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Filed Pursuant to Rule 424 (b)(3)
Registration No. 333-58111
PROSPECTUS
PACKAGED ICE, INC.
OFFER TO EXCHANGE
9 3/4% SENIOR NOTES DUE 2005, SERIES B
FOR ALL OUTSTANDING 9 3/4% SENIOR NOTES DUE 2005, SERIES A
AND
13% EXCHANGEABLE PREFERRED STOCK, SERIES B
FOR ALL OUTSTANDING 13% EXCHANGEABLE PREFERRED STOCK, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON AUGUST 12, 1998, UNLESS EXTENDED
THE 9 3/4% SERIES B SENIOR NOTES DUE 2005 WILL BE FULLY
AND UNCONDITIONALLY ON A JOINT AND SEVERAL BASIS
GUARANTEED BY THE SUBSIDIARIES OF PACKAGED ICE, INC.
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Packaged Ice, Inc., a Texas corporation (the "Company"), hereby offers,
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying letter of transmittal (the "Letter of Transmittal," and
together with this Prospectus, the "Exchange Offer"), to exchange (i) its 9 3/4%
Senior Notes due 2005, Series B (the "Series B Notes") for an equal principal
amount of its outstanding 9 3/4% Senior Notes due 2005, Series A (the "Series A
Notes"), of which an aggregate of $270,000,000 in principal is outstanding as of
the date hereof, and (ii) one new share of its 13% Exchangeable Preferred Stock,
Series B (the "Series B Preferred Stock") for each outstanding share of its 13%
Exchangeable Preferred Stock, Series A (the "Series A Preferred Stock"), of
which 400,000 shares are outstanding. The form and the terms of each of the
Series B Notes and the Series B Preferred Stock will be the same as the form and
terms of each of the Series A Notes and the Series A Preferred Stock,
respectively, except that (i) each of the Series B Notes and the Series B
Preferred Stock will be registered under the Securities Act of 1933, as amended
(the "Securities Act") and hence will not bear legends restricting the transfer
thereof and (ii) holders of each of the Series B Notes and the Series B
Preferred Stock will not be entitled to certain rights of holders of Series A
Notes and Series A Preferred Stock, respectively, under the Registration Rights
Agreements (as defined herein), which will terminate upon consummation of the
Exchange Offer. See "The Exchange Offer -- Purpose and Effect of the Exchange
Offer."
(Cover continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 21 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is July 13, 1998
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Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
that the Series B Notes and Series B Preferred Stock to be issued pursuant to
the Exchange Offer may be offered for resale, resold and otherwise transferred
by holders thereof (other than (i) a broker-dealer who purchases such Series B
Securities (as defined herein) from the Company to resell pursuant to Rule 144A
or any other available exemption under the Securities Act, or (ii) a person that
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act), without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Series B
Securities are acquired in the ordinary course of such holders' business and
such holders have no arrangement with any person to participate in the
distribution of such Series B Securities. Eligible holders wishing to accept the
Exchange Offer must represent to the Company that such conditions have been met.
Each broker-dealer that receives Series B Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Securities. The
Letters of Transmittal state that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Series B Securities received in exchange for
Series A Securities (as defined herein) where such Series A Securities were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date (as defined herein), it will make this Prospectus available
to any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Series A Notes and Series A Preferred Stock whose Series A
Notes and Series A Preferred Stock are not tendered and accepted in the Exchange
Offer will continue to hold such Series A Notes and Series A Preferred Stock and
will be entitled to all the rights and preferences and will be subject to the
limitations applicable thereto under the indenture governing the Series A Notes
and the Series B Notes and the certificate of designation governing the Series A
Preferred Stock, respectively. Following consummation of the Exchange Offer, the
holders of Series A Notes and Series A Preferred Stock will continue to be
subject to the existing restrictions upon transfer thereof and the Company will
have no further obligation to such holders to provide for the registration under
the Securities Act of the Series A Notes and Series A Preferred Stock held by
them; provided that if any holder of Series A Preferred Stock has notified the
Company that based upon the advice of counsel (i) such holder is prohibited by
applicable law or SEC policy from participating in the Exchange Offer or (ii)
such holder may not resell the Series B Preferred Stock acquired by it in the
Exchange Offer to the public without delivering a prospectus and that the
prospectus contained herein is not appropriate for such resales, the Company
shall be required to prepare and file a registration statement for an offering
(a "Shelf Registration") to be made on a continuous basis pursuant to Rule 415
of the Securities Act covering all such Series A Preferred Stock of such holder.
The Series B Notes will evidence the same debt as the Series A Notes and will be
entitled to the benefits of the indenture dated January 29, 1998, as amended and
restated as of April 30, 1998 (the "Indenture") governing the Series A Notes and
the Series B Notes. The Series A Notes and the Series B Notes are sometimes
referred to herein collectively as the "Notes." The Series A Preferred Stock and
the Series B Preferred Stock are sometimes referred to herein collectively as
the "Preferred Stock". The Series A Notes and the Series A Preferred Stock are
sometimes referred to herein collectively as the "Series A Securities." The
Series B Notes and the Series B Preferred Stock are sometimes referred to herein
collectively as the "Series B Securities."
The Notes will be senior unsecured obligations of the Company, ranking
pari passu in right of payment with all senior Indebtedness (as defined) of the
Company and senior to all future Subordinated Indebtedness (as defined) of the
Company. The Notes will be unconditionally and fully guaranteed (the "Subsidiary
Guarantees") on a senior unsecured basis by the Company's principal operating
subsidiaries, which comprise all of the Company's direct and indirect
subsidiaries (the "Subsidiary Guarantors"), and the Subsidiary Guarantees will
rank pari passu in right of payment with all senior Indebtedness of the
Subsidiary Guarantors and senior to all future Subordinated Indebtedness of the
Subsidiary Guarantors. The Subsidiary Guarantees may be released only in the
event of (i) a sale or disposition (whether by merger, stock purchase, asset
sale or otherwise) of a particular Subsidiary Guarantor to an entity which is
not a subsidiary of the Company or (ii) a particular Subsidiary Guarantor
becoming an Unrestricted Subsidiary (as defined herein). The Notes and
Subsidiary Guarantees will be effectively subordinated to secured Indebtedness
of the Company and the Subsidiary Guarantors, respectively, to the extent of any
security interest in assets of the Company and Subsidiary Guarantors, including
any Indebtedness under the New Credit Facility (as defined), which is secured by
liens on substantially all of the assets of the Company and the Subsidiary
Guarantors. The Indenture will permit the Company and its Subsidiaries to incur
additional Indebtedness in the future, subject to certain limitations. In the
event of a Change of Control (as defined
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herein), the Company will be required, subject to certain conditions, to make an
offer to purchase all of the Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest thereon to the date of purchase; however, there can
be no assurance that in the event of a Change of Control the Company will have
or will have access to sufficient funds to repurchase the Notes. See
"Description of Notes - Ranking and Guarantees", "--Change of Control" and
"--Certain Definitions".
The Notes will bear interest at the rate of 9 3/4% per annum, payable
in cash semi-annually on each February 1 and August 1, commencing August 1,
1998. The Notes will be redeemable at the option of the Company, in whole or in
part, on or after February 1, 2002 at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption. In addition, the
Company may redeem in the aggregate up to 35% of the original principal amount
of Notes at any time prior to February 1, 2001, at a redemption price equal to
109.75% of the principal amount thereof plus accrued and unpaid interest thereon
to the redemption date with the Net Proceeds (as defined herein) of one or more
Public Equity Offerings (as defined herein); provided that at least 65% of the
aggregate principal amount of Notes originally issued would remain outstanding
after giving effect to any such redemption and, provided further, that such
redemption occurs within 90 days of the date of the closing of such Public
Equity Offering(s). As of March 31, 1998, after giving pro forma effect to the
Transactions (as defined herein), the Company and the Subsidiary Guarantors
would have had $285.0 million of senior Indebtedness outstanding (including the
Notes).
Dividends on the Preferred Stock will be payable quarterly in arrears
on each February 1, May 1, August 1 and November 1, commencing August 1, 1998,
at a rate per annum of 13% of the liquidation preference per share; provided,
however, from April 30, 1998 until April 30, 1999, dividends on each share of
Preferred Stock will be payable at a rate per annum of 11.5% of the liquidation
preference per share, and from April 30, 1999 until April 30, 2000, dividends on
each share of Preferred Stock will be payable at a rate per annum of 12.25% of
the liquidation preference per share. Dividends may be paid, at the Company's
option, on any dividend payment date occurring on or prior to May 1, 2003 either
in cash or by the issuance of additional shares of Preferred Stock having an
aggregate liquidation preference equal to the amount of such dividends. The
liquidation preference of the Preferred Stock will be $100 per share. The
Preferred Stock is redeemable, at the option of the Company, in whole or in
part, at any time after April 30, 2002 and prior to April 30, 2003 at a
redemption price equal to 106.5% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of redemption. On or after April
30, 2003, the Preferred Stock is redeemable, at the option of the Company, in
whole or in part, at the redemption price equal to 100% of the liquidation
preference thereof, plus accumulated and unpaid dividends to the date of
redemption. The Preferred Stock is also redeemable, subject to certain
limitations, at the option of the Company, in whole or in part, at any time
prior to April 30, 2001 using the proceeds of an initial Public Equity Offering
at a redemption price equal to $113 per share, subject to certain adjustments.
The Company is required, subject to certain limitations, to redeem all of the
Preferred Stock outstanding on May 1, 2005 at a redemption price equal to 100%
of the liquidation preference thereof plus accumulated and unpaid dividends to
the date of redemption. Upon the occurrence of a Change of Control, the Company
will, subject to certain conditions, offer to purchase all of the outstanding
shares of Preferred Stock at a price equal to 101% of the liquidation preference
thereof, plus accumulated and unpaid dividends to the date of purchase.
Subject to certain conditions, the Preferred Stock is exchangeable in
whole, but not in part, at the option of the Company, for the Company's 13%
Subordinated Exchange Notes due 2005 (including any such securities paid in lieu
of cash dividends, as described herein, the "Exchange Debentures"). The Exchange
Debentures will bear interest at a rate of 13% per annum; provided, however,
from May 1, 1998 until April 30, 1999, the per annum interest rate will be
11.5%, and from May 1, 1999 and until April 30, 2000, the per annum interest
rate will be 12.25%. Interest will accrue from the most recent interest payment
date to which interest has been paid or provided for or, if no interest has been
paid or provided for, from the Exchange Date. Interest will be payable quarterly
in cash or in kind by issuing additional Exchange Debentures. The Exchange
Debentures mature on May 1, 2005. The Exchange Debentures will be redeemable, at
the option of the company, in whole or in part, at any time on and after April
30, 2002 and prior to May 1, 2003, at a redemption price equal to 106.5% of the
principal amount thereof, plus accumulated and unpaid interests to the date of
redemption. On or after May 1, 2003, the Exchange Debentures will be redeemable,
at the option of the Company, in whole or in part, at the redemption price equal
to 100% of the principal amount thereof, plus accumulated and unpaid interest to
the date of redemption.
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The Exchange Debentures will be subordinated to all existing and future
senior Indebtedness of the Company that expressly provides that it ranks senior
to the Exchange Debentures and will rank pari passu with or senior to all future
Indebtedness of the Company that expressly provides that it ranks pari passu
with or junior to the Exchange Debentures, as the case may be. The Exchange
Debentures will be unconditionally guaranteed, joint and severally, on a senior
subordinated basis, by each of the Subsidiary Guarantors.
The Exchange Offer is not conditioned on any minimum aggregate
principal amount of Series A Notes or any minimum number of shares of Series A
Preferred Stock being tendered for exchange. The Company will accept for
exchange any and all validly tendered Series A Securities not withdrawn prior to
5:00 p.m., New York City time, on August 12, 1998 unless extended by the
Company, in its sole discretion (the "Expiration Date"). Tenders of Series A
Securities may be withdrawn at any time prior to the Expiration Date. The
Exchange Offer is subject to certain customary conditions. See "The Exchange
Offer --Conditions." The Company has agreed to pay all expenses incident to the
Exchange Offer. The Company will not receive any proceeds from the Exchange
Offer.
Any Series A Securities not tendered and accepted in the Exchange Offer
will remain outstanding. The Company does not currently intend to list the
Series B Securities on any securities exchange. The Series A Preferred Stock
constitute securities for which there is no established trading market. The
Series A Notes have been designated for trading in the Private Offerings,
Resales and Trading through Automated Linkage ("PORTAL") market system of the
National Association of Securities Dealers, Inc. and the Company has arranged
for the Series B Notes to be designated for trading in the PORTAL market system.
To the extent that any Series A Securities are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Series A Securities could
be adversely affected unless such untendered Series A Securities were offered
pursuant to a Shelf Registration. No assurances can be given as to the liquidity
of the trading market for either the Series A Securities or the Series B
Securities.
Jefferies & Company, Inc. (the "Initial Purchaser" or "Jefferies") has
informed the Company that it currently intends to make a market for the Series A
Notes and that, following the Exchange Offer, it intends to make a market for
the Series B Notes; however, the Initial Purchaser is not so obligated, and any
such market making activities with respect to the Series B Notes may be
discontinued at any time without notice. Accordingly, no assurance can be given
that an active public or other market will develop for the Series B Notes or as
to the liquidity of or the trading market for the Series B Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF SERIES A NOTES OR SERIES A PREFERRED
STOCK IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF
WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH
JURISDICTION.
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on
Form S-4 under the Securities Act with respect to the Series B Securities
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus omits certain information, exhibits and undertakings contained
in the Registration Statement. For further information with respect to the
Company and the Series B Securities offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. The Registration
Statement (and the exhibits and schedules thereto), as well as the periodic
reports and other information filed by the Company with the Commission, may be
inspected and copied at the public reference section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Such information can also be reviewed through the
Commission's Electronic Data Gathering, Analysis and Retrieval System which is
publicly available through the Commission's Web Site (http://www.sec.gov).
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified by such reference.
Pursuant to the Indenture relating to the Series B Notes and the
Certificate of Designation (as defined herein) relating to the Series B
Preferred Stock, the Company has agreed to furnish to U.S. Trust Company of
Texas, N.A., as trustee (the "Trustee"), and to registered holders of the Notes
and the Preferred Stock, without cost to the Trustee or such registered holders,
copies of all reports and other information that would be required to be filed
by the Company with the Commission under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not the Company is then required to
file reports with the Commission. The Company has agreed that, whether or not
the Company is subject to filing requirements under Section 13 or 15(d) of the
Exchange Act, and so long as any Notes or Preferred Stock remain outstanding, it
will file such other reports as it may determine or as may be required by law.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference herein all documents and
reports filed with the Commission pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act") after the date of this Prospectus. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus. The Company will provide without charge to
each person to whom the Prospectus is delivered, upon the written or oral
request of such person, a copy of any or all of the documents incorporated by
reference herein (not including the exhibits to such documents, unless such
exhibits are specifically incorporated by reference in such documents). Requests
for such copies should be directed to the Company at 8572 Katy Freeway, Suite
101, Houston, Texas 77024, attention: Corporate Secretary.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF THIS
PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH
TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements of the Company, including the notes thereto, appearing elsewhere in
this Prospectus. For purposes of this Prospectus, references to a fiscal year
shall mean the fiscal year ending December 31 of such year. As used herein,
unless the context otherwise requires, (i) "Packaged Ice" refers to Packaged
Ice, Inc. and its consolidated subsidiaries prior to giving effect to the
acquisition of Reddy Ice Corporation, (the "Reddy Acquisition), (ii) "Reddy Ice"
refers to Reddy Ice Corporation prior to giving effect to the Reddy Acquisition
and (iii) the "Company" refers to the post-closing combined operations of
Packaged Ice and Reddy Ice. For a discussion of certain matters that should be
considered by prospective purchasers of the Series B Securities offered hereby,
see "Risk Factors" beginning on page 12.
THE COMPANY
The Company is the largest manufacturer and distributor of packaged ice in
the United States and is pursuing a consolidation strategy within the highly
fragmented packaged ice industry. The Company currently serves over 45,000
customer locations in 17 states and has grown significantly through strategic
acquisitions of ice manufacturing and distribution companies, and through
placements of proprietary ice machines which produce, package and store ice
through an automated, self-contained process (the "Packaged Ice System").
Through these strategic acquisitions, the Company enters new markets, gains
additional production capacity and leverages the relationships of acquired
companies with grocery and convenience store customers. The Company's presence
throughout key markets in the southern half of the United States has been
expanded through a consolidation strategy. In addition, Packaged Ice increased
its installed base of Packaged Ice Systems from 658 machines to 1,031 machines
during fiscal 1997. As a result, the Company's revenues have increased from $4.4
million during fiscal 1996 to $174.5 million, on a pro forma basis, during
fiscal 1997.
THE REDDY ACQUISITION
On April 30, 1998, Packaged Ice acquired all of the outstanding capital
stock of Reddy Ice, a subsidiary of Suiza Foods Corporation ("Suiza"), for
$180.8 million in cash plus net working capital. The stock purchase agreement
for the Reddy Acquisition contains customary representations, warranties,
covenants and indemnification provisions.
Prior to its acquisition by Packaged Ice, Reddy Ice was a leading
manufacturer and distributor of packaged ice with 38 manufacturing facilities
and 13 distribution centers in 13 states. Reddy Ice has historically been the
principal competitor to Packaged Ice in many of its primary markets and has,
like Packaged Ice, aggressively pursued a consolidation strategy in recent
years. During fiscal 1997, Reddy Ice generated pro forma revenues and Adjusted
EBITDA of $88.0 million and $20.6 million, respectively.
The Reddy Acquisition was funded through (i) an issuance of $125 million of
Series A Notes (the "Note Offering"), (ii) a sale of $40.0 million Series A
Preferred Stock and warrants (the "Equity Investment") primarily to Ares
Leveraged Investment Fund, L.P. ("Ares"), (iii) $15 million in borrowings under
a new $80.0 million senior credit facility (the "New Credit Facility") and (iv)
existing cash. The Reddy Acquisition, the Note Offering, the Equity Investment
and the initial borrowings under the New Credit Facility will collectively be
referred to herein as the "Transactions."
The following table sets forth a summary of the sources and uses of funds
related to the Transactions (amounts are shown in millions):
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<TABLE>
<S> <C>
SOURCES OF FUNDS
New Credit Facility(1) ........ $ 15.0
Note Offering(2) .............. 125.6
Equity Investment(3) .......... 40.0
Existing cash ................. 10.6
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Total Sources ....... $191.2
======
USES OF FUNDS
Reddy Acquisition ............. $180.8
Estimated fees and expenses ... 10.4
------
Total Uses .......... $191.2
======
</TABLE>
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(1) The Company has entered into a New Credit Facility with Antares Leveraged
Capital Corp.("Antares"), which consists of a $65.0 million revolving
acquisition facility and a $15.0 million revolving working capital
facility. The maximum amount available under the New Credit Facility,
however, is subject to further borrowing base limitations based on various
criteria. Borrowings under the New Credit Facility will initially bear
interest at the Company's option at a fluctuating rate equal to (i) LIBOR
plus 2.75% per annum, or (ii) the prime rate plus 1.00% per annum, with
interest rates subject to a pricing grid.
(2) Includes $625,000 issue premium.
(3) The Equity Investment was made by Ares and SV Capital Partners, L.P.
("SV"), an existing shareholder of the Company.
(4) The Company will not receive any cash proceeds from the issuance of the
Series B Securities offered hereby. In consideration for issuing the Series
B Securities as contemplated in this Prospectus, the Company will receive
in exchange a like principal amount of Series A Notes and a like number of
shares of Series A Preferred Stock, the respective terms of which are
identical in all material respects to the applicable Series B Securities.
THE INDUSTRY
The packaged ice industry is highly fragmented with over 3,000 companies,
consisting primarily of smaller packaged ice companies, many of which lack
significant capital resources. Having consummated the Reddy Acquisition,
management believes that the Company accounts for less than 10% of the U.S.
packaged ice market and that its largest competitor accounts for less than 2% of
the U.S. market. Traditional ice manufacturers produce and package ice at
centrally-located facilities and distribute to a limited market radius of
approximately 100 miles, mainly due to high shipping and product distribution
costs. Efficient distribution and customer concentration are important, as
transportation is a high cost component in the price of manufactured ice within
a traditional ice delivery system. It is difficult to ensure prompt and reliable
delivery during peak seasonal months in large markets with traditional ice
delivery systems. As a result, the ice business has historically been a regional
service business. The industry is seasonal, but on a year-to-year basis remains
stable, generally only affected by abnormally cold or rainy weather within a
region.
BUSINESS STRATEGY
The Company intends to continue to acquire traditional ice companies in
strategic markets. Acquisitions of existing manufacturers and distributors of
packaged ice have provided the Company with (i) access to key markets,
accelerating the roll out of Packaged Ice Systems, (ii) a source of stable cash
flow, (iii) the national scope to better service large supermarket and
convenience store chains and (iv) economies of scale and cost savings through
the consolidation of redundant administrative and selling functions. Management
believes that the Company's proven ability to enter new markets through
traditional acquisitions and the numerous advantages that the Packaged Ice
System provides to retailers will enable the Company to increase the penetration
of Packaged Ice Systems in supermarkets and convenience stores.
Acquire Traditional Ice Manufacturing Companies in Highly Fragmented
Industry. The Company believes that the highly fragmented packaged ice industry
contains numerous acquisition opportunities for service-oriented companies with
superior ice delivery systems and significant capital resources. The Company's
acquisition strategy is to target well-managed, traditional ice producers with
favorable demographics and significant customer bases in both new and existing
market areas. This acquisition strategy allows the Company to broaden geographic
coverage, increase market share, provide for additional distribution channels
through which to place Packaged Ice Systems and achieve greater economies
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of scale. In determining which businesses may be suitable acquisition
candidates, management conducts demographic and competitive analyses and
performs comprehensive due diligence on the target's facilities, management,
existing customer base and growth opportunities.
Upon closing an acquisition, the Company seeks reductions in operating costs
and working capital requirements by (i) closing or combining less efficient or
redundant manufacturing and distribution facilities, (ii) maximizing routing
efficiencies, (iii) managing vendor relationships to ensure a high level of
responsiveness and favorable pricing, (iv) increasing market concentration of
Packaged Ice Systems to improve merchandising and servicing efficiencies and (v)
consolidating certain administrative and selling functions to eliminate
redundancies and excess costs. Since the Company is focusing its acquisition
efforts on related businesses, it anticipates that the customer base of any
acquired business will be similar to its own and therefore administrative areas
such as management information systems, accounting systems and customer support
may be consolidated.
Expand Market Presence Through Packaged Ice System. In 1994, Packaged Ice
completed the development of the Packaged Ice System, a proprietary system that
utilizes state-of-the-art technology to produce, package and store ice directly
at customer locations. The Packaged Ice System is capable of producing up to
40,000 bags of ice per year and is most frequently used in large supermarkets.
The Company retains ownership of the Packaged Ice System, and charges
supermarkets by the bag. Packaged Ice recently began test marketing a smaller
version of the Packaged Ice System which is capable of producing 25,000 bags of
ice per year and has been designed for large or high volume convenience stores
and smaller grocery stores.
Management believes that the Packaged Ice System provides certain advantages
to the retailer including (i) a continuous supply of ice, thus reducing the
frequency of product shortages typical of traditional ice delivery, (ii)
reducing costs associated with delivery and storage at the retail location,
(iii) satisfying consumer demand for a higher quality and more sanitary ice than
typically found with traditional ice delivery, (iv) effectively managing
inventory through computerized production tracking and dedicated technical
support and (v) increasing safety by reducing the potential for "slip and fall"
accidents caused by water spills. These advantages have enabled the Packaged Ice
System to gain market acceptance. At May 31, 1998, the Company had an installed
base of 1,235 Packaged Ice Systems and 342 Ice Factories which were previously
installed by Reddy Ice, and had a backlog of approximately 250 Packaged Ice
Systems.
The Packaged Ice System, when combined with traditional delivery methods,
provides the Company with certain advantages, including (i) a delivery system
designed to supply high volume locations and capable of cost-effectively
servicing a market in excess of 100 miles from its traditional ice manufacturing
facilities, (ii) the ability to redistribute production from its traditional ice
facilities to additional customers as well as satisfy seasonal peak demand at
stores with Packaged Ice Systems, and (iii) higher operating margins, due to
significantly reduced production and distribution costs. Management has
recognized these benefits of combining traditional delivery methods with the
Packaged Ice System. As a result, the Company's strategy has been to enter new
markets through traditional acquisitions and, soon thereafter, to begin placing
Packaged Ice Systems throughout the region.
The Packaged Ice System, when combined with traditional delivery methods,
provides the Company with significant advantages, including (i) superior product
quality, (ii) a delivery system designed to supply high volume locations and
capable of cost-effectively servicing a market in excess of 100 miles from its
traditional ice manufacturing facilities, (iii) the ability to redistribute
production from its traditional ice facilities to additional customers as well
as satisfy seasonal peak demand at stores with Packaged Ice Systems and (iv)
higher operating margins, due to significantly reduced production and
distribution costs. Management has recognized these benefits of combining
traditional delivery methods with the Packaged Ice System. As a result, the
Company's strategy has been to enter new markets through traditional
acquisitions and, soon thereafter, to begin placing Packaged Ice Systems
throughout the region. Management believes that the technology utilized in the
Packaged Ice System is unique with several patents covering the bagging device,
and that there are significant barriers to entry for new and existing
competitors with respect to the development of a competitive and reliable
machine that performs the same functions as the Packaged Ice System.
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 benefits from the local operating knowledge and goodwill developed by
the management of the companies it acquires, having retained a significant
number of the principals of such companies. The
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<PAGE> 11
Company's executive officers are led by James F. Stuart, Chairman and Chief
Executive Officer, who founded Packaged Ice in 1990 and who has more than 12
years of industry experience. Mr. Stuart is chiefly responsible for the
development of the Packaged Ice System. Management holds an 11.0% fully diluted
equity interest in the Company.
Packaged Ice is a party to a strategic licensing agreement with Culligan
Water Technologies, Inc. ("Culligan"), one of the world's leading manufacturers
and distributors of water purification and treatment products and services, to
use the trademarks "Ice by Culligan(R)" and "Water by Culligan(R)." Management
believes that the use of these names could provide the Company with a national
marketing platform and a premium brand image. Culligan also made $23.5 million
of the $25.0 million equity investment (the "Culligan Investment") in the
Company in December 1997. The Company's shareholder group includes Norwest
Equity Partners V ("Norwest"), a partnership managed by Norwest Venture Capital
Management, Inc., a venture capital firm with over $1 billion under management
and Ares, a $1.2 billion investment partnership that was established in November
1997 to invest in bank loans, high yield securities, mezzanine securities and
equity securities. The general partner and investment advisor for Ares is 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.
THE EXCHANGE OFFER
Registration Rights Agreement......... The Series A Notes were sold in
transactions exempt from the
registration requirements of the
Securities Act by the Company on January
22, 1998 and April 30, 1998 to the
Initial Purchaser pursuant to Purchase
Agreements, dated as of January 22, 1998
and April 30, 1998, respectively, by and
among the Company, the Subsidiary
Guarantors named therein and the Initial
Purchaser (the "Note Purchase
Agreements"). The Series A Preferred
Stock was sold in a transaction exempt
from the registration requirements of
the Securities Act by the Company on
April 30, 1998 to Ares and SV pursuant
to a Securities Purchase Agreement dated
as of April 30, 1998 by and among the
Company, SV and Ares (the "Preferred
Stock Purchase Agreement). The Initial
Purchaser subsequently sold the Series A
Notes to qualified institutional buyers
in reliance on Rule 144A under the
Securities Act. The Company entered into
an amended and restated Notes
Registration Rights Agreement dated
April 30, 1998 (the "Notes Registration
Rights Agreement") and a Preferred Stock
Registration Rights Agreement dated
April 30, 1998 (the "Preferred Stock
Registration Rights Agreement" and,
together with the Notes Registration
Rights Agreement, the "Registration
Rights Agreements") which grant the
holders of the Series A Notes and the
Series A Preferred Stock, respectively,
certain exchange and registration
rights. The Exchange Offer is intended
to satisfy such rights. The holders of
the Series B Securities are not entitled
to any exchange or registration rights
with respect to the Series B Securities.
See "The Exchange Offer-- Purposes and
Effects of the Exchange Offer."
The Exchange Offer.................... The Company is offering to exchange (i)
$1,000 principal amount of Series B
Notes for each $1,000 principal amount
of Series A Notes that are properly
tendered and accepted and (ii) one share
of Series B Preferred Stock for each
share of Series A Preferred Stock
properly tendered and accepted. The
Company will issue Series B Securities
on or promptly after the Expiration
Date. As of the date hereof, there are
$270,000,000 aggregate principal amount
of Series A Notes outstanding and
400,000 shares of Series A Preferred
Stock outstanding. The terms of the
Series B Securities are substantially
identical in all respects to the terms
of the Series A Securities for which
they may be exchanged pursuant to the
Exchange Offer, except that (i) the
Series B Securities are freely
transferable by holders thereof (other
than as provided herein), and are not
subject to any covenant restricting
transfer absent registrations under the
Securities Act and (ii) holders of
the Series B Securities will not be
entitled to certain rights of holders of
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<PAGE> 12
the Series A Securities under the
Registration Rights Agreements, which
rights will terminate upon the
consummation of the Exchange Offer
(unless such holders are entitled to
require the Company to effect a Shelf
Registration). See "The Exchange Offer."
The Exchange Offer is not conditioned
upon any minimum aggregate principal
amount of Series A Notes or any minimum
number of shares of Series A Preferred
Stock being tendered for exchange. Based
on an interpretation by the Commission
set forth in no-action letters issued to
third parties, the Company believes that
the Series B Securities issued pursuant
to the Exchange Offer in exchange for
Series A Securities may be offered for
resale, resold and otherwise transferred
by a holder thereof (other than (i) a
broker-dealer who purchases such Series
B Securities directly from the Company
to resell pursuant to Rule 144A under
the Securities Act or any other
available exemption under the Securities
Act or (ii) a person that is an
affiliate (as defined in Rule 405 under
the Securities Act) of the Company),
without compliance with the registration
and prospectus delivery provisions of
the Securities Act, provided that the
holder is acquiring the Series B
Securities in the ordinary course of its
business and is not participating, and
had no arrangement or understanding with
any person to participate, in the
distribution of the Series B Securities.
Each broker-dealer that receives the
Series B Securities for its own account
in exchange for the Series A Securities,
where such Series A Securities were
acquired by such broker-dealer as a
result of market-making activities or
other trading activities, must
acknowledge that it will deliver a
prospectus in connection with any resale
of such Series B Securities. The Company
has agreed that for a period of 180 days
after the Expiration Date, it will make
this Prospectus available to any
broker-dealer for use in connection with
any such resale. See "Plan of
Distribution."
Expiration Date....................... The Exchange Offer will expire at 5:00
p.m., New York City time, on August 12,
1998, unless the Exchange Offer is
extended by the Company in its
reasonable discretion, in which case the
term "Expiration Date" shall mean the
latest date and time to which the
Exchange Offer is extended.
Conditions to the
Exchange Offer........................ The Exchange Offer is subject to certain
customary conditions, which may be
waived by the Company. See "The Exchange
Offer -- Conditions." The Company
reserves the right to terminate or amend
the Exchange Offer at any time prior to
the Expiration Date upon the occurrence
of any such conditions.
Procedures for Tendering
Series A Securities.................. Each holder of Series A Securities
wishing to accept the Exchange Offer
must complete, sign and date the
respective Letter of Transmittal, or a
facsimile thereof, in accordance with
the instructions contained herein and
therein, and mail or otherwise deliver
such Letter of Transmittal, or such
facsimile or an Agent's Message (as
defined herein), together with the
Series A Securities and any other
required documentation to the exchange
agent (the "Exchange Agent") at the
address set forth herein. Series A
Securities may be physically delivered,
but physical delivery is not required if
a confirmation of a book-entry transfer
of such Series A Securities to the
Exchange Agent's account at The
Depository Trust Company ("DTC" or the
"Depository") is delivered in a timely
fashion. By executing the Letter of
Transmittal, each holder will represent
to the Company that, among other things,
the Series B Securities acquired
pursuant to the Exchange Offer are being
obtained in the ordinary course of
business of the person receiving such
Series B Securities, whether or not such
person is the holder, that neither the
holder nor any such other person is
engaged in, or intends to engage in, or
has an arrangement or understanding with
any person to participate in, the
distribution of such Series B Securities
and that neither the
12
<PAGE> 13
holder nor any such person is an
"affiliate," as defined under Rule 405
of the Securities Act, of the Company.
Each broker or dealer that receives
Series B Securities for its own account
in exchange for Series A Securities,
where such Series A Securities were
acquired by such broker or dealer as a
result of market-making activities or
other trading activities, must
acknowledge that it will deliver a
prospectus in connection with any resale
of such Series B Securities. See "The
Exchange Offer -- Procedures for
Tendering" and "Plan of Distribution."
Special Procedures for
Beneficial Owner...................... Any beneficial owner whose Series A
Securities are registered in the name of
a broker, dealer, commercial bank, trust
company or other nominee and who wishes
to tender should contact such registered
holder promptly and instruct such
registered holder to tender on such
beneficial owner's behalf. If such
beneficial owner wishes to tender on
such owner's own behalf, such owner
must, prior to completing and executing
the Letter of Transmittal and delivering
his Series A Securities, either make
appropriate arrangements to register
ownership of the Series A Securities in
such owner's name or obtain a properly
completed bond power from the registered
holder. The transfer of registered
ownership may take considerable time and
may not be completed prior to the
Expiration Date. See "The Exchange Offer
-- Procedures for Tendering."
Guaranteed Delivery
Procedures............................ Holders of Series A Securities who wish
to tender their Series A Securities and
whose Series A Securities are not
immediately available or who cannot
deliver their Series A Securities, the
Letters of Transmittal or any other
documents required by the Letters of
Transmittal to the Exchange Agent prior
to the Expiration Date, must tender
their Series A Securities according to
the guaranteed delivery procedures set
forth in "The Exchange Offer --
Guaranteed Delivery Procedures."
Acceptance of the Series A
Securities and Delivery of the
Series B Securities................... Subject to the satisfaction or waiver of
the conditions to the Exchange Offer,
the Company will accept for exchange any
and all Series A Securities which are
properly tendered in the Exchange Offer
prior to the Expiration Date. The Series
B Securities issued pursuant to the
Exchange Offer will be delivered on the
earliest practicable date following the
Expiration Date. See "The Exchange Offer
-- Terms of the Exchange Offer."
Withdrawal Rights.................... Tenders of Series A Securities may be
withdrawn at any time prior to the
Expiration Date. See "The Exchange Offer
-- Withdrawal of Tenders."
Certain Federal Income Tax
Considerations........................ For a discussion of certain federal
income tax considerations relating to
the exchange of the Series B Securities
for the Series A Securities, see
"Certain Federal Income Tax Consequences
of the Exchange Offer."
Exchange Agent....................... U.S. Trust Company of Texas, N.A. is
serving as the Exchange Agent in
connection with the Exchange Offer. See
"The Exchange Offer -- Exchange Agent."
Effect on Holders of
the Series A Securities............... Holders of the Series A Securities who
do not tender their Series A Securities
will not have further exchange rights
and will continue to be subject to
certain
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<PAGE> 14
restrictions on transfer unless such
holders are entitled to require the
Company to effect a Shelf Registration.
To the extent that Series A Securities
are tendered and accepted in the
Exchange Offer, the trading market for
untendered Series A Securities could be
adversely affected (unless such
untendered Series A Securities were
offered pursuant to a Shelf
Registration).
Use of Proceeds...................... There will be no cash proceeds to the
Company from the exchange pursuant to
the Exchange Offer.
THE SECURITIES
THE NOTES
The Exchange Offer applies to $270,000,000 aggregate principal amount of
the Series A Notes. The form and terms of the Series B Notes will be the same as
the form and terms of the Series A Notes except that (i) the Series B Notes will
be registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (ii) holders of the Series B Notes will not
be entitled to certain rights of holders of Series A Notes under the Notes
Registration Rights Agreement which will terminate upon consummation of the
Exchange Offer. The Series B Notes will evidence the same debt as the Series A
Notes, will be entitled to the benefits of the Indenture and will be treated as
a single class thereunder with the Series A Notes. See "Description of the
Notes."
Issue................................. $270,000,000 aggregate principal amount
of 9 3/4% Senior Notes due 2005, Series
B.
Maturity Date......................... February 1, 2005.
Interest Rate and Payment Dates....... Interest will accrue on the Notes at the
rate of 9 3/4% per annum from the date
of issuance (the "Issue Date") and will
be payable in cash semi-annually in
arrears on each February 1 and August 1,
commencing August 1, 1998.
Ranking and Guarantees................ The Notes will be senior unsecured
obligations of the Company. The Notes
will rank senior in right of payment to
all existing and future Subordinated
Indebtedness of the Company. The Notes
will rank pari passu in right of payment
to all existing and future senior
Indebtedness of the Company. The Notes
are unsecured, and holders of secured
Indebtedness of the Company, including
the New Credit Facility, will
effectively rank prior to Holders of the
Notes with respect to the assets
securing such Indebtedness. The Notes
will be unconditionally guaranteed on a
senior basis by each of the Company's
Subsidiary Guarantors. The guarantee of
each such Subsidiary Guarantor (the
"Subsidiary Guarantees") will rank pari
passu in right of payment to all
existing and future senior Indebtedness
of such Subsidiary Guarantor. The
Subsidiary Guarantees are unsecured, and
holders of secured Indebtedness of the
Subsidiary Guarantors, including the New
Credit Facility, will effectively rank
prior to Holders of the Notes with
respect to the assets of the Subsidiary
Guarantors that secure such
Indebtedness. See "Description of Notes
-- Ranking and Guarantees" and
"Description of New Credit Facility."
Optional Redemption................... The Notes will be redeemable at the
option of the Company, in whole or in
part, on or after February 1, 2002, at
the redemption prices set forth herein,
plus accrued and unpaid interest, if
any, to the date of redemption. In
addition, prior to February 1, 2001, 35%
of the aggregate principal amount of the
Notes are redeemable at the option of
the Company, in whole or in part, at
109.75% of the principal amount thereof,
plus accrued and unpaid interest, if
any, to the
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<PAGE> 15
redemption date, with the net proceeds
of one or more Public Equity Offerings,
provided that at least 65% of the
aggregate principal amount of the Notes
remains outstanding immediately after
such redemption. See "Description of
Notes -- Optional Redemption."
Mandatory Redemption.................. None
Change of Control..................... Upon a Change of Control, the Company
will be required, subject to certain
conditions, to make an offer to purchase
all of the Notes at 101% of the
principal amount thereof, plus accrued
and unpaid interest thereon to the date
of purchase. See "Description of Notes--
Change of Control." There can be no
assurance that the Company will have
sufficient funds or will be
contractually permitted by outstanding
indebtedness to pay the required
purchase price for all Notes tendered by
holders upon a Change of Control.
Certain Covenants..................... The Indenture will contain certain
covenants that, among other things,
limit the ability of the Company and its
subsidiaries to (i) incur additional
Indebtedness, (ii) pay dividends or make
distributions with respect to capital
stock or make certain other restricted
payments, (iii) issue and sell capital
stock of subsidiaries, (iv) enter into
certain transactions with affiliates,
(v) create certain liens, (vi) sell
certain assets, (vii) enter into sale
and leaseback transactions and (viii)
consolidate, merge or sell all or
substantially all of the Company's
assets. See "Description of Notes --
Certain Covenants."
PREFERRED STOCK
The Exchange Offer applies to the 400,000 shares of Series A Preferred
Stock plus any additional shares of Series A Preferred Stock issued as dividends
prior to the Expiration Date. The form and terms of the Series B Preferred Stock
are the same as the form and terms of the Series A Preferred Stock except that
the shares of Series B Preferred Stock will be registered under the Securities
Act and thus will not bear restrictive legends restricting their transfer
pursuant to the Securities Act. See "Description of Preferred Stock and Exchange
Debentures."
Liquidation Preference................ $100 per share, plus accumulated and
unpaid dividends.
Optional Redemption................... The Preferred Stock is redeemable, at
the option of the Company, in whole or
in part, at any time after April 30,
2002 and prior to April 30, 2003 at a
redemption price equal to 106.5% of the
liquidation preference thereof, plus
accumulated and unpaid dividends to the
date of redemption. On or after April
30, 2003, the Preferred Stock is
redeemable, at the option of the
Company, in whole or in part, at the
redemption price equal to 100% of the
liquidation preference thereof, plus
accumulated and unpaid dividends to the
date of redemption.
Optional IPO Redemption............... Subject to certain limitations, the
Preferred Stock is redeemable, at the
option of the Company, in whole or in
part, at any time prior to April 30,
2001 using the proceeds of an initial
Public Equity Offering at a redemption
price equal to $113 per share; provided,
however, that if (a) the per share
purchase price for shares of common
stock purchased in the initial Public
Equity Offering is greater than the IPO
Base Price (as defined below) or (b)
prior to the redemption the last
reported sales price for the common
stock on its primary exchange or trading
market is equal to or greater than the
IPO Base Price for a period of at least
five consecutive days, then the
redemption price shall be $109.00 per
share if the redemption occurs prior to
April 30, 1999, and $111.00 per share if
the redemption occurs on or after April
30, 1999 and prior to April 30, 2000.
Public Equity Offering refers
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<PAGE> 16
to a bona fide firm commitment
underwritten 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, which results in
gross proceeds to the Company of not
less than $20,000,000. The IPO Base
Price is $20; provided, however, that if
at any time the Company shall (a)
entitle the holders of its common stock
to receive a dividend payable in, or
other distributions of, common stock,
(b) subdivide its outstanding shares of
common stock into a larger number of
shares of common stock or (c) combine
its outstanding shares of common stock
into a smaller number of shares of
common stock, the IPO Base Price will be
adjusted by multiplying such IPO Base
Price in effect immediately prior to
such event by a fraction, the numerator
of which shall be the number of shares
of common stock outstanding immediately
prior to such event and the denominator
of which shall be the number of shares
of common stock outstanding immediately
after such event.
Mandatory Redemption.................. The Company is required, subject to
certain conditions, to redeem all of the
Preferred Stock outstanding on May 1,
2005 at a redemption price equal to 100%
of the liquidation preference thereof,
plus accumulated and unpaid dividends to
the date of redemption.
Dividends............................. Dividends will be payable quarterly
beginning August 1, 1998, at a rate per
annum of 13% of the liquidation
preference per share; provided, however,
from April 30, 1998 and prior to April
30, 1999, dividends will be payable at a
rate per annum of 11.5% of the
liquidation preference per share, and
from April 30, 1999 and prior to April
30, 2000, dividends will be payable at a
rate per annum of 12.25% of the
liquidation preference per share.
Dividends may be paid in cash or in kind
by issuing additional shares of the
Preferred Stock.
Dividend Payment Dates................ February 1, May 1, August 1 and November
1, commencing August 1, 1998.
Voting................................ The Preferred Stock will be non-voting,
except as otherwise required by law and
except in certain circumstances
described herein, including (i) amending
certain rights of the holders of the
Preferred Stock and (ii) the issuance of
any class of equity securities that
ranks on a parity with or senior to the
Preferred Stock. In addition, if the
Company after May 1, 2003 fails to pay
cash dividends in respect of four or
more quarterly dividend periods in the
aggregate, holders of a majority of the
shares of the Preferred Stock, voting as
a class, will be entitled to elect one
member to the Company's board of
directors. If the Company after the
event contemplated in the preceding
sentence fails to pay cash dividends in
respect of two full quarterly dividend
periods in the aggregate, holders of a
majority of the shares of the Preferred
Stock, voting as a class, will be
entitled to elect an additional member
to the Company's board of directors.
Exchange Provisions................... The Preferred Stock will be exchangeable
into the Exchange Debentures, at the
Company's option, subject to certain
conditions, in whole but not in part, on
a pro rata basis, on any scheduled
dividend payment date.
Ranking............................... The Preferred Stock will, with respect
to dividend rights and rights on
liquidation, winding-up and dissolution
of the Company, rank senior to all
classes of common stock and to all other
classes of preferred stock of the
Company.
Change of Control.....................
In the event of a Change of Control, the
Company will, subject to certain
conditions, offer to repurchase all
outstanding shares of Preferred Stock at
a purchase price equal to 101% of the
liquidation preference thereof, plus
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<PAGE> 17
accumulated and unpaid dividends to the
date of purchase. There can be no
assurance that the Company will have
sufficient funds or will be
contractually permitted by outstanding
indebtedness to purchase all of the
Preferred Stock in the event of a Change
of Control, or that the Company would be
able to obtain financing for such
purpose on favorable terms, if at all.
Certain Restrictive
Provisions............................ The Preferred Stock Purchase Agreement
contains certain restrictive provisions
that, among other things, limit the
ability of the Company and its
subsidiaries to: (i) incur additional
indebtedness; (ii) pay dividends or make
certain other restricted payments; (iii)
make loans or advances which are not in
the ordinary course of business; (iv)
enter into transactions with affiliates;
(v) merge or consolidate with or sell
all or substantially all of their assets
to any other person.
EXCHANGE DEBENTURES
Issue................................. 13% Exchange Debentures due 2005
issuable in exchange for the Preferred
Stock in an aggregate principal amount
equal to the liquidation preference of
the Preferred Stock so exchanged, plus
accumulated and unpaid dividends to the
date fixed for the exchange thereof (the
"Exchange Date"), plus any additional
Exchange Debentures issued from time to
time in lieu of cash interest.
Maturity.............................. May 1, 2005.
Interest Rate and
Payment Dates......................... The Exchange Debentures will bear
interest at a rate of 13% per annum;
provided, however, from May 1, 1998
until April 30, 1999, the per annum
interest rate will be 11.5%, and from
May 1, 1999 until April 30, 2000, the
per annum interest rate will be 12.25%.
Interest will accrue from the most
recent interest payment date to which
interest has been paid or provided for
or, if no interest has been paid or
provided for, from the Exchange Date.
Interest will be payable quarterly in
cash (or, at the option of the Company,
on or prior to April 30, 2002, in
additional Exchange Debentures) in
arrears on each February 1, May 1,
August 1 and November 1, commencing with
the first such date after the Exchange
Date.
Optional Redemption................... The Exchange Debentures will be
redeemable, at the option of the
Company, in whole or in part, at any
time on and after April 30, 2002 and
prior to May 1, 2003 at a redemption
price equal to 106.5% of the principal
amount thereof, plus accumulated and
unpaid interests to the date of
redemption. On or after May 1, 2003, the
Exchange Debentures will be redeemable,
at the option of the Company, in whole
or in part, at the redemption price
equal to 100% of the principal amount
thereof, plus accumulated and unpaid
interest to the date of redemption.
Optional IPO Redemption............... Subject to certain limitations, the
Exchange Debentures will be redeemable,
at the option of the Company, in whole
or in part, at any time on or prior to
May 1, 2001 using the proceeds of any
Public Equity Offering at a redemption
price equal to 113% of the principal
amount thereof; provided, however, that
if (a) the per share purchase price for
shares of common stock purchased in the
initial Public Equity Offering is
greater than the IPO Base Price (as
defined below) or (b) prior to the
redemption the last reported sales price
for the common stock on its primary
exchange or trading market is equal to
or greater than the IPO Base Price for a
period of at least five consecutive
days, then the redemption price shall be
109% of the principal amount if the
redemption occurs prior to May 1, 1999,
and 111%
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<PAGE> 18
of the principal amount if the
redemption occurs on or after May 1,
1999 and prior to May 1, 2000. Public
Equity Offering refers to a bona fide
firm commitment underwritten 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, which results
in gross proceeds to the Company of not
less than $20,000,000. The IPO Base
Price is $20; provided, however, that if
at any time the Company shall (a)
entitle the holder of its common stock
to receive a dividend payable in, or
other distributions of, common stock,
(b) subdivide its outstanding shares of
common stock into a larger number of
shares of common stock or (c) combine
its outstanding shares of common stock
into a smaller number of shares of
common stock, the IPO Base Price will be
adjusted by multiplying such IPO Base
Price in effect immediately prior to
such event by a fraction, the numerator
of which shall be the number of shares
of common stock outstanding immediately
prior to such event and the denominator
of which shall be the number of shares
of common stock outstanding immediately
after such event.
Ranking............................... The Exchange Debentures will be
subordinated in right of payment to all
existing and future senior Indebtedness
of the Company which expressly provides
that it ranks senior to the Exchange
Debentures. The Exchange Debentures will
rank pari passu or senior to any class
or series of Indebtedness that expressly
provides that it ranks pari passu or
subordinate to the Exchange Debentures,
as the case may be.
Guarantees............................ The Exchange Debentures will be
unconditionally guaranteed, jointly and
severally, on a senior subordinated
basis by each of the Guarantors (the
"Debenture Guarantees"). The Debenture
Guarantees will be general unsecured
obligations of the Guarantors and will
be subordinated in right of payment to
all existing and future Senior Debt of
the Guarantors.
Change of Control..................... In the event of a Change of Control, the
Company will, subject to certain
conditions, be required to offer to
purchase all outstanding Exchange
Debentures at a purchase price equal to
101% of the principal amount thereof,
plus accrued and unpaid interest to the
date of purchase. There can be no
assurance that the Company will have
sufficient funds or will be
contractually permitted by outstanding
indebtedness to pay the required
purchase price for all Exchange
Debentures tendered by holders upon a
Change of Control.
Certain Covenants..................... The indenture governing the Exchange
Debentures (the "Exchange Indenture")
will contain certain covenants for the
benefit of the holders of the Exchange
Debentures that, among other things,
restrict the ability of the Company and
its Restricted Subsidiaries to (i) make
certain investments; (ii) create liens;
(iii) enter into transactions with
affiliates; (iv) merge or consolidate
the Company or the Guarantors; and (v)
transfer or sell assets.
For a more complete description of the Preferred Stock and Exchange
Debentures, see "Description of Preferred Stock and Exchange Debentures."
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Series B Securities pursuant to this Prospectus.
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<PAGE> 19
RISK FACTORS
Holders of the Series A Securities should consider carefully the
information set forth under the caption "Risk Factors," and all other
information set forth in this Prospectus, in evaluating the Exchange Offer.
