELATING TO THIS AGREEMENT SHALL BE PROPER IN BEXAR COUNTY, TEXAS.
[signatures on next page]
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Conversion Agreement as
of the date first above written.
PACKAGED ICE, INC.
By:________________________________
Name:______________________________
Title:_____________________________
SV CAPITAL PARTNERS, L.P.
By: SV Capital Management, Inc.,
Its: General Partner
By:________________________________
Name:______________________________
Title:_____________________________
8
<PAGE>
EXHIBIT A
A-1
<PAGE>
EXHIBIT B
B-1
EXHIBIT 10.29
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into as
of August 1, 1998, by and among Packaged Ice, Inc., a Texas corporation (the
"Company"), and James F.
Stuart (the "Employee").
PRELIMINARY STATEMENTS
The Company desires to employ Employee as Chief Executive Officer; and
The Employee desires to be so employed by the Company upon the terms and
conditions herein below set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual premises herein set forth,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto mutually agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
agrees to such employment on the terms and conditions hereinafter set forth.
2. DUTIES AND RESPONSIBILITIES OF EMPLOYEE. Employee shall serve as Chief
Executive Officer. Employee shall devote substantially all of his business time
to the performance of his duties hereunder unless otherwise authorized by the
Board of Directors.
3. TERM. The initial term of this Agreement commences effective August 1,
1998 and shall continue until July 31, 2000, and shall automatically renew for
consecutive two year periods at the expiration of each two year term.
4. COMPENSATION OF EMPLOYEE.
4.1 BASE SALARY. Commencing upon the date hereof, the Company shall
pay to Employee a base salary at the rate of $225,000 per annum. Such
compensation shall be paid to Employee in accordance with the Company's payroll
policies. The Compensation Committee of the Board of Directors will review base
salary no less often than annually and implement such raises in base salary as
are reasonable, after consultation with Company's outside compensation
consultant.
4.2 EXPENSES. In addition to those expenses that may be expressly
set forth herein, the Company shall, in accordance with the established policies
and procedures of the Company, pay or reimburse Employee for all ordinary and
necessary
<PAGE>
out-of-pocket expenses which are documented and are reasonably incurred by
Employee in connection with performing his duties hereunder.
4.3 BENEFITS. Employee shall be entitled to such benefits
commensurate with his position as Chief Executive Officer under plans
established by the Company and to the extent that Employee is eligible to
participate in such plans, including without limitation, the Company's incentive
compensation plan, stock option plan, health and welfare plans, etc.
4.4 AUTOMOBILE. With respect to Employee's use of an automobile in
connection with the performance of his duties hereunder, the Company shall, at
the discretion of the Employee, either reimburse the Employee for or directly
pay the reasonable costs of, the use of an automobile during the term of this
Agreement and all usual expenditures in connection therewith, such as fuel,
insurance, tolls, parking, maintenance and repairs, etc. in accordance with the
past practices of the Company.
5. TERMINATION.
5.1 TERMINATION. Either party shall have the right to terminate this
Employment Agreement upon thirty (30) days written notice to the other party.
5.2 SEVERANCE PAY. Except for the termination of Employee "For
Cause," or as a result of Employee's death or disability, in the event that the
Company elects to terminate Employee during the term hereof, Employee's
exclusive termination remuneration shall be continuation of Employee's base
salary and health and welfare benefits for a period of twenty four (24) months
from the date of termination.
5.3 "FOR CAUSE". As used herein, the term "For Cause" shall mean (i)
Employee's theft, fraud or other defalcation, (ii) Employee's conviction of a
felony, or any crime of moral turpitude, (iii) Employee's violation of any
covenant herein contained after ten (10) days notice and opportunity to cure,
(iv) Employee's failure to comply with all reasonable policies, standards and
regulations of the Company, as determined by the Board of Directors, after ten
(10) days notice and opportunity to cure, or (v) Employee's willful or grossly
negligent misconduct which is injurious to the Company, its business and
affairs. If the Company elects to terminate Employee "For Cause," or upon
Employee's death or disability, then this Agreement shall terminate and there
shall be no severance pay owed by the Company to Employee.
6. DISCLOSURE OF CONFIDENTIAL INFORMATION, COVENANT NOT TO COMPETE.
Employee acknowledges that certain information whether written or oral,
concerning the Company, including but not limited to general business
operations, or any other ideas and similar items relating to the business of the
Company (referred to herein as "Confidential Information") whether prepared or
generated by Employee or the Company pursuant to this Agreement or otherwise
coming into the possession or knowledge of Employee shall
2
<PAGE>
remain the exclusive, confidential property of the Company except to the extent
expressly authorized in writing by the Company for dissemination. Employee
further acknowledges and agrees that all such Confidential Information
constitutes trade secrets of the Company.
During the term of this Agreement and the Restricted Period (hereinafter
defined), Employee shall not disclose any of such Confidential Information to
any third party without the prior written consent of the Company and shall take
all reasonable steps and actions necessary to maintain the confidentiality of
such Confidential Information. Employee shall not use any of such Confidential
Information in any manner whatsoever during the Restricted Period, without the
Company's express prior written consent. In consideration of the obligations
undertaken by the Company herein, Employee will not, at any time, during or
after his employment hereunder, reveal, divulge or make known to any person, any
Confidential Information acquired by Employee during the course of his
employment.
During the term of this Agreement and the Restricted Period, Employee
shall not within 200 miles of any ice manufacturing facility owned or operated
by the Company or any of its subsidiaries be employed by (as an officer,
director, employee, consultant or independent contractor) engage in, or have any
interest in any person, firm, corporation or business (whether as a shareholder,
creditor, partner, consultant, holder of any beneficial interest or otherwise
other than as a beneficial holder of not more than 1% percent of the outstanding
voting stock of a company having at least 500 holders of voting stock) that is a
manufacturer or wholesale distributor of ice.
During the Restricted Period, Employee shall not solicit or attempt to
solicit any employee of the Company in attempt to encourage the employee to
leave the employ of the Company.
The provisions of this SECTION 6 shall survive the expiration or
termination of Employee's employment hereunder and until the end of the
Restricted Period. The term "Restricted Period," as used in this Section shall
mean the period commencing on the date hereof and ending three (3) years after
the date Employee's employment is terminated for any reason. The provisions of
this Section shall survive the expiration or termination of Employee's
employment hereunder and until the end of the Restricted Period as provided
herein. The Employee acknowledges and agrees that the restrictions imposed
herein are reasonable as to scope, duration and area, are necessary for the
protection of the Company's and its affiliates' business, and that but for the
Employee's agreement to the restrictions herein imposed the Company would not
have entered into this Agreement.
7. MISCELLANEOUS.
7.1. ASSIGNMENT. Neither Employee nor the Company may assign or
delegate any of their rights or duties under this Agreement without the express
written
3
<PAGE>
consent of the other. Provided that in the event that the Company elects to sell
all or substantially all of its assets, then the Company shall have the right to
assign this Agreement to the buyer thereof, on the condition that the buyer
expressly assumes all of the obligations of the Company under this Agreement,
and the failure of the buyer to do so will result in a constructive termination
of this Agreement. In the event of a merger or other business combination
resulting in a change of control of the Company, the acquirer will be required
to expressly assume all of the obligations of the Company under this Agreement,
and the failure of the acquirer to do so will result in a constructive
termination of this Agreement.
7.2 INJUNCTIVE RELIEF. Employee acknowledges that the services to be
rendered under the provisions of this Agreement are of a special, unique and
extraordinary character and that it would be difficult or impossible to replace
such services. Accordingly, Employee agrees that any breach or threatened breach
by him/her of SECTION 6 of this Agreement may cause irreparable harm to the
Company for which monetary damages may not be adequate and accordingly, any such
breach or threatened breach of SECTION 6 of this Agreement shall entitle
Company, in addition to all other legal remedies available to it at law or in
equity, to seek a temporary or permanent injunction to enjoin such breach or
threatened breach.
7.3 BINDING EFFECT. This Agreement shall inure to the benefit of, be
binding upon and enforceable against, the parties hereto and their permitted,
respective successor, heirs, beneficiaries and permitted assigns.
7.4 HEADINGS. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.5 NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given when personally delivered, sent by registered or
certified mail, return receipt requested, postage prepaid, by facsimile with
facsimile generated confirmation of receipt, or by private overnight mail
service (e.g. Federal Express) to the party at the address set forth as follows:
If to the Company, to: Packaged Ice, Inc.
8572 Katy Freeway, Suite 101
Houston, Texas 77024
Attn: Board of Directors
With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent Street, Suite 1500
San Antonio, Texas 78205
Attention: Alan Schoenbaum
4
<PAGE>
If to Employee, to: James F. Stuart
11407 Burgoyne
Houston Texas 77077
or to such other address as either party or the Company may hereafter give
notice of in accordance with the provisions hereof. Notices shall be deemed
given on the sooner of the date actually received or the third business day
after sending.
7.6 WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate or be construed as a continuing waiver of
any subsequent breach by either party. No waiver by either party of any
provision or condition to be performed shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time. No waiver by either party of any provisions or condition to be performed
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same time or any prior or subsequent time.
7.7 GOVERNING LAW. Regardless of the place of execution or
performance, this Agreement shall be governed by and construed in accordance
with the laws of the State of Texas without giving effect to such State's
conflicts of laws provisions.
7.8 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Rules of the American Arbitration
Association by a single arbitrator to be located in Houston, Harris County,
Texas, and judgment upon the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof, and shall not be appealable.
7.9 SEVERABILITY. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the rest of such provision not held so invalid, and the rest of
such provision, together with all other provisions of this Agreement, shall to
the full extent consistent with law continue in full force and effect.
7.10 COUNTERPARTS. This Agreement may be executed simultaneously in
one or more original or facsimile counterparts, each of which shall be deemed an
original, but all of which together shall constitute one of the same instrument.
[STUART EMPLOYMENT AGREEMENT
SIGNATURE PAGE FOLLOWS]
5
<PAGE>
[STUART EMPLOYMENT AGREEMENT SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
EMPLOYEE:
_____________________________________
James F. Stuart
PACKAGED ICE, INC.
By:__________________________________
A.J. Lewis III, President
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into as
of August 1, 1998, by and among Packaged Ice, Inc., a Texas corporation (the
"Company"), and A.J. Lewis III (the "Employee").
PRELIMINARY STATEMENTS
The Company desires to employ Employee as President; and
The Employee desires to be so employed by the Company upon the terms and
conditions herein below set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual premises herein set forth,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto mutually agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
agrees to such employment on the terms and conditions hereinafter set forth.
2. DUTIES AND RESPONSIBILITIES OF EMPLOYEE. Employee shall serve as
President. Employee shall devote substantially all of his business time to the
performance of his duties hereunder unless otherwise authorized by the Board of
Directors. Notwithstanding the foregoing, Employee shall have the right to
continue to serve as an officer and director of Jefferson Bancshares, Inc.,
Jefferson State Bank, Stockmen's National Bank, Southwest Texas Equipment
Distributors, Inc. ("STED") and Mission Ice Equipment Co.
("MECO").
3. TERM. The initial term of this Agreement commences effective August 1,
1998 and shall continue until July 31, 1999, and shall automatically renew for
one year periods at the expiration of each one year term.
4. COMPENSATION OF EMPLOYEE.
4.1 BASE SALARY. Commencing upon the date hereof, the Company shall
pay to Employee a base salary at the rate of $200,000 per annum. Such
compensation shall be paid to Employee in accordance with the Company's payroll
policies. The Compensation Committee of the Board of Directors will review base
salary no less often than annually and implement such raises in base salary as
are reasonable, after consultation with Company's outside compensation
consultant.
4.2 EXPENSES. In addition to those expenses that may be expressly
set forth herein, the Company shall, in accordance with the established policies
and
<PAGE>
procedures of the Company, pay or reimburse Employee for all ordinary and
necessary out-of-pocket expenses which are documented and are reasonably
incurred by Employee in connection with performing his duties hereunder.
4.3 BENEFITS. Employee shall be entitled to such benefits
commensurate with his position as President under plans established by the
Company and to the extent that Employee is eligible to participate in such
plans, including without limitation, the Company's incentive compensation plan,
stock option plan, health and welfare plans, etc.
4.4 AUTOMOBILE. With respect to Employee's use of an automobile in
connection with the performance of his duties hereunder, the Company shall, at
the discretion of the Employee, either reimburse the Employee for or directly
pay the reasonable costs of, the use of an automobile during the term of this
Agreement and all usual expenditures in connection therewith, such as fuel,
insurance, tolls, parking, maintenance and repairs, etc. in accordance with the
past practices of the Company.
5. TERMINATION.
5.1 TERMINATION. Either party shall have the right to terminate this
Employment Agreement upon thirty (30) days written notice to the other party.
5.2 SEVERANCE PAY. Except for the termination of Employee "For
Cause," or as a result of Employee's death or disability, in the event that the
Company elects to terminate Employee during the term hereof, Employee's
exclusive termination remuneration shall be continuation of Employee's base
salary and health and welfare benefits for a period of twelve (12) months from
the date of termination.
5.3 "FOR CAUSE". As used herein, the term "For Cause" shall mean (i)
Employee's theft, fraud or other defalcation, (ii) Employee's conviction of a
felony, or any crime of moral turpitude, (iii) Employee's violation of any
covenant herein contained after ten (10) days notice and opportunity to cure,
(iv) Employee's failure to comply with all reasonable policies, standards and
regulations of the Company, as determined by the Board of Directors, after ten
(10) days notice and opportunity to cure, or (v) Employee's willful or grossly
negligent misconduct which is injurious to the Company, its business and
affairs. If the Company elects to terminate Employee "For Cause," or upon
Employee's death or disability, then this Agreement shall terminate and there
shall be no severance pay owed by the Company to Employee.