19
<PAGE> 20
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(in thousands, except per share, ratio and percentage data)
The following table sets forth, for the periods and dates indicated,
summary historical and pro forma financial data of Packaged Ice. The unaudited
financial statements for the three months ended March 31, 1997 and 1998 reflect
all adjustments necessary in the opinion of management (consisting only of
normal recurring adjustments), for a fair presentation of such data. The
unaudited pro forma combined financial data gives effect to (i) the acquisitions
of traditional ice companies by Packaged Ice since January 1, 1997
(collectively, the "Prior Acquisitions"), (ii) the acquisitions of traditional
ice companies by Reddy Ice between January 1, 1997 and March 31, 1998
(collectively, the "RIC Acquisitions"), (iii) the Prior Acquisitions, the RIC
Acquisitions and the Reddy Acquisition, (collectively, the "Acquisitions"), (iv)
the issuance on January 22, 1998 of $145,000,000 aggregate principal amount of
Series A Notes (the "Prior Note Offering"), (v) the Culligan Investment and (vi)
the Transactions as if they had occurred at the beginning of the period
presented. The pro forma as adjusted balance sheet gives effect to the
Transactions as if they had occurred on March 31, 1998. The unaudited pro forma
financial data should not be considered indicative of actual results that would
have been achieved had the acquisitions been consummated on the dates or for the
periods indicated and do not purport to indicate results of operations as of any
future date or any future period. The following information should be read in
conjunction with the Consolidated Financial Statements of Packaged Ice,
including the notes thereto, "Unaudited Pro Forma Combined Condensed Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------------- ----------------------------------
UNAUDITED UNAUDITED
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------------------------------- COMBINED --------------------- COMBINED
1995 1996 1997 1997 1997 1998 1998
--------- --------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues .................................. $ 2,830 $ 4,427 $ 28,981 $ 174,201 $ 846 $ 8,401 $ 23,265
Cost of sales ............................. 1,251 2,035 18,724 113,948 460 6,394 12,220
Gross profit .............................. 1,579 2,392 10,257 60,553 386 2,007 11,045
Operating expenses ........................ 1,515 1,981 7,636 24,213 575 3,854 13,902
Other income .............................. 75 185 655 1,383 161 699 326
Net loss .................................. (688) (990) (8,439) (14,435) (592) (24,178) (32,726)
Net loss to common shareholders ........... (688) (990) (8,637) (23,554) (592) (24,178) (35,006)
OTHER DATA:
Depreciation and amortization ............. $ 751 $ 1,456 $ 5,130 $ (22,066) $ 479 $ 2,071 $ 5,285
Capital expenditures(1) ................... 2,717 5,745 10,765 N/A 1,281 4,026 N/A
BALANCE SHEET DATA:
Cash and equivalents ...................... $ 1,033 $ 170 $ 19,369 $ 279 $ 21,569 13,278
Working capital (deficiency) .............. 696 (1,228) 16,554 (2,610) 21,363 17,824
Total assets .............................. 8,050 11,523 122,300 12,922 186,421 374,021
Total long-term debt, including current
maturities .............................. 211 3,582 67,502 3,075 145,000 294,961
Total preferred stock(2) .................. 2,497 2,497 28,421 -- 29,035 64,156
Common stock with put redemption option ... 1,972 1,972 1,972 -- 1,972 1,972
Total shareholders' equity ................ 2,582 1,597 15,819 6,244 1,599 5,678
</TABLE>
- ----------
(1) Excludes expenditures used to acquire traditional ice businesses.
(2) Includes (i) Series A and Series B convertible preferred stock with put
redemption option, (ii) mandatorily redeemable preferred stock and (iii)
exchangeable preferred stock.
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<PAGE> 21
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") which represent the Company's
expectations and beliefs concerning future events that involve risks and
uncertainties, including those associated with the effects of national and
regional economic conditions. Investors are cautioned that all forward-looking
statements involve risks and uncertainty. Discussions containing such
forward-looking statements may be found in the material set forth under
"Prospectus Summary", "Summary Historical and Unaudited Pro Forma Combined
Financial Data", "Risk Factors", "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources", "Unaudited Pro Forma Combined Condensed Financial Statements",
"Selected Historical Financial Data", "Business" and "Description of Notes", as
well as elsewhere herein. Actual results may differ materially from those
projected in the forward-looking statements. Although the Company believes that
the assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this Prospectus
will prove to be accurate. Important factors that could cause actual results to
differ materially from the Company's expectations are disclosed in this
Prospectus. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
RISK FACTORS
The Securities offered hereby involve a high degree of risk. Prospective
investors should carefully consider the following factors, together with other
information contained herein, before investing in the Securities offered hereby.
These risk factors may not be exhaustive, particularly with respect to future
filings.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE DEBT
The Company is highly leveraged, with substantial debt service in addition
to operating expenses and planned capital expenditures. At March 31, 1998, as
adjusted to give effect to the Transactions, the total Indebtedness of the
Company (excluding debt discount) would have been approximately $285.0 million,
consisting of $270.0 million of Notes and $15.0 million of borrowings under the
New Credit Facility. The Indenture will permit the Company to incur $90.0
million of Indebtedness in addition to the Notes, or a greater amount depending
on the Company's Consolidated Fixed Charge Coverage Ratio (as defined). See "--
New Credit Facility; Effective Subordination," "Description of New Credit
Facility" and "Description of Notes -- Certain Covenants."
The Company has historically operated at substantially lower levels of debt
than is outstanding after giving effect to the Transactions. The Company's level
of indebtedness will have several important effects on its future operations,
including, without limitation, (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest and principal
on its indebtedness, (ii) covenants contained in the Company's Indenture and the
New Credit Facility will require the Company to meet certain financial tests,
and other restrictions will limit its ability to borrow additional funds or to
dispose of assets, and may affect the Company's flexibility in planning for, and
reacting to, changes in its business, including possible acquisition activities,
(iii) the Company's leveraged position will substantially increase its
vulnerability to adverse changes in general economic, industry and competitive
conditions and (iv) the Company's ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general corporate and other
purposes may be limited. The Company's ability to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to general economic,
industry and competitive conditions and to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
There can be no assurance that the Company's business will continue to generate
cash flow at or above current levels. If the Company is unable to generate
sufficient cash flow from operations in the future to service its debt, it may
be required, among other things, to seek additional financing in the debt or
equity markets, to refinance or restructure all or a portion of its
indebtedness, including the Notes, to sell selected assets, or to reduce or
delay planned capital expenditures. There can be no assurance that any such
measures would be sufficient to enable the Company to service its debt, or that
any of these measures could be effected on satisfactory terms, if at all. See
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<PAGE> 22
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
NEW CREDIT FACILITY; EFFECTIVE SUBORDINATION
The Company has entered into the New Credit Facility with Antares. The New
Credit Facility is a senior credit facility which provides for borrowings of up
to $80.0 million. Substantially all of the assets of the Company and the
Subsidiary Guarantors are pledged to secure the New Credit Facility.
Accordingly, the Notes and Subsidiary Guarantees will be effectively
subordinated to the extent of the collateral used to secure such secured
indebtedness. In the event of a default on the Notes, or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before any
payment therefrom could be made on the Notes. See "Description of New Credit
Facility."
RISKS OF ACQUISITIONS AND THE FAILURE TO INTEGRATE ACQUIRED BUSINESSES
As part of its growth strategy, the Company aggressively pursues the
acquisition of other companies, assets and product lines that either complement
or expand its existing business. Acquisitions involve a number of special risks,
including the diversion of management's attention to the assimilation of the
operations and personnel of the acquired companies, adverse short-term effects
on the Company's reported operating results and the amortization of acquired
intangible assets.
The Company has had preliminary acquisition discussions with, or has
evaluated the potential acquisition of, numerous companies over the last several
years. Acquisition opportunities identified to date include companies with
annual revenues ranging from several million dollars to revenues that approach
those of the Company. The Company has taken the following actions in the pursuit
of various acquisition opportunities: preliminary discussion; exchange of
nonpublic information; verbal and written expressions of interest; and
preliminary proposals regarding potential transaction structure and price.
The Company is unable to predict whether or when any prospective acquisition
candidates will become available or the likelihood of a material acquisition
being completed should any negotiations commence. If the Company proceeds with
an acquisition, and if such acquisition is relatively large and consideration is
in the form of cash, a substantial portion of the Company's surplus borrowing
capacity could be used in order to consummate any such acquisition. The Company
may also seek to finance any such acquisition through additional debt or equity
financings. In addition, due to the relatively large size of several potential
acquisition opportunities, the general risks described above inherent in
acquisitions would be particularly acute.
The Company anticipates that one or more potential acquisition
opportunities, including those that would be material, may become available in
the near future. If and when appropriate acquisition opportunities become
available, the Company intends to pursue them actively. No assurance can be
given that any acquisition by the Company will or will not occur, that if an
acquisition does occur that it will not materially and adversely affect the
Company or that any such acquisition will be successful in enhancing the
Company's business.
CAPITAL REQUIREMENTS
The Company must continue to make capital expenditures to maintain its
operating base, including investments in equipment and contract maintenance, and
to expand its base of Packaged Ice Systems. Packaged Ice spent approximately
$10.8 million on capital expenditures for the year ended December 31, 1997,
exclusive of the acquisition of traditional ice companies. While the Company
estimates that it will generate sufficient cash flow from operations to finance
anticipated capital expenditures exclusive of acquisitions, there can be no
assurance that it will be able to do so.
SEASONALITY OF ICE BUSINESS AND WEATHER
The Company's ice business is seasonal, with its highest sales occurring
during the second and third calendar quarters. In addition, ice sales are
adversely impacted by cold or rainy weather. In 1997, Packaged Ice recorded
approximately
22
<PAGE> 23
66% of its annual net sales during these two quarters. Because the Company's
operating results depend significantly on sales during its peak season, adverse
weather during this season (such as an unusually cold or rainy period) could
have a disproportionate impact on the Company's operating results for the full
year. In addition, the "El Nino" weather phenomenon, which is an abnormal
warming of the ocean temperatures across the eastern tropical Pacific Ocean that
affects weather around the globe, typically brings wetter, cooler weather to the
southern half of the United States from November through March. Based on
historical data from past El Nino events, some areas in the South may see as
much as 150 to 200 percent of normal rainfall accumulation. Inclement weather
such as the type caused by El Nino is believed to be a primary cause for
decreased volume in the ice industry. Further, during the extremely hot weather,
the Company may experience product shortages due to unusually high demand. In
order to fulfill supply commitments under these extreme conditions, the
Company's cost may be increased significantly. The Company could be adversely
affected by this and other weather phenomena. See "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 served by the Company, or the successful roll out by a
competitor of a machine which duplicates the function of the Packaged Ice System
could have a material adverse effect on the Company's operations. See "Business
- -- The Packaged Ice System" and "Business -- Competition."
SUBSTANTIAL NET OPERATING LOSSES
Packaged Ice has incurred substantial net operating losses since its
inception. At March 31, 1998, Packaged Ice had an accumulated deficit since
inception of $35.7 million. Such deficits reflect the cost of developmental and
other startup activities, including the industrial design, development and
marketing of the Packaged Ice Systems, interest expense, depreciation and
amortization. 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 Notes 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.
DEPENDENCE ON SINGLE MANUFACTURER
The Company's proprietary bagging device 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 INFLATION; RAW MATERIALS
Inflation has not had a significant effect on the operations of the Company.
However, in the event of increases in inflation or commodity prices from recent
levels, the Company could experience sudden and significant increases in the
cost of plastic bags, fuel, or utilities such as water and electricity. The
Company may be unable to pass these increases on to its customers. The Company
uses large quantities of plastic bags. Historically, market prices for plastic
bags have fluctuated in response to a number of factors, including changes in
polyethylene prices. The Company historically has not attempted to pass through
changes in the price of plastic bags; therefore, a large, abrupt change in the
price of plastic bags could have a material adverse effect on the Company's
operating margins, although such adverse effects historically have been
temporary. There can be no assurance that significant changes in plastic bag,
electricity, fuel or other commodity prices would not have a material adverse
effect on the Company's business, results of operations and debt service
capabilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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<PAGE> 24
RISK OF PRODUCT LIABILITY
The Company is subject to the inherent business risk of product liability
claims and adverse publicity in the event that any of its products are alleged
to have resulted in adverse effects to a user of such products. The Company
presently carries product liability insurance that management believes is
adequate under the Company's current circumstances, although there can be no
assurance that such circumstances will not change and that such insurance will
remain available at reasonable costs, if at all. In the event of an inadequately
insured product liability claim, the Company's business and financial condition
could be materially adversely affected.
LIMITED PATENT PROTECTION
Other than patents which it owns or licenses on the bagging devices, the
Company currently does not have patents relating to its products. While the
Company views the patents relating to the bagging device as important to the
value of the Packaged Ice System as a whole, there can be no assurance that any
issued patent will provide the Company with a meaningful competitive advantage,
that competitors will not design alternatives to reduce or eliminate the
benefits of any issued patent, or that challenges will not be instituted against
the validity or enforceability of these patents. Other companies may obtain
patents claiming products or processes that are necessary for, or useful to, the
development of the Company's products, in which event the Company may be
required to obtain licenses for patents or for proprietary technology in order
to develop, manufacture or market its products. There can be no assurance that
the Company would be able to obtain such licenses on commercially reasonable
terms, if at all.
It is the Company's practice to protect certain of its proprietary materials
and processes by relying on trade secret laws and non-disclosure and
confidentiality agreements. There can be no assurance that confidentiality or
trade secrets will be maintained or that others will not independently develop
or obtain access to such materials or processes.
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 $2.0 million of key-man life insurance on
James F. Stuart. The success of the Company will also depend in part upon the
Company's ability to find, hire and retain additional key management personnel,
including senior management, who are also being sought by other businesses. See
"Management."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS
The Indenture contains certain covenants that, among other things, limit the
ability of the Company and its subsidiaries to make restricted payments, to
incur indebtedness, to create liens, to issue preferred or other capital stock
of subsidiaries, to sell assets, to permit restrictions on dividend and other
payments by subsidiaries to the Company, to consolidate, merge or sell all or
substantially all of its assets, to engage in transactions with affiliates or to
engage in unrelated businesses. In addition, the New Credit Facility contains
other and more restrictive covenants and, under certain circumstances, prohibits
the Company from prepaying the Notes. The New Credit Facility requires the
Company to maintain specified financial ratios and satisfy certain financial
tests. The Company's ability to maintain or meet such financial ratios and tests
may be affected by events beyond its control, and there can be no assurance that
the Company will maintain or meet such ratios and tests. A breach of any of
these covenants could result in an event of default under the New Credit
Facility, in which case the lenders could elect to declare all amounts borrowed,
together with accrued interest, to be immediately due and payable and to
terminate all commitments under the New Credit Facility. If the Company were
unable to repay all amounts declared due and payable, the lenders could proceed
against the collateral granted to satisfy the indebtedness and other obligations
due and payable. Substantially all of the assets of the Company and its
subsidiaries, including the stock of the Company's significant Subsidiaries, are
pledged as security under the New Credit Facility. An acceleration of the
indebtedness under the New Credit Facility will also trigger an event of default
under the Indenture. If the obligations under the New Credit Facility and/or the
Notes were to be accelerated, there can be no assurance that the assets of the
Company and its subsidiaries would be sufficient to repay in full such
indebtedness and the other indebtedness of the Company, including the Notes. See
"Description of the Notes -- Certain Covenants" and "Description of New Credit
Facility."
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FRAUDULENT CONVEYANCE CONSIDERATIONS
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Subsidiary Guarantors' issuance of the Subsidiary Guarantees.
To the extent that a court were to find that (x) a Subsidiary Guarantee was
incurred by a Subsidiary Guarantor with intent to hinder, delay or defraud any
present or future creditor or the Subsidiary Guarantor contemplated insolvency
with a design to prefer one or more creditors to the exclusion in whole or in
part of others or (y) a Subsidiary Guarantor did not receive fair consideration
or reasonably equivalent value for issuing its Subsidiary Guarantee and such
Subsidiary Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of
the issuance of such Subsidiary Guarantee, (iii) was engaged or about to engage
in a business or transaction for which the remaining assets of such Subsidiary
Guarantor constituted unreasonably small capital to carry on its business, or
(iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, the court could avoid or subordinate
such Subsidiary Guarantee in favor of the Subsidiary Guarantor's creditors.
Among other things, a legal challenge of a Subsidiary Guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by the Subsidiary
Guarantor as a result of the Company's issuance of the Notes. The Indenture
contains a savings clause, which generally limits the obligations of each
Subsidiary Guarantor under its Subsidiary Guarantee to the maximum amount as
will, after giving effect to all of the liabilities of such Subsidiary
Guarantor, result in such obligations not constituting a fraudulent conveyance.
To the extent a Subsidiary Guarantee of any Subsidiary Guarantor was avoided or
limited as a fraudulent conveyance or held unenforceable for any other reason,
holders of the Notes would cease to have any claim against such Subsidiary
Guarantor and would be creditors solely of the Company and any Subsidiary
Guarantor whose Subsidiary Guarantee was not avoided or held unenforceable. In
such event, the claims of the holders of the Notes against the issuer of an
invalid Subsidiary Guarantee would be subject to the prior payment of all
liabilities (including trade payables) of such Subsidiary Guarantor. There can
be no assurance that, after providing for all prior claims, there would be
sufficient assets to satisfy the claims of the holders of the Notes relating to
any avoided portions of any of the Subsidiary Guarantees.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law applied in any such proceeding. Generally, however,
a Subsidiary Guarantor may be considered insolvent either (i) if the sum of its
debts, including contingent liabilities, was greater than the fair market value
or fair saleable value of all of its assets at a fair valuation or if the
present fair market value or fair saleable value of its assets was less than the
amount that would be required to pay its total outstanding debts and liabilities
including its probable liability on its existing debts, including contingent
liabilities, as they become absolute and mature, or (ii) if it is incurring
debts beyond its ability to pay as such debts mature. Based upon financial and
other information, the Company and the Subsidiary Guarantors believe that the
Subsidiary Guarantees are being incurred for proper purposes and in good faith
and that the Company and each Subsidiary Guarantor is solvent and will continue
to be solvent after issuing its Subsidiary Guarantee, will have sufficient
capital for carrying on its business after such issuance and will be able to pay
its debts as they mature. There can be no assurance, however, that a court
passing on such standards would agree with the Company. See "Description of
Notes -- Ranking and Guarantees."
PREFERENTIAL TRANSFER
The Indenture requires the Company's Subsidiaries created or acquired after
the Issue Date of the Notes having total assets with a book value in excess of
$250,000 to guarantee the Notes. If bankruptcy or insolvency proceedings were
initiated by or against the Company or any Subsidiary Guarantor within 90 days
(or, in certain cases, one year) after any such guarantee, or if any such
guarantee were made in contemplation of insolvency, such guarantee would be
vulnerable to avoidance as a preferential transfer. In addition, a court could
require holders of the Notes to return any payments made during the 90-day (or
one-year) period.
ENVIRONMENTAL MATTERS
The Company's ice manufacturing and ice storage operations are subject to
federal, state and local environmental laws and regulations. As a result, the
Company has the potential to be involved from time to time in administrative or
legal proceedings relating to environmental matters. There can be no assurance
that the aggregate amount of any environmental liabilities that might be
asserted in any such proceeding will not be material. The Company cannot predict
the types of environmental laws or regulations that may from time to time be
enacted in the future by federal, state or local
25
<PAGE> 26
governments, how existing or future laws or regulations will be interpreted or
enforced or what types of environmental conditions may be found to exist at its
facilities. The enactment of more stringent laws or regulations or a more strict
interpretation of existing laws and regulations may require additional
expenditures by the Company, some of which could be material.
The Company generates and handles certain hazardous substances in connection
with the manufacture and storage of packaged ice. The handling and disposal of
these substances and wastes is subject to federal, state and local regulations,
and site contamination originating from the release or disposal of such
substances or wastes can lead to significant liabilities. In addition, certain
of the Company's current and former facilities are located in industrial areas
and have been in operation for many years. As a consequence, it is possible that
historical activities on property currently or formerly owned by the Company or
that current or historical activities on neighboring properties have affected
properties currently or formerly owned by the Company and that, as a result,
additional environmental issues may arise in the future, the precise nature of
which the Company cannot now predict. Therefore, the Company may become liable
for site contamination at properties currently or formerly owned by the Company.
Although such liability has not had a material adverse affect on the financial
condition or operating results of Packaged Ice in the past, and the Company has
no knowledge of claims that could be expected to have a material adverse affect
on its financial condition or operations, there can be no assurance that the
Company will not incur significant costs in connection with historical or future
handling or disposal of such substances and wastes.
GOVERNMENT REGULATION
The packaged ice industry is subject to various federal, state and local
laws and regulations, which require the Company, among other things, to obtain
licenses for its manufacturing plants and machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding its plants and its Packaged Ice Systems and to continuously control
the quality and quantity of its ice. See "Business -- Government Regulation."
LACK OF PUBLIC MARKET; POSSIBLE PRICE VOLATILITY
The Series B Notes and Series B Preferred Stock constitute new issues of
securities with no established trading market, but the Series B Notes will be
eligible for trading in the PORTAL market. The Company does not intend to apply
for listing of the Series B Securities on any securities exchange or to seek
approval for quotation through any automated quotation system.
There can be no assurance as to the development or liquidity of any market
for the Series B Securities. If an active market does not continue or develop,
as the case may be, the market price and liquidity of the Series B Securities
could be adversely affected. Many possible events could adversely affect the
development or liquidity of any market for such securities. If such a market
were to develop, the Series B Securities could trade at prices that may be
higher or lower than their initial offering price depending upon many factors,
including prevailing interest rates, the Company's operating results and the
markets for similar securities. Although the Initial Purchaser has informed the
Company that it currently intends to make a market in the Series B Notes, the
Initial Purchaser is not obligated to do so and any such market-making activity
may be discontinued at any time without notice. Historically, the market for
non-investment grade debt has been subject to disruptions that have caused
substantial volatility in the prices of securities similar to the Series B
Notes. In addition, such market-making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act and may be limited during the
Exchange Offer and the pendency of any shelf registration statement.
CHANGE OF CONTROL
In the event of a Change of Control, the Company may be required to purchase
all of the outstanding Notes at 101% of the principal amount, as the case may
be, of the Notes plus any accrued and unpaid interest thereon, and Additional
Interest, if any, to the date of purchase. The exercise by the holders of the
Notes of their rights to require the Company to offer to purchase Notes upon a
Change of Control could also cause a default under other indebtedness of the
Company, even if the Change of Control itself does not, because of the financial
effect of such purchase on the Company. The Company's ability to pay cash to any
of the holders of Notes upon a purchase may be limited by the Company's then
existing capital resources and covenants under the New Credit Facility. There
can be no assurance that, in the event of a
26
<PAGE> 27
Change of Control, the Company will have, or will have access to, sufficient
funds, or will be contractually permitted under the terms of outstanding
indebtedness, to pay the required purchase price for any Notes. See "Description
of Notes."
In the event of a Change of Control, the Company will also, subject to
certain conditions, offer to purchase all outstanding shares of Preferred Stock
or Exchange Debentures at a purchase price equal to 101% of the liquidation
preference (or principal amount, in the case of the Exchange Debentures)
thereof, plus accumulated and unpaid dividends (or interest, as appropriate) to
the date of purchase. Again, there can be no assurance that the Company will
have sufficient funds or will be contractually permitted by outstanding
indebtedness to purchase any of the Preferred Stock in the event of a Change of
Control, or that the Company would be able to obtain financing for such purpose
on favorable terms, if at all.
PROCEDURES FOR THE TENDER OF SERIES A SECURITIES
The Series B Securities will be issued in exchange for Series A Securities
only after timely receipt by the Exchange Agent of such Series A Securities,
properly completed and duly executed Letters of Transmittal and all other
required documents. Therefore, holders of Series A Securities desiring to tender
such Series A Securities in exchange for Series B Securities should allow
sufficient time to ensure timely delivery. Neither the Exchange Agent nor the
Company is under any duty to give notification of defects or irregularities with
respect to tenders of Series A Securities for exchange. Any holder of Series A
Securities who tenders in the Exchange Offer for the purpose of participating in
a distribution of the Series B Securities will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives Series
B Securities for its own account in exchange for Series A Securities, where such
Series A Securities were acquired by such broker-dealer as a result of
market-making activities or any other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Series B
Securities. See "Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE SERIES A SECURITIES
The Series A Securities have not been registered under the Securities Act
and are subject to substantial restrictions on transfer. Series A Securities
that are not tendered in exchange for Series B Securities or are tendered but
not accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. The Company does not
currently anticipate that it will register the Series A Securities under the
Securities Act unless such holders of Series A Securities are entitled to
require the Company to effect a Shelf Registration. However, the Company has
granted SV the right to demand that its Series A Preferred Stock be registered
after the Company completes a Public Equity Offering (as defined herein). To the
extent that Series A Securities are tendered and accepted in the Exchange Offer,
the trading market, if any, for untendered and tendered but unaccepted Series A
Securities could be adversely affected. See "The Exchange Offer -- Consequences
of Failure to Exchange."
27
<PAGE> 28
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Series B Securities offered hereby. In consideration for issuing the Series B
Securities as contemplated in this Prospectus, the Company will receive in
exchange a like principal amount of Series A Notes and a like number of shares
of Series A Preferred Stock, the respective terms of which are identical in all
material respects to the applicable Series B Securities.
DIVIDEND POLICY
The Company has never paid or declared cash dividends on its Common Stock
or other securities. The Company currently anticipates that it will retain all
of its future earnings, if any, for use in the expansion and operation of its
business and does not anticipate paying any cash dividends in the foreseeable
future except with respect to the preferred stock. The Indenture and the
certificates of resolutions designating the preferred stock will restrict the
Company's ability to pay cash dividends to the holders of common stock and
preferred stock. See "Description of Notes."
28
<PAGE> 29
CAPITALIZATION
The following table sets forth the actual and pro forma combined cash and
equivalents, long-term debt and total capitalization of the Company as of March
31, 1998. The pro forma capitalization gives additional effect to the
Transactions as if they had occurred at March 31, 1998. This table should be
read in conjunction with "Use of Proceeds," "Unaudited Pro Forma Combined
Condensed Financial Statements," "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Packaged Ice's Consolidated Financial Statements, including the
notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
----------------------
PRO FORMA
ACTUAL COMBINED
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and equivalents ....................................................... $ 21,569 $ 13,128
========= =========
Long-term debt (including current maturities):
New Credit Facility(1) ................................................... $ -- $ 15,000
9 3/4% Senior Notes due 2005 ............................................. 145,000 270,000
Other indebtedness ......................................................... -- 241
Debt discount .............................................................. (905) (280)
--------- ---------
Total long-term debt (including current maturities) .............. 144,095 284,961
--------- ---------
Preferred stock:
Exchangeable preferred stock; 800,000 shares authorized;
400,000 shares outstanding (pro forma combined)(3) .................... -- 35,121
Mandatorily redeemable preferred stock; 500,000 shares authorized;
250,000 shares outstanding ............................................ 25,812 25,812
Series A convertible preferred stock with put redemption option, $0.01
par value; 450,000 shares authorized; 450,000 shares outstanding ...... 2,497 2,497
Series B convertible preferred stock with put redemption option, $0.01
par value; 200,000 shares authorized; 124,831 shares outstanding ...... 726 726
--------- ---------
Total preferred stock ............................................ 29,035 64,156
--------- ---------
Common stock with put redemption option; 420,000 shares outstanding ........ 1,972 1,972
--------- ---------
Shareholders' equity:
Common Stock, $0.01 par value; 50,000,000 shares authorized;
4,922,591 and issued (historical and pro forma combined
respectively).......................................................... 49 49
Additional paid-in capital ............................................... 38,754 42,833
Treasury stock, at cost .................................................. (1,491) (1,491)
Accumulated deficit ...................................................... (35,713) (35,713)
--------- ---------
Total shareholders' equity ....................................... 1,599 5,678
--------- ---------
Total capitalization ............................................. $ 177,606 $ 355,907
========= =========
</TABLE>
- ----------
(1) The Company has entered into the New Credit Facility with Antares, which
consists of a $65.0 million revolving acquisition facility and a $15.0
million revolving working capital facility.
(2) On January 28, 1998, the Company redeemed its 12% Senior Notes due 2004
(the "12% Senior Notes") at a premium with a portion of the proceeds from
the Prior Note Offering.
(3) Ares and SV have purchased an aggregate of $40.0 million of Series A
Preferred Stock from the Company.
(4) The Company will not receive any cash proceeds from the issuance of the
Series B Securities offered hereby. In consideration for issuing the Series
B Securities as contemplated in this Prospectus, the Company will receive
in exchange a like principal amount of Series A Notes and a like number of
shares of Series A Preferred Stock, the respective terms of which are
identical in all material respects to the applicable Series B Securities.
29
<PAGE> 30
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined statement of operations gives effect to
(i) the 50 insignificant Prior Acquisitions, (ii) the 25 insignificant RIC
Acquisitions, (iii) the Prior Note Offering (iv) the Culligan Investment and (v)
the Transactions as if they had occurred on March 31, 1998. The unaudited pro
forma combined statement of operations is derived from (i) the audited
historical financial statements of Packaged Ice and Reddy Ice for the fiscal
year ended December 31, 1997 and the unaudited interim historical financial
statements of Packaged Ice and Reddy Ice for the three months ended March 31,
1998, and (ii) the unaudited historical financial statements of the Acquisitions
for the applicable periods prior to their respective acquisition dates by
Packaged Ice and Reddy Ice.
The unaudited pro forma combined condensed balance sheet gives effect to (i)
three insignificant acquisitions which have been consummated by Reddy Ice after
March 31, 1998, (ii) the Prior Note Offering and (iii) the Transactions as if
they had occurred on March 31, 1998.
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 and Reddy Ice, including notes thereto,
included elsewhere herein.
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 Acquisitions are
accounted for by the Company 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. There can be no assurance that the actual adjustments will not vary
significantly from the estimated adjustments reflected in the unaudited pro
forma combined condensed financial statements. See "Risk Factors -- Risk of
Acquisitions and the Failure to Integrate Acquired Businesses."
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 successfully integrate the operations of the Acquisitions with its
current business, and several other factors, many of which are beyond the
Company's control. See "Risk Factors" included elsewhere herein.
30
<PAGE> 31
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
PACKAGED ICE REDDY ICE ADJUSTMENTS COMBINED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................. $ 21,569,133 $ 1,750,000 $ (8,291,051)(a) $ 13,278,082
(1,750,000)(b)
Accounts receivable .................. 5,269,164 5,706,000 783,000 (b) 11,758,164
Inventories .......................... 2,591,994 3,925,000 911,000 (b) 7,427,994
Prepaid expenses ..................... 748,541 958,000 907,150 (b) 2,613,691
------------- ------------- ------------- -------------
Total current assets .............. 30,178,832 12,339,000 (7,439,901) 35,077,931
Property, net .......................... 64,259,193 69,116,000 133,375,193
Other assets, net ...................... 9,791,150 3,157,000 10,453,958 (a) 23,402,108
Goodwill ............................... 81,287,505 32,733,000 68,145,410 (b) 182,165,915
------------- ------------- ------------- -------------
Total assets ...................... $ 185,516,680 $ 117,345,000 $ 71,159,467 $ 374,021,147
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of Long-
term debt ........................... $ 204,000 $ (204,000)(b)
Accounts payable ..................... $ 3,239,361 3,037,000 (1,856,116)(b) $ 7,534,828
3,114,583 (a)
Accrued expenses ..................... 5,576,369 4,143,000 9,719,369
------------- ------------- ------------- -------------
Total current liabilities ......... 8,815,730 7,384,000 1,054,467 17,254,197
Long-term debt:
New Credit Facility .................. 15,000,000 (a) 15,000,000
Affiliated debt ...................... 124,334,000 (124,334,000)(b)
Senior Notes ......................... 145,000,000 125,000,000 (a) 270,000,000
Other indebtedness ................... 241,000 241,000
Debt discount/premium ................ (904,800) 625,000 (a) (279,800)
------------- ------------- ------------- -------------
Total long-term debt .............. 144,095,200 124,575,000 16,291,000 284,961,200
Exchangeable preferred
Stock ................................. 40,000,000 (a) 35,121,240
(4,878,760)(a)
Mandatorily redeemable
Preferred stock ...................... 25,812,404 25,812,404
Preferred stock with put
Redemption option:
Series A ............................. 2,496,527 2,496,527
Series B ............................. 726,226 726,226
Common stock with put
Redemption option .................... 1,971,851 1,971,851
Shareholders' equity:
Common Stock ......................... 49,225 7,500 (7,500)(b) 49,225
Additional paid-in Capital ........... 38,753,968 1,640,500 (1,640,500)(b) 42,832,728
4,878,760 (a)
(800,000)(a)
Treasury stock ....................... (1,491,155) (1,491,155)
Accumulated deficit .................. (35,713,296) (16,262,000) 16,262,000 (b) (35,713,296)
------------- ------------- ------------- -------------
Total shareholders' equity ........... 1,598,742 (14,614,000) 18,692,760 (c) 5,677,502
------------- ------------- ------------- -------------
Total liabilities and
shareholders' equity ............ $ 185,516,680 $ 117,345,000 $ 71,159,467 $ 374,021,147
============= ============= ============= =============
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
31
<PAGE> 32
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
PACKAGED ICE REDDY ICE ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues .......................... $ 28,980,564 $ 66,449,199 $78,771,460 $ $174,201,223
Cost of goods sold ................ 18,723,786 41,713,350 53,211,413 113,648,549
------------ ------------ ----------- ------------- ------------
Gross profit ...................... 10,256,778 24,735,849 25,560,047 60,552,674
Operating expenses ................ 7,635,538 10,951,877 8,468,816 (155,186)(a) 24,212,783
(1,545,025)(b)
(446,484)(c)
(71,769)(d)
(499,436)(e)
(125,548)(f)
Depreciation & amortization ....... 5,129,879 6,070,256 6,719,401 4,146,357 (g) 22,065,893
Interest expense .................. 6,585,317 7,167,971 1,909,539 14,428,626 (h) 30,091,453
Other income (expense) ............ 655,320 580,535 302,150 (155,186)(a) 1,382,819
------------ ------------ ----------- ------------- ------------
Income (loss) before taxes ........ (8,438,636) 1,126,280 8,764,441 (15,886,721) (14,434,636)
Income taxes ...................... -- 441,298 -- (441,298)(j) --
------------ ------------ ----------- ------------- ------------
Income (loss) from operations
before preferred dividends ...... (8,438,636) 684,982 8,764,441 (15,445,423) (14,434,636)
Preferred dividends ............... 198,630 -- -- 8,721,060 (i) 8,919,690
------------ ------------ ----------- ------------- ------------
Loss to common shareholders ....... $ (8,637,266) $ 689,982 $ 8,764,441 24,166,483 $(23,354,326)
============ ============ =========== ============= ============
Net loss per share ................ $ (2.40) $ (4.65)
============= ============
Weighted average number of
common shares outstanding ....... 3,600,109 1,419,573 5,019,682
============ ============= ============
</TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
PACKAGED ICE REDDY ICE ACQUISITIONS ADJUSTMENTS COMBINED
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues .......................... $ 8,401,157 $ 11,089,093 $ 3,774,724 $ $ 23,264,974
Cost of goods sold ................ 6,394,028 4,790,565 1,035,504 12,220,097
------------ ------------ ----------- ----------- ------------
Gross profit ...................... 2,007,129 6,298,528 2,739,220 11,044,877
Operating expenses ................ 3,853,919 7,428,699 2,619,403 13,902,021
Depreciation & amortization ....... 2,071,065 2,300,752 403,741 509,719 (g) 5,285,277
Interest expense .................. 2,873,971 3,282,653 290,007 1,076,232 (h) 7,522,863
Other income (expense) ............ 699 124,210 201,603 326,512
------------ ------------ ----------- ----------- ------------
Loss before taxes ................. (6,791,127) (6,589,366) (372,328) (1,585,951) (15,338,772)
Income taxes ...................... -- -- -- -- --
------------ ------------ ----------- ----------- ------------
Loss from operations
Before extraordinary items ...... (6,791,127) (6,589,366) (372,328) (1,585,951) (15,338,772)
Extraordinary loss on
Refinancing ..................... (17,386,893) -- -- -- (17,386,893)
------------ ------------ ----------- ----------- ------------
Loss from operations
before preferred dividends ...... (24,178,020) (6,589,366) (372,328) (1,585,951) (32,725,665)
Preferred dividends ............... -- -- -- 2,229,923 (i) 2,229,923
------------ ------------ ----------- ----------- ------------
Loss to common shareholders ....... $(24,178,020) (6,589,366) (372,328) 3,815,874 $(34,955,578)
============ ============ =========== =========== ============
Net loss per share ................ $ (5.64) $ (6.93)
============ ============
Weighted average number of
common shares outstanding ....... 4,395,175 648,225 5,043,400
============ =========== ============
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
32
<PAGE> 33
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Cash used for the Transactions is calculated using the following
assumptions:
<TABLE>
<S> <C> <C>
Proceeds from the Note Offering (includes
premium of $625,000 and interest of $3,114,583) ... $ 128,739,583
New Credit Facility ................................. 15,000,000
Equity Investment (Net of $800,000 issue costs)...... 39,200,000(1)
-------------
Total Transactions proceeds .................................. $182,939,583
------------
Less cash used for:
Transactions costs ................................. 10,453,958
Reddy Acquisition .................................. 180,776,676
-------------
Total ........................................................ 191,230,634
------------
Pro forma cash used .................................................... $ (8,291,051)
============
</TABLE>
- ----------
(1) In connection with issuance of the $40,000,000 Exchangeable Preferred
Stock, the Company issued 975,752 $0.01 restricted warrants with an
estimated fair value of $5.00 a warrant or $4,878,760.
(b) The excess of total purchase price over the allocation of fair value to the
net assets will be recorded as goodwill, which is calculated based on the
following assumptions:
<TABLE>
<S> <C> <C>
Reddy purchase price ................................................... $180,776,676
Historical net assets (equity) of Reddy
Ice(1)(2) ........................................ $ (14,614,000)
Working Capital Acquired ........................... 4,661,266
Less historical assets of Reddy Ice not
acquired ......................................... (1,750,000)
Plus historical liabilities of Reddy Ice not
assumed .......................................... 124,334,000
-------------
Total assets acquired ........................................ 112,631,266
------------
Goodwill ............................................................... $ 68,145,410
============
</TABLE>
- ----------
(1) In recording the purchase price allocation, all historical equity
balances of the acquired company are eliminated.
(2) The Company has not completed an assessment of the fair value of the
net assets to be acquired for purposes of allocating the purchase
price. Accordingly, the excess of the purchase price over the net
asset value of the acquired companies has been allocated entirely to
goodwill. To the extent that such assessments indicate the fair value
of fixed assets is in excess of the net book value, this excess would
be allocated to fixed assets and reduce the goodwill calculated above.
Assuming a weighted average depreciable life for fixed assets of five
years, every $500,000 allocated to fixed assets rather than goodwill
would increase pro forma 1998 depreciation and amortization expense by
$87,500.
(c) Does not reflect pro forma undeclared preferred dividends of an additional
$2,301,370 on the $25,000,000 Mandatorily Redeemable Preferred Stock and
$5,200,000 on the $40,000,000 Exchangeable Preferred Stock and $1,219,690
accretion on Exchangeable Preferred Stock.
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 purchase during 1997.
(b) Elimination of compensation and related benefits for Prior Acquisitions'
owners that do not continue with the Company after the respective
acquisition dates.
33
<PAGE> 34
(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) Elimination of corporate overhead charges to acquired entities which are
not of a continuing nature with the Company's core business.
(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 Acquisitions 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:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
12/31/97 3/31/98
------------- -------------
<S> <C> <C>
Value of Common Stock consideration........................... $ 23,361,633 $ 23,361,633
Cash consideration............................................ 265,697,406 265,697,406
------------- -------------
Total Purchase Price..................................... 289,059,039 289,059,039
Total net assets acquired(1).................................. 106,743,124 106,743,124
------------- -------------
Goodwill...................................................... $ 182,315,915 $ 182,315,915
============= =============
40 year estimated life........................................ 40 40
============= =============
Calculated amortization for the period................... 4,557,898 1,139,474
Less: historical amortization............................ (411,541) (629,755
------------- -------------
Adjustment to amortization............................... $ 4,146,357 $ 509,719
============= =============
</TABLE>
(1) The Company has not completed an assessment of the fair value of the
net assets acquired or to be acquired for purposes of allocating the
purchase price. Accordingly, the excess of the purchase price over the
net asset value of the Acquisitions has been allocated entirely to
goodwill. To the extent that such assessments indicate the fair value
of fixed assets is in excess of the Acquisitions' net book value, this
excess would be allocated to fixed assets and reduce the goodwill
calculated above. Assuming a weighted average depreciable life for
fixed assets of five years, every $500,000 allocated to fixed assets,
rather than goodwill, would increase pro forma depreciation and
amortization expense by $87,500.
(h) Interest expense adjustments are as follows:
<TABLE>
<CAPTION>
Year Ended Three Months
12/31/97 Ended 3/31/98
------------- -------------
<S> <C> <C>
Senior Notes ................................................... $ 270,000,000 $ 270,000,000
Interest rate .................................................. 9.75% 9.75%
------------- -------------
Pro forma interest expense on Senior Notes ..................... 26,325,000 6,581,250
------------- -------------
New Credit Facility ............................................ $ 15,000,000 $ 15,000,000
Interest rate .................................................. 8.50% 8.50%
------------- -------------
Pro forma interest expense on New Credit Facility .............. 1,275,000 318,750
------------- -------------
Total pro forma interest expense ..................... 27,600,000 6,900,000
Less: Historical interest expense for debt to be retired ....... (6,585,317) (2,873,971)
Reddy Ice historical interest expense .................... (7,167,971) (3,282,653)
Acquisitions historical interest expense ................. (1,909,539) (290,007)
Amortization of premium on Offering:
Total premium of $625,000
Calculated amortization, 7 year life ................... (89,286) (22,321)
Plus: Additional interest on amortization of debt issuance
costs and debt discount on Original Offering and
Transactions:
Total debt issuance costs of $17,160,370
Calculated amortization, 7-year life ................... 2,451,482 612,870
Amortization of discount on Prior Note Offering:
Total discount of $904,800
Calculated amortization, 7 year life .................. 129,257 32,314
------------- -------------
Net adjustment to interest expense ............................. $ 14,428,626 $ 1,076,232
============= =============
</TABLE>
(i) Dividends on the $25,000,000 10% Mandatorily Redeemable Preferred Stock and
the $40,000,000 13% Exchangeable Preferred Stock and accretion on
Exchangeable Preferred Stock.
(j) The elimination of Reddy Ice's income tax expense assumes that the combined
Company was in a loss position, therefore the Company would not incur
income tax expense.
34
<PAGE> 35
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth selected historical financial data derived
from the audited financial statements of Packaged Ice at and for the five years
ended December 31, 1997 and contains selected financial data derived from the
unaudited financial statements of Packaged Ice for the three months ended March
31, 1997 and 1998. The ice system data has been derived from Packaged Ice's
unaudited property data. The unaudited financial statements of Packaged Ice as
of and for the three months ended March 31, 1997 and 1998 reflect all
adjustments necessary in the opinion of management (consisting only of normal
recurring adjustments) for a fair presentation of such data. The unaudited pro
forma combined financial data gives effect to (i) the acquisition of traditional
ice companies by Packaged Ice since January 1, 1997 (collectively, the "Prior
Acquisitions"), (ii) the acquisition of traditional ice companies by Reddy Ice
between January 1, 1997 and March 31, 1998 (collectively, the "RIC
Acquisitions"), (iii) together with the Prior Acquisitions, the RIC Acquisitions
and the Reddy Acquisition, (collectively, the, "Acquisitions"), (iv) the
issuance on January 22, 1998 of $145,000,000 aggregate principal amount of
Series A Notes (the "Prior Note Offering"), (v) the Culligan Investment and (vi)
the Transactions as if they had occurred at the beginning of the period
presented. The pro forma as adjusted balance sheet gives effect to the
Transactions as if they had occurred on March 31, 1998. The unaudited pro forma
financial data should not be considered indicative of actual results that would
have been achieved had the acquisitions been consummated on the dates or for the
periods indicated and do not purport to indicate results of operations as of any
future date or any future period. The following information should be read in
conjunction with the Consolidated Financial Statements of Packaged Ice,
including the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
UNAUDITED
PRO FORMA
COMBINED
1993 1994 1995 1996 1997 1997
----- ------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues ................................ $ 155 $ 784 $ 2,830 $ 4,427 $ 28,981 $ 174,201
Cost of goods sold ...................... 56 352 1,251 2,035 18,724 113,948
Gross profit ............................ 99 432 1,579 2,392 10,257 60,553
Operating expenses(1) ................... 431 974 1,515 1,981 7,636 24,213
Depreciation and amortization ........... 48 224 751 1,456 5,130 22,377
Interest expense ........................ 11 25 76 130 6,585 30,091
Other income (expense) .................. -- 69 75 185 655 1,383
Extraordinary loss on refinancing ....... -- -- -- -- -- --
Net loss ................................ (391) (722) (688) (990) (8,439) (14,435)
Net loss to common shareholders ......... (391) (722) (688) (990) (8,637) (23,554)
Loss per share of Common Stock .......... $(.25) $ (.28) $ (.26) $ (.35) $ (2.40) $ (4.64)
OTHER FINANCIAL DATA:
Cash flows-- operating activities ....... $(289) $ (647) $ 148 $ 1,094 $ (3,248)
Cash flows-- investing activities ....... (292) (3,497) (2,961) (5,925) (61,541)
Cash flows-- financing activities ....... 492 4,897 3,034 3,968 79,488
Capital expenditures(2) ................. 252 2,999 2,717 5,745 10,765
Ratio of earnings to fixed charges(3).... N/A N/A N/A N/A N/A
BALANCE SHEET DATA:
Cash and equivalents .................... $ 58 $ 812 $ 1,033 $ 170 $ 19,369
Working capital (deficiency) ............ (137) 639 696 (1,228) 16,554
Total assets ............................ 618 5,513 8,050 11,523 122,300
Total long-term debt, net of discount ... 125 566 211 3,582 67,502
Exchangeable Preferred Stock .............. -- -- -- -- --
Mandatorily redeemable preferred
stock ................................ -- -- -- -- 25,199
Total preferred stock with put
redemption option .................... -- -- 2,497 2,497 3,223
Common stock with put redemption
option ............................... -- -- 1,972 1,972 1,972
Total shareholders' equity .............. 247 4,427 2,582 1,597 15,819
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
UNAUDITED
PRO FORMA
COMBINED
1997 1998 1998
-------- --------- ---------
<S> <C> <C> <C>
OPERATING DATA:
Revenues ................................ $ 846 $ 8,401 $ 23,265
Cost of goods sold ...................... 460 6,394 12,220
Gross profit ............................ 386 2,007 11,045
Operating expenses(1) ................... 572 3,854 13,902
Depreciation and amortization ........... 479 2,071 5,285
Interest expense ........................ 85 2,874 7,523
Other income (expense) .................. 158 699 326
Extraordinary loss on refinancing ....... -- (17,387) (17,387)
Net loss ................................ (592) (24,178) (32,726)
Net loss to common shareholders ......... (592) (24,178) (35,006)
Loss per share of Common Stock .......... $ (0.21) $ (5.64) $ (9.02)
OTHER FINANCIAL DATA: .....................
Cash flows-- operating activities ....... $ 1,073 $ (7,017)
Cash flows-- investing activities ....... (1,530) (50,645)
Cash flows-- financing activities ....... 567 59,493
Capital expenditures(2) ................. 1,354 4,026
Ratio of earnings to fixed charges(3).... N/A N/A
BALANCE SHEET DATA:
Cash and equivalents .................... $ 279 $ 16,656 $ 13,278
Working capital (deficiency) ............ (2,610) 21,363 17,824
Total assets ............................ 12,922 186,421 374,021
Total long-term debt, net of discount ... 3,075 145,000 284,961
Exchangeable Preferred Stock ............ -- -- 35,121
Mandatorily redeemable preferred
stock ................................ -- 25,812 25,812
Total preferred stock with put
redemption option .................... -- 3,223 3,223
Common stock with put redemption
option ............................... -- 1,972 1,972
Total shareholders' equity .............. 6,244 1,599 5,678
</TABLE>
35
<PAGE> 36
- ---------
(1) Excludes depreciation and amortization.
(2) Excludes expenditures used to acquire traditional ice businesses.
(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 three months ended March 31, 1997 and 1998 to cover fixed charges.
The deficiencies were $391,000 in 1993, $722,000 in 1994, $688,000 in 1995,
$990,000 in 1996, $8,439,000 in 1997, $592,000 and $6,791,000 for the three
months ended March 31, 1997 and 1998, respectively.
36
<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical Financial Data," and Packaged Ice's Consolidated Financial
Statements, and the notes thereto, included elsewhere herein.
OVERVIEW
The Company derives its revenues primarily from the sale of packaged ice
through Packaged Ice Systems, which manufactures, packages and stores ice at the
retail location, and through traditional delivery methods, whereby ice is
manufactured, packaged and stored at a central facility and transported to the
retail location when needed. The Company has historically sold ice primarily
through Packaged Ice Systems, but upon acquiring certain traditional ice
businesses and certain assets pursuant to the Acquisitions, now sells ice
through both distribution methods. Such combination of distribution methods is
expected to provide the Company with (i) higher operating margins, due to
reduced production and distribution costs, (ii) a delivery system designed to
supply high volume locations and capable of cost-effectively servicing a market
in excess of 100 miles from its traditional ice manufacturing facilities, and
(iii) an ability to redistribute production from its traditional ice facilities
to additional customers and satisfy seasonal peak demands at customer locations
with Packaged Ice Systems. The Company also provides other services including
cold storage rental, the manufacturing and sale of bottled water, and equipment
leasing.
The Company manufactures its ice in crushed, cubed, half-moon and
cylindrical forms and packages its ice primarily in six to 40 pound bags for
eventual sale to retail customers and sells block ice in 10 and 300 pound sizes
primarily to commercial and agricultural users. Seven or eight pound bags are
the most commonly purchased size in the industry. Packaged ice sold in 20 pound
and 40 pound bags is typically purchased by restaurants and other commercial
users. Block ice in 10 pound and 300 pound units is typically sold to customers
in the commercial and agricultural sectors.
Prices for packaged ice are generally stable with some price variation
between markets based on geography and customer base. The Company services over
45,000 customer locations in 17 states, with Texas, Arizona, California and
Florida the most significant markets. The Company services the significant
segments of the ice industry, including supermarket and convenience store
retailers, restaurants, commercial users and the agricultural sector. Management
believes that this market diversity helps insulate the Company from both price
and demand fluctuations caused by geography, weather, customer base and product
segment.
The Company's costs of goods sold include costs associated with both
traditional ice delivery and the Packaged Ice Systems. In the traditional ice
business, plant occupancy, plastic bags, delivery, labor and utility-related
expenses account for the largest costs. Costs vary significantly by region and
fluctuate based upon, among other things, freezer capacity and local utility
rates. With the Packaged Ice System, ice storage costs and general operating
utility costs are eliminated. The Company's costs of goods sold also include the
cost of plastic bags which are incurred by both the traditional ice manufacturer
plants and the Packaged Ice Systems. The cost of the bag used in the Packaged
Ice System is substantially higher than that used in traditional delivery due to
special components and greater thickness. Costs of goods sold for both systems
also includes labor costs associated with manufacturing, delivery and
maintenance. The Packaged Ice System eliminates certain costs related to
production and distribution but does require in-store customer service
representatives and machine technicians. In the aggregate, labor costs
associated with the Packaged Ice System are substantially lower than labor costs
associated with traditional ice manufacturing.