6. DISCLOSURE OF CONFIDENTIAL INFORMATION, COVENANT NOT TO COMPETE.
Employee acknowledges that certain information whether written or oral,
concerning the Company, including but not limited to general business
operations, or any other ideas and similar items relating to the business of the
Company (referred to herein as "Confidential Information") whether prepared or
generated by Employee or the Company pursuant to
2
<PAGE>
this Agreement or otherwise coming into the possession or knowledge of Employee
shall remain the exclusive, confidential property of the Company except to the
extent expressly authorized in writing by the Company for dissemination.
Employee further acknowledges and agrees that all such Confidential Information
constitutes trade secrets of the Company.
During the term of this Agreement and the Restricted Period (hereinafter
defined), Employee shall not disclose any of such Confidential Information to
any third party without the prior written consent of the Company and shall take
all reasonable steps and actions necessary to maintain the confidentiality of
such Confidential Information. Employee shall not use any of such Confidential
Information in any manner whatsoever during the Restricted Period, without the
Company's express prior written consent. In consideration of the obligations
undertaken by the Company herein, Employee will not, at any time, during or
after his employment hereunder, reveal, divulge or make known to any person, any
Confidential Information acquired by Employee during the course of his
employment.
During the term of this Agreement and the Restricted Period, Employee
shall not within 200 miles of any ice manufacturing facility owned or operated
by the Company or any of its subsidiaries be employed by (as an officer,
director, employee, consultant or independent contractor) engage in, or have any
interest in any person, firm, corporation or business (whether as a shareholder,
creditor, partner, consultant, holder of any beneficial interest or otherwise
other than as a beneficial holder of not more than 1% percent of the outstanding
voting stock of a company having at least 500 holders of voting stock) that is a
manufacturer or wholesale distributor of ice. Notwithstanding the foregoing,
Employee shall not be restricted from his activities on behalf of STED or MECO,
which include (but are not limited to) the retail and wholesale business of
selling, renting and leasing commercial refrigeration and ice making equipment,
(but specifically excluding on-site, automatic, ice bagging devices).
During the Restricted Period, Employee shall not solicit or attempt to
solicit any employee of the Company in attempt to encourage the employee to
leave the employ of the Company (other than Ruth Pope, Employee's personal
assistant.)
The provisions of this SECTION 6 shall survive the expiration or
termination of Employee's employment hereunder and until the end of the
Restricted Period. The term "Restricted Period," as used in this Section shall
mean the period commencing on the date hereof and ending three (3) years after
the date Employee's employment is terminated for any reason. The provisions of
this Section shall survive the expiration or termination of Employee's
employment hereunder and until the end of the Restricted Period as provided
herein. The Employee acknowledges and agrees that the restrictions imposed
herein are reasonable as to scope, duration and area, are necessary for the
protection of the Company's and its affiliates' business, and that but for the
Employee's agreement to the restrictions herein imposed the Company would not
have entered into this Agreement.
3
<PAGE>
7. MISCELLANEOUS.
7.1. ASSIGNMENT. Neither Employee nor the Company may assign or
delegate any of their rights or duties under this Agreement without the express
written consent of the other. Provided that in the event that the Company elects
to sell all or substantially all of its assets, then the Company shall have the
right to assign this Agreement to the buyer thereof, on the condition that the
buyer expressly assumes all of the obligations of the Company under this
Agreement, and the failure of the buyer to do so will result in a constructive
termination of this Agreement. In the event of a merger or other business
combination resulting in a change of control of the Company, the acquirer will
be required to expressly assume all of the obligations of the Company under this
Agreement, and the failure of the acquirer to do so will result in a
constructive termination of this Agreement.
7.2 INJUNCTIVE RELIEF. Employee acknowledges that the services to be
rendered under the provisions of this Agreement are of a special, unique and
extraordinary character and that it would be difficult or impossible to replace
such services. Accordingly, Employee agrees that any breach or threatened breach
by him/her of SECTION 6 of this Agreement may cause irreparable harm to the
Company for which monetary damages may not be adequate and accordingly, any such
breach or threatened breach of SECTION 6 of this Agreement shall entitle
Company, in addition to all other legal remedies available to it at law or in
equity, to seek a temporary or permanent injunction to enjoin such breach or
threatened breach.
7.3 BINDING EFFECT. This Agreement shall inure to the benefit of, be
binding upon and enforceable against, the parties hereto and their permitted,
respective successor, heirs, beneficiaries and permitted assigns.
7.4 HEADINGS. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.5 NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given when personally delivered, sent by registered or
certified mail, return receipt requested, postage prepaid, by facsimile with
facsimile generated confirmation of receipt, or by private overnight mail
service (e.g. Federal Express) to the party at the address set forth as follows:
If to the Company, to: Packaged Ice, Inc.
8572 Katy Freeway, Suite 101
Houston, Texas 77024
Attn: Board of Directors
With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
4
<PAGE>
300 Convent Street, Suite 1500
San Antonio, Texas 78205
Attention: Alan Schoenbaum
If to Employee, to: A.J. Lewis III
801 Ivy Lane
San Antonio, Texas 78209
or to such other address as either party or the Company may hereafter give
notice of in accordance with the provisions hereof. Notices shall be deemed
given on the sooner of the date actually received or the third business day
after sending.
7.6 WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate or be construed as a continuing waiver of
any subsequent breach by either party. No waiver by either party of any
provision or condition to be performed shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time. No waiver by either party of any provisions or condition to be performed
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same time or any prior or subsequent time.
7.7 GOVERNING LAW. Regardless of the place of execution or
performance, this Agreement shall be governed by and construed in accordance
with the laws of the State of Texas without giving effect to such State's
conflicts of laws provisions.
7.8 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Rules of the American Arbitration
Association by a single arbitrator to be located in San Antonio, Bexar County,
Texas, and judgment upon the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof, and shall not be appealable.
7.9 SEVERABILITY. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the rest of such provision not held so invalid, and the rest of
such provision, together with all other provisions of this Agreement, shall to
the full extent consistent with law continue in full force and effect.
7.10 COUNTERPARTS. This Agreement may be executed simultaneously in
one or more original or facsimile counterparts, each of which shall be deemed an
original, but all of which together shall constitute one of the same instrument.
[LEWIS EMPLOYMENT AGREEMENT
5
<PAGE>
SIGNATURE PAGE FOLLOWS]
6
<PAGE>
[LEWIS EMPLOYMENT AGREEMENT SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
EMPLOYEE:
___________________________________
A.J. Lewis III
PACKAGED ICE, INC.
By:________________________________
James F. Stuart,
Chief Executive Officer
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into
effective May 1, 1998, by and among Packaged Ice, Inc., a Texas corporation (the
"Company"), and Jimmy C.
Weaver (the "Employee").
PRELIMINARY STATEMENTS
The Company desires to employ Employee as executive vice president and
chief operating officer; and
The Employee desires to be so employed by the Company upon the terms and
conditions herein below set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual premises herein set forth,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto mutually agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
agrees to such employment on the terms and conditions hereinafter set forth.
2. DUTIES AND RESPONSIBILITIES OF EMPLOYEE. Employee shall serve as
Executive Vice President and Chief Operating Officer and shall properly perform
such duties as may be assigned to him from time to time by the Chief Executive
Officer or President of the Company. Employee shall devote all of his business
time to the performance of his duties hereunder unless otherwise authorized by
the Chief Executive Officer, the President or either of their respective
representatives. Notwithstanding the foregoing, Employee may also be assigned
such other duties as may be reasonably assigned from time to time by the Board
of Directors.
3. TERM. The initial term of this Agreement commenced effective May 1,
1998 and shall continue until April 30, 2000. At the Company's option, this
Agreement may be renewed for a third year. In the event that the Company desires
to renew this Agreement, it shall so advise Employee at least sixty (60) days
prior to the expiration of the initial term.
4. COMPENSATION OF EMPLOYEE.
4.1 BASE SALARY. Commencing upon the date hereof, the Company shall
pay to Employee a base salary at the rate of $185,000 per annum. Such
compensation shall be paid to Employee in bi-weekly installments.
4.2 EXPENSES. In addition to those expenses that may be expressly
set forth herein, the Company shall, in accordance with the established policies
and
1
<PAGE>
procedures of the Company, pay or reimburse Employee for all ordinary and
necessary out-of-pocket expenses which are documented and are reasonably
incurred by Employee in connection with performing his duties hereunder.
4.3 BENEFITS. Employee shall be entitled to the same benefits that
other similarly situated employees of the Company are entitled to receive to the
extent such plans are established by the Company and to the extent that Employee
is eligible to participate in such plans.
4.4 STOCK OPTIONS. The Company shall grant to Employee stock options
for 40,000 shares of common stock under the Company's 1994 Stock Option Plan at
an exercise price of $14.00 per share, in accordance with a stock option
agreement dated as of the date hereof.
4.5 AUTOMOBILE ALLOWANCE. Employee shall receive an automobile
allowance of $1,000.00 per month.
4.6 CLUB DUES. Employee shall receive $185.00 per month as
reimbursement for country club dues.
5. TERMINATION.
5.1 TERMINATION. Either party shall have the right to terminate this
Employment Agreement with no less than fifteen days written notice to the other
party.
5.2 SEVERANCE PAY. Except for the termination of Employee "For
Cause," in the event that the Company elects to terminate Employee during the
term hereof, Employee's exclusive termination renumeration shall be continuation
of Employee's base salary and health and welfare benefits through the end of the
initial term of this Agreement or if this Agreement has been renewed, through
the end of the renewal term, but in no event shall such continuation period be
less than six (6) months. If the Company does not renew this Agreement at the
end of the initial term or any renewal term, Employee will be entitled to
receive base salary and health and welfare benefits for a period of six (6)
months following the termination of this Agreement as severance.
5.3 "FOR CAUSE" TERMINATION; DEATH AND DISABILITY. As used herein,
the term "For Cause" shall mean (i) Employee's theft, fraud or other
defalcation, (ii) Employee's conviction of a felony, or any crime of moral
turpitude, (iii) Employee's violation of any covenant herein contained after ten
(10) days notice and opportunity to cure, (iv) Employee's failure to comply with
all reasonable policies, standards and regulations of the Company, as determined
by the officers of the Company after ten (10) days notice and opportunity to
cure, or (v) Employee's willful or grossly negligent misconduct which is
injurious to the Company, its business and affairs. If the Company elects to
terminate Employee "For Cause," or upon Employee's death or disability, then
this Agreement shall terminate and there shall be no severance pay owed by the
Company to Employee.
2
<PAGE>
6. DISCLOSURE OF CONFIDENTIAL INFORMATION, COVENANT NOT TO COMPETE.
Employee acknowledges that certain information whether written or oral,
concerning the Company, including but not limited to general business
operations, or any other ideas and similar items relating to the business of the
Company (referred to herein as "Confidential Information") whether prepared or
generated by Employee or the Company pursuant to this Agreement or otherwise
coming into the possession or knowledge of Employee shall remain the exclusive,
confidential property of the Company except to the extent expressly authorized
in writing by the Company for dissemination. Employee further acknowledges and
agrees that all such Confidential Information constitutes trade secrets of the
Company.
During the term of this Agreement and the Restricted Period (hereinafter
defined), Employee shall not disclose any of such Confidential Information to
any third party without the prior written consent of the Company and shall take
all reasonable steps and actions necessary to maintain the confidentiality of
such Confidential Information. Employee shall not use any of such Confidential
Information in any manner whatsoever during the Restricted Period, without the
Company's express prior written consent. In consideration of the obligations
undertaken by the Company herein, Employee will not, at any time, during or
after his employment hereunder, reveal, divulge or make known to any person, any
Confidential Information acquired by Employee during the course of his
employment.
During the term of this Agreement and the Restricted Period, Employee
shall not within 200 miles of any ice manufacturing facility owned or operated
by the Company or any of its subsidiaries be employed by (as an officer,
director, employee, consultant or independent contractor) engage in, or have any
interest in any person, firm, corporation or business (whether as a shareholder,
creditor, partner, consultant, holder of any beneficial interest or otherwise
other than as a beneficial holder of not more than 1% percent of the outstanding
voting stock of a company having at least 500 holders of voting stock) that
engages in the business of manufacturing, producing, storing, selling or
distributing ice.
During the Restricted Period, Employee shall not solicit or attempt to
solicit any employee of the Company in attempt to encourage the employee to
leave the employ of the Company.
The provisions of this SECTION 6 shall survive the expiration or
termination of Employee's employment hereunder and until the end of the
Restricted Period. The term "Restricted Period," as used in this Section shall
mean the period commencing on the date hereof and ending two years after the
date Employee's employment is terminated for any reason. The provisions of this
Section shall survive the expiration or termination of Employee's employment
hereunder and until the end of the Restricted Period as provided herein. The
Employee acknowledges and agrees that the restrictions imposed herein are
reasonable as to scope, duration and area, are necessary for the protection of
the Company's and its affiliates' business, and that but for the Employee's
agreement to the restrictions herein imposed the Company would not have entered
into this Agreement.
3
<PAGE>
7. MISCELLANEOUS.
7.1. ASSIGNMENT. Neither Employee nor the Company may assign or
delegate any of their rights or duties under this Agreement without the express
written consent of the other except that in the event that the Company elects to
sell all or substantially all of its ice manufacturing assets that it acquired,
in part, from Employee to any third party, then the Company shall have the right
to terminate this Agreement with no further obligation being owed hereunder by
either party to the other.
7.2 INJUNCTIVE RELIEF. Employee acknowledges that the services to be
rendered under the provisions of this Agreement are of a special, unique and
extraordinary character and that it would be difficult or impossible to replace
such services. Accordingly, Employee agrees that any breach or threatened breach
by him/her of SECTION 6 of this Agreement may cause irreparable harm to the
Company for which monetary damages may not be adequate and accordingly, any such
breach or threatened breach of SECTION 6 of this Agreement shall entitle
Company, in addition to all other legal remedies available to it at law or in
equity, to seek a temporary or permanent injunction to enjoin such breach or
threatened breach. Such injunction shall be available without the posting of any
bond or other security, and the Employee hereby consents to the issuance of such
injunction.