The Company's operating expenses include costs associated with selling,
general and administrative functions. These costs include executive officers'
compensation, office and administrative salaries and costs associated with
leasing office space. Selling, general and administrative functions are similar
at both the traditional facilities operated by the various subsidiaries and at
Packaged Ice, which exclusively handles the Packaged Ice System. These operating
expenses are typically higher when the Company enters new markets, in which it
intends to place Packaged Ice Systems, as new marketing, systems and office
facilities must be established.
37
<PAGE> 38
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, selected
operating data and supplemental data expressed as a percentage of total revenue
at the end of each period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
---------------------------- ------------------
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 goods sold ............... 44.2 46.0 64.6 54.4 76.1
Gross profit ..................... 55.8 54.0 35.4 45.6 23.9
Operating expenses(1) ............ 53.5 44.7 26.3 67.6 45.9
Depreciation and amortization ... 26.5 32.9 17.7 56.6 24.7
Interest expense ................. 2.7 2.9 22.7 10.1 34.2
Other income ..................... 2.7 4.2 2.3 18.7 0.1
Net loss ......................... (24.3) (22.3) (29.1) (70.0) (80.8)
</TABLE>
- ----------
(1) Excludes depreciation and amortization.
HISTORICAL RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenues. Revenues increased $7.6 million from $0.8 million for the quarter
ended March 31, 1997 to $8.4 million for the quarter ended March 31, 1998.
Revenues increased $0.7 million due to the placement of additional Packaged Ice
Systems since the quarter ended March 31, 1997 and $6.9 million as a result of
revenue contributed by the Acquisitions.
Gross Profit. Gross profit increased $1.6 million from $0.4 million for the
quarter ended March 31, 1997 to $2.0 million for the quarter ended March 31,
1998. As a percentage of revenues gross profit decreased 21.7 percentage points
from 45.6% at March 31, 1997 to 23.9% at March 31, 1998. Gross margins decreased
because of the higher cost of sales reflected in the traditional ice businesses
of the Acquisitions. Traditional ice companies experience significantly higher
costs of goods sold than the lower costs of on-site manufacturing and delivery
associated with the Packaged Ice Systems.
Selling, General and Administrative Expenses. Operating expenses increased
$3.3 million from $0.6 million for the quarter ended March 31, 1997 to $3.9
million for the quarter ended March 31, 1998. As a percentage of revenues,
operating expenses decreased 21.7 percentage points from 67.6% at March 31, 1997
to 45.9% at March 31, 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 sales enjoyed as a result of the Acquisitions.
Depreciation and Amortization Expense. Depreciation and amortization
increased $1.6 million from $0.5 million for the quarter ended March 31, 1997 to
$2.1 million for the quarter ended March 31, 1998. As a percentage of sales,
deprecation and amortization decreased 31.9 percentage points from 56.6% to
24.7%. This decrease was due primarily to the lower historical depreciation and
amortization percentages of the businesses acquired pursuant to the
Acquisitions. These percentages reflect the longer estimated useful lives of
traditional ice plant and equipment as compared to Packaged Ice Systems. This
decrease more that offset the increase related to the amortization of goodwill
resulting from the Acquisitions.
Other Income. Other income decreased $0.2 million from $0.2 million for the
quarter ended March 31, 1997 to $699 for the quarter ended March 31, 1998. This
decrease was due primarily to the elimination in 1998 of income of companies
subsequently acquired, the management fee and equipment leasing income that was
recognized in 1997 before the acquisitions began.
Interest Expense. Interest expense increased $2.8 million from $0.1 million
for the quarter ended March 31, 1997 to $2.9 million for the quarter ended March
31, 1998. This increase was a result of higher levels of debt associated with
the Company borrowing $145 million from the issuance of the new 9 3/4% Senior
Notes.
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<PAGE> 39
Net Loss. Net loss increased $6.2 million from $0.6 million for the quarter
ended March 31, 1997 to $6.8 million for the quarter ended March 31, 1998. The
increase in the loss is due to the increases in selling, general and
administrative; depreciation and amortization and interest expense more than
offsetting the increased gross profit due to the Acquisitions.
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 Packaged Ice
Systems (which was the only method of distribution prior to the April
Acquisitions) and $21.9 million as a result of revenue contributed by the Prior
Acquisitions.
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. The Prior Acquisitions contributed $7.2 million of the increase in gross
profit. As a percentage of revenues, gross profit decreased 18.6 percentage
points 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 of the Prior Acquisitions. Traditional ice companies
have higher costs of goods sold than the lower costs associated with the on-site
manufacturing and delivery of the Packaged Ice System. As a result of (i)
unusually wet El Nino-related weather throughout the Sunbelt, especially in
California, Arizona and South Texas, and (ii) competitive pricing in Arizona and
South Texas, Packaged Ice did not meet expected gross profit (or margin) levels
during 1997.
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 18.4 percentage points 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 sales resulting from
the Prior Acquisitions.
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 15.2 percentage points from 32.9% to 17.7%. This
decrease was due primarily to the lower historical depreciation and amortization
percentages at the Prior Acquisitions. These percentages reflect the longer
estimated useful lives of traditional ice plant and equipment as compared to
Packaged Ice Systems. This decrease more than offset the increase related to the
amortization of goodwill resulting from the Prior Acquisitions.
Other Income. Other income increased $0.5 million from $0.2 million for the
year ended December 31, 1996 to $0.7 million for the year ended December 31,
1997. This increase was due primarily to interest and lease income.
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 associated with
the issuance of $75 million of the 12% Senior Notes.
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 was due primarily to the increase in depreciation (an increase of
$3.6 million) associated with the higher investment in fixed assets by the
traditional ice companies acquired by Packaged Ice in 1997, and an increase of
$6.5 million in interest expense related to the $75 million of bond debt used in
financing the acquisitions. Cash flow from operations was actually $2.2 million
greater in 1997 than 1996 ($2.6 million in 1997 versus $0.4 million in 1996)
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended December 31, 1997, Packaged Ice had net cash
provided by operating activities of $3.2 million; net cash used in investing
activities of $61.5 million, consisting primarily of $44.1 million used to
complete acquisitions of traditional ice companies and $10.6 million used to
purchase Packaged Ice Systems; and net cash provided by financing activities of
$79.5 million, consisting of $9.9 million of borrowings under Packaged Ice's Old
Credit Facility
39
<PAGE> 40
(as defined), $69.6 million of net proceeds from the issuance of the 12% Senior
Notes after the refinancing of existing indebtedness, and $27.1 million from the
issuance of common and preferred stock (net of Packaged Ice's $1.5 million
purchase of treasury stock), resulting in a net increase in cash and equivalents
of $14.7 million.
In September 1997, Packaged Ice executed a six year senior credit facility
with Frost National Bank and Zion's National Bank, which would have expired in
September 2003 (the "Old Credit Facility"). The Old Credit Facility was replaced
on April 30, 1998 by the New Credit Facility. The Old Credit Facility provided
for borrowings of up to $20 million, subject to a borrowing base limitation (as
defined). Interest was payable at Packaged Ice's option at either 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.
Through December 31, 1997, Packaged Ice has acquired certain traditional
ice businesses and certain assets to complement its core business for purchase
prices totaling approximately $44.1 million in cash, $13.5 million in assumed
liabilities paid at closing and $12.8 million in common stock reflected at
Packaged Ice's valuation of $10.00 per share. Such expenditures were funded from
the proceeds of the sale of the 12% Senior Notes and equity investments by
Culligan and an existing investor. The excess of the purchase price, based on
fair value of the net assets acquired, over the net book value of the acquired
business has been allocated to goodwill. 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 were recorded using the purchase method of
accounting, and therefore, the results of their operations are included in
Packaged Ice's consolidated financial statements from the date of their
respective purchase.
On December 2, 1997, Packaged Ice entered into a securities purchase
agreement with Culligan and an existing shareholder pursuant to which Packaged
Ice issued 250,000 shares of 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. 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 herein) during which there is a closing price on each such
trading day and the closing price on each such trading day equals or exceeds
$26.00 per share, subject to certain adjustments. "Qualifying IPO" means an
underwritten public offering of common stock of the Company at an aggregate
price to the public of at least $40,000,000 and after which the common stock is
listed on a national securities exchange or automated quotation system. 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.
On January 28, 1998, Packaged Ice completed a private offering of
$145,000,000 aggregate principal amount of Series A Notes (the "Series A Notes
I"). The Series A Notes I 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 Series A Notes I are effectively subordinated to any senior secured credit
facility. The Series A Notes I 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 Series A Notes I were applied to (i) repurchase the 12% Senior Notes as
discussed above, (ii) repay all outstanding obligations under the Old Credit
Facility, (iii) fund acquisitions of traditional ice companies and (iv) for
working capital and general corporate purposes.
On April 30, 1998 the Company issued an additional $125 million of Series A
Notes (the "Series A Notes II" and together with the Series Notes I, the "Series
Notes") due February 1, 2005 in a "tack-on" offering. The Series A Notes II were
issued under the indenture (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 U.S. Trust Company of
Texas, N. A., as Trustee. The Notes are of the same series as the $145 million
of Series A Notes I issued January 28, 1998.
40
<PAGE> 41
The Company obtained the consent of a majority of the holders of the Series
A Notes I issued under the Indenture to certain amendments to the Indenture. The
Company paid consent fees aggregating $1,397,600 to the consenting holders. The
principal amendments to the Indenture increase the Permitted Indebtedness to
allow the issuance of the Series A Notes II, and increase the Permitted
Indebtedness basket to permit the Company to fully utilize the New Credit
Facility as discussed below.
Concurrently with the Reddy Acquisition, the Company entered into an $80
million five year senior credit facility (the "New Credit Facility") with
Antares Leveraged Capital Corporation consisting of a revolving working capital
facility of $15 million and a revolving acquisition loan facility (the
"Acquisition Facility") of $65 million. The New Credit Facility replaced the Old
Credit Facility. The Old Credit Facility is defined on preceding page. The
Company plans to use the New Credit Facility for acquisition and working capital
needs.
Until June 30, 1999, the outstanding principal balance under the New Credit
Facility will bear interest at the Company's option at a fluctuating rate equal
to either (i) LIBOR plus 2.75% per annum, or (ii) the "prime rate" plus 1.00%
per annum. After June 30, 1999, such interest rates will be subject to a pricing
grid, and may decrease up to 0.50% per annum in certain circumstances. All
amounts outstanding under the Acquisition Facility on the second anniversary of
the New Credit Facility will amortize in 12 equal quarterly installments over
the remaining term.
The New Credit Facility contains general and financial covenants and events
of default customary for credit facilities of this type. The New Credit Facility
is secured by substantially all of the Company's assets and the capital stock of
all of the Company's significant subsidiaries.
For the three months ended March 31, 1998, the Company had net cash used in
operating activities of $10.9 million; net cash used in investing activities of
$50.3 million, consisting primarily of $45.2 million used to complete the
Acquisitions and $2.8 million used to purchase Packaged Ice Systems; and net
cash provided by financing activities of $63.4 million, consisting of $138.4
million net from the issuance of the Series A Notes I, which was offset by a
$75.0 million repayment of debts; thus resulting in a net increase in cash and
equivalents of $2.2 million.
During the three months ended March 31, 1998, the Company acquired certain
traditional ice businesses and certain assets to complement its core business
primarily in the Southeast portion of the United States for purchase prices
totaling approximately $45.3 million cash and $10.5 of common stock valued at
$10-13 per share. Such cash expenditures were funded from the proceeds of the
sale of the Series A Notes I.
At March 31, 1998 the Company had cash on hand of $21.6 million to meet its
short-term liquidity requirements. Additionally, the Company had up to a
potential $20.0 million available to fund acquisitions under Old Credit
Facility. This credit facility was replaced on April 30, 1998 by the New Credit
Facility.
The Company's Packaged Ice Systems are expected to range in cost from
$11,500 to $18,500 per installation and capital expenditures for such systems
are expected to be approximately $4.7 million in fiscal 1998. During the next
two years, 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. Capital
expenditures to maintain and expand traditional ice facilities are expected to
be approximately $5.0 million in fiscal 1998.
The Company believes that cash on hand, together with cash flow anticipated
from operations and available borrowings under the New Credit Facility will be
adequate to meet debt service requirements, fund continuing capital requirements
and satisfy working capital and general corporate needs, through the next twelve
months. The Company may need to raise additional funds through public or private
debt or equity financing in order 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 results of operations. There can be no
assurance that sufficient funds will be available to finance intended
acquisitions or capital expenditures for the placement of Packaged Ice Systems
to sustain the Company's recent rate of growth.
41
<PAGE> 42
YEAR 2000
The Company is in the process of addressing the impact of the Year 2000
problem on its computer and information systems. Key financial, information and
operational systems are being assessed to modify or replace each affected system
on a timely basis. 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. The financial impact of making required
systems changes is unknown, however, it is not expected to be material to the
Company's consolidated financial position, results of operations or cash flows.
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. If an extended period of high inflation is encountered, the Company
believes that it will be able to pass on its higher costs to its customers.
The packaged ice industry, as a whole, is extremely seasonal. In the warm
weather regions where the Company primarily operates, however, this seasonality
is less pronounced. Historically, approximately 66% of Packaged Ice's revenues
occur during the second and third fiscal quarters when the weather conditions
are generally warmer and demand is greater. Approximately 15% of Packaged Ice's
revenues occur during the first fiscal quarter, and approximately 19% of
Packaged Ice's revenues occur in the fourth fiscal quarter when the weather is
generally cooler. These percentages can vary from region to region within the
sunbelt depending upon the degree of volatility of the seasons, and other
weather phenomenon such as "El Nino".
BUSINESS
COMPANY OVERVIEW
The Company is the largest manufacturer and distributor of packaged ice in
the United States and is pursuing a consolidation strategy within the highly
fragmented packaged ice industry. The Company currently serves over 45,000
customer locations in 17 states and has grown significantly through strategic
acquisitions of ice manufacturing and distribution companies, and through
placements of proprietary ice machines which produce, package and store ice
through an automated, self-contained process (the "Packaged Ice System").
Through these strategic acquisitions, the Company enters new markets, gains
additional production capacity and leverages the relationships of acquired
companies with grocery and convenience store customers. The Company's presence
throughout key markets in the southern half of the United States has been
expanded through a consolidating strategy. In addition, Packaged Ice increased
its installed base of Packaged Ice Systems from 658 machines to 1,031 machines
during fiscal 1997. As a result, the Company's revenues have increased from
$4.4 million during fiscal 1996 to $174.5 million, on a pro forma basis, during
fiscal 1997.
REDDY ICE OVERVIEW
Reddy Ice was founded in Texas in the 1890s primarily as a supplier of
block ice for railroad refrigerator cars and, in the 1920s, expanded into the
retail market. In May 1988, a group of investors acquired the Reddy Ice division
of The Southland Corporation and, in October 1988, the same investor group
acquired the Sparkle Ice division of Circle K Corporation. These two companies
merged their operations in September 1992. Since this date, Reddy Ice has, like
Packaged Ice, aggressively pursued a consolidation strategy, primarily expanding
through a series of strategic and consolidating acquisitions. Today, Reddy Ice
is a leading manufacturer and distributor of packaged ice in the southeast and
southwest regions of the United States, with 38 manufacturing facilities and 13
distribution centers in 13 states.
42
<PAGE> 43
INDUSTRY OVERVIEW
The packaged ice industry is highly fragmented with over 3,000 companies,
consisting primarily of smaller packaged ice companies, many of which lack
significant capital resources. Traditional ice manufacturers produce and package
ice at centrally-located facilities and distribute to a limited market radius of
approximately 100 miles, mainly due to high shipping and product distribution
costs. Efficient distribution and customer concentration are important, as
transportation is a high cost component in the price of manufactured ice within
a traditional ice delivery system. It is difficult to ensure prompt and reliable
delivery during peak seasonal months in large markets with traditional ice
delivery systems. As a result, the ice business has historically been a regional
service business. The industry is seasonal, but on a year-to-year basis remains
stable, generally only affected by abnormal cold or rainy weather within a
region.
BUSINESS STRATEGY
The Company intends to continue its efforts to acquire traditional ice
companies in strategic markets. Acquisitions of existing manufacturers and
distributors of packaged ice have provided the Company with (i) quick access to
key markets, accelerating the roll out of Packaged Ice Systems, (ii) a source of
stable cash flow, (iii) the national scope to better service large supermarket
and convenience store chains and (iv) economies of scale and cost savings.
Management believes that the Company's proven ability to enter new markets
through traditional acquisitions and the numerous advantages that the Packaged
Ice System provides to retailers will enable the Company to increase the
penetration of Packaged Ice Systems in supermarkets and convenience stores.
Acquire Traditional Ice Manufacturing Companies in Highly Fragmented
Industry. The Company believes that the highly fragmented packaged ice industry
contains numerous acquisition opportunities for service-oriented companies with
superior ice delivery systems and significant capital resources. The Company's
acquisition strategy is to target well-managed, traditional ice producers with
favorable demographics and significant customer bases in both new and existing
market areas. This acquisition strategy allows the Company to broaden geographic
coverage, increase market share, provide for additional distribution channels
through which to place Packaged Ice Systems, and achieve greater economies of
scale. In determining which businesses may be suitable acquisition candidates,
management conducts demographic and competitive analyses and performs
comprehensive due diligence on the target's facilities, management, existing
customer base and growth opportunities.
Upon closing an acquisition, the Company seeks reductions in operating costs
and working capital requirements by (i) closing or combining less efficient or
redundant manufacturing and distribution facilities, (ii) maximizing routing
efficiencies, (iii) managing vendor relationships to ensure a high level of
responsiveness and favorable pricing, (iv) increasing market concentration of
Packaged Ice Systems to improve merchandising and servicing efficiencies and (v)
consolidating certain administrative and selling functions to eliminate
redundancies and excess costs. Since the Company is focusing its acquisition
efforts on related businesses, it anticipates that the customer base of any
acquired business will be similar to its own and therefore administrative areas
such as management information systems, accounting systems and customer support
may be consolidated. There can be no assurance that the Company will be able to
continue to find, finance and acquire suitable acquisition candidates at
acceptable prices and terms or succeed in integrating an acquired business into
the Company's existing business. See "Risk Factors -- Risks of Acquisitions and
the Failure to Integrate Acquired Businesses."
Expand Market Presence Through Packaged Ice System. Management believes that
the Packaged Ice System provides certain advantages to the retailer including
(i) a continuous supply of ice, thus reducing the frequency of product shortages
typical of traditional ice delivery, (ii) reducing costs associated with
delivery and storage at the retail location, (iii) satisfying consumer demand
for a higher quality and more sanitary ice than typically found with traditional
ice delivery, (iv) effectively managing inventory through computerized
production tracking and dedicated technical support and (v) increasing safety by
reducing the potential for "slip and fall" accidents caused by water spills.
These advantages have enabled the Packaged Ice System to gain market acceptance.
At May 31, 1998, Packaged Ice had an installed base of 1,235 Packaged Ice
Systems and had a placement backlog of approximately 250 machines.
The Packaged Ice System, when combined with traditional delivery methods,
provides the Company with certain advantages, including (i) a delivery system
designed to supply high volume locations and capable of cost-effectively
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<PAGE> 44
servicing a market in excess of 100 miles from its traditional ice manufacturing
facilities, (ii) the ability to redistribute production from its traditional ice
facilities to additional customers as well as satisfy seasonal peak demand at
stores with Packaged Ice Systems, and (iii) higher operating margins, due to
significantly reduced production and distribution costs. Management has
recognized these benefits of combining traditional delivery methods with the
Packaged Ice System. As a result, the Company's strategy has been to enter new
markets through traditional acquisitions and, soon thereafter, to begin placing
Packaged Ice Systems throughout the region.
THE PACKAGED ICE SYSTEM
In 1994, Packaged Ice completed the development of its proprietary system
that utilizes state-of-the-art technology to produce, package and store ice
directly at customer locations. The Packaged Ice System consists of standard
Hoshizaki America, Inc. ("Hoshizaki") ice cubers, an ice merchandiser built to
Packaged Ice's specifications by Beverage Air Corporation ("Beverage Air") and a
bagging machine, the heart of the Packaged Ice System, manufactured by Lancer, a
shareholder of the Company, 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. The
Packaged Ice System is capable of producing up to 40,000 bags of ice per year
and is most frequently used in large supermarkets. The latest generation of the
Packaged Ice System is equipped with remote communication capability which
allows the Company's national service center to track production, monitor the
systems, and diagnose and correct system errors through the use of a central
processing unit. The Packaged Ice Systems are serviced by trained
representatives and are designed to provide a high degree of reliability and
serviceability through the use of interchangeable parts and a durable stainless
steel cabinet. To guard against product contamination and satisfy consumer
demand for high quality, sanitary ice, the Packaged Ice System was engineered to
meet all specifications delineated by the National Sanitation Foundation ("NSF")
for ice production and contains a patented automatic sanitizing system. In
addition, the Packaged Ice System is U.L. approved. In addition, management
estimates that Packaged Ice's strategic partners, Hoshizaki, Lancer and Beverage
Air, funded an aggregate of over $3.5 million of the development of the Packaged
Ice System. Management believes that certain of the technology utilized in the
Packaged Ice System is unique, with several patents covering the bagging device,
and that there are significant barriers to entry for new and existing
competitors with respect to the development of a competitive and reliable
machine that performs the same functions as the Packaged Ice System.
Reddy Ice also utilizes and holds the rights to a machine which
manufactures, bags and stores packaged ice directly at customer locations. Reddy
Ice's machine is marketed under the name "The Ice Factory." As of April 30,
1998, Reddy Ice had 342 Ice Factory Systems in place. The Company is currently
evaluating the viability and effectiveness of the Ice Factory machine.
DISTRIBUTION AND SALES
Efficient service, distribution and pricing are the key determinants of
profitability due to the limited amount of product differentiation in the
packaged ice industry. The Company delivers ice to consumers through (i)
traditional distribution methods and (ii) placement of Packaged Ice Systems.
Traditional Distribution. The Company transports packaged ice produced at
its traditional manufacturing facilities to its retail and commercial customers.
In addition, the Company's market presence provides it with the necessary
customer density to efficiently transport its products.
Packaged Ice System Placement. By producing and bagging the ice at the
customer's location, the Packaged Ice System reduces the Company's distribution
costs. To store ice inventory, traditional producers, including the Company, own
or rent expensive refrigerated facilities and incur significant utility costs to
maintain temperatures below freezing. The Packaged Ice System eliminates these
storage costs by moving ice production to the site of the customer. Traditional
manufacturers are also subject to high transportation costs, especially over
long distances. These expenses are minimized by on-site production. Remote
communications systems between the Packaged Ice Systems and the Company's
national service center allow for monitoring of on-site inventories and usage,
thereby enhancing the Company's service quality and efficiency. In severe
weather conditions this technology provides instant information on the need for
supplemental ice deliveries and allows rapid, cost-effective responses to each
individual customer's product and servicing needs. As a result of these cost
savings, the proprietary Packaged Ice System provides the Company with (i) a
higher operating margin than
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<PAGE> 45
traditional ice, and (ii) a delivery system designed to supply high volume
locations and capable of cost-effectively servicing a market in excess of 100
miles from its traditional ice manufacturing facilities.
The Company places its Packaged Ice Systems inside supermarkets and other
commercial locations, such as airport catering facilities, construction staging
areas, and large manufacturing plants. The Company provides the machines and
pays for all installation costs, while the retailer provides and pays for the
cost of water, sewer and electricity. The Company maintains ownership of the
machines and charges its customers by the bag. The Company's prices are
competitive with prices for bagged ice delivered by traditional ice companies.
The Company believes that retailers are becoming increasingly aware of the
benefits of the Packaged Ice System, which provides a high quality product
without the necessity of receiving large shipments of ice on a weekly or more
frequent basis.
In accordance with the Company's expansion strategy, the placement of the
Packaged Ice Systems at customer locations is based upon a thorough review of
each site, which primarily focuses on the historical ice sales at the site. Also
included in the site review is an analysis of the surrounding trade area, the
level of overall retail activity, the level of direct competition and the
proximity of the site to other Packaged Ice Systems operated by the Company.
Further, the Company reviews each site in order to ensure that the site has high
visibility and easy access for the consumer, that the site meets the Company's
standards for sanitary conditions including a connection to the municipal water
supply, that it has received, where available, an acceptable rating from the
local health department, and that it has an acceptable power source. Upon
completion of this review, the Company makes a determination as to the viability
of the location and whether a single machine or multiple machines are required
at the time of initial installation. Multiple machines may be installed at a
site if the volume of sales so warrants.
The Company believes that providing frequent, regular and reliable service
and support is one of the most important elements in the operation of its
machine network. In order to maintain this level of service and support, the
Company has implemented its route servicing system, utilizing trained service
representatives to perform the Company's regularly scheduled service procedures.
A service representative has a route consisting of up to 30 Packaged Ice
Systems, each of which are visited on a regular and frequent basis. The Company
maintains regional services centers which are designed to support the activities
of the service representatives. Inventories of filters, supplies and machine
parts are maintained at the centers for use in service calls. 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 products to satisfy a broad range of customers,
including retailers, commercial users, restaurants and agricultural users under
a variety of brand names, including Reddy Ice, Mission Party Ice and Crystal
Ice. In addition through its licensing agreement with Culligan, the Company has
obtained the right to use the name Ice by Culligan(R). The Company produces its
ice in cube, half-moon, cylindrical and crushed forms to satisfy the demand of
particular customers. The Company's primary ice product is cocktail ice packaged
in 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.
CUSTOMERS
The Company markets its products to a broad range of customers, including
supermarket chains, convenience stores, commercial users, agricultural buyers,
resorts and restaurants, and competitive producers and self-suppliers who
experience supply shortages. Management believes that the Company's geographic
diversification and the superior economics and product quality of the Packaged
Ice System have allowed it to develop relationships with certain high volume
national supermarket chains, and will continue its penetration into this
segment.
Retailers with no internal ice production capacity are the primary
purchasers of the Company's manufactured ice products and users of its Packaged
Ice System. Management believes that reasonable pricing when combined with
quality service results in customer loyalty. The Company has a diversified
customer base, with its largest customer accounting for less than 2% of net
sales in 1997. In addition, the Company has a geographically diversified
customer base, with
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<PAGE> 46
operations in 17 states throughout the southern and western United States. The
geographic expansion of the Company's customer base protects it from adverse
environmental factors in a particular region, such as abnormally cold or rainy
weather
COMPETITION
The traditional manufactured ice industry is highly competitive. In addition
to the Company's direct competition, numerous convenience and grocery retailers
operate commercial ice plants for internal use or manufacture and bag ice at
their store locations. Because only one ice manufacturer typically services an
individual retail site, the Company's products generally do not face competition
within a particular store. The traditional delivery packaged ice industry in the
United States is led by the Company and five regional, multi-facility
competitors, consisting of Home City Ice, Cassco Ice and Cold Storage, Arctic
Ice, Mountain Water Ice and Triangle Ice, 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. In order to successfully compete, an ice manufacturer must be
able to substantially increase production and distribution on a seasonal basis
while maintaining cost efficiency. Management believes that the Company's high
quality traditional production facilities, substantial financial resources, high
regional market share and associated route density and proprietary ice machine
technology provide it with numerous competitive advantages. The Company believes
that there are significant barriers to entry to new and existing competitors
with respect to the development of a machine with the same functions as the
Packaged Ice System, such as the substantial capital outlay required to develop
such a machine, the large number of machines needed to achieve competitive
operating efficiencies, the time and cost involved in developing a sophisticated
service network, and the identification of locations suitable to place the
machines. However, a successful roll out by a competitor of a machine which
duplicates the functions of the Packaged ice System could have a material
adverse effect on the Company.
INTELLECTUAL PROPERTY
The Company regards the Packaged Ice System as proprietary and relies
primarily on a combination of patents, nondisclosure and confidentiality
agreements, and other copy protection methods to secure and protect its
intellectual property rights. The Company holds or has exclusive rights to
several patents relating to the Packaged Ice System.
While the Company views the patents relating to the bagging device as
important to the value of the Packaged Ice System as a whole, there can be no
assurance that any issued patent will provide the Company with a meaningful
competitive advantage, that competitors will not design alternatives to reduce
or eliminate the benefits of any issued patent or that challenges will not be
instituted against the validity or enforceability of these patents. Other
companies may obtain patents claiming products or processes that are necessary
for, or useful to, the development of the Company's products, in which case the
Company may be required to obtain licenses for patents or for proprietary
technology in order to develop, manufacture or market its products. There can be
no assurance that the Company would be able to obtain such licenses on
commercially reasonable terms, if at all.
The Company 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.
The Company protects certain of its proprietary materials and processes by
relying on trade secret laws and nondisclosure and confidentiality agreements
and requires all of its key employees and third-party developers to sign
nondisclosure agreements. There can be no assurance that confidentiality or
trade secrets will be maintained or that others will not independently develop
or obtain access to such materials or processes.
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<PAGE> 47
FACILITIES
With consummation of the Reddy Acquisition, after giving effect to the
consolidation of redundant manufacturing facilities, the Company has
approximately 65 manufacturing plants located throughout the southern and
western United States. These plants, together with the current installed base of
Packaged Ice Systems, have a combined manufacturing capacity of approximately
12,000 tons per day. In addition, the Company has regional service centers for
its Packaged Ice Systems located throughout its market areas. These service
centers are staffed by trained route service representatives who visit and
merchandise the Packaged Ice Systems on a weekly or more frequent basis.
GOVERNMENT REGULATION
The packaged ice industry is subject to various federal, state and local
laws and regulations, which require the Company, among other things, to obtain
licenses for its business plants and machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding its plants and the Packaged Ice Systems and to continuously control
the quality and quantity of its ice.
The Company's packaged ice products are subject to federal and state
regulation as a food pursuant to the Federal Food, Drug and Cosmetic Act,
regulations promulgated thereunder by the Food and Drug Administration and
analogous state statutes. These statutes and regulations impose comprehensive
good manufacturing practices requirements governing the sanitary conditions of
the facilities where ice is manufactured, the design and maintenance of the
equipment used to manufacture the ice, the quality of source water and the
sanitary practices of employees during ice production. The State of Florida has
imposed yet additional requirements that include quarterly testing of the ice
for the presence of microbes and certain substances regulated under the federal
Safe Drinking Water Act, specific requirements for keeping ice packaging
operations separate from other activities and labeling requirements for the bags
used including the name of the company and the net weight. All of the Company's
Packaged Ice Systems and ice manufacturing facilities are subject to routine and
random safety, health and quality inspections. The Company believes that its
facilities, manufacturing practices and Packaged Ice Systems are in 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.
ENVIRONMENTAL MATTERS
The Company's ice manufacturing and ice storage operations are subject to
federal, state and local environmental laws and regulations. As a result, the
Company has the potential to be involved from time to time in administrative or
legal proceedings relating to environmental matters. There can be no assurance
that the aggregate amount of any environmental liabilities that might be
asserted in any such proceeding will not be material. The Company cannot predict
the types of environmental laws or regulations that may from time to time be
enacted in the future by federal, state or local governments, how existing or
future laws or regulations will be interpreted or enforced or what types of
environmental conditions may be found to exist at its facilities. The enactment
of more stringent laws or regulations or a more strict interpretation of
existing laws and regulations may require additional expenditures by the
Company, some of which could be material.
The Company generates and handles certain hazardous substances in connection
with the manufacture and storage of packaged ice. The handling and disposal of
these substances and wastes is subject to federal, state and local regulations,
and site contamination originating from the release or disposal of such
substances or wastes can lead to significant liabilities. In addition, certain
of the Company's current and former facilities are located in industrial areas
and have been in operation for many years. As a consequence, it is possible that
historical activities on property currently or formerly owned by the Company or
that current or historical activities on neighboring properties have affected
properties currently or formerly owned by the Company and that, as a result,
additional environmental issues may arise in the future, the precise nature of
which the Company cannot now predict.
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The Company thus may become liable for site contamination at properties
currently or formerly owned by the Company. Although such liability has not had
a material adverse affect on the financial condition or operating results of the
Company in the past, and the Company has no knowledge of claims that could be
expected to have a material adverse affect on its financial condition or
operations, there can be no assurance that the Company will not incur
significant costs in connection with historical handling or disposal of such
substances and wastes.
INSURANCE
The Company carries general and product liability insurance. Its combined
coverage per occurrence and aggregate loss coverages are in amounts the Company
believes to be adequate. Although the Company is not aware of any actions having
ever been filed and believes that the technology utilized at its manufacturing
facilities and contained in its machines makes any contamination of the ice
manufactured at its plants or dispensed by its machines unlikely, any
significant damage awards against the Company in excess of the Company's
insurance coverage could result in a material loss to the Company.
EMPLOYEES AND LABOR RELATIONS
At December 31, 1997, Packaged Ice and Reddy Ice had approximately 1,500
employees, the majority of which are full-time employees. Packaged Ice and Reddy
Ice generally have not experienced difficulty in meeting their seasonal
employment needs. Forty-eight (48) employees are represented by a union or are
subject to a collective bargaining agreement. Packaged Ice and Reddy Ice have
never experienced a work stoppage due to labor difficulties, and management
believes its relationship with its employees is generally excellent.
LITIGATION AND 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.
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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......... 42 President, Director and Secretary
Jimmy C. Weaver........ 44 Executive Vice President and Chief Operating Officer
James C. Hazlewood..... 50 Chief Financial Officer and Treasurer
H.D. Wiginton.......... 60 Senior Vice President - Marketing
Leonard A. Bedell...... 53 Senior Vice President - Central Operations
Graham D. Davis........ 43 Senior Vice President - Western Operations
Dale M. Johnson........ 53 Senior Vice President - Corporate Development
Steven P. Rosenberg.... 39 Director
Richard A. Coonrod..... 66 Director
Robert G. Miller....... 47 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. Mr. Stuart is a member of the Compensation Committee of
the Board of Directors.
A.J. Lewis III is President, a position to which he was elected in January
1997. In addition, Mr. Lewis is the Secretary of the Company. Mr. Lewis has been
a shareholder and director of the Company since 1991, and also serves 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.
Jimmy C. Weaver became Executive Vice President and Chief Operating Officer
on April 30, 1998. Mr. Weaver joined Reddy Ice in September 1996 and was
President of Reddy Ice 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 division of Scotsman Industries based in Dallas, Texas.
From November 1988 until February 1993, Mr. Weaver was National Sales Director
of Scotsman Ice Systems, a division of Scotsman Industries based in Chicago,
Illinois.
James C. Hazlewood is Chief Financial Officer and Treasurer. 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 is a Certified Public
Accountant who initiated his career with Arthur Andersen LLP.
H.D. Wiginton is Senior Vice President -- Marketing. Mr. Wiginton joined
the Company in November 1996. For the five years prior to joining the Company,
Mr. Wiginton was Executive Vice President of Tower Marketing, a Texas-based,
regional food brokerage concern.
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<PAGE> 50
Leonard A. Bedell is 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. Mr. Bedell is a Certified Public Accountant
who initiated his career with Arthur Andersen LLP.
Graham D. Davis became Senior Vice President -- Western Operations on April
30, 1998. Mr. Davis joined Reddy Ice, 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 Ice.
Dale M. Johnson is Senior Vice President -- Integration and Acquisitions.
Mr. Johnson was one of the founders of Southwestern Ice 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.
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. Mr.
Rosenberg is Chairman of the Board and Chief Executive Officer of Nutricept,
Inc., a development stage company engaged in the manufacture and distribution of
nutriceutical products. From 1992 to February 1997, Mr. Rosenberg was President
of Arrow, 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 Limited Partnership ("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.
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
for the five years preceding 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 is a limited partner
in SV Capital Partners, L.P., 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 is a private investor 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 The Mobil
Chemical Co. and served as President of The Mobil Chemical Co. from 1983 to
1986. Mr. Biggs initiated his career with McKinsey and Company, Inc. in 1957.
VOTING AGREEMENT
In excess of 80% of the shareholders have entered into a voting agreement
(the "Voting Agreement") which fixes the number of directors at no 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 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
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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.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
Chief Executive Officer of the Company and three additional highly compensated
executive officers (the "Named Executive Officers"). Compensation information is
shown for fiscal 1995, 1996 and 1997.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
------------------------------- OPTIONS/ ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS OTHER SARS COMPENSATION
----------------------- ---- -------- ------- ----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James F. Stuart, 1997 $125,000 $50,000 --(1) 30,000 $2,500(2)
Chairman, Chief Executive Officer 1996 125,000 --(1) -- 1,827(2)
1995 75,000 --(1) -- --
A.J. Lewis III 1997(3) $ 83,173 $50,000 --(1) 25,000 $ 769(2)
President -- --(1) -- --
James C. Hazlewood 1997(4) $ 14,873 -- --(1) 20,000 $ 738(5)
Chief Financial Officer
H.D. Wiginton 1997 $110,000 $32,810 --(1) 5,000 $6,000(5)
Senior Vice President -- Marketing 1996(6) 18,333 -- --(1) 6,000 1,000(5)
</TABLE>
- ----------
(1) Did not receive perquisites and other personnel benefits from Packaged Ice
in excess of $50,000 or 10% of the Named Executive Officer's total annual
salary and bonus paid for the years indicated.
(2) Contributions to Packaged Ice's 401(k) plan made by Packaged Ice.
(3) Represents partial year compensation. No compensation is provided for prior
years as Mr. Lewis' employment commenced April 1997.
(4) Represents partial year compensation. No compensation is provided for prior
years as Mr. Hazlewood's employment commenced October 1997.
(5) Automobile allowance.
(6) Represents partial year compensation. 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
stock options to purchase shares of the Company's Common Stock granted to the
Named Executive Officers during the year ended December 31, 1997.
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<PAGE> 52
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATE OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED IN PER SHARE FOR OPTION TERM
OPTIONS FISCAL EXERCISE OR EXPIRATION ----------------------
NAME GRANTED 1997 BASE PRICE DATE 5% 10%
- ------------------- ---------- ---------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
James F. Stuart...... 30,000 15.4% $ 10.00 11/1/2007 $ 188,668 $ 478,123
A.J. Lewis III....... 25,000 12.9% $ 10.00 11/1/2007 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>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table provides certain information regarding the exercise of
stock options to purchase shares of the Company's Common Stock during the year
ended December 31, 1997, by the Named Executive Officers, and the fiscal
year-end value of stock options held by such officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR END FISCAL YEAR END(1)
ACQUIRED ON ---------------------------- ----------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
James F. Stuart...... -- -- 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
$10.00 per share, as determined by the Company's Board of Directors. The
value of in-the-money options is calculated as the difference between the
fair market value of the Packaged Ice Common Stock underlying the options
at fiscal year end and the exercise price of the options. Exercisable
options refer to those options that are exercisable as of December 31,
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. See "-- Voting Agreement." Directors are not compensated for their
services as directors. Directors are reimbursed, however, for ordinary and
necessary expenses incurred in attending board or committee meetings.
STOCK OPTION 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 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 by reason 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
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<PAGE> 53
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 December 31, 1997, Packaged Ice had outstanding options for 256,000
shares of Common Stock at a weighted average exercise price of $9.28 of which
31,200 were exercisable. All options granted under the Option Plan have a
five-year vesting period, which will be accelerated in the event of a change of
control or initial public offering. All of the outstanding options were granted
at exercise prices determined by the Board of Directors to be equal to the fair
market value of the Common Stock on the date of grant. To date, no options have
been exercised under the Option Plan.
1998 Stock Option Plan. The Company has adopted the 1998 Stock Option Plan
(the "1998 Option Plan") on June 18, 1998. The total number of shares of Common
Stock subject to issuance under the 1998 Option Plan is 500,000, subject to
adjustments as provided in 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 employees of the
Company, its subsidiaries and affiliates. The 1998 Option Plan will be
administered by the Option Committee of the Board of Directors (the "Committee")
which will be comprised of "disinterested persons" within the meaning of Rule
16b-3 of the Exchange Act. Stock options may be granted by the 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
Committee on such terms, including payment forms, as the Committee deems
appropriate, provided that a 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 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 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 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 241,445 shares of
Common Stock under the 1998 Option Plan at a price of $15.00 per share, subject
to customary adjustments.
EMPLOYMENT AND TERMINATION
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 may be 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.
H.D. Wiginton, the Company's Senior Vice President, Marketing, entered
into an employment agreement effective November 1, 1996, which establishes a
base salary of $110,000 per year, provides for certain cash bonus incentives
relating to his performance.
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
if the Company does not renew the agreement for one year at the end of the
initial term.
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'
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<PAGE> 54
employment agreement provides that, in certain circumstances, he will receive
severance payments equal to six months of his then current base salary if the
Company does not renew the agreement for one year at the end of the initial
term.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1997, Rod J. Sands and Richard A. Coonrod
served as members of the Compensation Committee. During 1997, no member of the
Compensation Committee was an officer, former officer or employee of the Company
or any of its subsidiaries. During 1997, no executive officer of the Company
served as a member of: (i) the compensation committee of another entity in which
one of the executive officers of such entity served on the Company's
Compensation Committee, (ii) the board of directors of another entity in which
one of the executive officers of such entity served on the Company's
Compensation Committee, or (iii) the compensation committee of another entity in
which one of the executive officers of such entity served as a member of the
Company's Board of Directors.
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<PAGE> 55
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of June 26, 1998 with
respect to the beneficial ownership of the Company's $.01 par value common stock
("Common Stock"), assuming conversion of the Series A Preferred Stock and Series
B Preferred Stock which have voting rights equivalent to that of the Common
Stock, exercise of stock options and warrants to purchase Common Stock by: (i)
each director of the Company, (ii) each Named Executive Officer of the Company,
(iii) each other person known to hold 5% or more of the outstanding shares of
Common Stock, and (iv) all current executive officers (regardless of salary and
bonus level) and directors of the Company as a group. Unless otherwise
indicated, the persons listed in the table below have sole voting and investment
powers with respect to the shares indicated.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED %
------------ -----
<S> <C> <C>
James F. Stuart(1)
8572 Katy Freeway, Suite 101
Houston, Texas 77024 ............................... 388,700 3.92%
A. J. Lewis III(2)
1120 E. Durango
San Antonio, Texas 78205 ........................... 418,943 4.23%
Steven P. Rosenberg(3)
5430 LBJ Freeway, Suite 1600
Dallas, Texas 75219 ................................ 438,423 4.42%
Norwest Equity Partners V(4)
222 South Ninth St., Suite 2800
Minneapolis, Minnesota 55402-3388 .................. 820,449 8.28%
Culligan Water Technologies, Inc.(5)
One Culligan Parkway
Northbrook, IL 60062-6209 .......................... 1,878,760 18.96%
Richard A. Coonrod(6)
5720 Smetana Drive, Suite 300
Minnetonka, Minnesota 55343 ........................ 91,161 0.94%
H. D. Wiginton(7)
8572 Katy Freeway, Suite 101
Houston, Texas 77024 ............................... 17,000 0.17%
Robert G. Miller(8)
4425 West Olive, Suite 310
Glendale, Arizona 85302 ............................ 309,040 3.12%
SV Capital Partners, L.P.(9)(11)
200 Concord Plaza, Suite 620
San Antonio, Texas 78216 ........................... 582,953 5.88%
Rod J. Sands(10)(11)
5121 Broadway
San Antonio, Texas 78204 ........................... 582,953 5.88%
James C. Hazlewood(12)
8572 Katy Freeway, Suite 101
Houston, Texas 77024 ............................... 20,000 0.20%
Ares Leveraged Investment Fund, L.P.(13)
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067 ...................... 792,799 8.00%
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C> <C>
Arthur E. Biggs, Sr. (14)
335 N. Congress Ave.
Delray Beach, Florida 33445 .......................... 233,849 2.36%
All directors and executive officers as a group (22
persons)(1)(15) ...................................... 2,744,794 27.70
</TABLE>
- ----------
(1) Includes stock options to purchase 30,000 shares of Common Stock at $10.00
per share, all of which is currently unvested.
(2) Includes stock options to purchase 25,000 shares of Common Stock at $10.00
per share, all of which is currently unvested, 2,000 shares of Common Stock
held by Mr. Lewis, as Trustee, 25,000 shares owned by South Texas Equipment
Distributors, Inc., a corporation owned by Mr. and Mrs. Liza B. Lewis, and
69,350 shares held by Mr. and Mrs. Lewis as tenants in common.
(3) Includes 83,221 shares of Series B Preferred Stock.
(4) Includes 405,000 shares of Series A Preferred Stock and 37,449 shares of
Series B Preferred Stock.
(5) Includes 1,807,692 shares of Common Stock subject to warrants currently
exercisable.
(6) Includes 45,000 shares of Series A Preferred Stock and 4,161 shares of
Series B Preferred Stock. Mr. Coonrod does not own any shares of record.
However, as general partner of Food Fund, Mr. Coonrod may be deemed to be
the beneficial owner of the shares held by Food Fund. Mr. Coonrod disclaims
beneficial ownership of the shares held by Food Fund.
(7) Includes stock options to purchase 11,000 shares of Common Stock at an
average price of $8.64 per share, of which 1,250 stock options are
currently vested.
(8) Includes stock options to purchase 22,500 shares of Common Stock at $10.00
per share, all of which is currently unvested.
(9) 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 shares of the Company owned by SV.
(10) Comprised solely of 400,000 shares of Common Stock beneficially owned by
SV. Mr. Sands, a limited partner of SV and a member of its investment
committee, may be deemed to have indirect beneficial ownership of the
shares of the Company owned by SV. Mr. Sands disclaims any such beneficial
ownership.
(11) Includes 282,953 shares of Common Stock subject to warrants currently
exercisable.
(12) Includes stock options to purchase 20,000 shares of Common Stock at $10.00
per share, all of which is currently unvested.
(13) Includes 792,799 shares of Common Stock subject to restricted warrants.
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<PAGE> 57
(14) Comprised solely of 233,849 shares of Common Stock beneficially owned by
Mr. Biggs
(15) Includes 450,000 shares of Series A Preferred Stock and 124,831 shares of
Series B Preferred Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company, certain
shareholders, and directors and officers.
Shareholders Agreement. All current holders of the Company's Common Stock
are parties to a shareholders agreement (the "Shareholders Agreement") which
restricts the transfer of their shares of capital stock of the Company and
grants the Company and the other shareholders a right of first refusal to
purchase shares which a shareholder attempts to transfer. The Shareholders
Agreement terminates upon the occurrence of any of the following: (i) if the
Company permanently ceases to do business; (ii) the Company completes an
underwritten public offering of its Common Stock which results in net proceeds
to the Company and any selling shareholders of at least $7,500,000; or (iii)
upon the written agreement of the holders of no less than eighty percent (80%)
of the voting power of the outstanding Common Stock and Preferred Stock voting
as a single class.
Tag-Along and Co-Sale Rights. James F. Stuart, A.J. Lewis III, Jack Stazo
and Steven P. Rosenberg, founding shareholders, have entered into agreements
with certain other shareholders granting such shareholders the right to
participate pro rata in sales to third parties.
Voting Agreement. A majority of the Company's shareholders are bound by one
or more voting agreements which establishes the number and make up of the Board
of Directors. See "Management -- Voting Agreement."
Stock Purchase Agreements with Norwest, et al. On September 20, 1995,
Packaged Ice entered into a stock purchase agreement with Norwest and Food Fund
("Norwest Agreement") pursuant to which the Company issued 450,000 shares of
Series A Preferred Stock at a price of $5.56 per share and 420,000 shares of
Common Stock at a price of $5.00 per share. In addition, the Norwest Agreement
requires a vote of two-thirds of the Board of Directors before the Company may
take certain actions relating to distributions, granting demand registration
rights, guaranteeing indebtedness, making loans, changing the business, making
acquisitions, issuing securities and pledging assets. In connection with the
issuance of stock, Norwest and Food Fund were granted demand and piggy-back
registration rights under a registration rights agreement. The demand right
gives the investors the right to cause the Company to register their securities
at any time after September 20, 2000 and before September 20, 2004. In addition,
Norwest and Food Fund were granted a put option to sell their stock back to the
Company at fair market value, which option becomes effective only if Norwest and
Food Fund have been unable to register their stock by September 20, 2004. The
put option terminates in the event the Company completes a firmly underwritten
public offering of Common Stock, provided that the gross offering price equals
or exceeds $7,500,000. In December 1996, Norwest, Food Fund and Steven P.
Rosenberg advanced $750,000 to the Company under convertible demand notes. On
January 17, 1997, the Company entered into a stock purchase agreement with
Norwest, Food Fund and Steven P. Rosenberg pursuant to which the Company issued
124,831 shares of Series B Preferred Stock at a price of $6.07 per share in
exchange for the cancellation of the $750,000 of demand notes. As a result of
the issuance of Series B Preferred Stock, the Shareholders Agreement and the
Voting Agreement were amended to include the Series B Preferred Stock. In
addition, Mr. Rosenberg was granted demand registration rights under the
September 20, 1995 registration rights agreement. The Company has amended the
September 20, 1995 registration rights agreement to grant demand registration
rights to Mr. Rosenberg, Food Fund and Norwest which are substantially similar
to those granted in connection with the issuance of the warrants. Holders of
Series A Preferred Stock and Series B Preferred Stock have contractual
preemptive rights to acquire capital stock.
Stock Purchase Agreements with Individual Investors. The Company entered
into a stock purchase agreement dated December 23, 1993 which granted certain
individual shareholders piggy-back registration rights with respect to the
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<PAGE> 58
Common Stock and the right to receive financial and other information and notice
of certain events. The Company entered into a stock purchase agreement on
September 20, 1995 with individual investors which granted them piggy-back
registration rights, contractual preemptive rights to acquire capital stock, and
the right to receive financial and other information. In addition, this
agreement requires a vote of two-thirds of the Board of Directors before the
Company may take certain actions relating to distributions, granting demand
registration rights, guaranteeing indebtedness, making loans, changing the
business, making acquisitions, issuing securities and pledging assets. The Board
of Directors has unanimously approved the issuance of the securities and all
ancillary agreements.
Agreements with A. J. Lewis III. A. J. Lewis III is the President and a
director of the Company. At December 31, 1997, Mr. Lewis and his wife, Liza B.
Lewis, owned 5.3% of the fully diluted shares of Common Stock of the Company.
Mr. and Mrs. Lewis have been granted demand registration rights in connection
with the acquisitions of Mission and STPI. Prior to completion of these
acquisitions, Mr. Lewis and his wife owned 100% of Mission and 80% of STPI. Mr.
Lewis and his wife also own Southwest Texas Equipment Distributors, Inc. which
is a shareholder of the Company. Southwest Texas Equipment Distributors, Inc.,
an ice equipment sales and rental company, has the exclusive right to supply
Hoshizaki ice cubers to the Company under an agreement dated September 9, 1991.
Mr. Lewis owns real estate on which Mission's facilities are located. As part of
the acquisitions of Mission and STPI, the Company leases these facilities from
Mr. Lewis on arms-length terms approved by a disinterested majority of the Board
of Directors. These agreements with Mr. Lewis may result in conflicts of
interest with respect to certain matters affecting the Company, such as
potential business opportunities, business dealings, demands on Mr. Lewis' time,
possible corporate transactions and other strategic decisions affecting the
future of the Company and Mr. Lewis.
Agreements with Southwestern Ice, Inc. and its Principals. Prior to
completion of the acquisition of SWI by the Company, Dale M. Johnson, Robert G.
Miller and Alan S. Bernstein together owned 95% of SWI. At December 31, 1997,
Messrs. Johnson, Miller and Bernstein owned an aggregate of 8.2% of the fully
diluted shares of Common Stock of the Company. Messrs. Johnson, Miller and
Bernstein were granted demand registration rights in connection with the
issuance of shares. In addition, Mr. Miller owns and leases to the Company the
real property on which an ice manufacturing plant in Phoenix, Arizona is
located.
Stock Purchase Agreement with SV Capital Partners, L.P. On July 17, 1997,
Packaged Ice entered into a stock purchase agreement with SV Capital Partners,
L.P. pursuant to which the Company issued 300,000 shares of Common Stock at a
price of $10.00 per share and a warrant to purchase 100,000 shares of Common
Stock at an exercise price of $14.00 per share until July 17, 2002. In addition,
the stock purchase agreement with SV requires a vote of two-thirds of the Board
of Directors before the Company may take certain action relating to
distributions, granting demand registration rights, guaranteeing indebtedness,
making loans, changing the business, making acquisitions, pledging assets and
becoming a party to a merger, consolidation or reorganization resulting in less
than 51% voting power by persons who held at least 51% of the voting power
before such transaction or selling all or substantially all of the Company's
assets. In connection with the investment by SV, the holders of at least 60% of
the outstanding capital stock of the Company executed a voting agreement
pursuant to which SV may designate a representative to be elected to the Board
of Directors and the shareholders shall elect such person to the Board. Also in
connection with the issuance of stock, SV was granted demand and piggy back
registration rights under a registration rights agreement. The demand gives SV
the right to cause the Company to register its securities at any time after 180
days following completion by the Company of a public equity offering. In
addition, James F. Stuart, A. J. Lewis III and Steven P. Rosenberg entered into
a parallel exit agreement with SV guaranteeing SV the right to participate pro
rata in sales to third parties. SV also became a party to the Shareholders
Agreement and Voting Agreement in connection with the issuance of stock to SV.
Securities Purchase Agreement with Culligan Water Technologies, Inc. On
December 2, 1997, the Company entered into a Securities Purchase Agreement (the
"Culligan Securities Purchase Agreement") with Culligan pursuant to which
Culligan acquired 235,000 shares of Mandatorily Redeemable Preferred Stock, 94
shares of Series C Preferred Stock and warrants, with an exercise price of
$13.00 per share, to purchase 1,807,692 shares of Common Stock for an aggregate
price of $23.5 million, $10.0 million of which was paid on December 2, 1997 and
$13.5 million of which was paid on December 15, 1997. In addition, the Company
entered into a Securities Purchase Agreement (the "Jesselson Securities Purchase
Agreement") with Erica Jesselson ("Jesselson"), an existing investor, pursuant
to which Jesselson purchased 15,000 shares of Mandatorily Redeemable Preferred
Stock, 6 shares of Series C Preferred Stock and warrants to acquire 115,385
shares of Common Stock for an aggregate price of $1.5 million. The warrants are
valid until the earlier to occur
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<PAGE> 59
of (a) April 15, 2005 and (b) the first anniversary of the last day of the first
period of twenty (20) consecutive Trading Days following a Qualifying IPO 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. "Qualifying IPO"
means an underwritten public offering of Common Stock at an aggregate price to
the public of at least $40,000,000 and after which the Common Stock is listed on
a national securities exchange or automated quotation system. "Closing Price"
means, with respect to any Trading Day, the last reported sale price per share
on such day of the Common Stock on the principal national securities exchange or
automated quotation system on which the Common Stock is then listed. "Threshold
Price" means, initially, $26.00, subject to adjustment. "Trading Day" means any
day on which the principal national securities exchange or automated quotation
system on which the Common Stock is listed is open for business. The Company
intends to use the net proceeds to support the Company's plan of strategic
acquisitions and for working capital.
Holders of the Mandatorily Redeemable Preferred Stock shall be entitled to
receive dividends equal to 10% of the liquidation preference thereof, and all
dividends shall be fully cumulative. Dividends may be paid in cash or in kind by
issuing a number of additional shares of Mandatorily Redeemable Preferred Stock.
If dividends are paid in kind, the Company shall also issue additional warrants
to purchase Common Stock at an exercise price of $13.00 per share to the holders
of the Mandatorily Redeemable Preferred Stock. Holders of the 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
the Mandatorily Redeemable Preferred Stock at any time subject to contractual
and other restrictions with respect thereto and to applicable provisions of the
Texas Business Corporation Act and to the legal availability of funds therefor.
The Company is obligated to redeem the Mandatorily Redeemable Preferred Stock
for cash on April 15, 2005 subject to applicable provisions of the Texas
Business Corporation Act. The Company may redeem all of the Mandatorily
Redeemable Preferred Stock for notes in an aggregate principal amount of the
liquidation preference amount of the Mandatorily Redeemable Preferred Stock.
The Series C Preferred Stock was created to provide Culligan and Jesselson
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 (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 fifty percent (50%) of the Fully
Diluted Warrant Common Stock (as defined in the Certificate of Designation of
the Series C Preferred Stock).
The securities purchase agreements require a vote of two-thirds of the Board
of Directors before the Company may take certain action relating to
distributions, granting demand registration rights, guaranteeing indebtedness,
making loans, changing the business, making acquisitions, pledging assets and
becoming a party to a merger, consolidation or reorganization resulting in less
than 51% of the Company's assets. The securities purchase agreements also
contain certain restrictive covenants which the Company is required to adhere to
while any of the Mandatorily Redeemable Preferred Stock is outstanding. In
connection with the investment by Culligan, the holders of over 80% of the
outstanding voting stock of the Company executed a voting agreement pursuant to
which Culligan may designate two representatives to be elected to the Board of
Directors and the shareholders shall elect such persons to the Board. Also in
connection with the issuance of stock, Culligan was granted demand and piggy
back registration rights under a registration rights agreement. The demand gives
Culligan the right to cause the Company to register its securities at any time
after 180 days following completion by the Company of a public equity offering.
In addition, James F. Stuart, A.J. Lewis III and Steven P. Rosenberg entered
into a parallel exit agreement with Culligan guaranteeing Culligan the right to
participate pro rata in sales to third parties. Culligan and Jesselson also
entered into a Stock Transfer Restriction Agreement which precludes them from
transferring the Series C Preferred Stock or Common Stock issued under the
warrants to the Company's primary competitor.
Securities Purchase Agreement with Ares Management, L.P. and SV Capital
Partners, L.P. In connection with the closing of the Transactions, the Company
entered into a securities purchase agreement (the "Preferred Stock Purchase
Agreement") with Ares and SV pursuant to which Ares and SV acquired 400,000
shares of Series A Preferred Stock and restricted warrants, with an exercise
price of $.01 per share, to purchase 975,752 shares of Common Stock, for an
aggregate price of $40.0 million for such securities. The restricted 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 or
asset sale, or default.
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<PAGE> 60
Holders of the Series A Preferred Stock shall be entitled to receive
dividends at a rate equal to 13.0% per annum ("Permanent Dividend Rate"). During
the first twelve months following the issuance of the Series A Preferred Stock,
the dividend rate shall be 11.5% per annum, and during the second twelve months
following issuance the dividend rate shall be 12.25% per annum. Dividends shall
be fully cumulative and payable quarterly in cash, except that during the first
five years after issuance, dividends may be paid in kind by issuing a number of
additional shares of Series A 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 Series A Preferred Stock will have
the right to add up to two directors to the Company's Board of Directors and the
dividend rate will be increased by 2% per annum until the default is cured.
Holders of the Series A Preferred Stock shall have the benefit of certain
affirmative and negative covenants, but shall have no voting rights. The Company
may redeem the Series A Preferred Stock at any time after the fourth anniversary
of the issue date and, in certain circumstances, upon an initial public equity
offering prior to the third anniversary of the issue date, in each case subject
to contractual and other restrictions with respect thereto (including the
Indenture and the New Credit Facility) and to applicable provisions of the Texas
Business Corporation Act and to the legal availability of funds therefor. The
Company is obligated to redeem the Series A Preferred Stock for cash after the
maturity date of the Notes in 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 Texas Business Corporation Act and all the other
restrictions (including the Indenture and the New Credit Facility). The Company
may exchange the Series A Preferred Stock for Exchange Debentures in an
aggregate principal amount of the liquidation preference amount of the Series A
Preferred Stock. Also in connection with the issuance of Series A Preferred
Stock and warrants, the investors were granted demand and piggy back
registration rights under separate registration rights agreements. The Exchange
Offer Registration Statement (as defined), of which this prospectus is part,
includes a registered offer to exchange the Series A Preferred Stock for Series
B Preferred Stock which will have terms identical in all material respects to
the Series A Preferred Stock.
Payment of cash dividends, redemption of the Series A Preferred Stock and
the exchange of the Series A Preferred Stock for subordinated notes will be
restricted by covenants under the Indenture and New Credit Facility. See
"Description of Notes -- Certain Covenants" and "Description of New Credit
Facility."
Other Transactions and Relationships with Shareholders. Akin, Gump, Strauss,
Hauer & Feld, L.L.P. ("Akin Gump") provides legal services to the Company. Cecil
Schenker, a shareholder of the Company, is a partner of Akin Gump. Alan
Schoenbaum, the son of Stanley Schoenbaum, a shareholder of the Company, is a
partner of Akin Gump. Kenneth H. Johnson, a shareholder, provides legal services
to the Company. Bill Highsmith, a shareholder, has acted as an insurance agent
for the Company in connection with the Company's health insurance and key-man
life insurance. James M. Raines, a shareholder, is affiliated with Williams
Financial Group, which provided investment banking services to the Company in
connection with the sale of the Notes and the Reddy Acquisition, for which it
will receive a finder's fee from the Initial Purchasers and an advisory fee from
the Company. Lancer Corporation, a shareholder, supplies the Company's
proprietary bagging devices under an exclusive contract. Antares Leveraged
Capital Corp., a shareholder, is the Company's senior secured lender under the
New Credit Facility. Jefferies & Company, Inc., the Initial Purchaser, and its
certain employees are holders of warrants to acquire Common Stock at $0.01 per
share.
The Company believes that the transactions referred to above are no less
favorable than transactions which would have been obtained from unrelated third
parties. Any future transactions between the Company and related parties will be
approved by outside directors and will be on terms no less favorable than those
which could have been obtained from unrelated third parties.
THE EXCHANGE OFFER
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
In connection with the sale of the Series A Securities, the purchasers
thereof became entitled to the benefits of certain registration rights under the
Registration Rights Agreements. The Series B Securities are being offered
hereunder in order to satisfy the obligations of the Company under the
Registration Rights Agreement. See " Registration Rights; Additional Interest."
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For each $1,000 principal amount of Series A Notes surrendered to the
Company pursuant to the Exchange Offer, the holder of such Series A Notes will
receive $1,000 principal amount of Series B Notes. For each share of Series A
Preferred Stock surrendered to the Company pursuant to the Exchange Offer, the
holder of such Series A Preferred Stock will receive one share of Series B
Preferred Stock. Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal, the Company will
accept all Series A Securities properly tendered prior to 5:00 p.m., New York
City time, on the Expiration Date. Holders may tender some or all of their
Series A Securities pursuant to the Exchange Offer in integral multiples of
$1,000 principal amount for the Series A Notes and in integral multiples of 100
shares for the Series A Preferred Stock.
Under existing interpretations of the staff of the SEC, including Exxon
Capital Holdings Corporation, SEC No-Action Letter (available April 13, 1989),
the Morgan Stanley Letter and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Company believes that the Series B Securities
would in general be freely transferable after the Exchange Offer without further
registration under the Securities Act by the respective holders thereof (other
than a "Restricted Holder," being (i) a broker-dealer who purchased Series A
Securities exchanged for such Series B Securities directly from the Company to
resell pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Series B Securities are acquired in the ordinary course of such
holder's business and such holder is not participating in, and has no
arrangement with any person to participate in, the distribution (within the
meaning of the Securities Act) of such Series B Securities. Eligible holders
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met. Any holder of Series A Securities who tenders in the
Exchange Offer for the purpose of participating in a distribution of the Series
B Securities could not rely on the interpretation by the staff of the SEC
enunciated in the Morgan Stanley Letter and similar no-action letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each holder of Series A Securities who wishes to exchange Series A
Securities for Series B Securities in the Exchange Offer will be required to
make certain representations, including that (i) it is neither an affiliate of
the Company nor a broker-dealer tendering Series A Securities acquired directly
from the Company for its own account, (ii) any Series B Securities to be
received by it are being acquired in the ordinary course of its business and
(iii) it is not participating in, and it has no arrangement with any person to
participate in, the distribution (within the meaning of the Securities Act) of
the Series B Securities. In addition, in connection with any resales of Series B
Securities, any broker-dealer (a "Participating Broker-Dealer") who acquired
Series A Securities for its own account as a result of market-making activities
or other trading activities must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such Series B Securities. The staff of the SEC has taken the position in
no-action letters issued to third parties including Shearman & Sterling, SEC
No-Action Letter (available July 2, 1993), that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Series B
Securities (other than a resale of an unsold allotment from the original sale of
Series A Securities) with this Prospectus, as it may be amended or supplemented
from time to time. Under the Registration Rights Agreements, the Company is
required to allow Participating Broker-Dealers to use this Prospectus, as it may
be amended or supplemented from time to time, in connection with the resale of
such Series B Securities. See "Plan of Distribution."
If the Company is not required to consummate the Exchange Offer because the
Exchange Offer is not permitted by applicable law or SEC policy or if the
Exchange Offer for Series A Notes is not consummated within 150 days from April
30, 1998, the holders of Series A Preferred Stock or Notes, as the case may be,
may require the Company to prepare and file a registration statement (a "Shelf
Registration Statement") for an offering to be made on a continuous basis
pursuant to Rule 415 of the Securities Act covering all such Series A Preferred
Stock or Notes, as the case may be, of such holder. In addition, if any holder
of Series A Preferred Stock notifies the Company that based upon the advice of
counsel (i) such holder is prohibited by applicable law or policy from
participating in the Exchange Offer or (ii) such holder may not resell the
Series B Preferred Stock acquired by it in the Exchange Offer to the public
without delivering a prospectus and that the prospectus contained herein is not
appropriate for such resales, the Company shall be required to effect a Shelf
Registration.
The Exchange Offer shall be deemed to have been consummated upon the earlier
to occur of (i) the Company having exchanged Series B Securities for all
outstanding Series A Securities (other than Series A Securities held by a
Restricted
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Holder) pursuant to the Exchange Offer or (ii) the Company having exchanged,
pursuant to the Exchange Offer, Series B Securities for all Series A Securities
that have been tendered and not withdrawn on the date that is 30 days following
the commencement of the Exchange Offer. In such event, holders of Series A
Securities who are not entitled to require the Company to effect a Shelf
Registration and seek liquidity in their investment would have to rely on
exemptions to registration requirements under the securities laws, including the
Securities Act.
As of the date of this Prospectus, $270,000,000 principal amount of Series A
Notes and 400,000 shares of the Series A Preferred Stock are issued and
outstanding. In connection with the issuance of the Series A Notes, the Company
arranged for the Series A Notes to be eligible for trading in the Private
Offering, Resale and Trading through Automated Linkages ("PORTAL") Market, the
National Association of Securities Dealers' screen based, automated market
trading of securities eligible for resale under Rule 144A.
The Company shall be deemed to have accepted for exchange validly tendered
Series A Securities when, as and if the Company has given oral or written notice
thereof to the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will
act as agent for the tendering holders of Series A Securities for the purpose of
receiving Series B Securities from the Company and delivering Series B
Securities to such holders. If any tendered Series A Securities are not accepted
for exchange because of an invalid tender or the occurrence of certain other
events set forth herein, certificates for any such unaccepted Series A
Securities will be returned, without expense, to the tendering holder thereof as
promptly as practicable after the Expiration Date. Holders of Series A
Securities who tender in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Series A Securities
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean August 12, 1998 unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Series A Securities an announcement thereof, each prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that the Company is
extending the Exchange Offer for a specified period of time. The Company
reserves the right (i) to delay acceptance of any Series A Securities, to
extend the Exchange Offer or to terminate the Exchange Offer and to refuse to
accept Series A Securities not previously accepted, if any of the conditions
set forth herein under "-- Termination" shall have occurred and shall not have
been waived by the Company (if permitted to be waived by the Company), by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent, and (ii) to amend the terms of the Exchange Offer in any manner
deemed by it to be advantageous to the holders of the Series A Securities. Any
such delay in acceptance, extension, termination or amendment will be followed
as promptly as practicable by oral or written notice thereof. If the Exchange
Offer is amended in a manner determined by the Company to constitute a material
change, the Company will promptly disclose such amendment in a manner
reasonably calculated to inform the holders of the Series A Securities of such
amendment. Without limiting the manner in which the Company may choose to make
public announcements of any delay in acceptance, extension, termination or
amendment of the Exchange Offer, the Company shall have no obligation to
publish, advertise, or otherwise communicate any such public announcement,
other than by making a timely release to the Dow Jones News Service.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile or an Agent's Message,
together with the Series A Securities and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
The tender by a holder of Series A Securities will constitute an agreement
between such holder and the Company in accordance with the terms
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and subject to the conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address set
forth herein. Holders may also request that their respective brokers, dealers,
commercial banks, trust companies or nominees effect such tender for such
holders. The method of delivery of Series A Securities and the Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the holders. Instead of delivery by mail, it is recommended
that holders use an overnight or hand delivery service. In all cases, sufficient
time should be allowed to assure timely delivery. No Letter of Transmittal or
Series A Securities should be sent to the Company. Only a holder of Series A
Securities may tender such Series A Securities in the Exchange Offer. The term
"holder" with respect to the Exchange Offer means any person in whose name
Series A Securities are registered on the books of the Company or any other
person who has obtained a properly completed stock power from the registered
holder.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering Series A Securities which are the subject of such
Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against such participant.
Any beneficial holder whose Series A Securities are registered in the name
of such holder's broker, dealer, commercial bank, trust company or other nominee
and who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on behalf of the registered holder. If
such beneficial holder wishes to tender directly, such beneficial holder must,
prior to completing and executing the Letter of Transmittal and delivering its
Series A Securities, either make appropriate arrangements to register ownership
of the Series A Securities in such holder's name or obtain a properly completed
bond power from the registered holder. The transfer of record ownership may take
considerable time. If the Letter of Transmittal is signed by the record
holder(s) of the Series A Securities tendered thereby, the signature must
correspond with the name(s) written on the face of the Series A Securities
without alteration, enlargement or any change whatsoever. If the Letter of
Transmittal is signed by a participant in DTC, the signature must correspond
with the name as it appears on the security position listing as the holder of
the Series A Securities. Signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, must be guaranteed by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution")unless the Series A Securities tendered pursuant thereto are
tendered (i) by a registered holder (or by a participant in DTC whose name
appears on a security position listing as the owner) who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery Instructions"
on the Letter of Transmittal and the Series B Securities are being issued
directly to such registered holder (or deposited into the participant's account
at DTC) or (ii) for the account of an Eligible Institution. If the Letter of
Transmittal is signed by a person other than the registered holder of any Series
A Securities listed therein, such Series A Securities must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender the
Series A Securities on behalf of the registered holder, in either case signed as
the name of the registered holder or holders appears on the Series A Securities.
If the Letter of Transmittal or any Series A Securities or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Series A
Securities (or a timely confirmation received of a book-entry transfer of Series
A Securities into the Exchange Agent's account at DTC with an Agent's Message)
or a Notice of Guaranteed Delivery from an Eligible Institution is received by
the Exchange Agent. Issuances of Series B Securities in exchange for Series A
Securities tendered pursuant to a Notice of Guaranteed Delivery by an Eligible
Institution will be made only against delivery of the Letter of Transmittal (and
any other required documents) and the tendered Series A Securities (or a timely
confirmation received of a book-entry transfer of Series A Securities into the
Exchange Agent's account at DTC) with the Exchange Agent.
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All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Series A Securities will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Series A Securities not properly tendered or any Series A Securities the
Company's acceptance of which would, in the opinion of the Company or its
counsel, be unlawful. The Company also reserves the absolute right to waive any
conditions of the Exchange Offer or defects or irregularities in tender as to
particular Series A Securities. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) shall be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Series A Securities must
be cured within such time as the Company shall determine. Neither the Company,
the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Series A
Securities nor shall any of them incur any liability for failure to give such
notification. Tenders of Series A Securities will not be deemed to have been
made until such irregularities have been cured or waived. Any Series A
Securities received by the Exchange Agent that are not properly tendered and as
to which the defects or irregularities have not been cured or waived will be
returned without cost by the Exchange Agent to the tendering holder of such
Series A Securities unless otherwise provided in the Letter of Transmittal, as
soon as practicable following the Expiration Date. In addition, the Company
reserves the right in its sole discretion to (i) purchase or make offers for any
Series A Securities that remain outstanding subsequent to the Expiration Date,
or, as set forth under "-- Termination," to terminate the Exchange Offer and
(ii) to the extent permitted by applicable law, purchase Series A Securities in
the open market, in privately negotiated transactions or otherwise. The terms of
any such purchases or offers may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Series A
Securities at DTC within two business days after the date of this Prospectus,
and any financial institution which is a participant in DTC may make book-entry
delivery of the Series A Securities by causing DTC to transfer such Series A
Securities into the Exchange Agent's account in accordance with DTC's procedure
for such transfer. Although delivery of Series A Securities may be effected
through book-entry transfer into the Exchange Agent's account at DTC, and
Agent's Message must be transmitted to and received by the Exchange Agent on or
prior to the Expiration Date at one of its addresses set forth below under "B
Exchange Agent", or the guaranteed delivery procedure described below must be
complied with. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT. All references in this Prospectus to deposit or delivery of
Series A Securities shall be deemed to include DTC's book-entry delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Securities and whose Series A
Securities are not immediately available or who cannot deliver their Series A
Securities, the Letter of Transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis and deliver an Agent's
Message, may effect a tender if: (i) the tender is made by or through an
Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Series A Securities, the
registration number or numbers of such Series A Securities (if applicable), and
the total principal amount of Series A Securities tendered, stating that the
tender is being made thereby and guaranteeing that, within five business days
after the Expiration Date, the Letter of Transmittal, together with the Series A
Securities in proper form for transfer (or a confirmation of a book-entry
transfer into the Exchange Agent's account at DTC) and any other documents
required by the Letter of Transmittal, will be deposited by the Eligible
Institution with the Exchange Agent; and (iii) such properly completed and
executed Letter of Transmittal, together with the certificate(s) representing
all tendered Series A Securities in proper form for transfer (or a confirmation
of such a book-entry transfer) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five business days after
the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
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Each holder who participates in the Exchange Offer will be required to
represent that any Series B Securities received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Series B Securities, and that such
holder is not a Restricted Holder.
Series A Securities tendered in exchange for Series B Securities (or a
timely confirmation of a book-entry transfer of such Series A Securities into
the Exchange Agent's account at DTC) must be received by the Exchange Agent,
with the Letter of Transmittal and any other required documents, by the
Expiration Date or within the time periods set forth above pursuant to a Notice
of Guaranteed Delivery from an Eligible Institution. Each holder tendering the
Series A Securities for exchange sells, assigns and transfers the Series A
Securities to the Exchange Agent, as agent of the Company, and irrevocably
constitutes and appoints the Exchange Agent as the holder's agent and
attorney-in-fact to cause the Series A Securities to be transferred and
exchanged. The holder warrants that it has full power and authority to tender,
exchange, sell, assign and transfer the Series A Securities and to acquire the
Series B Securities issuable upon the exchange of such tendered Series A
Securities, that the Exchange Agent, as agent of the Company, will acquire good
and unencumbered title to the tendered Series A Securities, free and clear of
all liens, restrictions, charges and encumbrances, and that the Series A
Securities tendered for exchange are not subject to any adverse claims when
accepted by the Exchange Agent, as agent of the Company. The holder also
warrants and agrees that it will, upon request, execute and deliver any
additional documents deemed by the Company or the Exchange Agent to be necessary
or desirable to complete the exchange, sale, assignment and transfer of the
Series A Securities. All authority conferred or agreed to be conferred in the
Letter of Transmittal by the holder will survive the death, incapacity or
dissolution of the holder and any obligation of the holder shall be binding upon
the heirs, personal representatives, successors and assigns of such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Series A Securities may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the business
day prior to the Expiration Date, unless previously accepted for exchange. To
withdraw a tender of Series A Securities in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the business day prior to the Expiration Date and prior to acceptance for
exchange thereof by the Company. Any such notice of withdrawal must (i) specify
the name of the person having deposited the Series A Securities to be withdrawn
(the "Depositor"), (ii) identify the Series A Securities to be withdrawn
(including, if applicable, the registration number or numbers and total
principal amount of such Series A Securities), (iii) be signed by the Depositor
in the same manner as the original signature on the Letter of Transmittal by
which such Series A Securities were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to permit the
Trustee with respect to the Series A Securities to register the transfer of such
Series A Securities into the name of the Depositor withdrawing the tender, (iv)
specify the name in which any such Series A Securities are to be registered, if
different from that of the Depositor and (v) if applicable because the Series A
Securities have been tendered pursuant to the book-entry procedures, specify the
name and number of the participant's account at DTC to be credited, if different
than that of the Depositor. All questions as to the validity, form and
eligibility (including time of receipt) of such withdrawal notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Series A Securities so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Series B Securities
will be issued with respect thereto unless the Series A Securities so withdrawn
are validly retendered. Any Series A Securities which have been tendered but
which are not accepted for exchange will be returned to the holder thereof
without cost to such holder as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Series A
Securities may be retendered by following one of the procedures described above
under "--Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange any Series A Securities not theretofore
accepted for exchange, and may terminate the Exchange Offer if it determines
that the Exchange Offer violates any applicable law or interpretation of the
staff of the SEC.
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If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Series A Securities and
return any Series A Securities that have been tendered to the holders thereof,
(ii) extend the Exchange Offer and retain all Series A Securities tendered prior
to the Expiration of the Exchange Offer, subject to the rights of such holders
of tendered Series A Securities to withdraw their tendered Series A Securities
or (iii) waive such termination event with respect to the Exchange Offer and
accept all properly tendered Series A Securities that have not been withdrawn.
If such waiver constitutes a material change in the Exchange Offer, the Company
will disclose such change by means of a supplement to this Prospectus that will
be distributed to each registered holder of Series A Securities, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered holders of the Series A Securities, if the Exchange Offer would
otherwise expire during such period. Holders of Series A Securities will have
certain rights against the Company under the Registration Rights Agreement
should the Company fail to consummate the Exchange Offer.
EXCHANGE AGENT
U.S. Trust Company of Texas, N.A. has been appointed as Exchange Agent for
the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, 27th Floor
Dallas, Texas 75201
Attention: Corporate Trust Department
Facsimile: (214) 754-1303
Telephone: (214) 754-1255
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith. The Company may also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the
Series A Securities and in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange Offer including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees, will be paid by the Company. The Company will pay all transfer taxes, if
any, applicable to the exchange of Series A Securities pursuant to the Exchange
Offer. If, however, Series B Securities or Series A Securities not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Series A
Securities tendered, or if tendered Series A Securities are registered in the
name of any person other than the person signing the Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Series A
Securities pursuant to the Exchange Offer, then the amount of any such transfer
taxes (whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Company over the term of the Series B Securities under
generally accepted accounting principles.
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DESCRIPTION OF NOTES
The Series A Notes were issued, and the Series B Notes will be issued, under
the indenture dated as of January 28, 1998, and as amended and restated as of
April 30, 1998 (the "Indenture"), by and among the Company, the Subsidiary
Guarantors and U.S. Trust Company of Texas, N.A., as Trustee (the "Trustee").
The terms of the Notes include those stated in the Indenture and, upon
effectiveness of the Exchange Offer Registration Statement, those made part of
the Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"). The following summary of certain provisions of the Indenture, the Notes
and the Subsidiary Guarantees does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the TIA, and to all of the
provisions of the Indenture (copies of which can be obtained from the Company
upon request), including the definitions of certain terms therein and those
terms made a part of the Indenture by reference to the TIA as in effect on the
date of the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth under "-- Certain Definitions" below. For
purposes of this Section, references to the "Company" shall mean Packaged Ice,
Inc., excluding its Subsidiaries.
The Indenture provides for $145,000,000 of Notes issued on January 28, 1998
(the "Series A Notes I") and $125,000,000 of Notes issued on the Issue Date (the
"Series A Notes II"), and provides for the issuance of additional notes under
the Indenture in the future (the Series A Notes I, the Series A Notes II and any
additional notes issued under the Indenture, including without limitation, any
additional notes issued under the Indenture upon consummation of an Exchange
Offer, as each may be amended or supplemented from time to time, are
collectively referred to in this "Description of Notes" section herein as the
"Notes"). All of the Notes will be identical in all respects other than purchase
price and issuance date, except that Notes issued upon consummation of an
Exchange Offer will not be subject to certain transfer restrictions and will not
be subject to the accrual of Additional Interest.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration of transfer and exchange at the offices of the Registrar, which
currently is the Trustee's corporate trust office. The Company may change any
Paying Agent and Registrar without notice to Holders of the Notes. The Company
will pay principal (and premium, if any) on the Notes at the Trustee's corporate
office in New York, New York. In addition, in the event the Notes do not remain
in book-entry form, interest may be paid at the Company's option, by wire
transfer or check mailed to the registered address of the Holders as shown on
the Note Register.
As of the date of the amendment and restatement of the Indenture, all of the
Company's Subsidiaries were Subsidiary Guarantors. Subject to the requirements
of the Indenture, the Company will be able to designate future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be Subsidiary
Guarantors and will not be subject to the restrictive covenants set forth in the
Indenture. Any right of the Company or a Subsidiary Guarantor to receive assets
of any of the Company's subsidiaries that is not a Subsidiary Guarantor upon the
latter's liquidation or reorganization (and the consequent right of the holders
of the Notes to participate in those assets) will be effectively subordinated to
the claims of that subsidiary's creditors, except to the extent that the Company
or a Subsidiary Guarantor is itself recognized as a creditor of such subsidiary,
in which case the claims of the Company or such Subsidiary Guarantor would still
be effectively subordinated to any security interest in the assets of such
subsidiary.
All series of Notes issued under the Indenture, including without limitation
any Notes that remain outstanding after the completion of an Exchange Offer,
together with the Series B Notes issued in connection with such Exchange Offer,
will be treated as a single class of securities under the Indenture.
The obligations of the Company under the Notes will be guaranteed on a
senior basis, jointly and severally, by each of the Subsidiary Guarantors. See
"-- Ranking and Guarantees."
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on February 1, 2005. Interest on the Notes will accrue
at the rate of 9 3/4% per annum and will be payable semi-annually on each
February 1 and August 1 commencing, in the case of the Series A Notes I and the
Series A Notes II, on August 1, 1998 to the persons who are registered Holders
at the close of business on the January 15 and July 15 immediately preceding the
applicable interest payment date. Interest on the Notes will accrue from and
including
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the most recent date to which interest has been paid or, if no interest has been
paid, from and including January 28, 1998. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Interest on the Notes
may increase if the Company fails to fulfill its obligations under the Notes
Registration Rights Agreement, and all references to "interest" herein include
any such increased interest. See "Exchange Offer; Registration Rights;
Additional Interest."
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole at any time
or in part from time to time, on and after February 1, 2002, at the following
redemption prices (expressed as percentages of the principal amount) if redeemed
during the twelve-month period commencing on February 1 of the year set forth
below, plus, in each case, accrued and unpaid interest thereon to the date of
redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........... 104.8750%
2003........... 102.4375%
2004 and
thereafter..... 100.0000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to February 1, 2001,
the Company may redeem up to 35% of the aggregate principal amount of the Notes
originally issued at a redemption price of 109.75% of the principal amount
thereof, plus accrued and unpaid interest thereon to the redemption date, with
the net proceeds of any Public Equity Offering; provided that at least 65% of
the aggregate principal amount of the Notes originally issued under the
Indenture remains outstanding immediately after the occurrence of such
redemption; and provided, further, that such redemption occurs within 90 days of
the date of the closing of such Public Equity Offering.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
securities exchange, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption.
RANKING AND GUARANTEES
The indebtedness of the Company evidenced by the Notes will rank senior in
right of payment to all Subordinated Indebtedness of the Company and pari passu
in right of payment with all existing and future senior Indebtedness of the
Company. The Notes are unsecured and holders of secured Indebtedness of the
Company will effectively rank prior to Holders of the Notes with respect to the
assets securing such secured Indebtedness. Loans under the New Credit Facility
will be secured by substantially all of the Company's assets, including the
stock of the Company's subsidiaries, and guaranteed by the Company's
subsidiaries, which guarantees in turn will be secured by substantially all of
the assets of such subsidiaries. Accordingly, while the Notes and the Subsidiary
Guarantees rank pari passu in right of payment with the loans and guarantees
under the New Credit Facility and all other liabilities not expressly
subordinated by their terms to the Notes and the Subsidiary Guarantees, the
Notes and the Subsidiary Guarantees will be effectively subordinated to the
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loans and guarantees outstanding under the New Credit Facility to the extent of
the value of the assets securing such loans. As of December 31, 1997, after
giving pro forma effect to the issuance of the Notes and the proposed
application of the estimated net proceeds therefrom, the Company would have had
no senior Indebtedness outstanding other than the Notes and the New Credit
Facility.
Each Subsidiary Guarantor fully and unconditionally guarantees, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Company's obligations under the Indenture and the Notes, including the
payment of principal of and interest on the Notes. The Subsidiary Guarantee of
each Subsidiary Guarantor will rank pari passu in right of payment to all
existing and future senior Indebtedness of such Subsidiary Guarantor. As of
December 31, 1997, after giving pro forma effect to the issuance of the Notes
and the application of the estimated net proceeds therefrom, the Subsidiary
Guarantors would have had no senior Indebtedness outstanding other than the
Subsidiary Guarantees and the Indebtedness under the New Credit Facility. The
obligations of each Subsidiary Guarantor are limited to the maximum amount
which, after giving effect to all other contingent and fixed liabilities of such
Subsidiary Guarantor and after giving effect to any collections from or payments
made by or on behalf of any other Subsidiary Guarantor in respect of the
obligations of such other Subsidiary Guarantor under its Subsidiary Guarantee or
pursuant to its contribution obligations under the Indenture, will result in the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Subsidiary Guarantor that makes a payment or distribution under
a Subsidiary Guarantee shall be entitled to a contribution from each other
Subsidiary Guarantor in an amount pro rata, based on the net assets of each
Subsidiary Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor without limitation, or
with other Persons upon the terms and conditions set forth in the Indenture. See
"-- Certain Covenants -- Mergers, Consolidations and Sale of Assets" and "--
Certain Covenants -- Asset Sales." In the event all of the capital stock of a
Subsidiary Guarantor is sold (including by way of merger or consolidation) by
the Company and the sale complies with the provisions set forth in "-- Certain
Covenants -- Asset Sales," the Subsidiary Guarantee with respect to such
Subsidiary Guarantor will be released.
Separate financial statements of the Subsidiary Guarantors are not included
herein, except for Reddy Ice (which became a Subsidiary Guarantor with
consummation of the Reddy Acquisition), because such Subsidiary Guarantors are
jointly and severally liable with respect to the Company's obligations pursuant
to the Notes, and the aggregate net assets, earnings and equity of the
Subsidiary Guarantors and the Company are substantially equivalent to the net
assets, earnings and equity of the Company on a consolidated basis.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes on a Business Day (the
"Change of Control Payment Date") not more than 60 nor less than 30 days
following such Change of Control, pursuant to the offer described below (the
"Change of Control Offer") at an offer price in cash equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest thereon to
the date of repurchase (the "Change of Control Payment"). Within 30 days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of Control
and offering to repurchase Notes pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being repurchased by the
Company. The Paying Agent will promptly mail or otherwise deliver to each Holder
of Notes so tendered the Change of Control Payment for such Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by
book-entry) to each Holder a new Note equal in principal
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amount to any unpurchased portion of the Notes surrendered, if any; provided
that each such new Note will be in a principal amount of $1,000 or an integral
multiple thereof. The Company will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture will not contain
provisions that permit the Holders of the Notes to require that the Company
repurchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction. The provisions of the Indenture may not afford Holders
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction affecting the Company that may
adversely affect Holders, if such transaction is not the type of transaction
included within the definition of Change of Control. A transaction involving the
management of the Company or its Affiliates, or a transaction involving a
recapitalization of the Company will result in a Change of Control only if it is
the type of transaction specified in such definition.
The existence of a Holder's rights to require the Company to repurchase
Notes in connection with a Change of Control may deter a third party from
acquiring the Company in a transaction that would constitute a "Change of
Control."
The source of funds for any repurchase of Notes upon a Change of Control
will be the Company's cash or cash generated from operations or other sources,
including borrowings or sales of assets; however, there can be no assurance that
sufficient funds will be available at the time of any Change of Control to repay
all Indebtedness owing under other senior Indebtedness or to make any required
repurchases of the Notes. Any failure by the Company to repurchase Notes
tendered pursuant to a Change of Control Offer will constitute an Event of
Default. See "Risk Factors -- Substantial Leverage and Ability to Service Debt"
and "Risk Factors -- Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Company and
repurchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries, taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under New York
law, which is the law governing the Indenture and the Notes. Accordingly, the
ability of a Holder of Notes to require the Company to repurchase such Notes as
a result of a sale, lease, transfer, conveyance or other disposition of less
than all of the assets of the Company and its Subsidiaries, taken as a whole, to
another Person or group may be uncertain.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. (a) The Indenture provides that neither the
Company nor any of its Subsidiaries will, directly or indirectly, incur any
Indebtedness, including, without limitation, any Acquired Indebtedness (other
than Permitted Indebtedness).
(b) Notwithstanding the foregoing limitations, the Company and its
Subsidiaries may Incur Indebtedness (including, without limitation, Acquired
Indebtedness), in each case, if (i) no Default or Event of Default shall have
occurred and be continuing on the date of the proposed Incurrence thereof or
would result as a consequence of such proposed Incurrence and (ii) immediately
after giving effect to such proposed Incurrence, the Consolidated Fixed Charge
Coverage Ratio of the Company is at least equal to 1.75 to 1.0 if such proposed
Incurrence is on or prior to September 30, 1999; and at least equal to 2.0 to
1.0 if such proposed Incurrence is thereafter.
(c) Neither the Company nor any Subsidiary Guarantor will, directly or
indirectly, in any event Incur any Indebtedness that by its terms (or by the
terms of any agreement governing such Indebtedness) is subordinated to any other
Indebtedness
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of the Company or such Subsidiary Guarantor, as the case may be, unless such
Indebtedness is also by its terms (or by the terms of any agreement governing
such Indebtedness) made expressly subordinate to the Notes or the Subsidiary
Guarantee of such Subsidiary Guarantor, as the case may be, to the same extent
and in the same manner as such Indebtedness is subordinated pursuant to
subordination provisions that are most favorable to the holders of any other
Indebtedness of the Company or such Subsidiary Guarantor, as the case may be.
Limitation on Restricted Payments. The Indenture provides that neither the
Company nor any of its Subsidiaries will, directly or indirectly, (a) declare or
pay any dividend or make any distribution (other than dividends or distributions
payable in Qualified Capital Stock of the Company) on or in respect of shares of
the Company's Capital Stock to holders of such Capital Stock, (b) purchase,
redeem or otherwise acquire or retire for value (each, an "acquisition of") any
Capital Stock of the Company, or any warrants, rights or options to acquire
shares of any class of such Capital Stock, other than through the exchange
therefor solely of Qualified Capital Stock of the Company or warrants, rights or
options to acquire Qualified Capital Stock of the Company, (c) make any
principal payment on, purchase, defease, redeem, prepay, decrease or otherwise
acquire or retire for value, prior to any scheduled final maturity, scheduled
repayment or scheduled sinking fund payment, (each, an "acquisition of") any
Subordinated Indebtedness of the Company, or (d) make any Investment (other than
Permitted Investments) in any Person (each of the foregoing prohibited actions
set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such proposed Restricted Payment or immediately
after giving effect thereto, (i) a Default or an Event of Default has occurred
and is continuing or would result therefrom, or (ii) the Company is not able to
Incur at least $1.00 of additional Indebtedness in accordance with paragraph (b)
of "-- Limitation on Indebtedness" above (as if such Restricted Payment had been
made as of the last day of the Four Quarter Period), or (iii) the aggregate
amount of Restricted Payments (including such proposed Restricted Payment) made
subsequent to the Issue Date exceeds or would exceed the sum of: (u) 50% of the
Consolidated Net Income (or if Consolidated Net Income shall be a loss, minus
100% of such loss) of the Company during the period (treating such period as a
single accounting period) from April 1, 1998 to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment; (v) 100% of the aggregate Net
Equity Proceeds received by the Company from any Person from the issuance and
sale subsequent to the Issue Date of Qualified Capital Stock of the Company
other than any Qualified Capital Stock sold to a Subsidiary of the Company; (w)
the aggregate net cash proceeds received after the Issue Date by the Company
(other than from any of its Subsidiaries) upon the exercise of any options,
warrants or rights to purchase shares of Qualified Capital Stock of the Company;
(x) the aggregate net cash proceeds received after the Issue Date by the Company
from the issuance or sale (other than to any of its Subsidiaries) of debt
securities or shares of Disqualified Capital Stock that have been converted into
or exchanged for Qualified Capital Stock of the Company, together with the
aggregate cash received by the Company at the time of such conversion or
exchange; (y) an amount equal to the net reduction in Investments, subsequent to
the Issue Date, in any Person resulting from payments of interest on debt,
dividends, repayments of loans or advances, return of capital, or other
transfers of property (but only to the extent such distributions are not
included in the calculation of Consolidated Net Income of the Company), in each
case, to the Company or any Subsidiary from any Person, not to exceed in the
case of any Person, the amount of Investments previously made by the Company or
any Subsidiary in such Person and which was treated as a Restricted Payment; and
(z) $500,000.
Notwithstanding the foregoing, these provisions do not prohibit: (1) the
acquisition of Capital Stock of the Company or warrants, rights or options to
acquire Capital Stock of the Company either (i) solely in exchange for shares of
Qualified Capital Stock of the Company or warrants, rights or options to acquire
Qualified Capital Stock of the Company, or (ii) through the application of net
proceeds of a substantially concurrent sale for cash (other than to a Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company or warrants,
rights or options to acquire Qualified Capital Stock of the Company; (2) the
acquisition of any Subordinated Indebtedness of the Company either (i) solely in
exchange for shares of Qualified Capital Stock of the Company, or (ii) through
the application of net proceeds of a substantially concurrent sale for cash
(other than to a Subsidiary of the Company) of (A) shares of Qualified Capital
Stock of the Company or warrants, rights or options to acquire Qualified Capital
Stock of the Company or (B) Permitted Refinancing Indebtedness; or (3) loans by
the Company or any Subsidiary to employees in the ordinary course of business up
to an aggregate principal amount of $250,000 at any one time outstanding;
provided, however, that in the case of clauses (1), (2) and (3) of this
paragraph, no Default or Event of Default shall have occurred and be continuing
at the time of such payment or as a result thereof. In determining the aggregate
amount of Restricted Payments made subsequent to the Issue Date, amounts
expended pursuant to clauses (1)(ii), (2)(i) and (2)(ii)(A) shall, in each case,
be included in such calculation.
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For purposes of the foregoing provisions, the amount of any Restricted
Payment (other than cash) shall be the fair market value (evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee) on the date of the Restricted Payment of the asset(s)
proposed to be transferred by the Company or such Subsidiary, as the case may
be, pursuant to the Restricted Payment. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment complies with the Indenture and
setting forth in reasonable detail the basis upon which the required
calculations were computed, which calculations may be based upon the Company's
latest available internal quarterly financial statements.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if such designation would be permitted by the provisions of this
"Limitation on Restricted Payments" covenant and if such Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. For purposes of making such
determination, all outstanding Investments by the Company and its Subsidiaries
(except to the extent repaid in cash prior to such designation) in the
Subsidiary so designated will at the election of the Company, either (A) reduce
the amount available for Restricted Payments under clause (iii) of the first
paragraph of this covenant or (B) constitute Permitted Investments under clauses
(f) or (g) of the definition thereof. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the fair market value of
such Investments at the time of such designation.
For purposes of this covenant, if a particular Restricted Payment involves a
non-cash payment, including a distribution of assets, then such Restricted
Payment shall be deemed to be an amount equal to the cash portion of such
Restricted Payment, if any, plus an amount equal to the fair market value of the
non-cash portion of such Restricted Payment.
Asset Sales. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, engage in an Asset Sale unless (i) the
Company or the Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value (evidenced by a
resolution of the Board of Directors of the Company set forth in an Officers'
Certificate delivered to the Trustee) of the assets or Properties issued or sold
or otherwise disposed of and (ii) at least 75% of the consideration therefor
received by the Company or such Subsidiary is in the form of cash or Cash
Equivalents; provided that the amount of (x) any liabilities (as shown on the
Company's or such Subsidiary's most recent balance sheet) of the Company or any
Subsidiary (other than contingent liabilities and liabilities that are
Subordinated Indebtedness or otherwise by their terms subordinated to the Notes
or the Subsidiary Guarantees) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Subsidiary from further liability and (y) any notes or other obligations
received by the Company or any such Subsidiary from such transferee that are
converted by the Company or such Subsidiary into cash within 360 days of closing
such Asset Sale (to the extent of the cash received), shall be deemed to be cash
for purposes of this provision.
Within 360 days after the receipt of any Net Cash Proceeds from any Asset
Sale, the Company may (i) apply all or any of the Net Cash Proceeds therefrom to
repay Indebtedness (other than Subordinated Indebtedness) of the Company or any
Subsidiary, provided, in each case, that the related loan commitment of any
revolving credit facility or other borrowing (if any) is thereby permanently
reduced by the amount of such Indebtedness so repaid, or (ii) invest all or any
part of the Net Cash Proceeds thereof in properties and other capital assets
that replace the properties or other capital assets that were the subject of
such Asset Sale or in other properties or other capital assets that will be used
in the Ice Business. Pending the final application of any such Net Cash
Proceeds, the Company may temporarily reduce borrowings under any revolving
credit facility or otherwise invest such Net Cash Proceeds in any manner that is
not prohibited by the Indenture. Any Net Cash Proceeds from an Asset Sale that
are not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Available Proceeds Amount." When the aggregate
Available Proceeds Amount exceeds $5 million, the Company shall make an offer to
purchase, from all Holders of the Notes and any then outstanding Pari Passu
Indebtedness required to be repurchased or repaid on a permanent basis in
connection with an Asset Sale, an aggregate principal amount of Notes and any
such Pari Passu Indebtedness equal to such Available Proceeds Amount as follows:
(i) (A) The Company shall make an offer to purchase (an "Asset Proceeds
Offer") from all Holders of the Notes in accordance with the procedures set
forth in the Indenture the maximum principal amount (expressed as a multiple
of $1,000) of Notes that may be purchased out of an amount (the "Payment
Amount") equal to the product of such Available Proceeds Amount multiplied
by a fraction, the numerator of which is the outstanding principal amount of
the Notes and the denominator of which is the sum of the outstanding
principal amount of the Notes and such Pari Passu Indebtedness, if any
(subject to proration in the event such amount is less than the aggregate
Offered Price (as defined
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in clause (ii) below) of all Notes tendered), and (B) to the extent
required by any such Pari Passu Indebtedness and provided there is a
permanent reduction in the principal amount of such Pari Passu
Indebtedness, the Company shall make an offer to purchase such Pari Passu
Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu
Indebtedness Amount") equal to the excess of the Available Proceeds Amount
over the Payment Amount.
(ii) The offer price for the Notes shall be payable in cash in an amount
equal to 100% of the principal amount of the Notes tendered pursuant to an
Asset Proceeds Offer, plus accrued and unpaid interest, if any, to the date
such Asset Proceeds Offer is consummated (the "Offered Price"), in
accordance with the procedures set forth in the Indenture. To the extent
that the aggregate Offered Price of the Notes tendered pursuant to an Asset
Proceeds Offer is less than the Payment Amount relating thereto or the
aggregate amount of the Pari Passu Indebtedness that is purchased or repaid
pursuant to the Pari Passu Offer is less than the Pari Passu Indebtedness
Amount (such shortfall constituting an "Asset Proceeds Deficiency"), the
Company may use such Asset Proceeds Deficiency, or a portion thereof, for
general corporate purposes, subject to the limitations of the "Limitation on
Restricted Payments" covenant.
(iii) If the aggregate Offered Price of Notes validly tendered and not
withdrawn by Holders thereof exceeds the Payment Amount, Notes to be
purchased will be selected on a pro rata basis. Upon completion of such Net
Proceeds Offer and Pari Passu Offer, the amount of Excess Proceeds shall be
reset to zero.
The Company will not permit any Subsidiary to enter into or suffer to exist
any agreement (excluding Permitted Liens) that would place any restriction of
any kind (other than pursuant to law or regulation) on the ability of the
Company to make an Asset Proceeds Offer following any Asset Sale. The Company
will comply with Rule 14e-1 under the Exchange Act, and any other securities
laws and regulations thereunder, if applicable, in the event that an Asset Sale
occurs and the Company is required to purchase Notes as described above.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, create or otherwise cause or permit
or suffer to exist or become effective any encumbrance or restriction on the
ability of any Subsidiary to (a) pay dividends or make any other distributions
on its Capital Stock; (b) make loans or advances or pay any Indebtedness or
other obligation owed to the Company or to any Subsidiary of the Company; or (c)
transfer any of its property or assets to the Company or to any Subsidiary of
the Company (each such encumbrance or restriction in clause (a), (b), or (c) a
"Payment Restriction"), except for such encumbrances or restrictions existing
under or by reason of: (1) applicable law; (2) the Indenture and the Notes; (3)
customary non-assignment provisions of any lease or license agreements or
similar agreements entered into in the ordinary course of business of any
Subsidiary of the Company; (4) any instrument governing Acquired Indebtedness
Incurred in accordance with paragraph (b) of the covenant "-- Limitation on
Indebtedness"; provided that such encumbrance or restriction is not, and will
not be, applicable to any Person, or the properties or assets of any Person,
other than the Person, or the property or assets of the Person, becoming a
Subsidiary of the Company; (5) agreements existing on the Issue Date to the
extent and in the manner such agreements are in effect on the Issue Date; (6)
any restriction or encumbrance contained in contracts for the sale of assets to
be consummated in accordance with the Indenture solely in respect of the assets
to be sold pursuant to such contract; (7) any restrictions on the sale or other
disposition or encumbrance of any property securing Indebtedness as a result of
a Permitted Lien on such property; (8) any agreement relating to an acquisition
of property, so long as the encumbrances or restrictions in any such agreement
relate solely to the property so acquired and are not or were not created in
anticipation of or in connection with the acquisition thereof; (9) the Credit
Facilities; or (10) any encumbrance or restriction contained in Permitted
Indebtedness or Permitted Refinancing Indebtedness Incurred to Refinance the
Indebtedness Incurred pursuant to an agreement referred to in clause (2), (4),
(5) or (9) above (whether the Indebtedness Refinanced is repaid in whole or in
part); provided that the provisions relating to such encumbrance or restriction
contained in any such Permitted Refinancing Indebtedness are no less favorable
to the Company or to the Holders in any material respect in the reasonable and
good faith judgment of the Board of Directors of the Company than the provisions
relating to such encumbrance or restriction contained in agreements referred to
in such clause (2), (4), (5) or (9).