7.3 BINDING EFFECT. This Agreement shall inure to the benefit of, be
binding upon and enforceable against, the parties hereto and their permitted,
respective successor, heirs, beneficiaries and permitted assigns.
7.4 HEADINGS. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.5 NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given when personally delivered, sent by registered or
certified mail, return receipt requested, postage prepaid, by facsimile with
facsimile generated confirmation of receipt, or by private overnight mail
service (e.g. Federal Express) to the party at the address set forth as follows:
If to the Company, to: Packaged Ice, Inc.
8572 Katy Freeway, Suite 101
Houston, Texas 77024
Attn: James F. Stuart, Chief Executive Officer
With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Attention: Alan Schoenbaum
4
<PAGE>
If to Employee, to: Jimmy C. Weaver
[address]
or to such other address as either party or the Company may hereafter give
notice of in accordance with the provisions hereof. Notices shall be deemed
given on the sooner of the date actually received or the third business day
after sending.
7.6 WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate or be construed as a continuing waiver of
any subsequent breach by either party. No waiver by either party of any
provision or condition to be performed shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time. No waiver by either party of any provisions or condition to be performed
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same time or any prior or subsequent time.
7.7 GOVERNING LAW. Regardless of the place of execution or
performance, this Agreement shall be governed by and construed in accordance
with the laws of the State of Texas without giving effect to such State's
conflicts of laws provisions.
7.8 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Rules of the American Arbitration
Association by a single arbitrator to be located in Dallas County, Texas, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof, and shall not be appealable.
7.9 SEVERABILITY. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the rest of such provision not held so invalid, and the rest of
such provision, together with all other provisions of this Agreement, shall to
the full extent consistent with law continue in full force and effect.
7.10 COUNTERPARTS. This Agreement may be executed simultaneously in
one or more original or facsimile counterparts, each of which shall be deemed an
original, but all of which together shall constitute one of the same instrument.
[WEAVER EMPLOYMENT AGREEMENT
SIGNATURE PAGE FOLLOWS]
5
<PAGE>
[WEAVER EMPLOYMENT AGREEMENT SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
EMPLOYEE:
_____________________________________
Jimmy C. Weaver
PACKAGED ICE, INC.
By:__________________________________
James F. Stuart, Chief Executive Officer
6
EXHIBIT 10.32
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into as
of November 1, 1997, by and among Packaged Ice, Inc., a Texas corporation (the
"Company"), and James Hazlewood (the "Employee").
PRELIMINARY STATEMENTS
The Company desires to employ Employee as chief financial officer; and
The Employee desires to be so employed by the Company upon the terms and
conditions hereinbelow set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual premises herein set forth,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto mutually agree as follows:
1. EMPLOYMENT. The Company shall employ Employee on an exclusive and at
will basis, and Employee hereby agrees to such employment in the capacity of
chief financial officer on an "at will" basis.
2. DUTIES AND RESPONSIBILITIES OF EMPLOYEE. Employee shall serve as chief
financial officer and shall properly perform such duties as may be assigned to
him from time to time by the Chief Executive Officer or President of the
Company. Employee shall devote all of his business time to the performance of
his/her duties hereunder unless otherwise authorized by the Chief Executive
Officer, the President or either of their respective representatives.
Notwithstanding the foregoing, Employee shall not be obligated to relocate from
the Houston, Texas area.
3. COMPENSATION OF EMPLOYEE.
3.1 BASE SALARY. Commencing upon the date hereof, the Company shall
pay to Employee a base salary of $105,000 per annum. Such compensation shall be
paid to Employee with the same frequency as other similarly situated employees
of the Company are compensated
3.2 EXPENSES. In addition to those expenses that may be expressly
set forth herein, the Company shall, in accordance with the established policies
and procedures of the Company, pay or reimburse Employee for all ordinary and
necessary out-of-pocket expenses actually incurred by Employee in connection
with performing his duties hereunder which are reasonable and documented.
<PAGE>
3.3 BENEFITS. Employee shall be entitled to the same benefits that
other similarly situated employees of the Company are entitled to receive to the
extent such plans are established by the Company and to the extent that Employee
is eligible to participate in such plans.
3.4 STOCK OPTIONS. The Company shall grant to Employee stock options
for 20,000 shares of common stock under its stock option plan in accordance with
a stock option agreement dated as of the date hereof.
3.5 AUTOMOBILE ALLOWANCE. Employee shall receive an automobile
allowance for a mid-sized domestic automobile such as a Ford Taurus or Chevrolet
Lumina or similar automobile
4. TERMINATION.
4.1 TERMINATION. Both parties shall have the right to terminate this
Employment Agreement with no less than fifteen days written notice to the other
party.
4.2 SEVERANCE PAY. Except for the termination of Employee "For
Cause," in the event that the Company elects to terminate Employee during the
term hereof, the Company will pay to Employee a sum equal to one year's salary;
provided, that in the event that the Company or substantially all of the assets
of the Company is sold to Suiza Foods Corporation or Reddy Ice Corporation, and
Employee is terminated or resigns within sixty days thereafter, the Company will
pay Employee a sum equal to two years salary, and in the event that the Company
or substantially all of its assets is sold to any other third party and Employee
is terminated or resigns within sixty days thereafter, the Company will pay
Employee a sum equal to one year's salary.
4.3 "FOR CAUSE". As used herein, the term "For Cause" shall mean (i)
Employee's theft, fraud or other defalcation, (ii) Employee's conviction of a
felony, or any crime of moral turpitude, (iii) Employee's violation of any
covenant herein contained, or (iv) Employee's failure to comply with all
reasonable policies, standards and regulations of the Company, as determined by
the officers of the Company. If the Company elects to terminate Employee For
Cause, then this Employment Agreement shall terminate and there shall be no
severance pay owed by the Company to Employee.
5. DISCLOSURE OF CONFIDENTIAL INFORMATION, COVENANT NOT TO COMPETE.
Employee acknowledges that certain information whether written or oral,
concerning the Company, including but not limited to general business
operations, or any other ideas and similar items relating to the business of the
Company (referred to herein as "Confidential Information") whether prepared or
generated by Employee or the Company pursuant to this Agreement or otherwise
coming into the possession or knowledge of Employee shall remain the exclusive,
confidential property of the Company except to the extent expressly authorized
in writing by the Company for dissemination. Employee further
2
<PAGE>
acknowledges and agrees that all such Confidential Information constitutes trade
secrets of the Company.
During the term of this Agreement and the Restricted Period (hereinafter
defined), Employee shall not disclose any of such Confidential Information to
any third party without the prior written consent of the Company and shall take
all reasonable steps and actions necessary to maintain the confidentiality of
such Confidential Information. Employee shall not use any of such Confidential
Information in any manner whatsoever during the Restricted Period, without the
Company's express prior written consent. In consideration of the obligations
undertaken by the Company herein, Employee will not, at any time, during or
after his employment hereunder, reveal, divulge or make known to any person, any
Confidential Information acquired by Employee during the course of his
employment.