Limitation on Issuances and Sales of Capital Stock of Subsidiaries. The
Indenture provides that the Company will not cause or permit any of its
Subsidiaries to issue or sell any Capital Stock (other than to the Company or to
a wholly-owned Subsidiary of the Company) or permit any Person (other than the
Company or a wholly-owned Subsidiary of the Company) to own or hold any Capital
Stock of any Subsidiary of the Company or any Lien or security interest therein;
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provided, however, that such covenant shall not prohibit (i) Permitted Liens or
(ii) the disposition (by sale, merger or otherwise) of all of the Capital Stock
of a Subsidiary provided any Net Cash Proceeds therefrom are applied in
accordance with the covenants described under "-- Asset Sales."
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any Subsidiary to, directly or indirectly, create, incur,
assume, affirm or suffer to exist or become effective any Lien of any kind
except for Permitted Liens, upon any of their respective property or assets,
whether owned now or acquired after the Issue Date, or any income, profits or
proceeds therefrom, to secure (a) any Indebtedness of the Company or such
Subsidiary (if it is not a Subsidiary Guarantor), unless prior to, or
contemporaneously therewith, the Notes are equally and ratably secured, or (b)
any Indebtedness of any Subsidiary Guarantor, unless prior to, or
contemporaneously therewith, the Subsidiary Guarantee (if it is not a Subsidiary
Guarantor) of such Subsidiary Guarantor is equally and ratably secured;
provided, however, that if such Indebtedness is expressly subordinated to the
Notes or the Subsidiary Guarantees, the Lien securing such Indebtedness will be
subordinated and junior to the Lien securing the Notes or the Subsidiary
Guarantees, as the case may be, with the same relative priority as such
Indebtedness has with respect to the Notes or the Subsidiary Guarantees. The
foregoing covenant will not apply to any Lien securing Acquired Indebtedness,
provided that any such Lien extends only to the property or assets that were
subject to such Lien prior to the related acquisition by the Company or such
Subsidiary and was not created, incurred or assumed in contemplation of such
transaction.
Mergers, Consolidations and Sale of Assets. The Indenture provides that the
Company will not, in a single transaction or series of related transactions,
consolidate or merge with or into any Person, or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Company's
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless: (i) either (1) the Company shall be the surviving or continuing
corporation or (2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Company's Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and, if applicable, the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness Incurred or anticipated to be
Incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, (1) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction and (2) shall be able to Incur at least
$1.00 of additional Indebtedness pursuant to paragraph (b) of "-- Limitation on
Indebtedness"; provided that in determining the Consolidated Fixed Charge
Coverage Ratio of the Company or such Surviving Entity, as the case may be, such
ratio shall be calculated as if the transaction (including the Incurrence of any
Indebtedness or Acquired Indebtedness) took place on the first day of the Four
Quarter Period; (iii) immediately before and immediately after giving effect to
such transaction and, if applicable, the assumption contemplated by clause
(i)(2)(y) above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness Incurred or anticipated to be Incurred
and any Lien granted in connection with or in respect of the transaction), no
Default and no Event of Default shall have occurred or be continuing; and (iv)
the Company or the Surviving Entity shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied.
Upon any such consolidation, merger, conveyance, lease or transfer in
accordance with the foregoing, the successor Person formed by such consolidation
or into which the Company is merged or to which such conveyance, lease or
transfer is made will succeed to, and be substituted for, and may exercise every
right and power of, the Company under the Indenture with the same effect as if
such successor had been named as the Company therein, and thereafter (except in
the case of a sale, assignment, transfer, lease, conveyance or other
disposition) the predecessor corporation will be relieved of all further
obligations and covenants under the Indenture and the Notes.
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Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Subsidiary Guarantee is to be released in accordance with the terms of the
Guarantee and the Indenture in connection with any transaction complying with
the provisions of "-- Asset Sales") will not, and the Company will not cause or
permit any Subsidiary Guarantor to, consolidate with or merge with or into any
Person, or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets, other than the Company or any other Subsidiary
Guarantor unless: (i) the entity formed by or surviving any such consolidation
or merger (if other than the Subsidiary Guarantor), or to which such disposition
shall have been made, is a corporation organized and existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) such
entity assumes by supplemental indenture all of the obligations of the
Subsidiary Guarantor on the Subsidiary Guarantee; (iii) immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; and (iv) immediately after giving effect to such transaction
and the use of any net proceeds therefrom on a pro forma basis, the Company
could satisfy the provisions of clause (ii) of the first paragraph of this
covenant. Any merger or consolidation of a Subsidiary Guarantor with and into
the Company (with the Company being the surviving entity) or another Subsidiary
Guarantor need only comply with clause (iv) of the first paragraph of this
covenant.
Limitation on Transactions with Affiliates. The Indenture provides that
neither the Company nor any Subsidiary of the Company will conduct any business
or enter into any transaction or series of transactions with or for the benefit
of any of their Affiliates (each an "Affiliate Transaction") but excluding
Specified Affiliate Transactions, except in good faith and on terms that are no
less favorable to the Company or such Subsidiary, as the case may be, than those
that could have been obtained in a comparable transaction on an arm's-length
basis from a Person not an Affiliate of the Company or such Subsidiary. All
Affiliate Transactions (and each series of related Affiliate Transactions which
are similar or part of a common plan) involving aggregate payments or other
property with a fair market value in excess of $1,000,000 shall be approved by
the Board of Directors of the Company, such approval to be evidenced by a Board
Resolution stating that such Board of Directors has determined that such
transaction complies with the foregoing provisions. If the Company or any
Subsidiary of the Company enters into an Affiliate Transaction (or a series of
related Affiliate Transactions related to a common plan) that involves an
aggregate fair market value of more than $10,000,000, the Company or such
Subsidiary shall, prior to the consummation thereof, obtain a favorable opinion
as to the fairness of such transaction or series of related transactions to the
Company or the relevant Subsidiary, as the case may be, from a financial point
of view, from an Independent Financial Advisor and file the same with the
Trustee. Notwithstanding the foregoing, the restrictions set forth in this
covenant shall not apply to (i) transactions between the Company and any
Subsidiary or between Subsidiaries, (ii) any employee compensation arrangement
of the Company or any Subsidiary which has been approved by a majority of the
Company's disinterested directors and found in good faith by such directors to
be in the reasonable best interest of the Company or such Subsidiary, as the
case may be or (iii) customary directors' fees, indemnification and similar
arrangements.
Additional Subsidiary Guarantees. If the Company or any of its Subsidiaries
transfers or causes to be transferred, in one transaction or a series of related
transactions, any property to any Subsidiary that is not a Subsidiary Guarantor,
or if the Company or any of its Subsidiaries shall organize, acquire or
otherwise invest in another Subsidiary having total assets with a book value in
excess of $250,000, then such transferee or acquired or other Subsidiary shall
(i) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Subsidiary shall
fully and unconditionally guarantee all of the Company's obligations under the
Notes and the Indenture on the terms set forth in the Indenture and (ii) deliver
to the Trustee an Opinion of Counsel that such supplemental indenture has been
duly authorized, executed and delivered by such Subsidiary and constitutes a
legal, valid, binding and enforceable obligation of such Subsidiary. Thereafter,
such Subsidiary shall be a Subsidiary Guarantor for all purposes of the
Indenture.
Limitation on Conduct of Business. The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries to, engage in the conduct
of any business other than the Ice Business.
Limitation on Status as Investment Company. The Indenture prohibits the
Company and the Subsidiary Guarantors from being required to register as an
"investment company" (as that term is defined in the Investment Company Act of
1940, as amended), or from otherwise becoming subject to regulation under the
Investment Company Act of 1940.
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Sale and Leaseback Transactions. The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries to, enter into any sale
and leaseback transaction; provided that the Company or any Subsidiary, as
applicable, may enter into a sale and leaseback transaction if (i) the Company
could have (a) Incurred Indebtedness in an amount equal to the Attributable
Indebtedness relating to such sale and leaseback transaction pursuant to the
Consolidated Fixed Charge Coverage Ratio test set forth in clause (b) of the
covenant described above under the caption "-- Limitation on Indebtedness" and
(b) Incurred a Lien to secure such Indebtedness pursuant to the covenant
described above under the caption "-- Limitation on Liens," (ii) the gross cash
proceeds of such sale and leaseback transaction are at least equal to the fair
market value (as determined in good faith by the Board of Directors of the
Company and set forth in an Officers' Certificate delivered to the Trustee) of
the property that is the subject of such sale and leaseback transaction and
(iii) the transfer of assets in such sale and leaseback transaction is permitted
by, and the Company applies the proceeds of such transaction in compliance with,
the covenant described under the caption "-- Asset Sales."
Reports to Holders. The Company will file with the Commission all
information, documents and reports required to be filed with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act, whether or not the Company
is then subject to such filing requirements so long as the Commission will
accept such filings. The Company will file with the Trustee, within 15 days
after it files them with the Commission, copies of the annual reports and of the
information, documents and other reports (or copies of such portions of any of
the foregoing as the Commission may by rules and regulations prescribe), without
exhibits, which the Company files with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. Regardless of whether the Company is required to
furnish such reports to its stockholders pursuant to the Exchange Act, the
Company will cause its consolidated financial statements, comparable to that
which would have been required to appear in annual or quarterly reports, to be
delivered to the Trustee and the Holders. The Company will also make such
reports available to prospective purchasers of the Notes, securities analysts
and broker-dealers upon their request. In addition, the Indenture requires that
for so long as any of the Notes remain outstanding the Company will make
available to any prospective purchaser of the Notes or beneficial owner of the
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act, until such time as the Company has either
consummated the exchange offer for the Notes for securities identical in all
material respects which have been registered under the Securities Act or until
such time as the holders thereof have disposed of such Notes pursuant to an
effective registration statement filed by the Company.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Note for a period of 30 days or
more after such interest becomes due and payable; or
(ii) the failure to pay the principal on any Note, when such principal
becomes due and payable, at maturity, upon redemption, pursuant to an Asset
Sale Offer or a Change of Control Offer or otherwise; or
(iii) (x) the failure of the Company or any Subsidiary Guarantor to
comply with any of the terms or provisions of "-- Certain Covenants --
Mergers, Consolidations and Sale of Assets" or (y) a default in the
observance or performance of any other covenant or agreement contained in
the Indenture which default continues for a period of 30 days after the
Company receives written notice specifying the default from the Trustee or
from Holders of at least 25% in principal amount of outstanding Notes; or
(iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Subsidiary of the Company (or the
payment of which is guaranteed by the Company or any Subsidiary of the
Company) which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness after any applicable grace
period provided in such Indebtedness on the date of such default (a "payment
default") or (b) results in the acceleration of such Indebtedness prior to
its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity of
which has been so accelerated, aggregates $2,500,000; or
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(v) one or more judgments in an aggregate amount in excess of $1,000,000
(which are not covered by third-party insurance as to which a financially
sound insurer has not disclaimed coverage) being rendered against the
Company or any of its Subsidiaries and such judgments remain undischarged,
or unstayed or unsatisfied for a period of 60 days after such judgment or
judgments become final and non-appealable; or
(vi) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any of its Subsidiary Guarantors or Significant
Subsidiaries; or
(vii) any of the Subsidiary Guarantees cease to be in full force and
effect or any of the Subsidiary Guarantees are declared to be null and void
and unenforceable or any of the Subsidiary Guarantees are found to be
invalid or any of the Subsidiary Guarantors denies its liability under its
Subsidiary Guarantee (other than by reason of release of a Subsidiary
Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) occurs and is continuing, then and in
every such case the Trustee or the Holders of not less than 25% in aggregate
principal amount of the then outstanding Notes may declare the unpaid principal
of, premium, if any, and accrued and unpaid interest on, all the Notes then
outstanding to be due and payable, by a notice in writing to the Company (and to
the Trustee, if given by Holders) and upon such declaration such principal
amount, premium, if any, and accrued and unpaid interest will become immediately
due and payable. If an Event of Default with respect to the Company specified in
clause (vi) above occurs, all unpaid principal of, and premium, if any, and
accrued and unpaid interest on, the Notes then outstanding will ipso facto
become due and payable without any declaration or other act on the part of the
Trustee or any Holder.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may rescind an acceleration and its
consequences if all existing Events of Default (other than the nonpayment of
principal of and premium, if any, and interest on the Notes which has become due
solely by virtue of such acceleration) have been cured or waived and if the
rescission would not conflict with any judgment or decree. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
Notwithstanding the foregoing, if an Event of Default specified in clause
(iv) above shall have occurred and be continuing, such Event of Default and any
consequential acceleration shall be automatically rescinded if the Indebtedness
that is the subject of such Event of Default has been repaid, or if the default
relating to such Indebtedness is waived or cured and if such Indebtedness has
been accelerated, the holders thereof have rescinded their declaration of
acceleration in respect of such Indebtedness (provided, in each case, that such
repayment, waiver, cure or rescission is effected within a period of 30 days
from the continuation of such default beyond the applicable grace period or the
occurrence of such acceleration).
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a Default in the payment of the principal of or interest on any Notes or
a Default in respect of any term or provision of the Notes or the Indenture that
cannot be modified or amended without the consent of all Holders.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable security or indemnity. Subject to all
provisions of the Indenture and applicable law, the Holders of a majority in
aggregate principal amount of the then outstanding Notes have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
Under the Indenture, the Company is required to provide an Officers'
Certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided, that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
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DEFEASANCE
The Indenture provides that the Company may, at its option and at any time,
elect to have the obligations of the Company and the Subsidiary Guarantors with
respect to the Indenture and the Notes discharged in accordance with the
provisions set forth below. Such defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by all
outstanding Notes and the Company and the Subsidiary Guarantors shall be deemed
to have satisfied all their respective other obligations under the Notes, the
Subsidiary Guarantees and the Indenture, except for (i) the rights of holders of
such outstanding Notes to receive payments in respect of the principal of,
premium, if any, and interest on such Notes when such payments are due, (ii) the
Company's and the Subsidiary Guarantors' respective obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee, and (iv) the redemption and
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the respective obligations of the Company
and the Subsidiary Guarantors released with respect to certain covenants in the
Indenture ("covenant defeasance"), and any omission to comply with such
obligations shall not constitute a Default or an Event of Default with respect
to the Notes. After such defeasance or covenant defeasance, no additional Notes
may be originally issued under the Indenture. In order to exercise either
defeasance or covenant defeasance, (i) the Company must irrevocably deposit with
the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S.
dollars, U.S. Government Obligations, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest on such outstanding Notes on the stated maturity thereof or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of defeasance, the Company shall have delivered to the
Trustee an Opinion of Counsel stating that (A) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (B) since
the Issue Date, there has been a change in the applicable federal income tax
law, in either case to the effect that, and based thereon such Opinion of
Counsel shall confirm that, the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred; (iii) in the case of covenant defeasance, the
Company shall have delivered to the Trustee an Opinion of Counsel to the effect
that the holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such covenant defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such covenant defeasance
had not occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit; (v) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a default
under, the Indenture or any other material agreement or instrument to which the
Company is a party or by default under, the Indenture or any other material
agreement or instrument to which the Company is a party or by which it is bound;
(vi) in the case of defeasance or covenant defeasance, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that after the 91st
day following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar law affecting
creditors' rights generally and that such defeasance or covenant defeasance will
not result in the Trustee or the trust arising from such deposit constituting an
Investment Company as defined in the Investment Company Act of 1940, as amended;
and (vii) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that all conditions precedent
provided for relating to either the defeasance or the covenant defeasance, as
the case may be, have been complied with.
MODIFICATION
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including (i)
curing ambiguities, defects or inconsistencies, so long as such change does not
materially adversely affect the rights of any of the Holders, and (ii) the
issuance of additional Notes. Other modifications and amendments of the
Indenture may be made with the consent of the Holders of a majority in principal
amount of the then outstanding Notes issued under the Indenture, except that,
without the consent of each Holder of the Notes affected thereby, no amendment
may, directly or indirectly: (i) reduce the amount of Notes whose Holders must
consent to an amendment; (ii) reduce the rate of or change the time for payment
of interest, including defaulted interest, on any Notes;
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(iii) reduce the principal of or change the fixed maturity of any Notes, or
change the date on which any Notes may be subject to redemption or repurchase,
or reduce the redemption or repurchase price therefor; (iv) make any Notes
payable in money other than that stated in the Notes; (v) make any change in
provisions of the Indenture protecting the right of each Holder to receive
payment of principal of and interest on such Note on or after the due date
thereof or to bring suit to enforce such payment, or permitting Holders of a
majority in principal amount of the Notes to waive Defaults or Events of
Default; (vi) amend, modify or change the obligation of the Company to make or
consummate a Change of Control Offer, an Asset Sale Offer or waive any default
in the performance thereof or modify any of the provisions or definitions with
respect to any such offers; (vii) adversely affect the ranking of the Notes or
the Subsidiary Guarantees; or (viii) release any Subsidiary Guarantor from any
of its obligations under its Subsidiary Guarantee or the Indenture otherwise
than in accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees provide that they
will be governed by, and construed in accordance with, the laws of the State of
New York.
THE TRUSTEE
U.S. Trust Company of Texas, N.A. is the Trustee under the Indenture.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided, that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign within 90 days of becoming aware of such
conflicting interest as provided in the TIA or apply to the Commission for
permission to continue as Trustee. The Trustee may resign at any time, in which
case a successor trustee is to be appointed pursuant to the terms of the
Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" of any Person means Indebtedness of another Person
and any of its Subsidiaries existing at the time such other Person becomes a
Subsidiary of such Person or at the time it merges or consolidates with such
Person or any of such Person's Subsidiaries or is assumed by such Person or any
Subsidiary of such Person in connection with the acquisition of assets from such
other Person and in each case not Incurred by such Person or any Subsidiary of
such Person or such other Person in connection with, or in anticipation or
contemplation of, such other Person becoming a Subsidiary of such Person or such
acquisition, merger or consolidation, and which Indebtedness is without recourse
to the Company or any of its Subsidiaries or to any of their respective
properties or assets other than the Person or such Person's Subsidiaries or the
assets to which such Indebtedness related prior to the time such Person becomes
a Subsidiary of the Company or the time of such acquisition, merger or
consolidation.
"Affiliate" means, when used with reference to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For the purposes of this definition, "control"
when used with respect to any specified Person means the power to direct or
cause the direction of management or policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative of the foregoing.
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"Affiliate Transaction" has the meaning set forth in "-- Certain Covenants
- -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means (i) an Investment by the Company or any Subsidiary
of the Company in any other Person pursuant to which such Person shall become a
Subsidiary of the Company or shall be merged with or into the Company or any
Subsidiary of the Company or (ii) the acquisition by the Company or any
Subsidiary of the Company of assets of any Person comprising an existing
business (whether existing as a separate entity), subsidiary, division or unit
of such Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Subsidiaries
(including, without limitation, by means of a sale and leaseback transaction or
a merger or consolidation) (collectively, for purposes of this definition, a
"transfer"), directly or indirectly, in one or a series of related transactions,
of (a) any Capital Stock of any Subsidiary held by the Company or any other
Subsidiary, (b) all or substantially all of the properties and assets of any
division or line of business of the Company or any of its Subsidiaries, (c) any
other properties or assets of the Company or any of its Subsidiaries other than
transfers of cash, Cash Equivalents, accounts receivable, or properties or
assets in the ordinary course of business; provided that the transfer of all or
substantially all of the properties or assets of the Company and its
Subsidiaries, taken as a whole, will be governed by the provisions of the
Indenture described above under the captions "-- Certain Covenants -- Mergers,
Consolidations and Sale of Assets" and/or "-- Change of Control" and not by the
provisions of the "Asset Sales" covenant. For the purposes of this definition,
the term "Asset Sale" also shall not include any of the following: (i) sales of
damaged, worn-out or obsolete equipment or assets that, in the Company's
reasonable judgment, are either (A) no longer used or (B) no longer useful in
the business of the Company or its Subsidiaries; (ii) any lease of any property
entered into in the ordinary course of business and with respect to which the
Company or any Subsidiary is the lessor, except any such lease that provides for
the acquisition of such property by the lessee during or at the end of the term
thereof for an amount that is less than the fair market value thereof at the
time the right to acquire such property is granted; (iii) a Restricted Payment
or Permitted Investment permitted under "Certain Covenants -- Limitation on
Restricted Payments;" and (iv) any transfers that, but for this clause (iv),
would be Asset Sales, if (A) the Company elects to designate such transfers as
not constituting Asset Sales and (B) after giving effect to such transfers, the
aggregate fair market value of the properties or assets transferred in such
transaction or any such series of related transactions so designated by the
Company does not exceed $1,000,000.
"Asset Proceeds Offer" has the meaning set forth in "-- Certain Covenants --
Asset Sales."
"Attributable Indebtedness" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended). As used in the preceding sentence, the "net rental
payments" under any lease for any such period shall mean the sum of rental and
other payments required to be paid with respect to such period by the lessee
thereunder, excluding any amounts required to be paid by such lessee on account
of maintenance and repairs, insurance, taxes, assessments, water rates or
similar charges. In the case of any lease that is terminable by the lessee upon
payment of penalty, such net rental payment shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Available Proceeds Amount" has the meaning set forth in "-- Certain
Covenants -- Asset Sales."
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the board of directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other day
on which banking institutions in the City of New York are required or authorized
by law or other governmental action to be closed.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common
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Stock and Preferred Stock of such Person and (ii) with respect to any Person
that is not a corporation, any and all partnership or other equity interests of
such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person to pay rent or other amounts under a lease that are required to be
classified and accounted for as capital lease obligations under GAAP and, for
purposes of this definition, the amount of such obligations at any date shall be
the capitalized amount of such obligations at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than 270 days from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within 180 days from
the date of acquisition thereof issued by any commercial bank organized under
the laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (v)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (iv) above; (vi) deposits
available for withdrawal on demand with any commercial bank not meeting the
qualifications specified in clause (ii) above, provided that all such deposits
do not exceed $5,000,000 in the aggregate at any one time; (vii) demand and time
deposits and certificates of deposit with any commercial bank organized in the
United States not meeting the qualifications specified in clause (ii) above,
provided that such deposits and certificates support bond, letter of credit and
other similar types of obligations incurred in the ordinary course of business;
and (viii) investments in money market or other mutual funds substantially all
of whose assets comprise securities of the types described in clauses (i)
through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any person (as such term is used in Section 13(d)(3) of the Exchange
Act) other than to the Company or a Subsidiary Guarantor; (ii) the Company
consolidates with or merges into another Person or any Person consolidates with,
or merges into, the Company, in any such event pursuant to a transaction in
which the outstanding Voting Stock of the Company is changed into or exchanged
for cash, securities or other property, other than any such transaction where
(a) the outstanding Voting Stock of the Company is changed into or exchanged for
Voting Stock of the surviving or resulting Person that is Qualified Capital
Stock and (b) the holders of the Voting Stock of the Company immediately prior
to such transaction own, directly or indirectly, not less than a majority of the
Voting Stock of the surviving or resulting Person immediately after such
transaction; (iii) the adoption of a plan relating to the liquidation or
dissolution of the Company not involving a merger or consolidation or a sale or
other disposition of assets described in clause (i) above; (iv) the consummation
of any transaction (including, without limitation, any merger or consolidation)
the result of which is that any person (as defined above), excluding Permitted
Holders, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50%
of the total voting power of the Voting Stock of the Company; provided that the
sale of Voting Stock of the Company to a Person or Persons acting as
underwriters in connection with a firm commitment underwriting shall not
constitute a Change of Control; or (v) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors
(other than by action of the Permitted Holders). For purposes of this
definition, any transfer of an equity interest of an entity that was formed for
the purpose of acquiring Voting Stock of the Company will be deemed to be a
transfer of such portion of such Voting Stock as corresponds to the portion of
the equity of such entity that has been so transferred.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
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"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income plus (ii) to the extent
that any of the following shall have been taken into account in determining
Consolidated Net Income, (A) all income taxes of such Person and its
Subsidiaries paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions of assets outside the
ordinary course of business), Consolidated Interest Expense, amortization
expense and depreciation expense, and (B) other non-cash items (other than
non-cash interest) reducing Consolidated Net Income, other than any non-cash
item which requires the accrual of or a reserve for cash charges for any future
period and other than any non-cash charge constituting an extraordinary item of
loss, less other non-cash items increasing Consolidated Net Income, all as
determined on a consolidated basis for such Person and its Subsidiaries in
conformity with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters for which financial information is available (the "Four Quarter
Period") ending on or prior to the date of the transaction or event giving rise
to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the
"Transaction Date") to Consolidated Fixed Charges of such Person for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to (i) the Incurrence or repayment of any
Indebtedness of such Person or any of its Subsidiaries (and the application of
the proceeds thereof) giving rise to the need to make such calculation and any
Incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the Incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, at any time subsequent to the first day of the Four Quarter
Period and on or prior to the Transaction Date, as if such Incurrence or
repayment, as the case may be (and the application of the proceeds thereof),
occurred on the first day of the Four Quarter Period, and (ii) any Asset Sales
or Asset Acquisitions (including, without limitation, any Asset Acquisition
giving rise to the need to make such calculation as a result of such Person or
one of its Subsidiaries (including any Person who becomes a Subsidiary as a
result of any such Asset Acquisition) Incurring, assuming or otherwise being
liable for Acquired Indebtedness) at any time subsequent to the first day of the
Four Quarter Period and on or prior to the Transaction Date, as if such Asset
Sale or Asset Acquisition (including the Incurrence, assumption or liability for
any such Indebtedness or Acquired Indebtedness and also including any
Consolidated EBITDA, based upon the four fiscal quarters of such Person for
which financial information is available immediately preceding such Asset
Acquisition, associated with such Asset Acquisition) occurred on the first day
of the Four Quarter Period; provided that the Consolidated EBITDA of any Person
acquired shall be included only to the extent includable pursuant to the
definition of "Consolidated Net Income." If such Person or any of its
Subsidiaries directly or indirectly guarantees Indebtedness of a third person,
the preceding sentence shall give effect to the Incurrence of such guaranteed
Indebtedness as if such Person or any Subsidiary of such Person had directly
Incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in
calculating "Consolidated Fixed Charges" for purposes of determining the
denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage
Ratio," (1) interest on Indebtedness determined on a fluctuating basis as of the
Transaction Date (including Indebtedness actually Incurred on the Transaction
Date) and which will continue to be so determined thereafter shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; and (2) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense and
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid (to the extent not accrued in a prior period), accrued or scheduled
to be paid or accrued during such period times (y) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
effective consolidated Federal, state and local tax rate of such Person,
expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate of the interest expense of such Person and its
Subsidiaries (excluding amortization of deferred financing fees) for such
period, on a consolidated basis, as determined in accordance with GAAP, and
including (a) all amortization of original issue discount (other than any
original issue discount on Indebtedness attributable to proceeds of the sale of
warrants issued in connection
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with the Incurrence of such Indebtedness); (b) the interest component of
Capitalized Lease Obligations paid (to the extent not accrued in a prior
period), accrued and/or scheduled to be paid or accrued by such Person and its
Subsidiaries during such period; (c) net cash costs under all Interest Swap
Obligations (including amortization of fees); (d) all capitalized interest; and
(e) the interest portion of any deferred payment obligations for such period.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP; provided
that there shall be excluded therefrom (a) after-tax gains and losses from Asset
Sales or abandonments or reserves relating thereto, (b) after-tax items
classified as extraordinary or nonrecurring gains, (c) the net income or loss of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Subsidiary of the referent Person or is merged or consolidated
with the referent Person or any Subsidiary of the referent Person, (d) the net
income (but not loss) of any Subsidiary of the referent Person to the extent
that the declaration of dividends or similar distributions by that Subsidiary of
that income is restricted by a contract, operation of law or otherwise, (e) the
net income of any Person, other than a Subsidiary of the referent Person, except
to the extent of cash dividends or distributions paid to the referent Person or
to a wholly-owned Subsidiary of the referent Person by such Person, (f) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Subsidiaries for such period, on a consolidated basis, as
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date; (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board of Directors at the time of such nomination or
election or (iii) was elected or nominated for election pursuant to the Voting
Agreement.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the sole option of the holder thereof, in whole or in part, on or prior to
the final maturity date of the Notes; provided, however, that any Capital Stock
that would constitute Disqualified Capital Stock solely because the holders
thereof have the right to require the Company to repurchase or redeem such
Capital Stock upon the occurrence of a Change of Control or an Asset Sale shall
not constitute Disqualified Capital Stock if the terms of such Capital Stock
provide that the Company may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless (i) all obligations of the Company under the
Indenture with respect to such Change of Control or Asset Sale have been
satisfied prior to such repurchase or redemption and (ii) such repurchase or
redemption does not violate any covenant of the Indenture.
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"Events of Default" has the meaning set forth in "-- Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934, as amended or any
successor statute or statutes thereto.
"Existing Indebtedness" means up to $85 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries in existence on the
Issue Date, until such amounts are repaid.
"Fair market value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length, free market
transaction, for cash, between an informed and willing seller and an informed
and willing and able buyer, neither of whom is under undue pressure or
compulsion to complete the transaction. Fair market value shall be determined by
the Board of Directors of the Company acting reasonably and in good faith and
shall be evidenced by a Board Resolution delivered to the Trustee; provided,
however, that if the aggregate non-cash consideration to be received by the
Company or any of its Subsidiaries from any Asset Sale or the issuance of
Qualified Capital Stock could be reasonably likely to exceed $5 million, the
fair market value shall be determined by an independent Financial Advisor.
"Family Member" means, when used with reference to any natural Person, such
Person's spouse, siblings, parents, children, or other lineal descendants
(whether by adoption or consanguinity), and shall mean a trust, the primary
beneficiary of which is the Person's spouse, siblings, parents, children, or
other lineal descendants (whether by adoption or consanguinity).
"Financial Advisor" means an accounting, appraisal or investment banking
firm of nationally recognized standing that is, in the reasonable and good faith
judgment of the Board of Directors of the Company, qualified to perform the task
for which such firm has been engaged.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Ice Business" means (i) the manufacture and sale (including, without
limitation, direct sales, wholesale sales and retail sales) of ice; (ii) the
manufacture and sale of ice and water by means of ice manufacturing or water
purification equipment (including ice makers, bins, baggers, merchandisers,
delivery devices and related equipment) installed on the premises of the
Company's customer(s) whether or not such equipment is owned by the Company, the
customers, or a third party; (iii) contract on-premises ice or water service
(including leasing of ice or water related equipment) for a customer's internal
use; (iv) providing cold storage and freezer related services in conjunction
with the traditional ice business; (v) the sale of products incidental or
related to the foregoing; and (v) all logical extensions of the foregoing.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"Incurrence," "Incurred," "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that (A) any Indebtedness
assumed in connection with an acquisition of assets and any Indebtedness of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) of the Company or at the time such
Person is merged or consolidated with the Company or any Subsidiary of the
Company shall be deemed to be Incurred at the time of the acquisition of such
assets or by such Subsidiary at the time it becomes, or is merged or
consolidated with, a Subsidiary of the Company or by the Company at the time of
such merger or consolidation, as the case may be, and (B) any amendment,
modification or waiver of any document pursuant to which Indebtedness was
previously Incurred shall not be deemed to be an Incurrence of Indebtedness
unless such amendment, modification or waiver shall increase the principal or
premium thereof or interest
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rate thereon (including by way of original issue discount), and (C) a change in
GAAP that results in an obligation of a Person that exists at such time becoming
Indebtedness shall not be deemed an Incurrence of Indebtedness. A guarantee by
the Company or a Subsidiary Guarantor of Indebtedness Incurred by the Company or
a Subsidiary Guarantor, as applicable, shall not be a separate Incurrence of
Indebtedness.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and accrued liabilities arising
in the ordinary course of business that are not overdue by 90 days or more or
are being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted), (v) all Obligations for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) all Indebtedness of others (including all dividends of other
Persons for the payment of which is) guaranteed, directly or indirectly, by such
Person or that is otherwise its legal liability or which such Person has agreed
to purchase or repurchase or in respect of which such Person has agreed
contingently to supply or advance funds but excluding endorsements of negotiable
instruments and documents in the ordinary course of business, (vii) net
liabilities of such Person under Interest Swap Obligations, (viii) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
any asset or property (including, without limitation, leasehold interests and
any other tangible or intangible property) of such Person, whether or not such
Indebtedness is assumed by such Person or is not otherwise such Person's legal
liability; provided that if the Obligations so secured have not been assumed by
such Person or are otherwise not such Person's legal liability, the amount of
such Indebtedness for the purposes of this definition shall be limited to the
lesser of the amount of such Indebtedness secured by such Lien or the fair
market value of the assets or property securing such Lien, and (ix) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed repurchase
price, but excluding accrued dividends if any. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and the maximum liability, upon the
occurrence of the contingency giving rise to the obligation, of any contingent
obligations at such date; provided that the amount outstanding at any time of
any non-interest bearing Indebtedness or other Indebtedness issued with original
issue discount is the full amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP, but such Indebtedness shall only be
deemed to be Incurred as of the date of original issuance thereof.
"Independent" when used with respect to any specified Person means such a
Person who (a) is in fact independent, (b) does not have any direct financial
interest or any material indirect financial interest in the Company or any of
its subsidiaries, or in any Affiliate of the Company or any of its subsidiaries
and (c) is not an officer, employee, promoter, underwriter, trustee, partner,
director or person performing similar functions for the Company or any of its
subsidiaries. Whenever it is provided in the Indenture that any Independent
Person's opinion or certificate shall be furnished to the Trustee, such Person
shall be appointed by the Company and approved by the Trustee in the exercise of
reasonable care, and such opinion or certificate shall state that the signer has
read this definition and that the signer is Independent within the meaning
thereof.
"Interest Swap Obligations" means the obligations of any Person under any
interest rate protection agreement, interest rate future, interest rate option,
interest rate swap, interest rate cap or other interest rate hedge or
arrangement.
"Investment" by any Person means any direct or indirect (i) loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property (valued at the fair market value thereof as of the date of
transfer) to others or payments for property or services for the account or use
of others, or otherwise) (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business); (ii) purchase
or acquisition of Capital Stock, bonds, notes, debentures or other securities or
evidences of Indebtedness issued by any other Person; (iii) guarantee or
assumption of any Indebtedness or any other obligation of any other Person
(except for an assumption of Indebtedness for which the assuming Person receives
consideration at the time of such assumption in the form of property or assets
with a fair market value at least equal to the principal amount of the
Indebtedness assumed, extensions of trade credit or other advances to customers
on commercially reasonable terms in accordance with normal
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trade practices or otherwise in the ordinary course of business, workers'
compensation, utility, lease and similar deposits and prepaid expenses made in
the ordinary course of business, and endorsements of negotiable instruments and
documents in the ordinary course of business); and (iv) all other items that
would be classified as investments on a balance sheet of such Person prepared in
accordance with GAAP. The amount of any Investment shall not be adjusted for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment. If the Company or any Subsidiary of the Company
sells or otherwise disposes of any Common Stock of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, the Company no longer owns, directly or indirectly, greater than
50% of the outstanding Common Stock of such Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Subsidiary not sold
or disposed of.
"Issue Date" means January 28, 1998, the date on which the Series A Notes I
were first issued under the Indenture.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statute or statutes) of any jurisdiction other than to reflect ownership by a
third party of property leased to the referent Person or any of its Subsidiaries
under a lease that is not in the nature of a conditional sale or title retention
agreement).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents (including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents)
received by the Company or any of its Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, brokerage, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable ((1) including,
without limitation, income taxes reasonably estimated to be actually payable as
a result of any disposition of property within two years of the date of
disposition and (2) after taking into account any reduction in tax liability due
to available tax credits or deductions and any tax sharing arrangements) and (c)
appropriate amounts to be provided by the Company or any Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"Net Equity Proceeds" means (a) in the case of any issuance or sale by the
Company of Qualified Capital Stock of the Company, the aggregate net cash
proceeds and the fair market value of any property or securities received by the
Company, after payment of expenses, commissions and the like (including, without
limitation, brokerage, legal, accounting and investment banking fees and
commissions) incurred in connection therewith, and (b) in the case of any
exchange, exercise, conversion or surrender of any outstanding Indebtedness of
the Company or any Subsidiary issued after the Issue Date for or into shares of
Qualified Capital Stock of the Company, the amount of such Indebtedness (or, if
such Indebtedness was issued at an amount less than the stated principal amount
thereof, the accrued amount thereof as determined in accordance with GAAP) as
reflected in the consolidated financial statements of the Company prepared in
accordance with GAAP as of the most recent date next preceding the date of such
exchange, exercise, conversion or surrender (plus any additional amount required
to be paid by the holder of such Indebtedness to the Company or to any wholly-
owned Subsidiary of the Company upon such exchange, exercise, conversion or
surrender and less any and all payments made to the holders of such
Indebtedness, and all other expenses incurred by the Company in connection
therewith), in each case (a) and (b) to the extent consummated after December
31, 1997.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Officers' Certificate" means a certificate signed by two officers of the
Company.
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"Opinion of Counsel" means a written opinion from legal counsel which and
who are reasonably acceptable to the Trustee.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment to the Notes.
"Paying Agent" shall initially be the Trustee until a successor paying agent
for the Notes is selected in accordance with the Indenture.
"Payment default" has the meaning set forth in "-- Events of Default."
"Permitted Holders" means the following Persons: Ares Leveraged Investment
Fund, L.P., Culligan Water Technologies, Inc., Erica Jesselson, SV Capital
Partners, L.P., Norwest Equity Partners V, a Minnesota Limited Partnership, The
Food Fund II Limited Partnership, A. J. Lewis III, Steven P. Rosenberg, and
James F. Stuart, and any of their respective Affiliates and Family Members, each
of the foregoing individually being a Permitted Holder.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Series A Notes I and the Series A Notes II;
(ii) Indebtedness under any Existing Indebtedness;
(iii) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company or any Subsidiary thereof in the ordinary
course of business, including guarantees or obligations of the Company or any
Subsidiary thereof with respect to letters of credit supporting such bid,
performance or surety obligations (in each case other than for an obligation for
money borrowed);
(iv) Permitted Refinancing Indebtedness;
(v) the Subsidiary Guarantees of the Series A Notes I and the Series A
Notes II;
(vi) Indebtedness under Credit Facilities in an aggregate principal
amount not to exceed $80 million at any one time outstanding and any guarantee
thereof, reduced by any permanent repayment or permanent reduction thereof after
the date of issuance of the Series A Notes II which is accompanied by a
corresponding permanent commitment reduction pursuant to the "Asset Sales"
covenant;
(vii) Interest Swap Obligations of the Company; provided, however, that
such Interest Swap Obligations are entered into to protect the Company and its
Subsidiaries from fluctuations in interest rates on Indebtedness Incurred in
accordance with the Indenture to the extent the notional principal amount of
such Interest Swap Obligation does not exceed the principal amount of the
Indebtedness to which such Interest Swap Obligation relates ("Permitted Swaps");
(viii) Indebtedness of a direct or indirect Subsidiary of the Company
to the Company or to a direct or indirect Subsidiary of the Company for so long
as such Indebtedness is held by the Company or a direct or indirect Subsidiary
of the Company in each case subject to no Lien held by a Person other than the
Company or a direct or indirect Subsidiary of the Company or the holders of
Indebtedness under the Credit Facilities (or an agent for such holders);
provided, that if as of any date any Person other than the Company or a direct
or indirect Subsidiary of the Company or the holders of Indebtedness under the
Credit Facilities (or an agent for such holders) owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be
deemed the date of the Incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;
(ix) Indebtedness of the Company to a direct or indirect Subsidiary of
the Company for so long as such Indebtedness is held by a direct or indirect
Subsidiary of the Company in each case subject to no Lien held by a Person other
than the holders of Indebtedness under the Credit Facilities (or an agent for
such holders); provided that (a) any Indebtedness of the Company to any direct
or indirect Subsidiary of the Company is unsecured and subordinated, pursuant
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to a written agreement, to the Company's Obligations under the Indenture and the
Notes, and (b) if as of any date any Person other than a direct or indirect
Subsidiary of the Company owns or holds any such Indebtedness or any Person
other than the holders of Indebtedness under the Credit Facilities (or an agent
for such holders) holds a Lien in respect of such Indebtedness, such date shall
be deemed the date of the Incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness; and
(x) additional Indebtedness not to exceed an aggregate principal amount
of $10 million at any one time outstanding and any guarantee thereof.
"Permitted Investments" means (a) Investments in cash and Cash Equivalents;
(b) Investments by the Company or by any Subsidiary of the Company in any Person
that is or will become immediately after such Investment a direct or indirect
Subsidiary of the Company; (c) any Investments in the Company by any Subsidiary
of the Company; provided that any Indebtedness evidencing such Investment is
unsecured; (d) Investments made by the Company or by its Subsidiaries as a
result of an Asset Sale made in compliance with "-- Certain Covenants -- Asset
Sales"; (e) Permitted Swaps; (f) Investments in ventures organized outside of
the United States in an amount not to exceed $5,000,000 at any one time
outstanding; (g) Investments in an amount not to exceed $500,000 at any one time
outstanding; (h) Investments held by any Person on the date such Person becomes
a Subsidiary to the extent such Investments are not incurred in anticipation of
or in connection with such acquisition; and (i) Investments in stock,
obligations or securities received in settlement of debts owing to the Company
or any Subsidiary as a result of bankruptcy or insolvency proceedings or upon
the foreclosure, perfection or enforcement of any Lien in favor of the Company
or any Subsidiary, in each case as to debt owing to the Company or any
Subsidiary that arose in the ordinary course of business of the Company or any
such Subsidiary, provided that any stocks, obligations or securities received in
settlement of debts that arose in the ordinary course of business (and received
other than as a result of bankruptcy or insolvency proceedings or upon
foreclosure, perfection or enforcement of any Lien) that are, within 30 days of
receipt, converted into cash or Cash Equivalents shall be treated as having been
cash or Cash Equivalents at the time received.
"Permitted Liens" means the following types of Liens:
(i) Liens existing as of the Issue Date;
(ii) Liens securing the Notes, the Subsidiary Guarantees or any
Indebtedness under the Credit Facilities or any guarantees of such indebtedness;
(iii) Liens in favor of the Company;
(iv) Liens for taxes, assessments and governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Subsidiaries shall have set aside
on its books such reserves as may be required pursuant to GAAP;
(v) Statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not delinquent for more
than 30 days or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been made
in respect thereof;
(vi) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other types
of social security, or to secure the payment or performance of tenders,
statutory or regulatory obligations, surety and appeal bonds, bids, government
contracts and leases, performance and return of money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(vii) Judgment Liens not giving rise to an Event of Default so long as
any appropriate legal proceedings which may have been duly initiated for the
review of such judgment shall not have been finally terminated or the period
within which such proceeding may be initiated shall not have expired;
(viii) Any interest or title of a lessor under any Capital Lease
Obligation or operating lease;
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(ix) Liens securing Purchase Money Indebtedness incurred in compliance
with the "Limitation on Indebtedness" covenant; provided, however, that (i) the
related Purchase Money Indebtedness shall not be secured by any property or
assets of the Company or any Subsidiary other than the property or assets so
acquired and any proceeds therefrom and (ii) the Lien securing any such
Indebtedness shall be created within 90 days of such acquisition;
(x) Liens securing obligations under or in respect of Interest Swap
Obligations;
(xi) Liens upon specific items of inventory or other goods of any
Person securing such Person's obligations in respect of bankers' acceptances
issued or created for the account of such Person to facilitate the purchase,
shipment or storage of such inventory or other goods;
(xii) Liens securing reimbursement obligations with respect to
commercial letters of credit that encumber documents and other property or
assets relating to such letters of credit and products and proceeds thereof;
(xiii) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements of the Company
or any of its Subsidiaries, including rights of offset and set-off;
(xiv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company and Liens on property or assets of
a Subsidiary existing at the time it became a Subsidiary, provided that such
Liens were in existence prior to the contemplation of the acquisition and do not
extend to any assets other than the property of such Person or the acquired
property (and the proceeds thereof), as applicable; and
(xv) Liens on capital stock or other equity interests in Unrestricted
Subsidiaries and Permitted Investments made pursuant to clause (f) of the
definition thereof.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to refinance, renew, replace, defease or refund, other Indebtedness of
the Company or any of its Subsidiaries incurred pursuant to clause (i), (ii) or
(v) of the definition of "Permitted Indebtedness"; provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so exchanged, refinanced, renewed,
replaced, defeased or refunded (plus the amount of related prepayment penalties,
fees and reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
exchanged, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being exchanged, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes or the Subsidiary
Guarantees, such Permitted Refinancing Indebtedness is subordinated in right of
payment to, the Notes or the Subsidiary Guarantees, as the case may be, on terms
at least as favorable to the Holders of Notes as those contained in the
documentation governing the Indebtedness being exchanged, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Subsidiary that is the obligor on the Indebtedness being
exchanged, refinanced, renewed, replaced, defeased or refunded.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness or that portion of
Indebtedness of the Company or any Subsidiary incurred in connection with the
acquisition by the Company or such Subsidiary, subsequent to the Issue Date, of
any property or assets including Capitalized Lease Obligations.
"Public Equity Offering" means an underwritten offer and sale of Qualified
Capital Stock of the Company pursuant to a registration statement that has been
declared effective by the Commission pursuant to the Securities Act (other than
a
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registration statement on Form S-8 or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to refinance,
renew, refund, repay, prepay, redeem, defease or retire, or to issue a security
or Indebtedness in exchange or replacement for, such security or Indebtedness in
whole or in part. "Refinanced" and "Refinancing" shall have correlative
meanings.
"Registrar" shall initially mean the Trustee until a successor registrar for
the Notes is selected in accordance with the Indenture.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02 (v)
of Regulation S-X under the Securities Act.
"Specified Affiliate Transactions" means certain transactions among the
Company and Subsidiaries and certain Affiliates which were entered into prior to
the Issue Date as set forth in a Schedule to the Indenture.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor that is expressly subordinated in right of payment to the
Notes or the Subsidiary Guarantees, as the case may be.
"Subsidiary," with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
Notwithstanding the foregoing, an Unrestricted Subsidiary shall be deemed not to
be a Subsidiary of the Company for purposes hereof and of the Indenture.
"Subsidiary Guarantee" means any guarantee of the Notes by a Subsidiary
Guarantor in accordance with the provisions described under "-- Ranking and
Guarantees."
"Subsidiary Guarantor" means (i) each of Packaged Ice Leasing, Inc., Southco
Ice, Inc., Mission Party Ice, Inc., Southwest Texas Packaged Ice, Inc.,
Southwestern Ice, Inc., Golden Eagle Ice -- Texas, Inc., Packaged Ice Southeast,
Inc., Southern Bottled Water Company, Inc. and Reddy Ice Corporation and (ii)
each of the Company's Subsidiaries that in the future executes a supplemental
indenture in which such Subsidiary agrees to be bound by the terms of the
Indenture as a Subsidiary Guarantor; provided that any Person constituting a
Subsidiary Guarantor as described above shall cease to constitute a Guarantor
when its respective Subsidiary Guarantee is released in accordance with the
terms of the Indenture.
"Unrestricted Subsidiary" means (1) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors as provided below) and (2) any Subsidiary or Subsidiaries
of an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any lien on any property
of, any other Subsidiary of the Company which is not a Subsidiary of the
Subsidiary of the Company to be so designated or otherwise an Unrestricted
Subsidiary, provided that (x) such designation complies with the "Limitation on
Restricted Payments" covenant, (y) each Subsidiary so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Subsidiaries and
(z) unless such designation is a Permitted Investment, immediately after giving
pro forma effect to such designation, the Company could incur $1.00 of
additional Indebtedness pursuant to paragraph (b) of the covenant entitled
"Limitation on Indebtedness." Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions.
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"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or only so long as no senior class of stock has voting power by
reason of any contingency) to vote in the election of members of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly-owned Subsidiary" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities which normally have the right to
vote in the election of directors, other than director's qualifying shares, are
owned by such Person or any wholly-owned Subsidiary of such Person.
DESCRIPTION OF PREFERRED STOCK AND EXCHANGE DEBENTURES
PREFERRED STOCK
The form and terms of the Series B Preferred Stock are the same as the form
and terms of the Series A Preferred Stock except that (i) the Series B Preferred
Stock will have been registered under the Securities Act and thus will not bear
restrictive legends restricting the transfer thereof and (ii) holders of Series
B Preferred Stock will not be entitled to certain rights of holder of Series A
Preferred Stock under the Preferred Stock Registration Rights Agreement, which
will terminate upon consummation of the Exchange Offer, unless such holders of
Series A Preferred Stock are entitled to require the Company to effect a Shelf
Registration. The form and terms of the Series B Exchange Debentures will be the
same as the Series A Exchange Debentures, except that the Series B Exchange
Debentures will have been registered under the Securities Act. The following is
a summary of the material terms and provisions of the Preferred Stock. This
summary does not purport to be a complete description of the Preferred Stock and
is subject to the detailed provisions of, and qualified in its entirety by
reference to, the provisions of the Certificates of Designation relating thereto
(including the definitions contained therein). Definitions relating to certain
capitalized terms are set forth under "---Certain Definitions" and throughout
this description. Capitalized terms that are used but not otherwise defined
herein have the meanings assigned to them in the Certificates of Designation and
such definitions are incorporated herein by reference.
General
Pursuant to the Certificate of Designation for the Series A Preferred Stock
(the "Certificate of Designation"), 400,000 shares of Series A Preferred Stock
with a liquidation preference of $100 per share were authorized for issuance in
the Units Offering (as defined herein), plus such additional shares as may be
issued in payment of dividends in the event the Company elects to pay dividends
on the Series A Preferred Stock by issuing additional shares of Series A
Preferred Stock. See "--Dividends" below. The Certificate of Designation for the
Series B Preferred Stock authorizes the issuance of up to 800,000 shares of
Series B Preferred Stock. Subject to certain conditions, the Preferred Stock is
exchangeable for Exchange Debentures at the option of the Company on any
dividend payment date. The Preferred Stock, when issued, will be fully paid and
nonassessable.
Ranking
The Preferred Stock ranks, with respect to dividend distributions and
distributions upon the liquidation, winding-up or dissolution of the Company,
senior to all classes of common stock of the Company, and to each other class of
capital stock or series of preferred stock now existing or hereafter created
(collectively, "Junior Securities"). The Company may not issue any class or
series of capital stock ranking senior to or on a parity with the Preferred
Stock with respect to dividend distributions or distributions upon liquidation,
winding-up or dissolution of the Company without the approval of the holders of
at least a majority of the shares of Preferred Stock then outstanding, voting or
consenting, as the case may be, together as one class; provided, however, that
the Company can issue additional shares of Preferred Stock to satisfy dividend
payments on outstanding shares of Preferred Stock.
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Dividends
Beginning on April 30, 1998 (the "Issue Date"), the Holders of the
outstanding shares of Preferred Stock, shall be entitled to receive, when, as
and if declared by the Board of Directors, out of funds legally available
therefor, dividends on each share of Preferred Stock, at a rate per annum equal
to 13% of the liquidation preference of one share of Preferred Stock, or $13.00
per whole share per annum (the "Permanent Dividend Rate"); provided, however,
from the Issue Date until the first anniversary of the Issue Date, dividends on
each share of Preferred Stock shall accrue and be paid at a rate per annum equal
to the Permanent Dividend Rate less 1.5 percent, and from the first anniversary
of the Issue Date until the second anniversary of the Issue Date, dividends on
each share of Preferred Stock shall accrue and be paid at a rate per annum equal
to the Permanent Dividend Rate less .75 percent. After the second anniversary of
the Issue Date, dividends on each share of Preferred Stock shall accrue and be
paid at the Permanent Dividend Rate. All dividends shall be fully cumulative and
shall accrue, whether or not earned or declared, on a daily basis from the Issue
Date and shall be payable quarterly in arrears on each Dividend Payment Date,
commencing on August 1, 1998. Any dividend on the Preferred Stock accrued and
payable (including, without limitation, Default Dividends (as defined below))
shall be paid either, as so elected by the Board of Directors of the Company,
(x) in cash or (y) by issuing a number of additional shares (and/or fractional
shares) of the Preferred Stock (the "Additional Shares of Preferred Stock") for
each such share (or fractional share) of Preferred Stock then outstanding equal
to the dividend then payable on each such share (or fractional share) of
Preferred Stock for the Dividend Period then ended (or such shorter period for
which dividends are so being paid) (expressed as a dollar amount) divided by the
liquidation preference of one share of Preferred Stock (expressed as a dollar
amount) or (z) in any combination thereof; provided, however, that on each
Dividend Payment Date which occurs after May 1, 2003, such dividend amount shall
be paid in cash, except to the extent prohibited by the Indenture or the New
Credit Facility, each as existing as of the Issue Date.
The Permanent Dividend Rate may be increased from time to time as
hereinafter provided. Upon:
(i) the failure of the Company to satisfy any mandatory
redemption, Change of Control redemption, or repurchase obligation with
respect to the Preferred Stock on the terms and in accordance with the
provisions described hereof;
(ii) the failure to pay a cash dividend on a Dividend Payment
Date which occurs after May 1, 2003;
(iii) the failure of the Company to comply with any of the
other covenants or agreements set forth in the Certificate of
Designation and the continuance of such failure for 30 consecutive days
or more; or
(iv) default under any mortgage, indenture or instrument under
which there may be issued, or by which there may be secured or
evidenced, any indebtedness for money borrowed by the Company or any of
its Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Subsidiaries) whether such indebtedness or guarantee now
exists, or is hereafter created, which default (1) is caused by a
failure to pay principal of or premium, if any, or interest on such
indebtedness on the date of such default (a "Payment Default") or (2)
results in the acceleration of such indebtedness prior to its express
maturity and, in each case, the principal amount of any such
indebtedness, together with the principal amount of any other such
indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $1,000,000 or
more (each of the events described in clauses (i), (ii), (iii) and (iv)
being referred to herein as an "Increased Dividend Triggering Event");
then the Permanent Dividend Rate will increase by 2% per annum from the date of
such Increased Dividend Triggering Event until such Increased Dividend
Triggering Event is cured.
If at any time dividends are not declared and paid on any Dividend Payment
Date, whether in cash or Additional Shares of Preferred Stock, or any
combination thereof (the "Omitted Dividends"), the shares of Preferred Stock in
respect of which such Omitted Dividends were not paid shall accrue additional
dividends as though such Omitted Dividends had been paid in Additional Shares of
Preferred Stock at a rate per annum equal to the Permanent Dividend Rate
multiplied by the amount of such Omitted Dividends (expressed as a dollar
amount) (the "Default Dividends"). Such Default Dividends
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shall be fully cumulative and shall accrue (whether or not earned or declared)
on a daily basis and shall be deemed to constitute accrued and unpaid dividends
for all purposes hereof, even if such additional dividends are not specifically
mentioned in any particular context. For purposes of the description herein, all
Default Dividends shall be considered to be in arrears at all times.
Each distribution in the form of a dividend (whether in cash or in
Additional Shares of Preferred Stock) shall be payable to Holders of record as
they appear on the stock books of the Company on such record dates, not less
than 10 nor more than 60 days preceding the related Dividend Payment Date, as
shall be fixed by the Board of Directors. Dividends shall cease to accumulate in
respect of shares of the Preferred Stock on the Debentures Exchange Date or on
the date of their earlier redemption unless the Company shall have failed to
issue the appropriate aggregate principal amount of Exchange Debentures in
respect of the Preferred Stock on the Debentures Exchange Date or shall have
failed to pay the relevant redemption price on the date fixed for redemption.
All dividends paid with respect to shares of the Preferred Stock shall be
paid pro rata to the Holders entitled thereto. Dividends on account of arrears
for any past Dividend Period and dividends in connection with any optional
redemption described below may be declared and paid at any time, without
reference to any regular Dividend Payment Date, to Holders of record on such
date, not more than 45 days prior to the payment thereof, as may be fixed by the
Board of Directors.
No full dividends shall be declared by the Board of Directors or paid or
funds set apart for the payment of dividends by the Company on any Parity
Securities (as defined herein) for any period unless full cumulative dividends
shall have been or contemporaneously are declared and paid in full, or declared
and (in the case of dividends payable in cash) a sum in cash set apart in trust
sufficient for such payment, on the Preferred Stock for all dividend periods
terminating on or prior to the date of payment of such full dividends on such
Parity Securities. If any dividends are not paid in full, as aforesaid, upon the
shares of the Preferred Stock and any other Parity Securities, all dividends
declared upon shares of the Preferred Stock and any other Parity Securities
shall be declared pro rata so that the amount of dividends declared per share on
the Preferred Stock and such Parity Securities shall in all cases bear to each
other the same ratio that accrued dividends per share on the Preferred Stock and
such Parity Securities bear to each other.
Holders of shares of the Preferred Stock shall be entitled to receive the
dividends provided for hereof in preference to and in priority over any
dividends upon any of the Junior Securities (as defined herein). So long as any
shares of Preferred Stock are outstanding, the Company shall not declare, pay or
set apart for payment any dividend on any of the Junior Securities or make any
payment on account of, or set apart for payment, money for a sinking or other
similar fund, for the purchase, redemption or other retirement of any of the
Junior Securities or any warrants, rights, calls or options exercisable for or
convertible into any of the Junior Securities, or make any distribution in
respect thereof, either directly or indirectly, and whether in cash, obligations
or shares of the Company or other property (other than dividends on Junior
Securities paid solely in additional shares of Junior Securities), and shall not
permit any person or entity directly or indirectly controlled by the Company to
purchase or redeem any of the Junior Securities or any such warrants, rights,
calls or options. In addition, so long as any shares of the Preferred Stock are
outstanding, the Company shall not make any payment on account of, or set apart
for payment, money for a sinking or other similar fund, for the purchase,
redemption or other retirement of any of the Parity Securities or any warrants,
rights, calls or options exercisable for or convertible into any of the Parity
Securities, and shall not permit any person or entity directly or indirectly
controlled by the Company to purchase or redeem any of the Parity Securities or
any such warrants, rights, calls or options unless the dividends determined in
accordance herewith on the Preferred Stock have been paid in full.
Notwithstanding the foregoing, these provisions do not prohibit (a) the
acquisition of Junior Securities or warrants, rights, calls or options
exercisable for or convertible into Junior Securities either (i) solely in
exchange for shares of Junior Securities or (ii) through the application of the
net proceeds of a substantially concurrent sale for cash (other than to a person
or entity directly or indirectly controlled by the Company) of shares of Junior
Securities or warrants, rights, calls or options to acquire Junior Securities or
(b) the acquisition of Parity Securities or warrants, rights, calls or options
exercisable for or convertible into Parity Securities either (i) solely in
exchange for shares of Junior Securities or Parity Securities or a combination
thereof or (ii) through the application of the net proceeds of a substantially
concurrent sale for cash (other than to a person or entity directly or
indirectly controlled by the Company) of shares of Junior Securities or
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Parity Securities or warrants, rights, calls or options to acquire Junior
Securities or Parity Securities (or any combination thereof).
Dividends payable on shares of the Preferred Stock for any period less than
a year shall be computed on the basis of a 360-day year of twelve 30-day months
and the actual number of days elapsed in the period for which payable. If any
Dividend Payment Date occurs on a day that is not a Business Day, any accrued
dividends otherwise payable on such Dividend Payment Date shall be paid on the
next succeeding Business Day.
Redemption
Optional Redemption. The Company may (subject to contractual and other
restrictions with respect thereto and to applicable provisions of the Securities
Act, and to the legal availability of funds therefor), at the option of the
Board of Directors, redeem at any time after the fourth anniversary of the Issue
Date or from time to time thereafter, in whole or in part, any or all of the
shares of the Preferred Stock, at the applicable Optional Redemption Cash Price
(as defined herein) plus an amount equal to all accumulated and unpaid dividends
thereon, whether or not earned or declared (including an amount in cash equal to
a prorated dividend for the period from the Dividend Payment Date immediately
prior to the Redemption Date to the Redemption Date) (the "Optional Redemption
Price"), provided that no optional redemption shall be authorized or made unless
prior thereto full unpaid cumulative dividends for all Dividend Periods
terminating on or prior to the Redemption Date and for an amount equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the Redemption Date to the Redemption Date shall have been or
immediately prior to the Redemption Notice (as defined herein), are declared and
paid in cash or declared and a sum set apart sufficient for such cash payment on
the Redemption Date, on the outstanding shares of the Preferred Stock. The
"Optional Redemption Cash Price" shall be (a) if the redemption occurs prior to
the fifth anniversary of the Issue Date, $106.50 per share, and (b) if the
redemption occurs on or after the fifth anniversary of the Issue Date, $100.00
per share.
Optional IPO Redemption. The Company may (subject to contractual and other
restrictions with respect thereto and to applicable provisions of the Securities
Act and to the legal availability of funds therefor), at the option of the Board
of Directors, redeem at any time prior to the third anniversary of the Issue
Date using the proceeds of an Initial Public Offering (an "IPO Redemption"), in
whole or in part, any or all of the shares of the Preferred Stock, at the
applicable IPO Redemption Cash Price plus an amount equal to all accumulated and
unpaid dividends thereon, whether or not earned or declared (including an amount
in cash equal to a prorated dividend for the period from the Dividend Payment
Date immediately prior to the Redemption Date to the Redemption Date) (the "IPO
Redemption Price"), provided that no IPO Redemption shall be authorized or made
unless prior thereto full unpaid cumulative dividends for all Dividend Periods
terminating on or prior to the Redemption Date and for an amount equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the Redemption Date to the Redemption Date shall have been or
immediately prior to the Redemption Notice, are declared and paid in cash or
declared and a sum set apart sufficient for such cash payment on the Redemption
Date, on the outstanding shares of the Preferred Stock. The "IPO Redemption Cash
Price" shall be $113.00 per share of Preferred Stock; provided, however, that if
(a) the per share purchase price for shares of Common Stock purchased in the
Initial Public Offering is greater than the IPO Base Price (as defined below) or
(b) prior to the IPO Redemption the last reported sales price for the Common
Stock on its primary exchange or trading market is equal to or greater than the
IPO Base Price for a period of at least five (5) consecutive days, then the IPO
Redemption Cash Price shall be (x) if the redemption occurs prior to the first
anniversary of the Issue Date, $109.00 per share, and (y) if the redemption
occurs on or after the first anniversary of the Issue Date and prior to the
second anniversary of the Issue Date, $111.00 per share.
Redemption of Less than All Shares. In the event of a redemption pursuant to
Optional Redemption or Optional IPO Redemption hereof only a portion of the then
outstanding shares of the Preferred Stock, the Company shall effect such
redemption pro rata according to the number of shares held by each Holder of the
Preferred Stock.
Change of Control Redemption. If at any time there shall occur any Change of
Control, then the Company shall offer to repurchase all of the Preferred Stock,
on the date that is 45 days after the date of the Change of Control, and the
redemption price per share shall be $101 per share of Preferred Stock so
redeemed, plus an amount equal to all accumulated and unpaid dividends thereon,
whether or not earned or declared (including an amount in cash equal to a
prorated dividend for the period from the Dividend Payment Date immediately
prior to the Redemption Date to the
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Redemption Date) (the "Change of Control Redemption Price"). The failure by the
Company to repurchase all of the Preferred Stock as provided immediately above
shall constitute an Increased Dividend Triggering Event, notwithstanding the
next sentence. The Company shall not repurchase or redeem any shares of
Preferred Stock unless (1) all obligations of the Company under the Indenture or
New Credit Facility with respect to a change of control have been satisfied
prior to such repurchase or redemption and (2) such repurchases or redemption
does not violate any covenant of the Indenture or New Credit Facility.
Mandatory Redemption. Subject to applicable provisions of the Securities
Act, on May 1, 2005, the Company shall redeem all of the shares of the Preferred
Stock then outstanding at a cash redemption price of $100.00 per share plus an
amount equal to all accumulated and unpaid dividends thereon, whether or not
earned or declared (including an amount in cash equal to a prorated dividend for
the period from the Dividend Payment Date immediately prior to the Redemption
Date to the Redemption Date) (the "Mandatory Redemption Price").
Procedures for Redemption.
(1) At least 20 days and not more than 60 days prior to the date fixed
for any redemption of the Preferred Stock, written notice (the "Redemption
Notice") shall be given by first-class mail, postage prepaid, to each Holder of
record on the record date fixed for such redemption of the Preferred Stock at
such Holder's address as the same appears on the stock register of the Company,
provided that no failure to give such notice nor any deficiency therein shall
affect the validity of the procedure for the redemption of any shares of
Preferred Stock to be redeemed except as to the Holder or Holders to whom the
Company has failed to give said notice or except as to the Holder or Holders
whose notice was defective and except that any failure to give such notice or
any deficiency therein shall have no effect on the Company's obligation to
effect a mandatory redemption. The Redemption Notice shall state:
(A) whether the redemption is an Optional Redemption,
Optional IPO Redemption, Change of Control Redemption
or Mandatory Redemption;
(B) the Optional Redemption Price, the IPO Redemption
Price, the Change of Control Redemption Price or the
Mandatory Redemption Price, as the case may be;
(C) whether all or less than all (in the case of either
an Optional Redemption or and Optional IPO
Redemption) the outstanding shares of the Preferred
Stock are to be redeemed and the total number of
shares of the Preferred Stock being redeemed;
(D) in the case of either an Optional Redemption or an
Optional IPO Redemption, the number of shares of
Preferred Stock held, as of the appropriate record
date, by the Holder that the Company intends to
redeem;
(E) the Redemption Date;
(F) the place or places where certificates representing
the shares of Preferred Stock are to be surrendered
for redemption and the manner in which such
certificates are to be surrendered;
(G) that the Holder is to surrender to the Company, at
the place or places referred to in clause (F) above,
in the manner designated and at the Optional
Redemption Price, the IPO Redemption Price, the
Change of Control Redemption Price or the Mandatory
Redemption Price, as the case may be, the certificate
or certificates representing the shares of Preferred
Stock; and
(H) that dividends on the shares of the Preferred Stock
to be redeemed shall cease to accrue on such
Redemption Date unless the Company defaults in the
payment of the Optional Redemption Price, the IPO
Redemption Price, the Change of Control Redemption
Price or the Mandatory Redemption Price, as the case
may be.
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(2) Each Holder of Preferred Stock shall surrender the certificate or
certificates representing such shares of Preferred Stock to the Company, duly
endorsed, in the manner and at the place designated in the Redemption Notice,
and on the Redemption Date the full Optional Redemption Price, IPO Redemption
Price, Change of Control Redemption Price or Mandatory Redemption Price, as the
case may be, for such shares shall be payable in cash to the Person whose name
appears on such certificate or certificates as the owner thereof, and each
surrendered certificate shall be canceled and retired. In the event that less
than all of the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(3) Unless the Company defaults in the payment in full of the
applicable redemption price, dividends on the Preferred Stock called for
redemption shall cease to accumulate on the Redemption Date, and the Holders of
such shares to be redeemed shall cease to have any further rights with respect
thereto on the Redemption Date, other than the right to receive the Optional
Redemption Price, IPO Redemption Price, Change of Control Redemption Price or
the Mandatory Redemption Price, as the case may be, without interest.
Exchange
The Company may, at its option, redeem all, but not less than all, of the
then outstanding shares of Preferred Stock through the issuance of, in
redemption of and in exchange for the shares of Preferred Stock, Exchange
Debentures in an aggregate principal amount equal to the sum of $100.00 per
share of Preferred Stock to be redeemed plus the amount of accrued and unpaid
dividends thereon whether or not earned or declared (including an amount equal
to a prorated dividend for the period from the Dividend Payment Date immediately
prior to the Debentures Exchange Date to the Debentures Exchange Date), provided
that on the date of such exchange: (i) there shall be no contractual or legal
impediments to such exchange; (ii) there shall be legally available funds
sufficient therefor; (iii) the Company shall have delivered to the Holders a
written opinion of counsel of national prominence that the Exchange Debentures
have been duly authorized, executed and delivered by the Company, have been
validly issued, have not been issued in violation of any law, rule, regulation
or agreement and constitute valid and legally binding obligations of the Company
enforceable (subject to customary exceptions) against the Company in accordance
with their terms and entitled to the benefits of the Exchange Indenture; (iv)
the Company shall have executed and delivered to the Holders an Exchange
Indenture in form and substance satisfactory to the holders of a majority of the
outstanding shares of Preferred Stock and such Exchange Indenture shall comply
with the definition thereof in the Certificate of Designation; and (v)
immediately after giving effect to such exchange, no Default or Event of Default
(each as defined in the Exchange Indenture) would exist under the Exchange
Indenture.
Procedures for Exchange.
(1) At least 20 days and not more than 60 days prior to the date fixed
for exchange (the "Debentures Exchange Date"), written notice (the "Debentures
Exchange Notice") shall be given by first-class mail postage prepaid, to each
Holder of record on the date fixed for such exchange at such Holder's address as
the same appears on the stock register of the Company, provided that no failure
to give such notice nor any deficiency therein shall affect the validity of the
procedure for the exchange of any shares of Preferred Stock to be exchanged
except as to the Holder or Holders to whom the Company has failed to give said
notice or except as to the Holder or Holders whose notice was defective. The
Debentures Exchange Notice shall state:
(A) that the Company is exercising its option to exchange
the Preferred Stock for Exchange Debentures pursuant
to the Certificate of Resolution;
(B) the Debentures Exchange Date, which date shall not be
less than 20 days nor more than 60 days following the
date on which the Debentures Exchange Notice is
mailed (except as provided in the last sentence of
this paragraph);
(C) the place or places where certificates representing
the shares of Preferred Stock are to be surrendered
for exchange and the manner in which such
certificates are to be surrendered;
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(D) that the Holder is to surrender to the Company, at
the place or places referred to in clause (C) above,
in the manner designated, the certificate or
certificates representing the shares of Preferred
Stock;
(E) that dividends on the shares of Preferred Stock to be
exchanged shall cease to accrue on the Debentures
Exchange Date whether or not certificates for shares
of Preferred Stock are surrendered for exchange on
the Debentures Exchange Date unless the Company shall
default in the delivery of Exchange Debentures; and
(F) that interest on the Exchange Debentures shall accrue
from the Debentures Exchange Date whether or not
certificates for shares of Preferred Stock are
surrendered for exchange on the Debentures Exchange
Date.
On the Debentures Exchange Date, if the conditions set forth in clauses (i)
through (v) in the above paragraph are satisfied, the Company shall issue
Exchange Debentures in exchange for the Preferred Stock as provided hereto.
(2) Upon any exchange pursuant to conditions and procedures described
above, Exchange Debentures shall be issued in exchange for Preferred Stock, in
registered form without coupons. Exchange Debentures will be issued in principal
amounts of $100 and integral multiples thereof to the extent possible, and will
also be issued in principal amounts less than $100 so that each Holder of
Preferred Stock will receive certificates representing the entire amount of
Exchange Debentures to which his shares of Preferred Stock entitles him,
provided that the Company may, at its option, pay cash in lieu of issuing
Exchange Debentures in a principal amount of less than $100.
(3) On or before the date fixed for exchange, each Holder of Preferred
Stock shall surrender the certificate or certificates representing such shares
of Preferred Stock, in the manner and at the place designated in the Debentures
Exchange Notice. The Company shall cause the Exchange Debentures to be executed
on or prior to the Debentures Exchange Date and, upon surrender in accordance
with the Debentures Exchange Notice of the certificates for any shares of
Preferred Stock so exchanged (properly endorsed or assigned for transfer, if the
notice shall so state), such shares shall be redeemed by the Company in exchange
for Exchange Debentures. The Company shall pay interest on the Exchange
Debentures at the rate and on the date or dates specified therein from the
Debentures Exchange Date.
(4) If notice has been mailed as aforesaid, and if before the
Debentures Exchange Date, (a) the Exchange Indenture shall have been duly
executed and delivered by the Company, and (b) all Exchange Debentures necessary
for such exchange shall have been duly executed and delivered by the Company,
then on the Debentures Exchange Date, dividends shall cease to accrue on the
outstanding shares of Preferred Stock and all of the rights of the Holders of
shares of the Preferred Stock as stockholders of the Company shall cease (except
the right to receive Exchange Debentures), and the Person or Persons entitled to
receive the Exchange Debentures issuable upon exchange shall be treated for all
purposes as the registered holder or holders of such Exchange Debentures as of
the Debentures Exchange Date. See "--The Exchange Debentures."
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
the Company, holders of the Preferred Stock will initially be entitled to be
paid, out of the assets of the Company available for distribution, $100 per
share, plus an amount in cash equal to accumulated and unpaid dividends thereon
to the date fixed for liquidation, dissolution or winding-up (including an
amount equal to a prorated dividend for the period from the immediately
preceding dividend payment date to the date fixed for liquidation, dissolution
or winding-up), before any distribution is made on any Junior Securities. If
upon any voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the amounts payable with respect to the Preferred Stock are not paid in
full, the holders of the Preferred Stock will share equally and ratably in any
distribution of assets of the Company in proportion to the amounts which would
be payable on such distribution to each holder if the amount to which each
holder is entitled were paid in full.
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Voting Rights
Holders of the Preferred Stock will have no voting rights with respect to
general corporate matters except as provided by Texas law or as set forth in the
Certificate of Designation. The Certificate of Designation provides that if
after May 1, 2003, dividends on the Preferred Stock required to be paid in cash
are in arrears and unpaid for four or more quarterly dividend periods (whether
or not consecutive), then the number of directors constituting the board of
directors of the Company will be immediately and automatically adjusted to
permit the holders of a majority of the then outstanding shares of Preferred
Stock, voting separately and as a class, to elect one member to the board of
directors of the Company. The Certificate of Designation further provides that,
upon each accumulation of accrued and unpaid cash dividends in an amount equal
to two full quarterly dividends (whether or not consecutive) that occurs after
the accumulation of accrued and unpaid cash dividends contemplated in the
previous sentence, the holders of a majority of the then outstanding shares of
Preferred Stock, voting separately and as a class, will be entitled to elect an
additional member to the board of directors of the Company, and the number of
directors constituting the board of directors of the Company will be immediately
and automatically increases as appropriate. Such voting rights will continue
until such time as all accumulated and unpaid dividends on the Preferred Stock
are paid in full in cash and at which time the term of any directors elected
pursuant to the provisions of this paragraph shall terminate.
In addition, the Certificate of Designation provides that the Company will
not authorize any additional shares of Preferred Stock or any class or series of
capital stock ranking prior to or on a parity with the Preferred Stock with
respect to dividend distributions or distributions upon liquidation, winding-up
or dissolution without the affirmative vote or consent of holders of at least a
majority of the shares of Preferred Stock of the Company then outstanding which
are entitled to vote thereon, voting or consenting, as the case may be, as one
class. The Certificate of Designation also provides that the Company may not
amend the Certificate of Designation so as to affect adversely the specified
rights, preferences, privileges or voting rights of the holders of shares of
Preferred Stock, without the affirmative vote or consent of the holders of at
least a majority of the then outstanding shares of Preferred Stock which are
entitled to vote thereon, voting or consenting, as the case may be, as one
class.
Under Texas law, holders of Preferred Stock are entitled to vote as a class
upon a proposed amendment to the certificate of incorporation of the Company,
whether or not entitled to vote thereon by the certificate of incorporation, if
the amendment would increase or decrease the par value of the shares of such
class, or alter or change the powers, preferences, or special rights of the
shares of such class so as to affect them adversely.
Certain Covenants
The Preferred Stock Purchase Agreement contains, among others, the following
covenants.
Limitation on Preferred Stock Issuances. Except as allowed in the
Certificate of Resolution, the Company shall not issue preferred stock that
ranks senior to or on a parity with the Preferred Stock as to dividend
distributions or distributions upon liquidation, winding-up or dissolution of
the Company, or that matures or is mandatorily redeemable, pursuant to a sinking
fund obligation or otherwise, or is redeemable at the option of the holder
thereof, in whole or in part, on or prior to the redemption of all of the
Preferred Stock. In addition, the Company shall not reissue shares of its Series
A Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Preferred Stock or 10% Mandatorily Redeemable Preferred Stock acquired or
redeemed by the Company or issue any authorized shares of each of the foregoing
preferred stock that have not been issued as of the Issue Date; provided , that
the Company may issue shares of such preferred stock as necessary to pay
dividends in kind on such preferred stock issued and outstanding on the Issue
Date.
Limitation on Contingent Liabilities. Without the prior approval of the
Board of Directors of the Company by an affirmative vote of at least two-thirds
of its members, the Company will not, and will not allow any of its subsidiaries
to, guarantee, endorse or otherwise become contingently liable, in connection
with obligations in excess of 1 million dollars in the aggregate, securities or
dividends of any person or corporation (other than the Company and any 100%
owned subsidiary), except that the Company and any subsidiary may endorse
negotiable instruments for collection in the ordinary course of business.
Limitation on Transactions with Affiliates. Without the prior approval of
the Board of Directors of the Company by an affirmative vote of at least
two-thirds of its members, the Company will not, will not permit any of its
subsidiaries to, directly or indirectly, enter into any transaction or series of
related transactions (including without limitation, the sale,
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purchase, exchange or lease of assets, property or services) (each of the
foregoing, the "Affiliate Transaction") with any Affiliate (as defined herein),
unless such Affiliate Transaction is made on terms that are no less favorable to
the Company or the relevant subsidiary than those that would have been obtained
in a comparable transaction by the Company or such subsidiary with an unrelated
person. An "Affiliate" of the Company or its subsidiaries shall mean any person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company or its subsidiaries.
Merger, Consolidation and Sale of Assets. Without the prior approval of the
Board of Directors of the Company by an affirmative vote of at least two-thirds
of its members, the Company will not reorganize, consolidate with or merge with
or into any other Person (as defined herein) unless at least 51% of the voting
power of the Company will be held, directly or indirectly, by persons or
entities who held at least 51% of the voting power before such merger,
consolidation or reorganization. Nor shall the Company sell or otherwise dispose
of all or substantially all of the assets of the Company to any other Person
without the affirmative vote of at least two-thirds of members of the Board of
Directors. A "Person" shall mean any individual, corporation, partnership,
venture or proprietorship or other enterprise or entity.
Limitation on Investments. Without the prior approval of the Board of Directors
of the Company by an affirmative vote of at least two-thirds of its members, the
Company or its subsidiaries will not organize any subsidiary, joint venture,
partnership, or acquire a business (by asset purchase, stock purchase, merger or
otherwise), or acquire any assets or make any investment (all of the foregoing
being hereinafter referred to as an "Investment"), except that:
(i) in the case of an Investment that is in the same line of business
as the Company (i.e., the distribution of packaged ice systems and the
sale of bags for use in such systems or the traditional methods of
manufacturing and distributing ice) or to be used in or in connection
with the Company's business as currently conducted, the Company and its
subsidiaries may make such Investment to the extent that the total
expenditure for such Investment does not exceed $500,000; and
(ii) in the case of any other Investment, the Company and its
subsidiaries may make such Investment only to the extent permitted by
the Indenture, as such agreements are in effect on the date hereof,
without giving effect to any amendment, modification, or supplement
thereto after the date hereof.
Limitation on Loans. Without the prior approval of the Board of Directors of the
Company by an affirmative vote of at least two-thirds of its members, the
Company or its subsidiaries will not make or permit any subsidiary to make loans
or advances to any person (including without limitation to any officer, director
or shareholder of the Company or any officer or director of any subsidiary),
firm, association or corporation (other than the Company and any 100% owned
subsidiary), except advances to suppliers, customers and employees made in the
ordinary course of business.
Other Limitations. Without the prior approval of the Board of Directors of the
Company by an affirmative vote of at least two-thirds of its members, the
Company or its subsidiaries will not (i) make any material change in the nature
of its business as carried on at the date of the Preferred Stock Purchase
Agreement; (ii) grant to the holders of any securities issued or to be issued by
the Company a "demand" right to register such securities under the Securities
Act; (iii) mortgage, pledge, or create a security interest in all or
substantially all of the Company's assets as collateral.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Certificate of Designation. Reference is made to the Certificate of Designation
for the full definition of all such terms, as well as any other terms used
herein for which no definition is provided.
"Affiliate" means with respect to any person, any other person directly
or indirectly controlling or controlled by, or under direct or indirect common
control with, such specified person. For the purposes of this definition,
control when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"Business Day" means any day other than a Legal Holiday.
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"Change of Control" has the meaning set forth in Section 1.01 of the
Indenture.
"Dividend Payment Date" means February 1, May 1, August 1 and November
1 of each year.
"Dividend Period" means the Initial Dividend Period and, thereafter,
each Quarterly Dividend Period.
"Debentures Exchange Date" means a date on which shares of 13%
Preferred Stock are exchanged by the Company for Exchange Debentures.
"Exchange Debentures" means subordinated notes of the Company having an
interest rate of 13% per annum, payable quarterly on February 1, May 1, August 1
and November 1 of each year, a maturity date of May 1, 2005, and having the
benefit of, and subject to the terms and conditions of, the Exchange Indenture.
"Exchange Indenture" means the indenture in the form attached as
Exhibit A to the Exchange Offer Registration Rights Agreement.
"Exchange Offer Registration Rights Agreement" means that certain
agreement dated April 30, 1998, between the Company and certain investors
pursuant to which said investors shall have the right to exchange shares of
Series A Preferred Stock for a like number of Series B Preferred Stock.
"Holder" means a holder of shares of Preferred Stock.
"Indenture" means the Indenture, dated January 22, 1998, relating to
$270,000,000 of 9 3/4% Senior Notes due 2005 of the Company, as amended and
restated as of April 30, 1998.
"Initial Dividend Period" means the dividend period commencing on the
Issue Date and ending on the day before the first Dividend Payment Date to occur
thereafter.
"Initial Public Offering" 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, which results in gross proceeds
to the Company of not less than $20,000,000.
"IPO Base Price" initially means $20.00; provided, however, that if at
any time or from time to time the Company shall (1) entitle the holders of its
Common Stock to receive a dividend payable in, or other distribution of, Common
stock, (2) subdivide its outstanding shares of Common Stock into a larger number
of shares of Common Stock or (3) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock, the IPO Base Price shall be
adjusted by multiplying such IPO Base Price in effect immediately prior to such
event by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such event and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after such event.
"Issue Date" means the date on which the Preferred Stock is originally
issued by the Company under the Certificate of Resolution.
"Junior Securities" means securities which includes (i) all classes of
common stock of the Company and (ii) each other class of capital stock or series
of Preferred Stock of the Company now existing or hereafter created by the Board
of Directors, the terms of which expressly provide that such class or series
shall rank junior to the Preferred Stock as to dividend distribution upon the
liquidation, winding-up or dissolution of the Company.
"Legal Holiday" means a Saturday, a Sunday, or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
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"New Credit Facility" means the senior secured credit facility among
the Company, its subsidiaries and Antares Leveraged Capital Corp., as agent and
lender, and the other lenders from time to time parties thereto.
"Parity Securities" means any class of capital stock or series of
Preferred Stock now existing or hereafter created by the Board of Directors, the
terms of which expressly provide that such class or series shall rank on a
parity with the Preferred Stock as to dividend distribution upon the
liquidation, winding-up or dissolution of the Company.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Permitted Transferee" means with respect to any person, (i) any
Affiliate of such person, (ii) the heirs, executors, administrators,
testamentary trustees, legatees or beneficiaries of any such person, (iii) a
trust, the beneficiaries of which, or a corporation or partnership, the
stockholders or general or limited partners of which, include only such person
or his or her spouse or lineal descendants, in each case to whom such person has
transferred the beneficial ownership of any securities of the Company, (iv) any
investment account whose investment managers and investment advisors consist
solely of such person and/or Permitted Transferees of such person and (v) any
investment fund or investment entity that is a subsidiary of such person or a
Permitted Transferee of such person.
"Quarterly Dividend Period" shall mean the three-month period
commencing on each February 1, May 1, August 1 and November 1 and ending on the
day before the following Dividend Payment Date.
"Redemption Date" with respect to any shares of Preferred Stock, means
the date on which such shares of Preferred Stock are to be redeemed by the
Company.
EXCHANGE DEBENTURES
The Company may at its option redeem all, but not less than all, of the
then outstanding shares of Preferred Stock through the issuance of, in
redemption of and in exchange for the shares of Preferred Stock, Exchange
Debentures in an aggregate principal amount equal to the sum of $100.00 per
share of Preferred Stock to be redeemed plus the amount of accrued and unpaid
dividends thereon whether or not earned or declared. "Exchange Debentures"
refers to both 13% Series A Senior Subordinated Notes (the "Series A
Debentures") due May 1, 2005 and 13% Series B Senior Subordinated Notes (the
"Series B Debentures") due May 1, 2005 which may be issued under the indenture
to be dated as of the date of issue (the "Exchange Indenture"), by and among the
Company, the Subsidiary Guarantors and U.S. Trust Company of Texas, N.A., as
Trustee (the "Trustee"). The terms of the Exchange Debentures include those
stated in the Exchange Indenture and[, upon effectiveness of the Exchange Offer
Registration Statement, those made part of the Exchange Indenture by reference
to the Trust Indenture Act of 1939, as amended (the "TIA").] The following
summary of certain provisions of the Exchange Indenture, the Exchange Debentures
and the Subsidiary Guarantees does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the TIA, and to all of the
provisions of the Exchange Indenture (copies of which can be obtained from the
Company upon request), including the definitions of certain terms therein and
those terms made a part of the Exchange Indenture by reference to the TIA as in
effect on the date of the Exchange Indenture. The definitions of certain
capitalized terms used in the following summary are set forth under "-- Certain
Definitions" below. For purposes of this Section, references to the "Company"
shall mean Packaged Ice, Inc., excluding its Subsidiaries.
The Exchange Indenture provides for $40,000,000 of Series A Debentures or
Series B Debentures, as the case may be, to be issued at the Company's option
and provides for the issuance of additional notes under the Exchange Indenture
in the future (the Series A Debentures, the Series B Debentures and any
additional notes issued under the Exchange Indenture, including without
limitation, any additional notes issued under the Exchange Indenture as an
in-kind payment of interest on Exchange Debentures to be issued and outstanding,
are collectively referred to in this "Description of Exchange Debentures"
section herein as the "Exchange Debentures"). Series A Debentures may be issued
pursuant to the Exchange Debenture Indenture in exchange for the Series A
Preferred Stock. Series B Debenture may be issued pursuant to the Exchange
Debenture Indenture in exchange for either (i) the Series A Debentures pursuant
to a registered Debenture Exchange Offer or ii) the Series B Preferred Stock
pursuant to the certificate of resolution authorizing the issuance of such
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stock. All of the Exchange Debentures will be identical in all respects, except
that Series B Debentures shall be registered under the Securities Act, and shall
not contain the restrictive legend on the face of the form of the Series A
Debentures.
The Exchange Debentures will be issued in fully registered form only,
without coupons, in denominations of $100 and integral multiples thereof.
Initially, the Trustee will act as Paying Agent and Registrar for the Exchange
Debentures. The Exchange Debentures may be presented for registration of
transfer and exchange at the offices of the Registrar, which currently is the
Trustee's corporate trust office. The Company may change any Paying Agent and
Registrar without notice to Holders of the Exchange Debentures. The Company will
pay principal (and premium, if any) on the Exchange Debentures at the Trustee's
corporate office in New York, New York. [In addition, in the event the Exchange
Debentures do not remain in book-entry form, interest may be paid at the
Company's option, by wire transfer or check mailed to the registered address of
the Holders as shown on the Note Register.]
As of the date of the Exchange Indenture, all of the Company's Subsidiaries
were Subsidiary Guarantors. Subject to the requirements of the Exchange
Indenture, the Company will be able to designate future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be Subsidiary
Guarantors and will not be subject to the restrictive covenants set forth in the
Exchange Indenture. Any right of the Company or a Subsidiary Guarantor to
receive assets of any of the Company's subsidiaries that is not a Subsidiary
Guarantor upon the latter's liquidation or reorganization (and the consequent
right of the holders of the Exchange Debentures to participate in those assets)
will be effectively subordinated to the claims of that subsidiary's creditors,
except to the extent that the Company or a Subsidiary Guarantor is itself
recognized as a creditor of such subsidiary, in which case the claims of the
Company or such Subsidiary Guarantor would still be effectively subordinated to
any security interest in the assets of such subsidiary.
All series of Exchange Debentures issued under the Exchange Indenture,
including without limitation any Series A Debentures that remain outstanding
after the completion of a registered Debenture Exchange Offer, together with the
Series B Debentures issued in connection with such Debenture Exchange Offer,
will be treated as a single class of securities under the Exchange Indenture.
The obligations of the Company under the Exchange Debentures will be
guaranteed on a senior basis, jointly and severally, by each of the Subsidiary
Guarantors. See "-- Ranking and Guarantees."
Principal, Maturity and Interest Rate
The Exchange Debentures will mature on May 1, 2005. The rate of interest per
annum on the Exchange Debentures shall be 13% (the "Permanent Interest Rate");
provided, however, from May 1, 1998 until April 30, 1999, interest shall accrue
and be paid at a rate per annum equal to the Permanent Dividend Rate less 1.5
percent, and from May 1, 1999 until April 30, 2000, interest shall accrue and be
paid at a rate per annum equal to the Permanent Interest Rate less .75 percent.
After May 1, 2000, interest shall accrue and be paid at the Permanent Interest
Rate. Interest shall be payable quarterly in arrears on each Interest Payment
Date, commencing on August 1, 1998. Any interest on the Exchange Debentures
accrued and payable as provided hereto (including, without limitation, Default
Interest (as defined below)) shall be paid either, as so elected by the Board of
Directors of the Company, (x) in cash or (y) by issuing a number of additional
Exchange Debentures (the "Additional Debentures") for each such Exchange
Debenture then outstanding equal to the interest then payable on each such
Exchange Debenture for the Interest Period then ended (or such shorter period
for which interest is so being paid) (expressed as a dollar amount) divided by
the principal amount of such Exchange Debenture or (z) in any combination
thereof; provided, however, that on each Interest Payment Date which occurs
after May 1, 2003, such dividend amount shall be paid in cash, except to the
extent prohibited by the Indenture or the New Credit Facility, each as existing
on April 30, 1998.
The Permanent Interest Rate may be increased from time to time as
hereinafter provided. Upon:
(a) the failure of the Company to satisfy any mandatory
redemption, Change of Control redemption or acceleration obligation
with respect to the Exchange Debentures on the terms and in accordance
with the provisions described herein;
(b) the failure to pay interest in cash on a Interest Payment
Date which occurs after May 1, 2003;
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(c) the failure of the Company to comply with any of the other
covenants or agreements set forth in the Exchange Indenture and the
continuance of such failure for 30 consecutive days or more; or
(d) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any indebtedness for money borrowed by the Company or any of its
Subsidiaries (or the payment of which is guaranteed by the Company or
any of its Subsidiaries) whether such indebtedness or guarantee now
exists, or is hereafter created, which default (1) is caused by a
failure to pay principal of or premium, if any, or interest on such
indebtedness prior to the expiration of the grace period provided in
such indebtedness on the date of such default (a "Payment Default") or
(2) results in the acceleration of such indebtedness prior to its
express maturity and, in each case, the principal amount of any such
indebtedness, together with the principal amount of any other such
indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $1,000,000 or
more (each of the events described in clauses (a), (b), (c) and (d)
being referred to herein as an "Increased Interest Payment Triggering
Event");
then the Permanent Interest Rate will increase by 2% per annum from the date of
such Increased Interest Payment Triggering Event until such Increased Interest
Payment Triggering Event is cured.
Optional Redemption
The Exchange Debentures shall be redeemable, at the Company's option, in
whole at any time or in part from time to time, on and after April 30, 2002 at
the following Redemption Prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on May 1 of the
year set forth below, plus, in each case, accrued and unpaid interest thereon to
the Redemption Date.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2002........................................... 106.50%
2003 and thereafter ........................... 100.00%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to May 1, 2001, the
Company may redeem all or part of the Exchange Debentures originally issued at a
Redemption Price of 113.00% of the principal amount thereof, plus accrued and
unpaid interest thereon, to the Redemption Date, with the net proceeds of any
Public Equity Offering, provided that no redemption shall be authorized or made
under this paragraph unless prior thereto full unpaid interest for all interest
periods terminating on or prior to the Redemption Date and for an amount equal
to a prorated interest payment for the period from the Interest Payment Date,
immediately prior to the Redemption Date to the Redemption Date shall have been
or immediately prior to the Redemption Date are paid or a sum set apart
sufficient for such payment on the Redemption Date; and, provided, further, that
(a) if the per share purchase price for shares of Common Stock purchased in the
Public Equity Offering is greater than the IPO Base Price or (b) prior to the
redemption the last reported sales price for the Common Stock on its primary
exchange or trading market is greater than or equal to the IPO Base Price for a
period of at least five (5) consecutive days, then the Redemption Price shall be
(x) if the redemption occurs prior to May 1, 1999, 109.00% of the principal
amount and (y) if the redemption occurs on or after May 1, 1999 and before
May 1, 2000, 111% of the principal amount.
Sinking Fund
There will be no mandatory sinking fund payments for the Exchange
Debentures.
Selection and Notice of Redemption
If the Company elects to redeem Exchange Debentures, it shall notify the
Trustee in writing of the Redemption Date and the principal amount of Exchange
Debentures to be redeemed. The Company shall give notice of redemption to the
Paying Agent and Trustee at least 30 days but not more than 60 days before the
Redemption Date (unless a shorter notice
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shall be agreed to by the Trustee in writing), together with an Officers'
Certificate stating that such redemption will comply with the conditions
contained herein.
If less than all of the Exchange Debentures are to be redeemed at any time,
selection of such Exchange Debentures for redemption will be made by the Trustee
in compliance with the requirements of the principal national securities
exchange, if any, on which such Exchange Debentures are listed or, if such
Exchange Debentures are not then listed on a national securities exchange, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate.
The Trustee shall make the selection from the Exchange Debentures
outstanding and not previously called for redemption and shall promptly notify
the Company in writing of the Exchange Debentures selected for redemption and,
in the case of any Exchange Debenture selected for partial redemption, the
principal amount thereof to be redeemed. Exchange Debentures in denominations of
$100 may be redeemed only in whole. The Trustee may select for redemption
portions (equal to $100 or any integral multiple thereof) of the principal of
Exchange Debentures that have denominations larger than $100. Provisions of the
Exchange Indenture that apply to Exchange Debentures called for redemption also
apply to portions of Exchange Debentures called for redemption.
At least 30 days but not more than 60 days before a Redemption Date, the
Trustee, at the Company's request made at least 45 days before the Redemption
Date (unless a shorter notice shall be agreed to by the Trustee in writing)
shall mail a notice of redemption by first class mail, postage prepaid, to each
Holder whose Exchange Debentures are to be redeemed at the addresses of such
Holders as they appear in the register maintained by the Register. The Trustee
shall give the notice of redemption in the Company's name and at the Company's
expense. Each notice for redemption shall identify the Exchange Debentures to be
redeemed and shall state:
(1) the Redemption Date;
(2) the Redemption Price and the amount of accrued
interest, if any, to be paid;
(3) the name and address of the Paying Agent;
(4) that Exchange Debentures called for redemption must be
surrendered to the Paying Agent to collect the Redemption Price plus
accrued interest, if any;
(5) that, unless the Company defaults in making the redemption
payment, interest on Exchange Debentures called for redemption ceases
to accrue on and after the Redemption Date, and the only remaining
right of the Holders of such Exchange Debentures is to receive payment
of the Redemption Price upon surrender to the Paying Agent of the
Exchange Debentures redeemed;
(6) if any Exchange Debenture is being redeemed in part, the
portion of the principal amount of such Exchange Debenture to be
redeemed and that, after the Redemption Date, and upon surrender of
such Exchange Debenture, a new Exchange Debenture or Exchange
Debentures in aggregate principal amount equal to the unredeemed
portion thereof will be issued;
(7) if fewer than all the Exchange Debentures are to be
redeemed, the identification of the particular Exchange Debentures (or
portion thereof) to be redeemed, as well as the aggregate principal
amount of Exchange Debentures to be redeemed and the aggregate
principal amount of Exchange Debentures to be outstanding after such
partial redemption; and
(8) the subparagraph of the Exchange Debentures pursuant to
which the Exchange Debentures are to be redeemed.
Once notice of redemption is mailed, Exchange Debentures called for
redemption become due and payable on the Redemption Date and at the Redemption
Price plus accrued interest, if any. Upon surrender to the Trustee or Paying
Agent, such Exchange Debentures called for redemption shall be paid at the
Redemption Price (which shall include accrued interest thereon to the Redemption
Date), but installments of interest, the maturity of which is on or prior to the
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Redemption Date, shall be payable to Holders of record at the close of business
on the relevant Record Dates. Failure to give notice or any defect in the notice
to any Holder shall not affect the validity of notice to any other Holder.
On or before 11:00 a.m. New York Time on the Redemption Date, the Company
shall deposit with the Paying Agent U.S. Legal Tender sufficient to pay the
Redemption Price plus accrued interest, if any, of all Exchange Debentures to be
redeemed on that date. The Paying Agent shall promptly return to the Company any
U.S. Legal Tender so deposited which is not required for that purpose upon the
written request of the Company, except with respect to monies owed as
obligations to the Trustee.
If the Company complies with the preceding paragraph, then, unless the
Company defaults in the payment of such Redemption Price plus accrued interest,
if any, interest on the Exchange Debentures to be redeemed will cease to accrue
on and after the applicable Redemption Date, whether or not such Exchange
Debentures are presented for payment.
Upon surrender of an Exchange Debenture that is to be redeemed in part, the
Company shall execute and the Trustee, upon the Company's written request, shall
authenticate for the Holder a new Exchange Debenture or Exchange Debentures
equal in principal amount to the unredeemed portion of the Exchange Debenture
surrendered.
Ranking and Guarantees
The indebtedness of the Company evidenced by the Exchange Debentures will
rank senior in right of payment to all Subordinated Indebtedness of the Company
and pari passu in right of payment with all existing and future senior
Indebtedness of the Company except such as expressly made senior. The Exchange
Debentures are unsecured and holders of secured Indebtedness of the Company will
effectively rank prior to Holders of the Exchange Debentures with respect to the
assets securing such secured Indebtedness. Loans under the New Credit Facility
will be secured by substantially all of the Company's assets, including the
stock of the Company's subsidiaries, and guaranteed by the Company's
subsidiaries, which guarantees in turn will be secured by substantially all of
the assets of such subsidiaries. As of December 31, 1997, after giving pro forma
effect to the issuance of the Exchange Debentures and the proposed application
of the estimated net proceeds therefrom, the Company would have had no senior
Indebtedness outstanding other than the Exchange Debentures, Notes and the New
Credit Facility.
Each Subsidiary Guarantor fully and unconditionally guarantees, jointly and
severally, to each Holder and the Trustee, the full and prompt performance of
the Company's obligations under the Exchange Indenture and the Exchange
Debentures, including the payment of principal of and interest on the Exchange
Debentures. The Subsidiary Guarantee of each Subsidiary Guarantor will rank pari
passu in right of payment to all existing and future senior Indebtedness of such
Subsidiary Guarantor except such as expressly made senior. As of December 31,
1997, after giving pro forma effect to the issuance of the Exchange Debentures
and the application of the estimated net proceeds therefrom, the Subsidiary
Guarantors would have had no senior Indebtedness outstanding other than the
Subsidiary Guarantees (under both Indenture and Exchange Indenture) and the
Indebtedness under the New Credit Facility. The obligations of each Subsidiary
Guarantor are limited to the maximum amount which, after giving effect to all
other contingent and fixed liabilities of such Subsidiary Guarantor and after
giving effect to any collections from or payments made by or on behalf of any
other Subsidiary Guarantor in respect of the obligations of such other
Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its
contribution obligations under the Exchange Indenture, will result in the
obligations of such Subsidiary Guarantor under the Subsidiary Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Subsidiary Guarantor that makes a payment or distribution under
a Subsidiary Guarantee shall be entitled to a contribution from each other
Subsidiary Guarantor in an amount pro rata, based on the net assets of each
Subsidiary Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell its
assets to the Company or another Subsidiary Guarantor without limitation, or
with other Persons upon the terms and conditions set forth in the Exchange
Indenture. See "-- Certain Covenants -- Mergers, Consolidations and Sale of
Assets" and "-- Certain Covenants -- Asset Sales." In the event all of the
capital stock of a Subsidiary Guarantor is sold (including by way of merger or
consolidation) by the Company and the sale complies with the provisions set
forth in "-- Certain Covenants -- Asset Sales," the Subsidiary Guarantee with
respect to such Subsidiary Guarantor will be released.
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Separate financial statements of the Subsidiary Guarantors are not included
herein, except for Reddy Ice (which became a Subsidiary Guarantor with
consummation of the Reddy Acquisition), because such Subsidiary Guarantors are
jointly and severally liable with respect to the Company's obligations pursuant
to the Exchange Debentures, and the aggregate net assets, earnings and equity of
the Subsidiary Guarantors and the Company are substantially equivalent to the
net assets, earnings and equity of the Company on a consolidated basis.
Change of Control
Upon the occurrence of a Change of Control, each Holder of Exchange
Debentures will have the right to require the Company to repurchase all or any
part (equal to $100 or an integral multiple thereof) of such Holder's Exchange
Debentures on a Business Day (the "Change of Control Payment Date") not more
than 60 nor less than 30 days following such Change of Control, pursuant to the
offer described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest thereon to the date of repurchase (the "Change of Control Payment").