During the term of this Agreement and the Restricted Period, Employee
shall not within 500 miles of any ice manufacturing facility owned or operated
by the Company or any of its subsidiaries be employed by (as an officer,
director, employee, consultant or independent contractor) engage in, or have any
interest in any person, firm, corporation or business (whether as a shareholder,
creditor, partner, consultant, holder of any beneficial interest or otherwise
other than as a beneficial holder of not more than 5 percent of the outstanding
voting stock of a company having at least 500 holders of voting stock) that
engages in the business of manufacturing, producing, storing, selling or
distributing ice.
The provisions of this SECTION 5 shall survive the expiration or
termination of Employee's employment hereunder and until the end of the
Restricted Period. The term "Restricted Period," as used in this Section shall
mean the period commencing on the date hereof and ending two years after the
date Employee's employment is terminated. The provisions of this Section shall
survive the expiration or termination of Employee's employment hereunder and
until the end of the Restricted Period as provided herein. The Employee
acknowledges and agrees that the restrictions imposed herein are reasonable as
to scope, duration and area, are necessary for the protection of the Company's
and its affiliates' business, and that but for the Employee's agreement to the
restrictions herein imposed the Company would not have entered into this
Agreement.
6. MISCELLANEOUS.
6.1. ASSIGNMENT. Neither Employee nor the Company may assign or
delegate any of their rights or duties under this Agreement without the express
written consent of the other except that in the event that the Company elects to
sell all or substantially all of its ice manufacturing assets that it acquired,
in part, from Employee to any third party, then the Company shall have the right
to terminate this Agreement with no further obligation being owed hereunder by
either party to the other.
6.2 INJUNCTIVE RELIEF. Employee acknowledges that the services to be
rendered under the provisions of this Agreement are of a special, unique and
3
<PAGE>
extraordinary character and that it would be difficult or impossible to replace
such services. Accordingly, Employee agrees that any breach or threatened breach
by him/her of SECTIONS 5 of this Agreement may cause irreparable harm to the
Company for which monetary damages may not be adequate and accordingly, any such
breach or threatened breach of SECTIONS 5 of this Agreement shall entitle
Company, in addition to all other legal remedies available to it at law or in
equity, to seek a temporary or permanent injunction to enjoin such breach or
threatened breach. Such injunction shall be available without the posting of any
bond or other security, and the Employee hereby consents to the issuance of such
injunction.
6.3 BINDING EFFECT. This Agreement shall inure to the benefit of, be
binding upon and enforceable against, the parties hereto and their permitted,
respective successor, heirs, beneficiaries and permitted assigns.
6.4 HEADINGS. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
6.5 NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given when personally delivered, sent by registered or
certified mail, return receipt requested, postage prepaid, by facsimile with
facsimile generated confirmation of receipt, or by private overnight mail
service (e.g. Federal Express) to the party at the address set forth as follows:
If to the Company, to: Packaged Ice, Inc.
8572 Katy Freeway, Suite 101
Houston, Texas 77024
Attn: James F. Stuart, Chief Executive Officer
With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Attention: Alan Schoenbaum, P.C.
If to Employee, to: James Hazlewood
7623 Olympia
Houston, Texas 770631
or to such other address as either party or the Company may hereafter give
notice of in accordance with the provisions hereof. Notices shall be deemed
given on the sooner of the date actually received or the third business day
after sending.
4
<PAGE>
6.6 WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate or be construed as a continuing waiver of
any subsequent breach by either party. No waiver by either party of any
provision or condition to be performed shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time. No waiver by either party of any provisions or condition to be performed
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same time or any prior or subsequent time.
6.7 GOVERNING LAW. Regardless of the place of execution or
performance, this Agreement shall be governed by and construed in accordance
with the laws of the State of Texas without giving effect to such State's
conflicts of laws provisions.
6.8 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Rules of the American Arbitration
Association by a single arbitrator to be located in San Antonio, Bexar County,
Texas, and judgment upon the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof, and shall not be appealable.
6.9 SEVERABILITY. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the rest of such provision not held so invalid, and the rest of
such provision, together with all other provisions of this Agreement, shall to
the full extent consistent with law continue in full force and effect.
6.10 COUNTERPARTS. This Agreement may be executed simultaneously in
one or more original or facsimile counterparts, each of which shall be deemed an
original, but all of which together shall constitute one of the same instrument.
[HAZLEWOOD EMPLOYMENT AGREEMENT
SIGNATURE PAGE FOLLOWS]
5
<PAGE>
[HAZLEWOOD EMPLOYMENT AGREEMENT SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
EMPLOYEE:
_____________________________________
James Hazlewood
PACKAGED ICE, INC.
By:__________________________________
A.J. Lewis III, President
EXHIBIT 10.33
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made and entered into
effective May 1, 1998, by and among Packaged Ice, Inc., a Texas corporation (the
"Company"), and Graham D. Davis (the "Employee").
PRELIMINARY STATEMENTS
The Company desires to employ Employee as Senior Vice President--Western
Operations; and
The Employee desires to be so employed by the Company upon the terms and
conditions herein below set forth.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual premises herein set forth,
and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto mutually agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and Employee hereby
agrees to such employment on the terms and conditions hereinafter set forth.
2. DUTIES AND RESPONSIBILITIES OF EMPLOYEE. Employee shall serve as Senior
Vice President--Western Operations and shall properly perform such duties as may
be assigned to him from time to time by the Chief Executive Officer or President
of the Company. Employee shall devote all of his business time to the
performance of his duties hereunder unless otherwise authorized by the Chief
Executive Officer, the President or either of their respective representatives.
Notwithstanding the foregoing, Employee may also be assigned such other duties
as may be reasonably assigned from time to time by the Board of Directors.
3. TERM. The initial term of this Agreement commenced effective May 1,
1998 and shall continue until April 30, 2000. At the Company's option, this
Agreement may be renewed for a third year. In the event that the Company desires
to renew this Agreement, it shall so advise Employee at least sixty (60) days
prior to the expiration of the initial term.
4. COMPENSATION OF EMPLOYEE.
4.1 BASE SALARY. Commencing upon the date hereof, the Company shall
pay to Employee a base salary at the rate of $156,000 per annum. Such
compensation shall be paid to Employee in bi-weekly installments.
4.2 EXPENSES. In addition to those expenses that may be expressly
set forth herein, the Company shall, in accordance with the established policies
1
<PAGE>
and procedures of the Company, pay or reimburse Employee for all ordinary and
necessary out-of-pocket expenses which are documented and are reasonably
incurred by Employee in connection with performing his duties hereunder.
4.3 BENEFITS. Employee shall be entitled to the same benefits that
other similarly situated employees of the Company are entitled to receive to the
extent such plans are established by the Company and to the extent that Employee
is eligible to participate in such plans.