Within 30 days following any Change of Control, the Company will mail a notice
to each Holder describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Exchange Debentures pursuant to the
procedures required by the Exchange Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Exchange
Debentures as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Exchange Debentures or portions thereof
properly tendered pursuant to the Change of Control Offer, (ii) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of all
Exchange Debentures or portions thereof so tendered and (iii) deliver or cause
to be delivered to the Trustee the Exchange Debentures so accepted together with
an Officers' Certificate stating the aggregate principal amount of Exchange
Debentures or portions thereof being repurchased by the Company. The Paying
Agent will promptly mail or otherwise deliver to each Holder of Exchange
Debentures so tendered the Change of Control Payment for such Exchange
Debentures, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book-entry) to each Holder a new Note equal in principal amount
to any unpurchased portion of the Exchange Debentures surrendered, if any;
provided that each such new Note will be in a principal amount of $100 or an
integral multiple thereof. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Exchange Indenture are applicable. Except as
described above with respect to a Change of Control, the Exchange Indenture will
not contain provisions that permit the Holders of the Exchange Debentures to
require that the Company repurchase or redeem the Exchange Debentures in the
event of a takeover, recapitalization or similar transaction. The provisions of
the Exchange Indenture may not afford Holders protection in the event of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction affecting the Company that may adversely affect Holders, if such
transaction is not the type of transaction included within the definition of
Change of Control. A transaction involving the management of the Company or its
Affiliates, or a transaction involving a recapitalization of the Company will
result in a Change of Control only if it is the type of transaction specified in
such definition.
The existence of a Holder's rights to require the Company to repurchase
Exchange Debentures in connection with a Change of Control may deter a third
party from acquiring the Company in a transaction that would constitute a
"Change of Control."
The source of funds for any repurchase of Exchange Debentures upon a Change
of Control will be the Company's cash or cash generated from operations or other
sources, including borrowings or sales of assets; however, there can be no
assurance that sufficient funds will be available at the time of any Change of
Control to repay all Indebtedness owing under other senior Indebtedness or to
make any required repurchases of the Exchange Debentures. Any failure by the
Company to repurchase Exchange Debentures tendered pursuant to a Change of
Control Offer will constitute an Event of Default. See "Risk Factors --
Substantial Leverage and Ability to Service Debt" and "Risk Factors -- Change of
Control."
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The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Exchange Indenture applicable to a Change of Control Offer made by the
Company and repurchases all Exchange Debentures validly tendered and not
withdrawn under such Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries, taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under New York
law, which is the law governing the Exchange Indenture and the Exchange
Debentures. Accordingly, the ability of a Holder of Exchange Debentures to
require the Company to repurchase such Exchange Debentures as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of the Company and its Subsidiaries, taken as a whole, to another Person
or group may be uncertain.
Certain Covenants
The Exchange Indenture contains, among others, the following covenants:
Limitation on Contingent Liabilities. Without the prior approval of the
Board of Directors of the Company by an affirmative vote of at least two-thirds
of its members, the Company will not, and will not allow any of its subsidiaries
to, guarantee, endorse or otherwise become contingently liable, in connection
with obligations in excess of 1 million dollars in the aggregate, securities or
dividends of any person or corporation (other than the Company and any 100%
owned subsidiary), except that the Company and any subsidiary may endorse
negotiable instruments for collection in the ordinary course of business.
Limitation on Transactions with Affiliates. Without the prior approval of
the Board of Directors of the Company by an affirmative vote of at least
two-thirds of its members, the Company will not, will not permit any of its
subsidiaries to, directly or indirectly, enter into any transaction or series of
related transactions (including without limitation, the sale, purchase, exchange
or lease of assets, property or services) (each of the foregoing, the "Affiliate
Transaction") with any Affiliate (as defined herein), unless such Affiliate
Transaction is made on terms that are no less favorable to the Company or the
relevant subsidiary than those that would have been obtained in a comparable
transaction by the Company or such subsidiary with an unrelated person. An
"Affiliate" of the Company or its subsidiaries shall mean any person directly or
indirectly controlling or controlled by or under direct or indirect common
control with the Company or its subsidiaries.
Limitation on Investments. Without the prior approval of the Board of
Directors of the Company by an affirmative vote of at least two-thirds of its
members, the Company or its subsidiaries will not organize any subsidiary, joint
venture, partnership, or acquire a business (by asset purchase, stock purchase,
merger or otherwise), or acquire any assets or make any investment (all of the
foregoing being hereinafter referred to as an "Investment"), except that:
(i) in the case of an Investment that is in the same line of business
as the Company (i.e., the distribution of packaged ice systems and the
sale of bags for use in such systems or the traditional methods of
manufacturing and distributing ice) or to be used in or in connection
with the Company's business as currently conducted, the Company and its
subsidiaries may make such Investment to the extent that the total
expenditure for such Investment does not exceed $500,000; and
(ii) in the case of any other Investment, the Company and its
subsidiaries may make such Investment only to the extent permitted by
the Indenture, as such agreements are in effect on the date hereof,
without giving effect to any amendment, modification, or supplement
thereto after the date hereof.
Limitation on Loans. Without the prior approval of the Board of Directors of
the Company by an affirmative vote of at least two-thirds of its members, the
Company or its subsidiaries will not make or permit any subsidiary to make loans
or advances to any person (including without limitation to any officer, director
or shareholder of the Company or any officer or director of any subsidiary),
firm, association or corporation (other than the Company and any 100% owned
subsidiary), except advances to suppliers, customers and employees made in the
ordinary course of business.
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Other Limitations. Without the prior approval of the Board of Directors of
the Company by an affirmative vote of at least two-thirds of its members, the
Company or its subsidiaries will not (i) make any material change in the nature
of its business as carried on at the date of the Preferred Stock Purchase
Agreement; (ii) grant to the holders of any securities issued or to be issued by
the Company a "demand" right to register such securities under the Securities
Act; (iii) mortgage, pledge, or create a security interest in all or
substantially all of the Company's assets as collateral.
Asset Sales. Within 450 days after the receipt of any Net Cash Proceeds from
any Asset Sale, the Company may (i) apply all or any of the Net Cash Proceeds
therefrom to repay Indebtedness (other than Subordinated Indebtedness) of the
Company or any Subsidiary, provided, in each case, that the related loan
commitment of any revolving credit facility or other borrowing (if any) is
thereby permanently reduced by the amount of such Indebtedness so repaid, or
(ii) invest all or any part of the Net Cash Proceeds thereof in properties and
other capital assets that replace the properties or other capital assets that
were the subject of such Asset Sale or in other properties or other capital
assets that will be used in the Ice Business. Pending the final application of
any such Net Cash Proceeds, the Company may temporarily reduce borrowings under
any revolving credit facility or otherwise invest such Net Cash Proceeds in any
manner that is not prohibited by the Exchange Indenture. Any Net Cash Proceeds
from an Asset Sale that are not applied or invested as provided in the first
sentence of this paragraph will be deemed to constitute "Available Proceeds
Amount." When the aggregate Available Proceeds Amount exceeds $5 million, the
Company shall make an offer to purchase, from all Holders of the Exchange
Debentures and any then outstanding Pari Passu Indebtedness required to be
repurchased or repaid on a permanent basis in connection with an Asset Sale, an
aggregate principal amount of Exchange Debentures and any such Pari Passu
Indebtedness equal to such Available Proceeds Amount as follows:
(i) (A) The Company shall make an offer to purchase (an "Asset Proceeds
Offer") from all Holders of the Exchange Debentures in accordance with the
procedures set forth in the Exchange Indenture the maximum principal amount
(expressed as a multiple of $100) of Exchange Debentures that may be
purchased out of an amount (the "Payment Amount") equal to the product of
such Available Proceeds Amount multiplied by a fraction, the numerator of
which is the outstanding principal amount of the Exchange Debentures and the
denominator of which is the sum of the outstanding principal amount of the
Exchange Debentures and such Pari Passu Indebtedness, if any (subject to
proration in the event such amount is less than the aggregate Offered Price
(as defined in clause (ii) below) of all Exchange Debentures tendered), and
(B) to the extent required by any such Pari Passu Indebtedness and provided
there is a permanent reduction in the principal amount of such Pari Passu
Indebtedness, the Company shall make an offer to purchase such Pari Passu
Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu
Indebtedness Amount") equal to the excess of the Available Proceeds Amount
over the Payment Amount.
(ii) The offer price for the Exchange Debentures shall be payable in
cash in an amount equal to 100% of the principal amount of the Exchange
Debentures tendered pursuant to an Asset Proceeds Offer, plus accrued and
unpaid interest, if any, to the date such Asset Proceeds Offer is
consummated (the "Offered Price"), in accordance with the procedures set
forth in the Exchange Indenture. To the extent that the aggregate Offered
Price of the Exchange Debentures tendered pursuant to an Asset Proceeds
Offer is less than the Payment Amount relating thereto or the aggregate
amount of the Pari Passu Indebtedness that is purchased or repaid pursuant
to the Pari Passu Offer is less than the Pari Passu Indebtedness Amount
(such shortfall constituting an "Asset Proceeds Deficiency"), the Company
may use such Asset Proceeds Deficiency, or a portion thereof, for general
corporate purposes, subject to the limitations of the "Limitation on
Restricted Payments" covenant.
(iii) If the aggregate Offered Price of Exchange Debentures validly
tendered and not withdrawn by Holders thereof exceeds the Payment Amount,
Exchange Debentures to be purchased will be selected on a pro rata basis.
Upon completion of such Net Proceeds Offer and Pari Passu Offer, the amount
of Excess Proceeds shall be reset to zero.
The Company will not permit any Subsidiary to enter into or suffer to exist
any agreement (excluding Permitted Liens) that would place any restriction of
any kind (other than pursuant to law or regulation) on the ability of the
Company to make an Asset Proceeds Offer following any Asset Sale. The Company
will comply with Rule 14e-1 under the Exchange Act, and any other securities
laws and regulations thereunder, if applicable, in the event that an Asset Sale
occurs and the Company is required to purchase Exchange Debentures as described
above.
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Events of Default
The following events are defined in the Exchange Indenture as "Events of
Default":
(i) the failure to pay interest on any Note for a period of 30 days
or more after such interest becomes due and payable; or
(ii) the failure to pay the principal on any Note, when such principal
becomes due and payable, at maturity, upon redemption, pursuant to an Asset
Sale Offer or a Change of Control Offer or otherwise; or
(iii) (x) the failure of the Company or any Subsidiary Guarantor to
comply with any of the terms or provisions of "-- Certain Covenants --
Mergers, Consolidations and Sale of Assets" or (y) a default in the
observance or performance of any other covenant or agreement contained in
the Exchange Indenture which default continues for a period of 30 days after
the Company receives written notice specifying the default from the Trustee
or from Holders of at least 25% in principal amount of outstanding Exchange
Debentures; or
(iv) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness of the Company or of any Subsidiary of the Company (or the
payment of which is guaranteed by the Company or any Subsidiary of the
Company) which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness after any applicable grace
period provided in such Indebtedness on the date of such default (a "payment
default") or (b) results in the acceleration of such Indebtedness prior to
its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the maturity of
which has been so accelerated, aggregates $2,500,000; or
(v) one or more judgments in an aggregate amount in excess of $1,000,000
(which are not covered by third-party insurance as to which a financially
sound insurer has not disclaimed coverage) being rendered against the
Company or any of its Subsidiaries and such judgments remain undischarged,
or unstayed or unsatisfied for a period of 60 days after such judgment or
judgments become final and non-appealable; or
(vi) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any of its Subsidiary Guarantors or Significant
Subsidiaries; or
(vii) any of the Subsidiary Guarantees cease to be in full force and
effect or any of the Subsidiary Guarantees are declared to be null and void
and unenforceable or any of the Subsidiary Guarantees are found to be
invalid or any of the Subsidiary Guarantors denies its liability under its
Subsidiary Guarantee (other than by reason of release of a Subsidiary
Guarantor in accordance with the terms of the Exchange Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) occurs and is continuing, then and in
every such case the Trustee or the Holders of not less than 25% in aggregate
principal amount of the then outstanding Exchange Debentures may declare the
unpaid principal of, premium, if any, and accrued and unpaid interest on, all
the Exchange Debentures then outstanding to be due and payable, by a notice in
writing to the Company (and to the Trustee, if given by Holders) and upon such
declaration such principal amount, premium, if any, and accrued and unpaid
interest will become immediately due and payable. If an Event of Default with
respect to the Company specified in clause (vi) above occurs, all unpaid
principal of, and premium, if any, and accrued and unpaid interest on, the
Exchange Debentures then outstanding will ipso facto become due and payable
without any declaration or other act on the part of the Trustee or any Holder.
The Holders of a majority in aggregate principal amount of the Exchange
Debentures then outstanding by notice to the Trustee may rescind an acceleration
and its consequences if all existing Events of Default (other than the
nonpayment of principal of and premium, if any, and interest on the Exchange
Debentures which has become due solely by virtue of such acceleration) have been
cured or waived and if the rescission would not conflict with any judgment or
decree. No such rescission shall affect any subsequent Default or impair any
right consequent thereto.
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Notwithstanding the foregoing, if an Event of Default specified in clause
(iv) above shall have occurred and be continuing, such Event of Default and any
consequential acceleration shall be automatically rescinded if the Indebtedness
that is the subject of such Event of Default has been repaid, or if the default
relating to such Indebtedness is waived or cured and if such Indebtedness has
been accelerated, the holders thereof have rescinded their declaration of
acceleration in respect of such Indebtedness (provided, in each case, that such
repayment, waiver, cure or rescission is effected within a period of 30 days
from the continuation of such default beyond the applicable grace period or the
occurrence of such acceleration).
The Holders of a majority in principal amount of the Exchange Debentures may
waive any existing Default or Event of Default under the Exchange Indenture, and
its consequences, except a Default in the payment of the principal of or
interest on any Exchange Debentures or a Default in respect of any term or
provision of the Exchange Debentures or the Exchange Indenture that cannot be
modified or amended without the consent of all Holders.
Holders of the Exchange Debentures may not enforce the Exchange Indenture or
the Exchange Debentures except as provided in the Exchange Indenture and under
the TIA. Subject to the provisions of the Exchange Indenture relating to the
duties of the Trustee, the Trustee is under no obligation to exercise any of its
rights or powers under the Exchange Indenture at the request, order or direction
of any of the Holders, unless such Holders have offered to the Trustee
reasonable security or indemnity. Subject to all provisions of the Exchange
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Exchange Debentures have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred on the Trustee.
Under the Exchange Indenture, the Company is required to provide an
Officers' Certificate to the Trustee promptly upon any such officer obtaining
knowledge of any Default or Event of Default (provided, that such officers shall
provide such certification at least annually whether or not they know of any
Default or Event of Default) that has occurred and, if applicable, describe such
Default or Event of Default and the status thereof.
Defeasance
The Exchange Indenture provides that the Company may, at its option and at
any time, elect to have the obligations of the Company and the Subsidiary
Guarantors with respect to the Exchange Indenture and the Exchange Debentures
discharged in accordance with the provisions set forth below. Such defeasance
means that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by all outstanding Exchange Debentures and the Company
and the Subsidiary Guarantors shall be deemed to have satisfied all their
respective other obligations under the Exchange Debentures, the Subsidiary
Guarantees and the Exchange Indenture, except for (i) the rights of holders of
such outstanding Exchange Debentures to receive payments in respect of the
principal of, premium, if any, and interest on such Exchange Debentures when
such payments are due, (ii) the Company's and the Subsidiary Guarantors'
respective obligations with respect to the Exchange Debentures concerning
issuing temporary Exchange Debentures, registration of Exchange Debentures,
mutilated, destroyed, lost or stolen Exchange Debentures and the maintenance of
an office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and (iv)
the redemption and defeasance provisions of the Exchange Indenture. In addition,
the Company may, at its option and at any time, elect to have the respective
obligations of the Company and the Subsidiary Guarantors released with respect
to certain covenants in the Exchange Indenture ("covenant defeasance"), and any
omission to comply with such obligations shall not constitute a Default or an
Event of Default with respect to the Exchange Debentures. After such defeasance
or covenant defeasance, no additional Exchange Debentures may be originally
issued under the Exchange Indenture. In order to exercise either defeasance or
covenant defeasance, (i) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders of the Exchange Debentures, cash in
U.S. dollars, U.S. Government Obligations, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest on such outstanding Exchange Debentures on the stated maturity thereof
or on the applicable redemption date, as the case may be, and the Company must
specify whether the Exchange Debentures are being defeased to maturity or to a
particular redemption date; (ii) in the case of defeasance, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (A) the Company
has received from, or there has been published by, the Internal Revenue Service
a ruling or (B) since the Issue Date, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such Opinion of
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Counsel shall confirm that, the holders of the outstanding Exchange Debentures
will not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such defeasance had not occurred; (iii) in the case of covenant defeasance, the
Company shall have delivered to the Trustee an Opinion of Counsel to the effect
that the holders of the outstanding Exchange Debentures will not recognize
income, gain or loss for federal income tax purposes as a result of such
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit; (v) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a default under, the Exchange Indenture or any other material
agreement or instrument to which the Company is a party or by default under, the
Exchange Indenture or any other material agreement or instrument to which the
Company is a party or by which it is bound; (vi) in the case of defeasance or
covenant defeasance, the Company shall have delivered to the Trustee an Opinion
of Counsel to the effect that after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar law affecting creditors' rights generally
and that such defeasance or covenant defeasance will not result in the Trustee
or the trust arising from such deposit constituting an Investment Company as
defined in the Investment Company Act of 1940, as amended; and (vii) the Company
shall have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel each stating that all conditions precedent provided for relating to
either the defeasance or the covenant defeasance, as the case may be, have been
complied with.
Modification of the Exchange Indenture
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Exchange Indenture for certain specified purposes,
including (i) curing ambiguities, defects or inconsistencies, so long as such
change does not materially adversely affect the rights of any of the Holders,
and (ii) the issuance of additional Exchange Debentures. Other modifications and
amendments of the Exchange Indenture may be made with the consent of the Holders
of a majority in principal amount of the then outstanding Exchange Debentures
issued under the Exchange Indenture, except that, without the consent of each
Holder of the Exchange Debentures affected thereby, no amendment may, directly
or indirectly: (i) reduce the amount of Exchange Debentures whose Holders must
consent to an amendment; (ii) reduce the rate of or change the time for payment
of interest, including defaulted interest, on any Exchange Debentures; (iii)
reduce the principal of or change the fixed maturity of any Exchange Debentures,
or change the date on which any Exchange Debentures may be subject to redemption
or repurchase, or reduce the redemption or repurchase price therefor; (iv) make
any Exchange Debentures payable in money other than that stated in the Exchange
Debentures; (v) make any change in provisions of the Exchange Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount of
the Exchange Debentures to waive Defaults or Events of Default; (vi) amend,
modify or change the obligation of the Company to make or consummate a Change of
Control Offer, an Asset Sale Offer or waive any default in the performance
thereof or modify any of the provisions or definitions with respect to any such
offers; (vii) adversely affect the ranking of the Exchange Debentures or the
Subsidiary Guarantees; or (viii) release any Subsidiary Guarantor from any of
its obligations under its Subsidiary Guarantee or the Exchange Indenture
otherwise than in accordance with the terms of the Exchange Indenture.
Governing Law
The Exchange Indenture, the Exchange Debentures and the Subsidiary
Guarantees provide that they will be governed by, and construed in accordance
with, the laws of the State of New York.
The Trustee
U.S. Trust Company of Texas, N.A. is the Trustee under the Exchange
Indenture.
The Exchange Indenture provides that, except during the continuance of an
Event of Default, the Trustee will perform only such duties as are specifically
set forth in the Exchange Indenture. During the existence of an Event of
Default, the Trustee will exercise such rights and powers vested in it by the
Exchange Indenture, and use the same degree of care and skill in its exercise as
a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
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The Exchange Indenture and the provisions of the TIA contain certain
limitations on the rights of the Trustee, should it become a creditor of the
Company, to obtain payments of claims in certain cases or to realize on certain
property received in respect of any such claim as security or otherwise. Subject
to the TIA, the Trustee will be permitted to engage in other transactions;
provided, that if the Trustee acquires any conflicting interest as described in
the TIA, it must eliminate such conflict or resign within 90 days of becoming
aware of such conflicting interest as provided in the TIA or apply to the
Commission for permission to continue as Trustee. The Trustee may resign at any
time, in which case a successor trustee is to be appointed pursuant to the terms
of the Exchange Indenture.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Exchange Indenture. Reference is made to the Exchange Indenture for the full
definition of all such terms, as well as any other terms used herein for which
no definition is provided.
"Acquired Indebtedness" of any Person means Indebtedness of another Person
and any of its Subsidiaries existing at the time such other Person becomes a
Subsidiary of such Person or at the time it merges or consolidates with such
Person or any of such Person's Subsidiaries or is assumed by such Person or any
Subsidiary of such Person in connection with the acquisition of assets from such
other Person and in each case not Incurred by such Person or any Subsidiary of
such Person or such other Person in connection with, or in anticipation or
contemplation of, such other Person becoming a Subsidiary of such Person or such
acquisition, merger or consolidation, and which Indebtedness is without recourse
to the Company or any of its Subsidiaries or to any of their respective
properties or assets other than the Person or such Person's Subsidiaries or the
assets to which such Indebtedness related prior to the time such Person becomes
a Subsidiary of the Company or the time of such acquisition, merger or
consolidation.
"Affiliate" means, when used with reference to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For the purposes of this definition, "control"
when used with respect to any specified Person means the power to direct or
cause the direction of management or policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth in "-- Certain Covenants
- -- Limitation on Transactions with Affiliates."
"Asset Acquisition" means (i) an Investment by the Company or any Subsidiary
of the Company in any other Person pursuant to which such Person shall become a
Subsidiary of the Company or shall be merged with or into the Company or any
Subsidiary of the Company or (ii) the acquisition by the Company or any
Subsidiary of the Company of assets of any Person comprising an existing
business (whether existing as a separate entity), subsidiary, division or unit
of such Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Subsidiaries
(including, without limitation, by means of a sale and leaseback transaction or
a merger or consolidation) (collectively, for purposes of this definition, a
"transfer"), directly or indirectly, in one or a series of related transactions,
of (a) any Capital Stock of any Subsidiary held by the Company or any other
Subsidiary, (b) all or substantially all of the properties and assets of any
division or line of business of the Company or any of its Subsidiaries, (c) any
other properties or assets of the Company or any of its Subsidiaries other than
transfers of cash, Cash Equivalents, accounts receivable, or properties or
assets in the ordinary course of business; provided that the transfer of all or
substantially all of the properties or assets of the Company and its
Subsidiaries, taken as a whole, will be governed by the provisions of the
Exchange Indenture described above under the captions "-- Certain Covenants --
Mergers, Consolidations and Sale of Assets" and/or "-- Change of Control" and
not by the provisions of the "Asset Sales" covenant. For the purposes of this
definition, the term "Asset Sale" also shall not include any of the following:
(i) sales of damaged, worn-out or obsolete equipment or assets that, in the
Company's reasonable judgment, are either (A) no longer used or (B) no longer
useful in the business of the Company or its Subsidiaries; (ii) any lease of any
property entered into in the ordinary course of business and with respect to
which the Company or any Subsidiary is the lessor, except any such lease that
provides for the acquisition of such property by the lessee during or at the end
of the term thereof for an amount
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that is less than the fair market value thereof at the time the right to acquire
such property is granted; (iii) a Restricted Payment or Permitted Investment
permitted under "Certain Covenants -- Limitation on Restricted Payments;" and
(iv) any transfers that, but for this clause (iv), would be Asset Sales, if (A)
the Company elects to designate such transfers as not constituting Asset Sales
and (B) after giving effect to such transfers, the aggregate fair market value
of the properties or assets transferred in such transaction or any such series
of related transactions so designated by the Company does not exceed $1,000,000.
"Asset Proceeds Offer" has the meaning set forth in "-- Certain Covenants --
Asset Sales."
"Attributable Indebtedness" in respect of a sale and leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended). As used in the preceding sentence, the "net rental
payments" under any lease for any such period shall mean the sum of rental and
other payments required to be paid with respect to such period by the lessee
thereunder, excluding any amounts required to be paid by such lessee on account
of maintenance and repairs, insurance, taxes, assessments, water rates or
similar charges. In the case of any lease that is terminable by the lessee upon
payment of penalty, such net rental payment shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Available Proceeds Amount" has the meaning set forth in "-- Certain
Covenants -- Asset Sales."
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the board of directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other day
on which banking institutions in the City of New York are required or authorized
by law or other governmental action to be closed.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person to pay rent or other amounts under a lease that are required to be
classified and accounted for as capital lease obligations under GAAP and, for
purposes of this definition, the amount of such obligations at any date shall be
the capitalized amount of such obligations at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than 270 days from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within 180 days from
the date of acquisition thereof issued by any commercial bank organized under
the laws of the United States of America or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000; (v)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clause (i) above entered into with any bank
meeting the qualifications specified in clause (iv) above; (vi) deposits
available for withdrawal on demand with any commercial bank not meeting the
qualifications specified in clause (ii) above, provided that all such deposits
do not exceed $5,000,000 in the aggregate at any one time; (vii) demand and time
deposits and certificates of deposit with any
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commercial bank organized in the United States not meeting the qualifications
specified in clause (ii) above, provided that such deposits and certificates
support bond, letter of credit and other similar types of obligations incurred
in the ordinary course of business; and (viii) investments in money market or
other mutual funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any person (as such term is used in Section 13(d)(3) of the Exchange
Act) other than to the Company or a Subsidiary Guarantor; (ii) the Company
consolidates with or merges into another Person or any Person consolidates with,
or merges into, the Company, in any such event pursuant to a transaction in
which the outstanding Voting Stock of the Company is changed into or exchanged
for cash, securities or other property, other than any such transaction where
(a) the outstanding Voting Stock of the Company is changed into or exchanged for
Voting Stock of the surviving or resulting Person that is Qualified Capital
Stock and (b) the holders of the Voting Stock of the Company immediately prior
to such transaction own, directly or indirectly, not less than a majority of the
Voting Stock of the surviving or resulting Person immediately after such
transaction; (iii) the adoption of a plan relating to the liquidation or
dissolution of the Company not involving a merger or consolidation or a sale or
other disposition of assets described in clause (i) above; (iv) the consummation
of any transaction (including, without limitation, any merger or consolidation)
the result of which is that any person (as defined above), excluding Permitted
Holders, becomes the "beneficial owner" (as such term is defined in Rule 13d-3
and Rule 13d-5 under the Exchange Act), directly or indirectly, of more than 50%
of the total voting power of the Voting Stock of the Company; provided that the
sale of Voting Stock of the Company to a Person or Persons acting as
underwriters in connection with a firm commitment underwriting shall not
constitute a Change of Control; or (v) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors
(other than by action of the Permitted Holders). For purposes of this
definition, any transfer of an equity interest of an entity that was formed for
the purpose of acquiring Voting Stock of the Company will be deemed to be a
transfer of such portion of such Voting Stock as corresponds to the portion of
the equity of such entity that has been so transferred.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
sum (without duplication) of (i) Consolidated Net Income plus (ii) to the extent
that any of the following shall have been taken into account in determining
Consolidated Net Income, (A) all income taxes of such Person and its
Subsidiaries paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions of assets outside the
ordinary course of business), Consolidated Interest Expense, amortization
expense and depreciation expense, and (B) other non-cash items (other than
non-cash interest) reducing Consolidated Net Income, other than any non-cash
item which requires the accrual of or a reserve for cash charges for any future
period and other than any non-cash charge constituting an extraordinary item of
loss, less other non-cash items increasing Consolidated Net Income, all as
determined on a consolidated basis for such Person and its Subsidiaries in
conformity with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters for which financial information is available (the "Four Quarter
Period") ending on or prior to the date of the transaction or event giving rise
to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the
"Transaction Date") to Consolidated Fixed Charges of such Person for the Four
Quarter Period. In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed
Charges" shall be calculated after giving effect on a pro forma basis for the
period of such calculation to (i) the Incurrence or repayment of any
Indebtedness of such Person or any of its Subsidiaries (and the application of
the proceeds thereof) giving rise to the need to make such calculation and any
Incurrence or repayment of other Indebtedness (and the application of the
proceeds thereof), other than the Incurrence or repayment of Indebtedness in the
ordinary course of business for working capital purposes pursuant to working
capital facilities, at any time subsequent to the first day of the Four Quarter
Period and on or prior to the Transaction Date, as if such Incurrence or
repayment, as the case may be (and the application of the proceeds thereof),
occurred on the first day of the Four Quarter Period, and (ii) any Asset
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Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of such
Person or one of its Subsidiaries (including any Person who becomes a Subsidiary
as a result of any such Asset Acquisition) Incurring, assuming or otherwise
being liable for Acquired Indebtedness) at any time subsequent to the first day
of the Four Quarter Period and on or prior to the Transaction Date, as if such
Asset Sale or Asset Acquisition (including the Incurrence, assumption or
liability for any such Indebtedness or Acquired Indebtedness and also including
any Consolidated EBITDA, based upon the four fiscal quarters of such Person for
which financial information is available immediately preceding such Asset
Acquisition, associated with such Asset Acquisition) occurred on the first day
of the Four Quarter Period; provided that the Consolidated EBITDA of any Person
acquired shall be included only to the extent includable pursuant to the
definition of "Consolidated Net Income." If such Person or any of its
Subsidiaries directly or indirectly guarantees Indebtedness of a third person,
the preceding sentence shall give effect to the Incurrence of such guaranteed
Indebtedness as if such Person or any Subsidiary of such Person had directly
Incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in
calculating "Consolidated Fixed Charges" for purposes of determining the
denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage
Ratio," (1) interest on Indebtedness determined on a fluctuating basis as of the
Transaction Date (including Indebtedness actually Incurred on the Transaction
Date) and which will continue to be so determined thereafter shall be deemed to
have accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; and (2) notwithstanding clause
(1) above, interest on Indebtedness determined on a fluctuating basis, to the
extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense and
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of such Person (other than dividends paid in Qualified Capital
Stock) paid (to the extent not accrued in a prior period), accrued or scheduled
to be paid or accrued during such period times (y) a fraction, the numerator of
which is one and the denominator of which is one minus the then current
effective consolidated Federal, state and local tax rate of such Person,
expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate of the interest expense of such Person and its
Subsidiaries (excluding amortization of deferred financing fees) for such
period, on a consolidated basis, as determined in accordance with GAAP, and
including (a) all amortization of original issue discount (other than any
original issue discount on Indebtedness attributable to proceeds of the sale of
warrants issued in connection with the Incurrence of such Indebtedness); (b) the
interest component of Capitalized Lease Obligations paid (to the extent not
accrued in a prior period), accrued and/or scheduled to be paid or accrued by
such Person and its Subsidiaries during such period; (c) net cash costs under
all Interest Swap Obligations (including amortization of fees); (d) all
capitalized interest; and (e) the interest portion of any deferred payment
obligations for such period.
"Consolidated Net Income" means, with respect to any Person, for any period,
the aggregate net income (or loss) of such Person and its Subsidiaries for such
period on a consolidated basis, determined in accordance with GAAP; provided
that there shall be excluded therefrom (a) after-tax gains and losses from Asset
Sales or abandonments or reserves relating thereto, (b) after-tax items
classified as extraordinary or nonrecurring gains, (c) the net income or loss of
any Person acquired in a "pooling of interests" transaction accrued prior to the
date it becomes a Subsidiary of the referent Person or is merged or consolidated
with the referent Person or any Subsidiary of the referent Person, (d) the net
income (but not loss) of any Subsidiary of the referent Person to the extent
that the declaration of dividends or similar distributions by that Subsidiary of
that income is restricted by a contract, operation of law or otherwise, (e) the
net income of any Person, other than a Subsidiary of the referent Person, except
to the extent of cash dividends or distributions paid to the referent Person or
to a wholly-owned Subsidiary of the referent Person by such Person, (f) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of Consolidated Net Income accrued at
any time following the Issue Date, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
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"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any Person for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Subsidiaries for such period, on a consolidated basis, as
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the Issue Date; (ii) was nominated for election or elected to such
Board of Directors with the approval of a majority of the Continuing Directors
who were members of such Board of Directors at the time of such nomination or
election or (iii) was elected or nominated for election pursuant to Section
4.7(a) of the Exchange Indenture or Section 4.5(a) of the Purchase Agreement.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
or letters of credit, in each case, as amended, restated, modified, renewed,
refunded, replaced or refinanced in whole or in part from time to time.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Disqualified Capital Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the sole option of the holder thereof, in whole or in part, on or prior to
the final maturity date of the Exchange Debentures; provided, however, that any
Capital Stock that would constitute Disqualified Capital Stock solely because
the holders thereof have the right to require the Company to repurchase or
redeem such Capital Stock upon the occurrence of a Change of Control or an Asset
Sale shall not constitute Disqualified Capital Stock if the terms of such
Capital Stock provide that the Company may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless (i) all obligations of the
Company under the Exchange Indenture with respect to such Change of Control or
Asset Sale have been satisfied prior to such repurchase or redemption and (ii)
such repurchase or redemption does not violate any covenant of the Exchange
Indenture.
"Events of Default" has the meaning set forth in "-- Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934, as amended or any
successor statute or statutes thereto.
"Existing Indebtedness" means up to $85 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries in existence on the
Issue Date, until such amounts are repaid.
"Fair market value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length, free market
transaction, for cash, between an informed and willing seller and an informed
and willing and able buyer, neither of whom is under undue pressure or
compulsion to complete the transaction. Fair market value shall be determined by
the Board of Directors of the Company acting reasonably and in good faith and
shall be evidenced by a Board Resolution delivered to the Trustee; provided,
however, that if the aggregate non-cash consideration to be received by the
Company or any of its Subsidiaries from any Asset Sale or the issuance of
Qualified Capital Stock could be reasonably likely to exceed $5 million, the
fair market value shall be determined by an independent Financial Advisor.
"Family Member" means, when used with reference to any natural Person, such
Person's spouse, siblings, parents, children, or other lineal descendants
(whether by adoption or consanguinity), and shall mean a trust, the primary
beneficiary of which is the Person's spouse, siblings, parents, children, or
other lineal descendants (whether by adoption or consanguinity).
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"Financial Advisor" means an accounting, appraisal or investment banking
firm of nationally recognized standing that is, in the reasonable and good faith
judgment of the Board of Directors of the Company, qualified to perform the task
for which such firm has been engaged.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Ice Business" means (i) the manufacture and sale (including, without
limitation, direct sales, wholesale sales and retail sales) of ice; (ii) the
manufacture and sale of ice and water by means of ice manufacturing or water
purification equipment (including ice makers, bins, baggers, merchandisers,
delivery devices and related equipment) installed on the premises of the
Company's customer(s) whether or not such equipment is owned by the Company, the
customers, or a third party; (iii) contract on-premises ice or water service
(including leasing of ice or water related equipment) for a customer's internal
use; (iv) providing cold storage and freezer related services in conjunction
with the traditional ice business; (v) the sale of products incidental or
related to the foregoing; and (v) all logical extensions of the foregoing.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Indebtedness or other
obligation or the recording, as required pursuant to GAAP or otherwise, of any
such Indebtedness or other obligation on the balance sheet of such Person (and
"Incurrence," "Incurred," "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that (A) any Indebtedness
assumed in connection with an acquisition of assets and any Indebtedness of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) of the Company or at the time such
Person is merged or consolidated with the Company or any Subsidiary of the
Company shall be deemed to be Incurred at the time of the acquisition of such
assets or by such Subsidiary at the time it becomes, or is merged or
consolidated with, a Subsidiary of the Company or by the Company at the time of
such merger or consolidation, as the case may be, and (B) any amendment,
modification or waiver of any document pursuant to which Indebtedness was
previously Incurred shall not be deemed to be an Incurrence of Indebtedness
unless such amendment, modification or waiver shall increase the principal or
premium thereof or interest rate thereon (including by way of original issue
discount), and (C) a change in GAAP that results in an obligation of a Person
that exists at such time becoming Indebtedness shall not be deemed an Incurrence
of Indebtedness. A guarantee by the Company or a Subsidiary Guarantor of
Indebtedness Incurred by the Company or a Subsidiary Guarantor, as applicable,
shall not be a separate Incurrence of Indebtedness.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and accrued liabilities arising
in the ordinary course of business that are not overdue by 90 days or more or
are being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted), (v) all Obligations for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) all Indebtedness of others (including all dividends of other
Persons for the payment of which is) guaranteed, directly or indirectly, by such
Person or that is otherwise its legal liability or which such Person has agreed
to purchase or repurchase or in respect of which such Person has agreed
contingently to supply or advance funds but excluding endorsements of negotiable
instruments and documents in the ordinary course of business, (vii) net
liabilities of such Person under Interest Swap Obligations, (viii) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
any asset or property (including, without limitation, leasehold interests and
any other tangible or intangible property) of such Person, whether or not such
Indebtedness is assumed by such Person or is not otherwise such Person's legal
liability; provided that if the Obligations so
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secured have not been assumed by such Person or are otherwise not such Person's
legal liability, the amount of such Indebtedness for the purposes of this
definition shall be limited to the lesser of the amount of such Indebtedness
secured by such Lien or the fair market value of the assets or property securing
such Lien, and (ix) all Disqualified Capital Stock issued by such Person with
the amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends if any. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date; provided that the amount
outstanding at any time of any non-interest bearing Indebtedness or other
Indebtedness issued with original issue discount is the full amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP, but such Indebtedness shall only be deemed to be Incurred as of the date
of original issuance thereof.
"Independent" when used with respect to any specified Person means such a
Person who (a) is in fact independent, (b) does not have any direct financial
interest or any material indirect financial interest in the Company or any of
its subsidiaries, or in any Affiliate of the Company or any of its subsidiaries
and (c) is not an officer, employee, promoter, underwriter, trustee, partner,
director or person performing similar functions for the Company or any of its
subsidiaries. Whenever it is provided in the Exchange Indenture that any
Independent Person's opinion or certificate shall be furnished to the Trustee,
such Person shall be appointed by the Company and approved by the Trustee in the
exercise of reasonable care, and such opinion or certificate shall state that
the signer has read this definition and that the signer is Independent within
the meaning thereof.
"Interest Swap Obligations" means the obligations of any Person under any
interest rate protection agreement, interest rate future, interest rate option,
interest rate swap, interest rate cap or other interest rate hedge or
arrangement.
"Investment" by any Person means any direct or indirect (i) loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property (valued at the fair market value thereof as of the date of
transfer) to others or payments for property or services for the account or use
of others, or otherwise) (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business); (ii) purchase
or acquisition of Capital Stock, bonds, notes, debentures or other securities or
evidences of Indebtedness issued by any other Person; (iii) guarantee or
assumption of any Indebtedness or any other obligation of any other Person
(except for an assumption of Indebtedness for which the assuming Person receives
consideration at the time of such assumption in the form of property or assets
with a fair market value at least equal to the principal amount of the
Indebtedness assumed, extensions of trade credit or other advances to customers
on commercially reasonable terms in accordance with normal trade practices or
otherwise in the ordinary course of business, workers' compensation, utility,
lease and similar deposits and prepaid expenses made in the ordinary course of
business, and endorsements of negotiable instruments and documents in the
ordinary course of business); and (iv) all other items that would be classified
as investments on a balance sheet of such Person prepared in accordance with
GAAP. The amount of any Investment shall not be adjusted for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment. If the Company or any Subsidiary of the Company sells or otherwise
disposes of any Common Stock of any direct or indirect Subsidiary of the Company
such that, after giving effect to any such sale or disposition, the Company no
longer owns, directly or indirectly, greater than 50% of the outstanding Common
Stock of such Subsidiary, the Company shall be deemed to have made an Investment
on the date of any such sale or disposition equal to the fair market value of
the Common Stock of such Subsidiary not sold or disposed of.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statute or statutes) of any jurisdiction other than to reflect ownership by a
third party of property leased to the referent Person or any of its Subsidiaries
under a lease that is not in the nature of a conditional sale or title retention
agreement).
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"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents (including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents)
received by the Company or any of its Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, brokerage, legal, accounting and investment
banking fees and sales commissions), (b) taxes paid or payable ((1) including,
without limitation, income taxes reasonably estimated to be actually payable as
a result of any disposition of property within two years of the date of
disposition and (2) after taking into account any reduction in tax liability due
to available tax credits or deductions and any tax sharing arrangements) and (c)
appropriate amounts to be provided by the Company or any Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Subsidiary,
as the case may be, after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"Net Equity Proceeds" means (a) in the case of any issuance or sale by the
Company of Qualified Capital Stock of the Company, the aggregate net cash
proceeds and the fair market value of any property or securities received by the
Company, after payment of expenses, commissions and the like (including, without
limitation, brokerage, legal, accounting and investment banking fees and
commissions) incurred in connection therewith, and (b) in the case of any
exchange, exercise, conversion or surrender of any outstanding Indebtedness of
the Company or any Subsidiary issued after the Issue Date for or into shares of
Qualified Capital Stock of the Company, the amount of such Indebtedness (or, if
such Indebtedness was issued at an amount less than the stated principal amount
thereof, the accrued amount thereof as determined in accordance with GAAP) as
reflected in the consolidated financial statements of the Company prepared in
accordance with GAAP as of the most recent date next preceding the date of such
exchange, exercise, conversion or surrender (plus any additional amount required
to be paid by the holder of such Indebtedness to the Company or to any wholly-
owned Subsidiary of the Company upon such exchange, exercise, conversion or
surrender and less any and all payments made to the holders of such
Indebtedness, and all other expenses incurred by the Company in connection
therewith), in each case (a) and (b) to the extent consummated after December
31, 1997.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Officers' Certificate" means a certificate signed by two officers of the
Company.
"Opinion of Counsel" means a written opinion from legal counsel which and
who are reasonably acceptable to the Trustee.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment to the Exchange Debentures.
"Paying Agent" shall initially be the Trustee until a successor paying agent
for the Exchange Debentures is selected in accordance with the Exchange
Indenture.
"Payment default" has the meaning set forth in "-- Events of Default."
"Permitted Holders" means the following Persons: Ares Leveraged Investment
Fund, L.P., Culligan Water Technologies, Inc., Erica Jesselson, SV Capital
Partners, L.P., Norwest Equity Partners V, a Minnesota Limited Partnership, The
Food Fund II Limited Partnership, A. J. Lewis III, Steven P. Rosenberg, and
James F. Stuart, and any of their respective Affiliates and Family Members, each
of the foregoing individually being a Permitted Holder.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Series A Exchange Debentures I and the
Series A Exchange Debentures II;
(ii) Indebtedness under any Existing Indebtedness;
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(iii) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company or any Subsidiary thereof in the ordinary
course of business, including guarantees or obligations of the Company or any
Subsidiary thereof with respect to letters of credit supporting such bid,
performance or surety obligations (in each case other than for an obligation for
money borrowed);
(iv) Permitted Refinancing Indebtedness;
(v) the Subsidiary Guarantees of the Series A Exchange Debentures I and
the Series A Exchange Debentures II;
(vi) Indebtedness under Credit Facilities in an aggregate principal
amount not to exceed $80 million at any one time outstanding and any guarantee
thereof, reduced by any permanent repayment or permanent reduction thereof after
the date of issuance of the Series A Exchange Debentures II which is accompanied
by a corresponding permanent commitment reduction pursuant to the "Asset Sales"
covenant;
(vii) Interest Swap Obligations of the Company; provided, however, that
such Interest Swap Obligations are entered into to protect the Company and its
Subsidiaries from fluctuations in interest rates on Indebtedness Incurred in
accordance with the Exchange Indenture to the extent the notional principal
amount of such Interest Swap Obligation does not exceed the principal amount of
the Indebtedness to which such Interest Swap Obligation relates ("Permitted
Swaps");
(viii) Indebtedness of a direct or indirect Subsidiary of the Company
to the Company or to a direct or indirect Subsidiary of the Company for so long
as such Indebtedness is held by the Company or a direct or indirect Subsidiary
of the Company in each case subject to no Lien held by a Person other than the
Company or a direct or indirect Subsidiary of the Company or the holders of
Indebtedness under the Credit Facilities (or an agent for such holders);
provided, that if as of any date any Person other than the Company or a direct
or indirect Subsidiary of the Company or the holders of Indebtedness under the
Credit Facilities (or an agent for such holders) owns or holds any such
Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be
deemed the date of the Incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;
(ix) Indebtedness of the Company to a direct or indirect Subsidiary of
the Company for so long as such Indebtedness is held by a direct or indirect
Subsidiary of the Company in each case subject to no Lien held by a Person other
than the holders of Indebtedness under the Credit Facilities (or an agent for
such holders); provided that (a) any Indebtedness of the Company to any direct
or indirect Subsidiary of the Company is unsecured and subordinated, pursuant to
a written agreement, to the Company's Obligations under the Exchange Indenture
and the Exchange Debentures, and (b) if as of any date any Person other than a
direct or indirect Subsidiary of the Company owns or holds any such Indebtedness
or any Person other than the holders of Indebtedness under the Credit Facilities
(or an agent for such holders) holds a Lien in respect of such Indebtedness,
such date shall be deemed the date of the Incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness; and
(x) additional Indebtedness not to exceed an aggregate principal amount
of $10 million at any one time outstanding and any guarantee thereof.
"Permitted Investments" means (a) Investments in cash and Cash Equivalents;
(b) Investments by the Company or by any Subsidiary of the Company in any Person
that is or will become immediately after such Investment a direct or indirect
Subsidiary of the Company; (c) any Investments in the Company by any Subsidiary
of the Company; provided that any Indebtedness evidencing such Investment is
unsecured; (d) Investments made by the Company or by its Subsidiaries as a
result of an Asset Sale made in compliance with "-- Certain Covenants -- Asset
Sales"; (e) Permitted Swaps; (f) Investments in ventures organized outside of
the United States in an amount not to exceed $5,000,000 at any one time
outstanding; (g) Investments in an amount not to exceed $500,000 at any one time
outstanding; (h) Investments held by any Person on the date such Person becomes
a Subsidiary to the extent such Investments are not incurred in anticipation of
or in connection with such acquisition; and (i) Investments in stock,
obligations or securities received in settlement of debts owing to the Company
or any Subsidiary as a result of bankruptcy or insolvency proceedings or upon
the foreclosure, perfection or enforcement of any Lien in favor of the Company
or any Subsidiary, in each case as to debt owing to the Company or any
Subsidiary that arose in the ordinary course of business of the Company or any
such
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Subsidiary, provided that any stocks, obligations or securities received in
settlement of debts that arose in the ordinary course of business (and received
other than as a result of bankruptcy or insolvency proceedings or upon
foreclosure, perfection or enforcement of any Lien) that are, within 30 days of
receipt, converted into cash or Cash Equivalents shall be treated as having been
cash or Cash Equivalents at the time received.
"Permitted Liens" means the following types of Liens:
(i) Liens existing as of the Issue Date;
(ii) Liens securing the Exchange Debentures, the Subsidiary Guarantees
or any Indebtedness under the Credit Facilities or any guarantees of such
indebtedness;
(iii) Liens in favor of the Company;
(iv) Liens for taxes, assessments and governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Subsidiaries shall have set aside
on its books such reserves as may be required pursuant to GAAP;
(v) Statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not delinquent for more
than 30 days or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been made
in respect thereof;
(vi) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other types
of social security, or to secure the payment or performance of tenders,
statutory or regulatory obligations, surety and appeal bonds, bids, government
contracts and leases, performance and return of money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(vii) Judgment Liens not giving rise to an Event of Default so long as
any appropriate legal proceedings which may have been duly initiated for the
review of such judgment shall not have been finally terminated or the period
within which such proceeding may be initiated shall not have expired;
(viii) Any interest or title of a lessor under any Capital Lease
Obligation or operating lease;
(ix) Liens securing Purchase Money Indebtedness incurred in compliance
with the "Limitation on Indebtedness" covenant; provided, however, that (i) the
related Purchase Money Indebtedness shall not be secured by any property or
assets of the Company or any Subsidiary other than the property or assets so
acquired and any proceeds therefrom and (ii) the Lien securing any such
Indebtedness shall be created within 90 days of such acquisition;
(x) Liens securing obligations under or in respect of Interest Swap
Obligations;
(xi) Liens upon specific items of inventory or other goods of any
Person securing such Person's obligations in respect of bankers' acceptances
issued or created for the account of such Person to facilitate the purchase,
shipment or storage of such inventory or other goods;
(xii) Liens securing reimbursement obligations with respect to
commercial letters of credit that encumber documents and other property or
assets relating to such letters of credit and products and proceeds thereof;
(xiii) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements of the Company
or any of its Subsidiaries, including rights of offset and set-off;
(xiv) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company and Liens on property or assets of
a Subsidiary existing at the time it became a Subsidiary, provided that such
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Liens were in existence prior to the contemplation of the acquisition and do not
extend to any assets other than the property of such Person or the acquired
property (and the proceeds thereof), as applicable; and
(xv) Liens on capital stock or other equity interests in Unrestricted
Subsidiaries and Permitted Investments made pursuant to clause (f) of the
definition thereof.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to refinance, renew, replace, defease or refund, other Indebtedness of
the Company or any of its Subsidiaries incurred pursuant to clause (i), (ii) or
(v) of the definition of "Permitted Indebtedness"; provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the Indebtedness so exchanged, refinanced, renewed,
replaced, defeased or refunded (plus the amount of related prepayment penalties,
fees and reasonable expenses incurred in connection therewith); (ii) such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
exchanged, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being exchanged, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Exchange Debentures or the
Subsidiary Guarantees, such Permitted Refinancing Indebtedness is subordinated
in right of payment to, the Exchange Debentures or the Subsidiary Guarantees, as
the case may be, on terms at least as favorable to the Holders of Exchange
Debentures as those contained in the documentation governing the Indebtedness
being exchanged, refinanced, renewed, replaced, defeased or refunded; and (iv)
such Indebtedness is incurred either by the Company or by the Subsidiary that is
the obligor on the Indebtedness being exchanged, refinanced, renewed, replaced,
defeased or refunded.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness or that portion of
Indebtedness of the Company or any Subsidiary incurred in connection with the
acquisition by the Company or such Subsidiary, subsequent to the Issue Date, of
any property or assets including Capitalized Lease Obligations.
"Public Equity Offering" means an underwritten offer and sale of Qualified
Capital Stock of the Company pursuant to a registration statement that has been
declared effective by the Commission pursuant to the Securities Act (other than
a registration statement on Form S-8 or otherwise relating to equity securities
issuable under any employee benefit plan of the Company).
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Refinance" means, in respect of any security or Indebtedness, to refinance,
renew, refund, repay, prepay, redeem, defease or retire, or to issue a security
or Indebtedness in exchange or replacement for, such security or Indebtedness in
whole or in part. "Refinanced" and "Refinancing" shall have correlative
meanings.
"Registrar" shall initially mean the Trustee until a successor registrar for
the Exchange Debentures is selected in accordance with the Exchange Indenture.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02 (v)
of Regulation S-X under the Securities Act.
"Specified Affiliate Transactions" means certain transactions among the
Company and Subsidiaries and certain Affiliates which were entered into prior to
the Issue Date as set forth in a Schedule to the Exchange Indenture.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor that is expressly subordinated in right of payment to the
Exchange Debentures or the Subsidiary Guarantees, as the case may be.
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"Subsidiary," with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
Notwithstanding the foregoing, an Unrestricted Subsidiary shall be deemed not to
be a Subsidiary of the Company for purposes hereof and of the Exchange
Indenture.
"Subsidiary Guarantee" means any guarantee of the Exchange Debentures by
a Subsidiary Guarantor in accordance with the provisions described under
"-- Ranking and Guarantees."