4.4 STOCK OPTIONS. The Company shall grant to Employee stock options
for 20,000 shares of common stock under the Company's 1994 Stock Option Plan at
an exercise price of $14.00 per share, in accordance with a stock option
agreement dated as of the date hereof.
4.5 AUTOMOBILE ALLOWANCE. Employee shall receive an automobile
allowance of $1,000.00 per month.
5. TERMINATION.
5.1 TERMINATION. Either party shall have the right to terminate this
Employment Agreement with no less than fifteen days written notice to the other
party.
5.2 SEVERANCE PAY. Except for the termination of Employee "For
Cause," in the event that the Company elects to terminate Employee during the
term hereof, Employee's exclusive termination renumeration shall be continuation
of Employee's base salary and health and welfare benefits through the end of the
initial term of this Agreement or if this Agreement has been renewed, through
the end of the renewal term but in no event shall such continuation period be
less than six (6) months. If the Company does not renew this Agreement at the
end of the initial term or any renewal term, Employee will be entitled to
receive base salary and health and welfare benefits for a period of six (6)
months following the termination of this Agreement as severance.
5.3 "FOR CAUSE" TERMINATION; DEATH AND DISABILITY. As used herein,
the term "For Cause" shall mean (i) Employee's theft, fraud or other
defalcation, (ii) Employee's conviction of a felony, or any crime of moral
turpitude, (iii) Employee's violation of any covenant herein contained after ten
(10) days notice and opportunity to cure, (iv) Employee's failure to comply with
all reasonable policies, standards and regulations of the Company, as determined
by the officers of the Company after ten (10) days notice and opportunity to
cure, or (v) Employee's willful or grossly negligent misconduct which is
injurious to the Company, its business and affairs. If the Company elects to
terminate Employee "For Cause," or upon Employee's death or disability, then
this Agreement shall terminate and there shall be no severance pay owed by the
Company to Employee.
6. DISCLOSURE OF CONFIDENTIAL INFORMATION, COVENANT NOT TO COMPETE.
Employee acknowledges that certain information whether written or oral,
concerning the Company, including but not limited to general business
operations, or any other ideas and
2
<PAGE>
similar items relating to the business of the Company (referred to herein as
"Confidential Information") whether prepared or generated by Employee or the
Company pursuant to this Agreement or otherwise coming into the possession or
knowledge of Employee shall remain the exclusive, confidential property of the
Company except to the extent expressly authorized in writing by the Company for
dissemination. Employee further acknowledges and agrees that all such
Confidential Information constitutes trade secrets of the Company.
During the term of this Agreement and the Restricted Period (hereinafter
defined), Employee shall not disclose any of such Confidential Information to
any third party without the prior written consent of the Company and shall take
all reasonable steps and actions necessary to maintain the confidentiality of
such Confidential Information. Employee shall not use any of such Confidential
Information in any manner whatsoever during the Restricted Period, without the
Company's express prior written consent. In consideration of the obligations
undertaken by the Company herein, Employee will not, at any time, during or
after his employment hereunder, reveal, divulge or make known to any person, any
Confidential Information acquired by Employee during the course of his
employment.
During the term of this Agreement and the Restricted Period, Employee
shall not within 200 miles of any ice manufacturing facility owned or operated
by the Company or any of its subsidiaries be employed by (as an officer,
director, employee, consultant or independent contractor) engage in, or have any
interest in any person, firm, corporation or business (whether as a shareholder,
creditor, partner, consultant, holder of any beneficial interest or otherwise
other than as a beneficial holder of not more than 1% percent of the outstanding
voting stock of a company having at least 500 holders of voting stock) that
engages in the business of manufacturing, producing, storing, selling or
distributing ice.
During the Restricted Period, Employee shall not solicit or attempt to
solicit any employee of the Company in attempt to encourage the employee to
leave the employ of the Company.
The provisions of this SECTION 6 shall survive the expiration or
termination of Employee's employment hereunder and until the end of the
Restricted Period. The term "Restricted Period," as used in this Section shall
mean the period commencing on the date hereof and ending two years after the
date Employee's employment is terminated for any reason. The provisions of this
Section shall survive the expiration or termination of Employee's employment
hereunder and until the end of the Restricted Period as provided herein. The
Employee acknowledges and agrees that the restrictions imposed herein are
reasonable as to scope, duration and area, are necessary for the protection of
the Company's and its affiliates' business, and that but for the Employee's
agreement to the restrictions herein imposed the Company would not have entered
into this Agreement.
3
<PAGE>
7. MISCELLANEOUS.
7.1. ASSIGNMENT. Neither Employee nor the Company may assign or
delegate any of their rights or duties under this Agreement without the express
written consent of the other except that in the event that the Company elects to
sell all or substantially all of its ice manufacturing assets that it acquired,
in part, from Employee to any third party, then the Company shall have the right
to terminate this Agreement with no further obligation being owed hereunder by
either party to the other.
7.2 INJUNCTIVE RELIEF. Employee acknowledges that the services to be
rendered under the provisions of this Agreement are of a special, unique and
extraordinary character and that it would be difficult or impossible to replace
such services. Accordingly, Employee agrees that any breach or threatened breach
by him/her of SECTION 6 of this Agreement may cause irreparable harm to the
Company for which monetary damages may not be adequate and accordingly, any such
breach or threatened breach of SECTION 6 of this Agreement shall entitle
Company, in addition to all other legal remedies available to it at law or in
equity, to seek a temporary or permanent injunction to enjoin such breach or
threatened breach. Such injunction shall be available without the posting of any
bond or other security, and the Employee hereby consents to the issuance of such
injunction.
7.3 BINDING EFFECT. This Agreement shall inure to the benefit of, be
binding upon and enforceable against, the parties hereto and their permitted,
respective successor, heirs, beneficiaries and permitted assigns.
7.4 HEADINGS. The headings contained in this Agreement are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
7.5 NOTICES. All notices, requests, demands and other communications
required or permitted to be given hereunder shall be in writing and shall be
deemed to have been duly given when personally delivered, sent by registered or
certified mail, return receipt requested, postage prepaid, by facsimile with
facsimile generated confirmation of receipt, or by private overnight mail
service (e.g. Federal Express) to the party at the address set forth as follows:
If to the Company, to: Packaged Ice, Inc.
8572 Katy Freeway, Suite 101
Houston, Texas 77024
Attn: James F. Stuart, Chief Executive Officer
With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1500 NationsBank Plaza
300 Convent Street
San Antonio, Texas 78205
Attention: Alan Schoenbaum
4
<PAGE>
If to Employee, to: Graham D. Davis
[address]
or to such other address as either party or the Company may hereafter give
notice of in accordance with the provisions hereof. Notices shall be deemed
given on the sooner of the date actually received or the third business day
after sending.
7.6 WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate or be construed as a continuing waiver of
any subsequent breach by either party. No waiver by either party of any
provision or condition to be performed shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same time or any prior or subsequent
time. No waiver by either party of any provisions or condition to be performed
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same time or any prior or subsequent time.
7.7 GOVERNING LAW. Regardless of the place of execution or
performance, this Agreement shall be governed by and construed in accordance
with the laws of the State of Texas without giving effect to such State's
conflicts of laws provisions.
7.8 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Rules of the American Arbitration
Association by a single arbitrator to be located in Dallas County, Texas, and
judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof, and shall not be appealable.
7.9 SEVERABILITY. If, for any reason, any provision of this
Agreement is held invalid, such invalidity shall not affect any other provision
of this Agreement not held so invalid, and each such other provision shall to
the full extent consistent with law continue in full force and effect. If any
provision of this Agreement shall be held invalid in part, such invalidity shall
in no way affect the rest of such provision not held so invalid, and the rest of
such provision, together with all other provisions of this Agreement, shall to
the full extent consistent with law continue in full force and effect.
7.10 COUNTERPARTS. This Agreement may be executed simultaneously in
one or more original or facsimile counterparts, each of which shall be deemed an
original, but all of which together shall constitute one of the same instrument.
[DAVIS EMPLOYMENT AGREEMENT
SIGNATURE PAGE FOLLOWS]
5
<PAGE>
[DAVIS EMPLOYMENT AGREEMENT SIGNATURE PAGE]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
EMPLOYEE:
__________________________________________
Graham D. Davis
PACKAGED ICE, INC.
By:_______________________________________
James F. Stuart, Chief Executive Officer
6
EXHIBIT 11.1
PACKAGED ICE, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------
1998 1997 1997 1996 1995
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Weighted Average Common Shares
Outstanding........................ 4,721,536 3,231,509 3,600,109 2,826,371 2,682,281
------------- ------------ ------------ ----------- -----------
Net Loss before extraordinary
item available to common
shareholders................... $ (1.11) $ (0.53) $ (2.40) $ (0.35) $ (0.26)
============= ============ ============ =========== ===========
Net Loss to common
shareholders................... $ (4.79) $ (0.53) $ (2.40) $ (0.35) $ (0.26)
============= ============ ============ =========== ===========
DILUTED EARNINGS PER SHARE:
Weighted Average Common Shares
Outstanding........................ 4,721,536 3,231,509 3,600,109 2,826,371 2,682,261
Shares Issuable from Assumed
Conversion of Common Share Options
and Warrants....................... 1,621,995 609,208 774,787 272,822 174,293
Convertible Demand Notes............. -- 5,814 5,814 8,550 --
------------- ------------ ------------ ----------- -----------
Weighted Average Common Shares
Outstanding, as Adjusted........... 6,343,531 3,846,531 4,380,710 3,107,743 2,856,554
============= ============ ============ =========== ===========
Net Loss before extraordinary
item available to common
shareholders................... $ (0.83) $ (0.44) $ (1.93) $ (0.32) $ (0.24)
============= ============ ============ =========== ===========
Net Loss to common
shareholders................... $ (3.57) $ (0.44) $ (1.93) $ (0.32) $ (0.24)
============= ============ ============ =========== ===========
EARNINGS FOR BASIC AND DILUTED
COMPUTATION:
Net Loss before extraordinary item
and preferred dividends............ $ (3,224,484) $ (1,698,206) $ (8,438,636) $ (990,432) $ (688,482)
Extraordinary item................... (17,386,893) -- -- -- --
Preferred Shares Dividend............ (2,008,493) -- (198,630)
------------- ------------ ------------ ----------- -----------
Net Loss to Common Shareholders
(Basic Earnings Per Share
Computation)................... (22,619,870) (1,698,206) (8,637,266) (990,432) (688,482)
Interest Expense of Convertible
Demand Notes....................... -- 505 505 6,236 --
------------- ------------ ------------ ----------- -----------
Net Loss to Common Shareholders, as
adjusted (Diluted Earnings Per
Share Computation)................. $ (22,619,870) $ (1,697,701) $ (8,438,131) $ (984,196) $ (688,482)
============= ============ ============ =========== ===========
</TABLE>
This calculation is submitted in accordance with Regulation 8-K; although
it is contrary to paragraphs 13 and 27 of the Financial Accounting Standards
Board's Statement of Financial Standard No. 128, because it produces an
antidilutive result.
EXHIBIT 12.1
PACKAGED ICE, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
HISTORICAL YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1998 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES AS DEFINED:
(1)Interest on long-term debt... $ 11 $ 25 $ 76 $ 130 $ 6,585 $ 8,727 $ 1,519
(2)Total Fixed Charges.......... $ 11 $ 25 $ 76 $ 130 $ 6,585 $ 8,727 $ 1,519
EARNINGS AS DEFINED:
(3)Loss from continuing $ (3,224)
operations.................... $ (391) $ (722) $ (688) $ (990) $ (8,439) 98)
(4) Income taxes for continuing
operations..................
(5)Total Fixed Charges.......... 11 25 76 130 6,585 8,727 1,519
--------- --------- --------- --------- --------- --------- ---------
(6) Income (Loss) From
Continuing Operations Before
Income Taxes and Fixed
Charges..................... $ (380) $ (697) $ (612) $ (860) $ (1,854) $ 5,503 $ (179)
========= ========= ========= ========= ========= ========= =========
RATIO OF EARNINGS TO FIXED CHARGES
(line 6 divided by line 2)......... N/A N/A N/A N/A N/A N/A N/A
COVERAGE DEFICIENCY(a):.............. $ (391) $ (722) $ (688) $ (990) $ (8,439) $ (3,224) $ (1,698)
========= ========= ========= ========= ========= ========= =========
</TABLE>
- ------------
(a) Earnings are adequate to cover fixed charges.
EXHIBIT 12.2
PACKAGED ICE, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
UNAUDITED PROFORMA COMBINED
-------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ----------------
FIXED CHARGES AS DEFINED:
(1)Interest on long-term debt...... $ 29,678 $ 14,165
----------------- ----------------
(2)Total Fixed Charges............. $ 29,678 $ 14,165
================= ================
EARNINGS AS DEFINED:
(3)Loss from continuing
operations....................... $ (10,216) $ 12,166)
(4)Income taxes for continuing
operations.......................
(5)Total Fixed Charges............. 29,678 14,165
----------------- ----------------
(6) Income From Continuing
Operations Before Income Taxes
and Fixed Charges.............. $ 19,462 $ 1,999
================= ================
RATIO OF EARNINGS TO FIXED CHARGES
(line 6 divided by line 2)............ N/A N/A
COVERAGE DEFICIENCY(a):................. $ (10,216 $(12,166)
================= ================
- ------------
(a) Earnings are inadequate to cover fixed charges.
EXHIBT 21.1
PACKAGED ICE, INC. SUBSIDIARIES
Packaged Ice, Inc., a Texas corporation
Packaged Ice Leasing, Inc., a Nevada corporation
Southco Ice, Inc., a Texas corporation
Southwest Texas Packaged Ice, Inc., a Nevada corporation
Reddy Ice Corporation, a Nevada corporation Southern
Bottled Water Company, Inc., a Nevada corporation
Cassco Ice & Cold Storage, Inc., a Virginia corporation
Packaged Ice IP, Inc., a Nevada corporation