"Subsidiary Guarantor" means (i) each of Packaged Ice Leasing, Inc., Southco
Ice, Inc., Mission Party Ice, Inc., Southwest Texas Packaged Ice, Inc.,
Southwestern Ice, Inc., Golden Eagle Ice -- Texas, Inc., Packaged Ice Southeast,
Inc., Southern Bottled Water Company, Inc. and Reddy Ice Corporation and (ii)
each of the Company's Subsidiaries that in the future executes a supplemental
indenture in which such Subsidiary agrees to be bound by the terms of the
Exchange Indenture as a Subsidiary Guarantor; provided that any Person
constituting a Subsidiary Guarantor as described above shall cease to constitute
a Guarantor when its respective Subsidiary Guarantee is released in accordance
with the terms of the Exchange Indenture.
"Unrestricted Subsidiary" means (1) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors as provided below) and (2) any Subsidiary or Subsidiaries
of an Unrestricted Subsidiary. The Board of Directors may designate any
Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any lien on any property
of, any other Subsidiary of the Company which is not a Subsidiary of the
Subsidiary of the Company to be so designated or otherwise an Unrestricted
Subsidiary, provided that (x) such designation complies with the "Limitation on
Restricted Payments" covenant, (y) each Subsidiary so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Subsidiaries and
(z) unless such designation is a Permitted Investment, immediately after giving
pro forma effect to such designation, the Company could incur $1.00 of
additional Indebtedness pursuant to paragraph (b) of the covenant entitled
"Limitation on Indebtedness." Any such designation by the Board of Directors
shall be evidenced to the Trustee by filing with the Trustee a Board Resolution
giving effect to such designation and an Officers' Certificate certifying that
such designation complied with the foregoing conditions.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or only so long as no senior class of stock has voting power by
reason of any contingency) to vote in the election of members of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly-owned Subsidiary" of any Person means any Subsidiary of such Person
of which all the outstanding voting securities which normally have the right to
vote in the election of directors, other than director's qualifying shares, are
owned by such Person or any wholly-owned Subsidiary of such Person.
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BOOK-ENTRY; DELIVERY AND FORM
Except as set forth in the next paragraph, the Series B Notes will be
issued in the form of one or more fully registered Global Notes (collectively,
the "Global Note"). The Global Note will be deposited with, or on behalf of, DTC
and registered in the name of a nominee of DTC.
Notes (i) originally purchased by or transferred to Accredited
Investors who are not qualified institutional buyers (as defined in "Transfer
Restrictions"), or (ii) held by qualified institutional buyers which elect to
take physical delivery of their certificates instead of holding their interest
through the Global Note (and which are thus ineligible to trade through DTC)
(collectively referred to herein as the "Non-Global Purchasers") will be issued,
in registered certificated form, "Certificated Securities"). Upon the transfer
to a qualified institutional buyer of any Certificated Security initially issued
to a Non-Global Purchaser, such Certificated Security will, unless the
transferee requests otherwise or the Global Note has previously been exchanged
in whole for Certificated Securities, be exchanged for an interest in the Global
Note.
The Global Note. The Company expects that pursuant to procedures
established by DTC (i) upon deposit of the Global Note, DTC or its custodian
will credit, on its internal system, portions of the Global Note which shall be
comprised of the corresponding respective principal amount of the Global Note to
the respective accounts of persons who have accounts with such depository and
(ii) ownership of the Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC or its nominee
(with respect to interests of participants) and the records of participants
(with respect to interests of persons other than participants). Such accounts
initially will be designated by or on behalf of the Initial Purchaser and
ownership of beneficial interests in the Global Note will be limited to persons
who have accounts with DTC ("participants") or persons who hold interests
through participants. Qualified institutional buyers may hold their interests in
the Global Note directly through DTC if they are participants in such system, or
indirectly through organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of
the Notes, DTC or such nominee will be considered the sole owner or holder of
the Notes represented by the Global Note for all purposes under the Indenture.
No beneficial owner of an interest in the Global Note will be able to transfer
such interest except in accordance with DTC's applicable procedures, in addition
to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest (including
Additional Interest) on the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interest in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any
payment of the principal of, premium (if any) and interest (including Additional
Interest) on the Global Note, will credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of such Global Note as shown on the records of DTC or its
nominee. The Company also expects that payments by participants to owners of
beneficial interests in the Global Note held through such participants will be
governed by standing instructions and customary practice, as is now the case
with securities held for the accounts of customers registered in the names of
nominees for such customers. Such payments will be the responsibility of such
participants.
Transfers between participants in DTC will be effected in the ordinary
way in accordance with DTC rules and be settled in accordance with DTC rules in
same day funds. If a holder requires physical delivery of a Certificated
Security for any reason, including to sell Notes to persons in states which
require physical delivery of such securities or to pledge such securities, such
holder must transfer its interest in the Global Note in accordance with the
normal procedures of DTC and with the procedures set forth in the Indenture.
DTC has advised the Company that DTC will take any action permitted to
be taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect to
such portion of Notes, the
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aggregate principal amount of Notes as to which such participant or participants
have given such direction. However, if there is an Event of Default under the
Indenture, DTC will exchange the Global Note for Certificated Securities, which
it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of DTC,
it is under no obligation to perform such procedures, and such procedures may be
discontinued at any time. None of the Company, the Trustee or the Warrant Agent
will have any responsibility for the performance by DTC or its participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Certificated Security. If DTC is at any time unwilling or unable to
continue as a depository for the Global Note and a successor depository is not
appointed by the Company, within 90 days, the Company will issue Certificated
Securities in exchange for the Global Note.
TRANSFER RESTRICTIONS ON SERIES A SECURITIES
The Series A Securities have not been registered under the Securities
Act and may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act.
Accordingly, the Series A Securities were offered and sold by the Initial
Purchaser only (i) to a limited number of "qualified institutional buyers" (as
defined in Rule 144A promulgated under the Securities Act) ("QIBs") in
compliance with Rule 144A; and (ii) to a limited number of other institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7)
promulgated under the Securities Act) ("Accredited Investors") that prior to
their purchase of any Series A Securities delivered to the Initial Purchaser a
letter containing certain representations and agreements.
Each purchaser of Series A Securities, by its acceptance thereof, will
be deemed to have acknowledged represented and agreed as follows:
1. It is purchasing the Series A Securities for its own
account or an account with respect to which it exercises sole
investment discretion and that it and any such account is (i) a QIB,
and is aware that the sale to it is being made in reliance on Rule
144A; or (ii) an Accredited Investor.
2. It acknowledges that the Series A Securities have not been
registered under the Securities Act and may not be offered or sold
except as set forth below.
3. It shall not resell or otherwise transfer the Series A
Securities except (i) to the Company or any subsidiary thereof, (ii) to
a QIB in compliance with Rule 144A, (iii) to an Accredited Investor
that, prior to such transfer, furnishes (or has furnished on its behalf
by a U.S. broker-dealer) to the Trustee, a signed letter containing
certain representations and agreements relating to the restrictions on
transfer of the Series A Securities (the form of which letter can be
obtained from the Trustee), (iv) pursuant to the exemption from
registration provided by Rule 144 promulgated under the Securities Act
(if available), or (v) pursuant to an effective registration under the
Securities Act. Each Accredited Investor that is not a QIB and that is
an original purchaser of the Series A Securities will be required to
sign an agreement to the foregoing effect.
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4. It agrees that it will give to each person to whom it
transfers Series A Securities notice of any restrictions on transfer of
Series A Securities.
5. It understands that the Series A Securities will bear a
legend substantially to the following effect unless otherwise agreed by
the Company and the holder thereof:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF,
THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL
BUYER" (AS DEFINED IN RULE 144A PROMULGATED UNDER THE SECURITIES ACT)
OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501 (A) (1), (2), (3) OR (7) PROMULGATED UNDER THE SECURITIES ACT) (AN
"ACCREDITED INVESTOR"), (2) AGREES THAT IT WILL NOT RESELL OR OTHERWISE
TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER THEREOF OR ANY
SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN
COMPLIANCE WITH RULE 144A PROMULGATED UNDER THE SECURITIES ACT, (C) TO
AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER,
FURNISHED (OR HAS FURNISHED ON ITS BEHALF BY A U.S. BROKER-DEALER) TO
THE TRUSTEE OR WARRANT AGENT A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER
OF THIS SECURITY), (D) PURSUANT TO THE EXEMPTION FROM REGISTRATION
PROVIDED BY RULE 144 PROMULGATED UNDER THE SECURITIES ACT (IF
AVAILABLE) OR (E) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO
WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS SECURITY WITHIN
TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY, IF THE PROPOSED
TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST,
PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE OR WARRANT AGENT AND THE
ISSUER SUCH CERTIFICATIONS, WRITTEN LEGAL OPINIONS OR OTHER INFORMATION
AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER
IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
6. It acknowledges that the Trustee will not be required to
accept for registration of transfer any the Series A Securities
acquired by it, except upon presentation of evidence satisfactory to
the Company and the Trustee that the restrictions set forth herein have
been complied with.
7. It acknowledges that the Company, the Initial Purchaser and
others will rely upon the truth and accuracy of the foregoing
acknowledgments, representations and agreements and agrees that if any
of the acknowledgments, representations or agreements deemed to have
been made by its purchase of the Series A Securities are no longer
accurate, it shall promptly notify the Company and Initial Purchaser.
If it is acquiring any Series A Securities as a fiduciary or agent for
one or more investor accounts, it represents that it has sole
investment discretion with respect to each such account and it has full
power to make the foregoing acknowledgments, representations and
agreements on behalf of each account.
The Series A Securities may not be sold or transferred to, and
each purchaser by its purchase of the Series A Securities shall be deemed to
have represented and covenanted that it is not acquiring the Series A Securities
for or on behalf of, any pension or welfare plan (as defined in Section 3 of the
Employee Retirement Income Security Act of 1974 ("ERISA")), except that such a
purchase for or on behalf of a pension or welfare plan shall be permitted:
(1) to the extent such purchase is made by or on behalf of a
bank collective investment fund maintained by the purchase in which no
plan (together with any other plans maintained by the same employer or
employee
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organization) has an interest in excess of 10% of the total assets in
such collective investment fund and the applicable conditions of
Prohibited Transaction exemption 91-38 issued by the Department of
Labor are satisfied;
(2) to the extent such purchase is made by or on behalf of an
insurance company pooled separate account maintained by the purchase in
which, at any time while the Series A Securities are outstanding, no
plan (together with any other plans maintained by the same employer or
employee organization) has an interest in excess of 10% of the total of
all assets in such pooled separate account and the applicable
conditions of Prohibited Transaction Exemption 90-1 issued by the
Department of Labor are satisfied;
(3) to the extent such purchase is made on behalf of a plan by
(A) an investment advisor registered under the Investment Advisers Act
of 1940 that had as of the last day of its most recent fiscal year
total assets under its management and control in excess of $50,000,000
and had shareholders' or partners' equity in excess of $750,000, as
shown in its most recent balance sheet prepared in accordance with
GAAP, (B) a bank as defined in Section 202(a) of the Investment
Advisers Act of 1940 with equity capital in excess of $1,000,000 as of
the last day of its most recent fiscal year or (C) an insurance company
which is qualified under the laws of more than one state to manage,
acquire or dispose of any assets of a plan, which company had, as of
the last day of its most recent fiscal year, net worth in excess of
$1,000,000 and which is subject to supervision and examination by a
state authority having supervision over insurance companies, in each
case, such investment advisor, bank or insurance company is otherwise a
qualified professional asset manager, as such term is used in the
Prohibited Transaction Exemption 84-14 issued by the Department of
Labor, and the assets of such plan when combined with the assets of
other plans established or maintained by the same employer (or
affiliate thereof) or employee organization and managed by such
investment advisor, bank or insurance company, do not represent more
than 20% of the total client assets managed by such investment advisor,
bank or insurance company and the applicable conditions or Prohibited
Transaction Exemption 84-14 are otherwise satisfied; or
(4) to the extent such plan is a governmental plan (as defined
in Section 3 of ERISA) which is not subject to the provisions of Title
1 of ERISA or Section 4975 of the Code.
Each purchaser by its purchase of the Series A Securities shall also be
deemed to have represented that (a) if it is an insurance company, no part of
the funds to be used to purchase the Series A Securities to be purchased by it
constitutes assets allocated to any separate account maintained by it such that
the use of such funds constitutes a transaction in violation of Section 406 of
ERISA or a Prohibited Transaction, as such term is defined in Section 4975 of
the Code, which could be subject to, respectively, a civil penalty assessed
pursuant to Section 502 of ERISA or a tax imposed by Section 4975 of the Code
and (b) if it is not an insurance company, that no part of the funds to be used
to purchase the Series A Securities to be purchased by it constitutes assets
allocated to any trust, plan or account which contains the assets of any
employee pension benefit plan, welfare plan or account prohibited pursuant to
the preceding paragraph of these "Transfer Restrictions."
Purchasers are advised that the Prohibited Transaction Exemptions
described above do not relieve a fiduciary or other party from all prohibited
transaction provisions of the Code and ERISA and from ERISA's general fiduciary
responsibilities including, but not limited to, a fiduciary's obligation to
discharge his or her duties solely in the interests of participants and
beneficiaries. As a result of the foregoing restrictions, Purchasers are advised
to consult legal counsel prior to making any offer, resale pledge,
hypothecation, or other transfer or disposition of the Series A Securities or
any interest therein.
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DESCRIPTION OF NEW CREDIT FACILITY
Concurrently with the Reddy Acquisition, Antares Leveraged Capital Corp.,
Chicago, Illinois provided the Company with an $80,000,000 five year senior
credit facility consisting of a revolving working capital facility of
$15,000,000 and a revolving acquisition loan facility of $65,000,000 (the "New
Credit Facility"). The maximum amount available under the New Credit Facility,
however, is further subject to borrowing base limitations based on various
criteria. The New Credit Facility replaces the Company's previous credit
facility with Frost National Bank, San Antonio, Texas and Zion's National Bank,
Salt Lake City, Utah, and the Company plans to use the New Credit Facility for
its immediate and future acquisition and working capital needs.
The outstanding principal balance under the New Credit Facility will
initially bear 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 will amortize in 12 equal quarterly installments over the remaining
term.
The New Credit Facility contains certain covenants limiting, among other
things, the Company's ability to pay cash dividends or make other distributions,
change its business, merge, consolidate or dispose of assets, incur liens, make
loans and investments, incur indebtedness and engage in certain transactions
with affiliates. The New Credit Facility also contains numerous other financial
covenants, including, without limitation, covenants that require the Company to
meet a minimum fixed charge coverage ratio, maintain a minimum net worth and
limit capital expenditures.
The New Credit Facility contains events of default customary for facilities
of its type, including without limitation, the Company's failure to pay
principal, interest, fees or other amounts when due; the Company's breach of any
covenants, representations or warranties; cross-default and cross acceleration;
bankruptcy, insolvency or similar events involving the Company or its
Subsidiaries; the unenforceability of any of the agreements or liens securing
payment of the obligations under the New Credit Facility; and the occurrence or
existence of any event or circumstance which has a material adverse effect upon
the Company. The New Credit Facility is secured by substantially all of the
Company's assets and the capital stock of all of the Company's Significant
Subsidiaries.
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DESCRIPTION OF CAPITAL STOCK AND WARRANTS
GENERAL
The authorized capital stock of the Company consists of 50,000,000
shares of common stock, par value $.01 per share (the "Common Stock"), of which
5,044,310 shares are issued and outstanding and of which 298,231 shares are 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, of which all of the authorized shares are issued
and outstanding; 200,000 shares as the Series B Convertible Preferred Stock, of
which 124,831 shares are issued and outstanding; 500,000 shares as the 10%
Exchangeable Preferred stock, of which 250,000 shares are issued and
outstanding; 100 shares as the Series C Preferred Stock, of which 100 shares are
issued and outstanding; and 800,000 shares as the 13% Exchangeable Preferred
Stock Series A, of which 400,000 shares are issued and outstanding; and 800,000
shares as the 13% Exchangeable Preferred Stock Series B, which will be reserved
for issues in the Exchange Offer. In addition, a total of 400,000 shares of
Common Stock have been reserved for issuance upon exercise of stock options
under the 1994 Stock Option Plan, a total of 500,000 shares of Common Stock have
been reserved for issuance upon exercise of stock options under the 1998 Stock
Option Plan, shares of Common Stock have been reserved for issuance upon
conversion of the Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock, and shares have been reserved for issuance upon exercise of
warrants.
SERIES A CONVERTIBLE PREFERRED STOCK
In September 1995, the Board of Directors authorized the designation of
450,000 shares of 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 $2,502,000) 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. Each share of Series A
Convertible Preferred Stock is convertible into Common Stock without payment of
additional consideration at a conversion price of $5.56 per share, subject to
anti-dilution adjustments.
SERIES B CONVERTIBLE PREFERRED STOCK
In December 1996, the Board of Directors authorized the designation of
200,000 shares of Series B Convertible Preferred Stock and on January 17, 1997
the Company issued 124,831 shares in full satisfaction of $750,000 of
convertible demand notes bearing interest at a rate of 10% per annum which were
issued in December 1996. The Series B 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 the whole number of shares of Common
Stock into which each share of Series B Convertible Preferred Stock is then
convertible. Each share of Series B Convertible Preferred Stock is convertible
into Common Stock without payment of additional consideration at a conversion
price of $6.07 per share, subject to anti-dilution adjustments.
10% MANDATORILY REDEEMABLE PREFERRED STOCK
In December 1997, the Board of Directors authorized the designation of
500,000 shares of the 10% Mandatorily Redeemable Preferred Stock and the Company
has since issued 250,000 shares. The 10% Mandatorily Redeemable Preferred Stock
has liquidation preference of $100.00 per share. Holders of the Mandatorily
Redeemable Preferred Stock shall be entitled to receive dividends equal to 10%
of the liquidation preference thereof, and all dividends shall be fully
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cumulative. Dividends may be paid in cash or in kind by issuing a number of
additional shares of Mandatorily Redeemable Preferred Stock. If dividends are
paid in kind, the Company shall also issue additional warrants to purchase
Common Stock at an exercise price of $13.00 per share to the holders of the
Mandatorily Redeemable Preferred Stock. Holders of the 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 the
Mandatorily Redeemable Preferred Stock at any time subject to contractual and
other restrictions with respect thereto and to applicable provisions of the
Texas Business Corporation Act and to the legal availability of funds therefor.
The Company is obligated to redeem the Mandatorily Redeemable Preferred Stock
for cash on April 15, 2005 subject to applicable provisions of the Texas
Business Corporation Act. The Company may redeem all of the Mandatorily
Redeemable Preferred Stock for notes in an aggregate principal amount of the
liquidation preference amount of the Mandatorily Redeemable Preferred Stock.
SERIES C PREFERRED STOCK
In December 1997, the Board of Directors authorized the designation of
100 shares of the Series C Preferred Stock and the Company has since issued 100
shares. The Series C Preferred Stock has a liquidation preference of $10.00 per
share. The Series C Preferred Stock was created to provide Culligan Water
Technologies, Inc. and Erica Jesselson 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 (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 fifty percent (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, SERIES A
See "Description of Securities - Preferred Stock"
13% EXCHANGEABLE PREFERRED STOCK, SERIES B
See "Description of Securities - Preferred Stock"
WARRANTS
General. The Company issued warrants pursuant to a warrant agreement
entered into in connection with the issuance of 12% Senior Notes. Each such
warrant, when exercised, will entitle the holder thereof to receive 10.2377
shares of Common Stock of the Company at an exercise price of $.01 per share. A
total of 75,000 warrants, representing 767,828 warrant shares were issued in
connection with the 12% Senior Notes; in addition, the Company issued to
Jefferies, in conjunction with 12% Senior Notes issuance, warrants to purchase
127,972 shares of Common Stock at an exercise price of $.01 per share. Unless
exercised, the warrants issued in connection with the 12% Senior Notes will
automatically expire on the maturity date of the respective 12% Senior Notes.
The Company will give notice of expiration not less than 90 nor more than 120
days prior to the expiration date to the registered holders of the then
outstanding warrants issue in connection with the 12% Senior Notes.
On July 7, 1997, the Company issued to SV warrants to purchase 100,000
shares of Common Stock at an exercise price of $14.00 per share. These warrants
must be exercised on or before July 17, 2002.
On December 2, 1997, the Company issued warrants to Culligan Water
Technologies, Inc. and Erica Jesselson pursuant to warrant agreements entered
into in conjunction with an issuance of 10% mandatorily redeemable preferred
stock and Series C Preferred Stock . These warrants, when exercised, will
entitle the holder thereof to receive an aggregate of 1,923,077 shares of the
Common Stock of the Company at an exercise price of $13.00 per share. These
warrants must be exercised on or before the earlier to occur of (a) April 15,
2005 or (ii) the first arriving of the last day of the first period of 20
consecutive trading days following a qualifying initial public offering. See
"Certain Relationships and Related Transactions -- Securities Purchase Agreement
with Culligan Water Technology, Inc."
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On April 30, 1998, the Company issued warrants to Ares and SV pursuant
to warrant agreements entered into in conjunction with the issuance of Series A
Preferred Stock . These warrants, when exercised, will entitle the holder
thereof to receive an aggregate of 975,752 shares of the Common Stock of the
Company at an exercise price of $.01 per share. These warrants must be exercised
on or before May 1, 2005 or 10 business days following the closing of an initial
public offering. These warrants may be exercised upon the earlier to occur of:
upon a change of control, asset sale, event of default, consolidation or merger,
or initial public offering, or May 1, 2003.
The Exercise Price and the number of warrant shares issuable on
exercise of a warrant are both subject to adjustment in certain cases. See
"Adjustments" below.
Voting Rights. The holders of the Warrants will have no right to vote
on matters submitted to the stockholders of the Company and will have no right
to receive cash dividends. The holders of the Warrants will not be entitled to
share in the assets of the Company in the event of the liquidation, dissolution
or winding up of the Company's affairs.
Adjustments. Each of the number of Warrant Shares purchasable upon the
exercise of the Warrants and the Exercise Price will be subject to adjustment in
certain events including: (i) the payment by the Company of dividends (or other
distributions) on the Common Stock of the Company payable in shares of such
Common Stock or other shares of the Company's capital stock, (ii) subdivisions,
combinations and reclassifications of the Common Stock, and (iii) the
distribution to all holders of the Common Stock of any of the Company's assets,
debt securities or any rights or warrants to purchase securities (excluding cash
dividends or other cash distributions from current or retained earnings).
Subject to certain exceptions set forth in the Warrant Agreement, if
the Company issues (i) shares of Common Stock for a consideration per share less
than the current market value per share or (ii) any securities convertible into
or exchangeable for Common Stock for a consideration per share of Common Stock
initially deliverable upon conversion or exchange of such securities that is
less than the current market value per share on the date of issuance of such
securities, the Company shall offer to sell to each holder of Warrants, at the
same price and on the same terms offered to all other prospective buyers
(provided that the holders of Warrants shall not be required to buy any other
securities in order to buy such Common Stock or convertible securities), a
portion of such Common Stock or convertible securities that is equal to such
holder's portion of the Common Stock then outstanding if immediately prior
thereto all the Warrants had been exercised. Each such holder may elect to buy
all or any portion of the Common Stock or convertible securities offered or may
decline to purchase any.
Registration Rights. The Company has granted demand and piggy back
registration rights to holders of the Warrants pursuant to a Securityholders'
and Registration Rights Agreement (the "Securityholders' Agreement"). From time
to time after 180 days following the completion by the Company of a public
equity offering, holders of Warrant shares owning, individually or in the
aggregate, not less than 25% of the Warrant shares held in the aggregate by all
holders of Warrant shares may make a written request for registration under the
Securities Act of their warrant shares. Subject to certain conditions, within
120 days of the receipt of such written request for such a demand registration,
the Company shall file with the Commission and use its best efforts to cause to
become effective under the Securities Act a registration statement with respect
to such securities. This summary of the Securityholders' Agreement does not
purport to be complete and is qualified in its entirety by reference to the
terms and provisions of the Securityholders' Agreement.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders of the Company. Subject to any
preferential rights of any outstanding series of preferred stock designated by
the Board of Directors, the holders of Common Stock are entitled to receive,
ratably, with the holders of the Series A Convertible Preferred Stock, the
Series B Convertible Preferred Stock, the 10% Mandatorily Redeemable Preferred
Stock, the Series C Preferred Stock, the Series A Preferred Stock and the Series
B Preferred Stock, such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available therefor. In the event
of liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to receive pro rata all assets of the Company available for
distribution to such holders after distribution in full of the preferential
amount to be distributed to holders of shares of the Series A Convertible
Preferred Stock, the Series B Convertible Preferred Stock, the 10% Mandatorily
Redeemable Preferred Stock, the Series C Preferred Stock, the Series A Preferred
Stock and the Series B Preferred Stock.
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All outstanding shares of Common Stock are validly issued, fully paid and
nonassessable. The Company's Articles of Incorporation deny preemptive rights
and cumulative voting, however the Company has granted certain preferential
rights to purchase new issuances of shares to certain shareholders. These rights
expire upon an initial public offering of at least $7.5 million. The Common
Stock has no conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the Common Stock. The
Company has granted piggy-back and/or demand registration rights to certain
shareholders. See "Certain Relationships and Related Transactions."
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Company's Articles of Incorporation (the "Articles of
Incorporation") provide that the Board of Directors is vested with authority to
establish, from time-to-time, series of unissued shares of any class, to
determine and fix the designation and the relative rights, preferences and
limitations of the shares of each series so established, and to increase or
decrease the number of shares within each such series. The relative rights and
preferences of shares may vary in any respect between series, but all shares of
the same series shall be identical in all respects. The authority possessed by
the Board of Directors to issue different classes and series of stock could
potentially be used to discourage attempts by others to obtain control of the
Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult to achieve or more costly. The Board of Directors
may issue Preferred Stock with voting and conversion rights that could adversely
affect the voting power of the holders of Common Stock. There are no agreements
or understandings for the issuance of Preferred Stock and the Board of Directors
has no present intention to issue any Preferred Stock other than the Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock described
herein.
Article 1302-7.06 of the Texas Miscellaneous Corporation Act ("TMCA")
authorizes a Texas corporation to include a provision in its articles of
incorporation limiting or eliminating the personal liability of its directors to
the corporation and its shareholders for monetary damages for breach of
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Absent the
limitations authorized by such provision, directors are accountable to
corporations and their shareholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Although
Article 1302-7.06 of the TMCA does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. Pursuant to such provision, the Articles of
Incorporation limit the personal liability of directors of the Company (in their
capacity as directors but not in their capacity as officers) to the Company or
its shareholders to the fullest extent permitted by the TMCA. Specifically, a
director of the Company will not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for (i) any breach of the director's duty of loyalty to the Company or
its shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) unlawful payments of
dividends or unlawful stock repurchases, redemptions or other distributions, and
(iv) any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter shareholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have 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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes certain material United States
federal income tax considerations generally applicable to purchasers of the
Notes, the Preferred Stock and Exchange Debentures. The federal income tax
considerations set forth below are based upon currently existing provisions of
the Code (the "Code"), applicable final, temporary and proposed Treasury
Regulations ("Treasury Regulations"), judicial authority, and current
administrative rulings and pronouncements of the Service. There can be no
assurance that the Service will not take a contrary view, and no ruling from the
Service has been,
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or will be, sought on the issues discussed herein. Legislative, judicial, or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences discussed below. This discussion applies only to a person who is
(i) a citizen or resident of the United States for U.S. federal income tax
purposes, (ii) a corporation, partnership or other entity created or organized
under the laws of the United States or any political subdivision thereof, or
(iii) an estate or trust that is not a foreign estate or trust (a "U.S.
Holder").
The summary is not a complete analysis or description of all potential
federal tax considerations that may be relevant to, or of the actual tax effect
that any of the matters described herein will have on, particular U.S. Holders,
and does not address foreign, state, local or other tax consequences. This
summary does not purport to address special classes of taxpayers (such as S
corporations, mutual funds, insurance companies, financial institutions, small
business investment companies, foreign companies, nonresident alien individuals,
regulated investment companies, broker-dealers and tax-exempt organizations) who
are subject to special treatment under the federal income tax laws, or persons
that hold Notes, the Preferred Stock or Exchange Debentures that are a hedge
against, or that are hedged against, currency risk or that are part of a
straddle or conversion transaction, or persons whose functional currency is
not the U.S. dollar. Furthermore, estate and gift tax consequences are not
discussed herein. No opinion of counsel or ruling from the IRS will be
requested with respect to any of the matters discussed herein.
The discussion assumes that the Notes, the Preferred Stock and the
Exchange Debentures that may be issued in redemption of the Preferred Stock will
be held as capital assets within the meaning of section 1221 of the Code.
PERSONS CONSIDERING THE EXCHANGE OF NOTES OR PREFERRED STOCK SHOULD CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE APPLICATION OF U.S. FEDERAL INCOME TAX
LAWS, AS WELL AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO
THEIR PARTICULAR SITUATIONS.
THE NOTES
The following summary is limited to the United States federal income
tax consequences relevant to a U.S. Holder of the Notes.
THE REGISTERED EXCHANGE OFFER
Pursuant to the Regulations, the exchange of Series A Notes for Series B
Notes pursuant to the Exchange Offer should not constitute a significant
modification of the terms of the Series A Notes and, accordingly, such exchange
should be treated as a "non-event" for federal income tax purposes. Therefore,
such exchange should have no federal income tax consequences to U.S. Holders of
Notes. The holding period of a Series B Note will include the holding period of
the Series A Note for which it was exchanged; the basis of a Series B Note will
be the same as the basis of the Series A Note for which it was exchanged; and
each U.S. Holder of Notes will continue to be required to include interest on
the Notes in its gross income in accordance with the rules described below.
PAYMENT OF INTEREST
Interest on a Note generally will be includable in the income of a U.S.
Holder as ordinary income at the time such interest is received or accrued, in
accordance with such U.S. Holder's method of accounting for United States
federal income tax purposes.
With respect to the Series A Notes, the Company is obligated to pay
Additional Interest amounts in the event of a Registration Default. Under the
Regulations, certain contingent payments on debt instruments (like the
Additional Interest amounts payable in the event of a Registration Default) must
be accrued into gross income by a holder (regardless of such holder's method of
accounting). However, any payment subject to a remote or incidental contingency
(i.e., there is a remote likelihood that the contingency will occur or the
potential amount of the contingent payment is insignificant
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relative to the total expected amount of remaining payments) is not treated as a
contingent payment and is ignored until payment, if any, is actually made. The
determination of whether a contingency is remote or incidental is made as of the
issue date. The Company intends to take the position that the Additional
Interest payments resulting from a Registration Default are subject to a remote
or incidental contingency. Accordingly, any Additional Interest payments
resulting from a Registration Default should be includable in the income of a
U.S. Holder in accordance with such holder's method of accounting for United
States federal income tax purposes.
AMORTIZABLE BOND PREMIUM
If a U.S. Holder acquires a Note for an amount which is greater than the sum
of all amounts payable at maturity (other than payments of qualified stated
interest), such holder will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Qualified stated
interest is defined generally as stated interest that is payable unconditionally
in cash at least annually at a single fixed rate. The Company is obligated to
pay Additional Interest to the U.S. Holders of Series A Notes in the event of a
Registration Default. Amounts of Additional Interest that are contingent on a
Registration Default will likely not be considered qualified stated interest.
The U.S. Holder may elect to amortize the premium, using a constant yield method
(employing six-month compounding), over the period from the acquisition date to
the maturity date of the Note. The "amount payable at maturity" will be
determined as of an earlier call date, using the call price payable on such
earlier date, if the combination of such earlier date and call price will
produce a smaller amortizable bond premium than would result from using the
scheduled maturity date and its amount payable. If an earlier call date is used
and the Note is not called, the Note will be treated as having matured on such
earlier call date and then as having been reissued on such date for the amount
so payable. Amortized amounts may be offset only against interest payments due
under the Note and will reduce the U.S. Holder's adjusted tax basis in the Note
to the extent so used.
Once made, an election to amortize and offset interest on bonds, such as the
Notes, will apply to all bonds in respect of which the election was made that
were owned by the taxpayer on the first day of the taxable year to which the
election relates and to all bonds of such class or classes subsequently acquired
by such taxpayer. Such election may only be revoked with the consent of the
Service. If a U.S. Holder of a Note does not elect to amortize the premium, the
premium will decrease the gain or increase the loss which would otherwise be
recognized upon disposition of the Note. Holders of Notes with amortizable bond
premium should consult their tax advisors regarding recently finalized
Regulations promulgated under Code Section 171 in connection with amortizable
bond premium.
EFFECT OF CHANGE OF CONTROL OR OPTIONAL REDEMPTION
Upon a Change of Control, the Company is required to offer to redeem all
outstanding Notes for a price equal to 101% of the principal amount thereof plus
accrued and unpaid interest. Under the Regulations, such Change of Control
redemption requirements will not affect the yield or maturity date of the Notes
unless, based on all the facts and circumstances of the Issue Date, it was more
likely than not that a Change of Control giving rise to the redemption would
occur. The Company will not treat the Change of Control redemption provisions of
the Notes as affecting the calculation of the yield to maturity of any Note.
The Company, at its option, may redeem part or all of the Notes at the times
and for the amounts described in "Description of the Notes -- Optional
Redemption" herein. The Regulations provide that for purposes of calculating the
yield to maturity of a debt instrument, an issuer will be treated as exercising
any option if its exercise would lower the yield of the debt instrument.
However, a redemption of the Notes at the optional redemption prices would
increase the effective yield of such Notes as calculated from the date of
issuance. Accordingly, the Company does not intend to exercise such redemption
option on the Notes and in accordance with the Regulations, as of the date of
issuance of the Notes, the optional redemption provisions will not be taken into
account in calculating the yield to maturity of the Notes.
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MARKET DISCOUNT
If a U.S. Holder purchases a Note for less than the stated redemption price
at maturity (the sum of all payments on the Note other than qualified stated
interest), the difference is considered "market discount," unless such
difference is de minimis. A discount will be considered de minimis if it is less
than one-fourth ( 1/4) of one percent of the issue price of the debt instrument
multiplied by the number of complete years to maturity (after the holder
acquires such debt instrument). Under the market discount rules, any gain
realized by the U.S. Holder on the sale, exchange, retirement or other
disposition of a Note having "market discount," as well as on any partial
principal payment made with respect to such Note, will be treated as ordinary
income to the extent of the market discount which has not previously been
included in income and is treated as having accrued on such Note on or prior to
the time of such payment or disposition. An overview of the rules concerning the
calculation of "accrued market discount" is set forth in the paragraph
immediately below. In addition, a U.S. Holder of such Note may be required to
defer the deduction of all or a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry a Note.
Any market discount will accrue ratably from the date of acquisition to the
maturity date of the Note, unless the U.S. Holder elects, irrevocably, to accrue
market discount on a constant interest rate method. The constant interest rate
method generally accrues interest at times and in amounts equivalent to the
result which would have occurred had the market discount been original issue
discount computed from the U.S. Holder's acquisition of the Note through the
maturity date. The election to accrue market discount on a constant interest
rate method may be made separately as to each Note held by the U.S. Holder.
Accrual of market discount will not cause the accrued amounts to be included
currently in a U.S. Holder's taxable income, in the absence of a disposition of,
or principal payment on, the Note. However, a U.S. Holder of a Note may elect to
include market discount in income currently as it accrues on either a ratable or
constant interest rate method. In such event, interest expense relating to the
acquisition of a Note which would otherwise be deferred would be currently
deductible to the extent otherwise permitted by the Code. The election to
include market discount in income currently, once made, applies to all market
discount obligations acquired by such holder on or after the first day of the
first taxable year to which the election applies, and may not be revoked without
the consent of the Service. Accrued market discount which is included in a U.S.
Holder's gross income will increase the adjusted tax basis of the Note in the
hands of the U.S. Holder.
ACQUISITION PREMIUM
A U.S. Holder of Notes will be entitled to a reduction in the amount of OID
required to be included in its income if such Holder purchases such Note with
"acquisition premium." A U.S. Holder of a Note will have acquisition premium if
its adjusted tax basis in the Note is less than or equal to the stated
redemption price at maturity and exceeds the adjusted issue price of such Note.
The acquisition premium is the amount by which the purchase price exceeds the
adjusted issue price. The adjusted issue price of a Note will be the issue price
increased by the amount of OID previously includable in the gross income of any
U.S. Holder (determined without regard to any reduction for acquisition premium
or amortizable bond premium (as defined below)) reduced by any payments on the
Notes (other than payments of qualified stated interest). The amount of the
reduction to which a U.S. Holder may be entitled in any given year is equal to a
fraction, the numerator of which is the amount of the acquisition premium and
the denominator of which is the excess of the sum of all amounts payable on the
Note (other than payments of qualified stated interest) over the adjusted issue
price of the Note on the date of purchase.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement (including redemption) of a Note,
other than the exchange of a Series A Note for a Series B Note (see "-- The
Registered Exchange Offer" above), a U.S. Holder of a Note generally will
recognize gain or loss in an amount equal to the difference between the amount
of cash and the fair market value of any property received on the sale, exchange
or retirement of the Note (other than in respect of accrued and unpaid interest
on the Note, which such amounts are treated as ordinary interest income) and
such U.S. Holder's adjusted tax basis in the Note. Such gain or loss will be
capital gain or loss, except to the extent of any accrued market discount (see
"-- Market Discount" above), and will generally be long-term capital gain
taxable at a rate of 20% if the Note is held for more than 18 months, mid-term
capital gain taxable at a rate of 28% if the Note is held for 18 months or less
but more than 12 months, and short-term capital gain
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taxable at ordinary income tax rates if the Note is held for 12 months or less.
Subsequent to December 31, 2000, subject to certain limitations, the capital
gain rate would be reduced to 18% if a Note has been held for more than five
years. The deductibility of capital losses is subject to limitations.
Under recently proposed legislation, the capital gains rate for securities
held for more than one year would be reduced to 20%.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to interest
payments on the Notes made to U.S. Holders other than certain exempt recipients
(such as corporations) and to proceeds realized by such U.S. Holders on
dispositions of Notes. A 31% backup withholding tax will apply to such amounts
only if the U.S. Holder: (i) fails to furnish its social security or other
taxpayer identification number ("TIN") within a reasonable time after request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly
interest or dividend income, or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that it is not subject to backup withholding.
Any amount withheld from a payment to a U.S. Holder under the backup withholding
rules is allowable as a refund or as a credit against such U.S. Holder's federal
income tax liability, provided that the required information is furnished to the
Service. U.S. Holders of Notes should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
THE PREFERRED STOCK
TAX BASIS OF PREFERRED STOCK
The purchase price of the Series A Preferred Stock with the Warrants was
treated as the purchase of an investment unit for federal income tax purposes.
In order to determine the issue price for each security, the aggregate issue
price of the Series A Preferred Stock and Warrants was allocated between each of
the securities based on their relative fair market values on the date of
issuance. A U.S. Holder's initial tax basis in the Series A Preferred Stock
should be equal to the portion of purchase price paid by the U.S. Holder for the
Series A Preferred Stock (adjusted to take into account any constructive
distributions on the Series A Preferred Stock under Section 305 of the Code)
immediately before the exchange.
EXCHANGE OFFER
Because the Company is required to redeem the Preferred Stock on May 1,
2005, and because such requirement is not subject to a contingency which as of
the issue date makes remote the likelihood of such redemption, the Preferred
Stock should be treated as nonqualified preferred stock within the meaning of
Code Section 351(g). Generally, the receipt of nonqualified preferred stock in
an otherwise tax-free reorganization will be treated as the receipt of "boot"
and taxable to the extent of gain realized in the reorganization transaction.
However, according to the legislative history accompanying the Taxpayer Relief
Act of 1997, in the event that nonqualified preferred stock is exchanged for
comparable nonqualified preferred stock of equal or lesser value, it will be
treated as "stock" for purposes of the reorganization provisions and thereby
permitted to be received without the recognition of gain or loss. It is not
clear from the legislative history whether the Series B Preferred Stock would be
considered "comparable" nonqualified preferred stock. In addition, because of
its transferability rights, it is not clear that the Series B Preferred Stock
will be treated as being of equal or lesser value than the Series A Preferred
Stock. Accordingly, all holders of Series A Preferred Stock are urged to consult
their own tax advisors as to the particular tax consequences to them of the
Exchange Offer and receipt of Series B Preferred Stock.
DISPOSITION OF THE PREFERRED STOCK
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by the Company) or other disposition of
Preferred Stock will be a taxable event for U.S. federal income tax purposes. In
such event, in general, a U.S. Holder of Preferred Stock will recognize gain or
loss equal to the difference between (i) the amount of cash plus the fair market
value of property received upon such sale, exchange, redemption or other
disposition and (ii) the Holder's tax basis in the Preferred Stock. Any such
gain or loss will generally be long-term capital gain or loss, provided the
Preferred Stock has been held for more than 18 months. The deductibility of
capital losses is subject to limitations.
Under recently proposed legislation, the capital gains rate for securities
held for more than one year would be reduced to 20%.
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DIVIDENDS ON THE PREFERRED STOCK OR THE COMMON STOCK
Dividends paid on the Preferred Stock (including dividends of additional
shares of Preferred Stock) will be taxable as ordinary income to the extent of
the Company's current or accumulated earnings and profits (as determined for
federal income tax purposes). To the extent that the amount of distributions
paid on the Preferred Stock exceeds the Company's current or accumulated
earnings and profits (as determined for federal income tax purposes), the
distributions will be treated as a return of capital, thus reducing the holder's
adjusted tax basis in such Preferred Stock and increasing the amount of gain (or
reducing the amount of loss) which may be realized by such holder upon a sale or
exchange of the Preferred Stock. The amount of any distribution which exceeds
the holder's adjusted basis in the Preferred Stock will be taxed as capital
gain, and will be long-term capital gain if the holder's holding period for such
Preferred Stock exceeds 18 months (except to the extent that recently proposed
legislation is enacted, thereby reducing the capital gains rate to 20% for
securities held for more than one year). For purposes of the remainder of this
discussion, the term "dividend" refers to a distribution paid out of the
Company's allocable earnings and profits, unless the context indicates
otherwise.
Dividends Received Deduction. Dividends paid to a corporate holder who
owns less than 20 percent of the Company (by vote or value) will be eligible for
the 70 percent dividends-received deduction under section 243 of the Code,
subject to the limitations contained in sections 246 and 246A of the Code. In
general, the dividends-received deduction is available only if the stock in
respect of which the dividends are paid is held for at least 46 days (91 days in
the case of a preference dividend attributable to a period or periods
aggregating more than 366 days). A taxpayer's holding period for these purposes
is reduced by periods during which the taxpayer's risk of loss with respect to
the stock is considered diminished by reason of the existence of options,
contracts to sell or similar transactions. The dividends-received deduction will
also not be available if the taxpayer is under an obligation to make related
payments with respect to positions in substantially similar or related property.
The dividends-received deduction will be limited to specified percentages of a
corporate holder's taxable income and may be reduced or eliminated if the
corporate holder has indebtedness "directly attributable" to its investment in
the stock. Holders of the Preferred Stock should consult their own tax advisors
to determine whether these limitations might apply to them.
For purposes of computing its alternative minimum tax, dividends
eligible for the 70 percent dividends-received deduction are included in a
corporate holder's "adjusted current earnings." If such adjusted current
earnings exceed the corporate holder's alternative minimum taxable income
(determined without regard to the adjustments for adjusted current earnings or
the alternative tax net operating loss deduction), 75 percent of the excess is
added to the holder's alternative minimum taxable income.
Extraordinary Dividends. Under section 1059 of the Code, if a corporate
holder receives an "extraordinary dividend" from the Company with respect to the
Preferred Stock which it has not held for more than two years on the dividend
announcement date, the basis of the Preferred Stock will be reduced (but not
below zero) by the non-taxed portion of the dividend. If, because of the
limitation on reducing basis below zero, any amount of the non-taxed portion of
an extraordinary dividend has not been applied to reduce basis, such amount will
be treated as gain from the sale or exchange of the Preferred Stock in the
taxable year in which the extraordinary dividend is received. Generally, the
non-taxed portion of an extraordinary dividend is the amount excluded from
income under section 243 of the Code (relating to the dividends-received
deduction). An extraordinary dividend on the Preferred Stock generally would
include any dividend that (i) equals or exceeds five percent of the holder's
adjusted tax basis in the Preferred Stock, treating all dividends having
ex-dividend dates within an 85-day period as one dividend or (ii) exceeds 20
percent of the holder's adjusted tax basis in the Preferred Stock, treating all
dividends having ex-dividend dates within a 365-day period as one dividend. In
determining whether a dividend paid on the Preferred Stock is an extraordinary
dividend, a holder may elect to use the fair market value of such stock rather
than its adjusted tax basis for purposes of determining the five percent (or 20
percent) limitation if the holder is able to establish to the satisfaction of
the Secretary of the Treasury the fair market value of the Preferred Stock as of
the day before the ex-dividend date. An extraordinary dividend would also
include any amount treated as a dividend in the case of a redemption of the
Preferred Stock that is non-pro rata as to all holders, part of a partial
liquidation, or would have been treated as a dividend if any options were not
taken into account under Code Section 318(a)(4) or Code Section 304(a) were not
applicable, without regard to the period the holder held the stock. Corporate
holders should see "Certain Federal Income Tax Considerations--Redemption of the
Preferred Stock" for a discussion of when a redemption of the Preferred Stock
will constitute an extraordinary dividend.
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Certain "qualified preferred dividends," however, are not considered
extraordinary dividends. A qualified preferred dividend is any fixed dividend
payable with respect to preferred stock which (i) provides for fixed preferred
dividends payable not less frequently than annually and (ii) is not in arrears
as to dividends when acquired, provided, however, that the actual rate of return
(as determined under section 1059(e)(3) of the Code) on such stock does not
exceed 15 percent. If a qualified preferred dividend announced within two years
of the date of acquisition of the preferred stock exceeds the five percent (or
20 percent) threshold for extraordinary dividend status described above, (i)
section 1059(a) will not apply (and no reduction in basis will be required) if
the holder holds the stock for more than five years and (ii) if the holder
disposes of the stock before it has been held for more than five years, the
aggregate reduction in basis under section 1059(a) will not exceed the excess of
the qualified preferred dividends paid on such stock during the period held by
the holder over the qualified preferred dividends that would have been paid
during such period on the basis of the stated rate of return, as determined
under section 1059(e)(3) of the Code. The length of time that a holder is deemed
to have held stock for purposes of section 1059 of the Code is determined under
principles similar to those contained in section 246(c) of the Code discussed
above.
PREFERRED STOCK DISCOUNT
The Preferred Stock is subject to mandatory redemption on May 1, 2005
(the "Mandatory Redemption"). The Preferred Stock is also redeemable, subject to
certain restrictions, at any time at the option of the Company at specified
redemption prices (the "Optional Redemption"). In addition, the Preferred Stock
is redeemable in the event of a Change of Control (the "Change of Control
Redemption") or an initial Public Equity Offering (the "Optional IPO
Redemption"). See "Description of Preferred Stock and Exchange
Debentures--Redemption". Pursuant to Section 305(c) of the Code, U.S. Holders of
Preferred Stock may be required to treat a portion of the difference between the
Preferred Stock's issue price and its redemption price as constructive
distributions of property includible in income on a periodic basis. For purposes
of determining whether such constructive distribution treatment applies, the
Mandatory Redemption, the Optional Redemption, Optional IPO Redemption and
Change of Control Redemption are tested separately. Constructive distribution
treatment is required if any of these tests is satisfied.
Section 305(c) of the Code provides that the entire amount of a
redemption premium with respect to preferred stock that is subject to mandatory
redemption is treated as being distributed to the holders of such preferred
stock on an economic accrual basis; provided however, that the Company's
obligation is not subject to a contingency that is beyond the legal or practical
control of the U.S. Holders and that based on the facts and circumstances as of
the issue date, renders the likelihood of redemption to be remote. Preferred
stock generally is considered to have a redemption premium for this purpose if
the price at which it must be redeemed (the "Redemption Price") exceeds its
issue price (as determined in accordance with an allocation of the issue price
of the Units, as discussed above) by more than a de minimis amount. For this
purpose, such excess (the "Preferred Stock Discount") will be treated as zero if
it is less than 1/4 of 1% of the Redemption Price multiplied by the number of
complete years from the date of issuance of the stock until the stock must be
redeemed. Preferred Stock Discount is taxable as a constructive distribution to
the U.S. Holder (treated as a dividend to the extent of the Company's current
and accumulated earnings and profits and otherwise subject to the treatment
described above for distributions) over the term of the preferred stock using a
constant interest rate method similar to that described above for accruing OID.
See "--Original Issue Discount" above.
Under recently issued regulations (the "Regulations") Preferred Stock
Discount will arise due to the Optional Redemption, Optional IPO Redemption or
Change of Control Redemption features only if, based on all of the facts and
circumstances as of the date the Preferred Stock is issued, redemption pursuant
to the Optional Redemption, Optional IPO Redemption or Change of Control
Redemption is more likely than not to occur. Even if redemption were more
likely than not to occur, however, constructive distribution treatment would
not result if the redemption premium were solely in the nature of a penalty for
premature redemption. For this purpose, a penalty for premature redemption is a
premium paid as a result of changes in economic or market conditions over which
neither the issuer nor the U.S. Holder has legal or practical control, such as
changes in prevailing dividend rates. The Regulations provide a safe harbor
pursuant to which constructive distribution treatment will not result from an
issuer call right if (i) the issuer and the U.S. Holder are unrelated, (ii)
there are no arrangements that effectively require the issuer to redeem the
stock (disregarding for this purpose, the Mandatory Redemption) and (iii)
exercise of the option to redeem would not reduce the yield of the stock.
Although the issue is not free from doubt, the Company believes that
the Preferred Stock will be considered to have been issued with an unreasonable
redemption premium.
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Shares of Preferred Stock received by U.S. Holders of the Preferred
Stock as dividends may bear Preferred Stock Discount depending upon the issue
price of such shares (i.e. the fair market value of such shares on the date of
their issuance). If shares of Preferred Stock bear Preferred Stock Discount,
such shares generally will have different tax characteristics from other shares
of Preferred Stock and might trade separately, which might adversely affect the
liquidity of such shares.
REDEMPTION OF THE PREFERRED STOCK
A redemption of shares of the Preferred Stock for cash or for Exchange
Debentures will be a taxable event. A redemption of shares of the Preferred
Stock for cash will be treated as a dividend to the extent of the Company's
current or accumulated earnings and profits (as determined for federal income
tax purposes), as a return of capital to the extent of such U.S. Holder's
adjusted tax basis in its Preferred Stock, and thereafter, as capital gain,
unless generally the redemption (i) results in a "complete termination" of the
Holder's stock interest in the Company under section 302(b)(3) of the Code, or
(ii) is "not essentially equivalent to a dividend" with respect to the U.S.
Holder under section 302(b)(1) of the Code. In the case of a redemption of
shares of the Preferred Stock for Exchange Debentures, the amount of the
dividend will not exceed the amount of gain realized upon the exchange. The gain
realized by a U.S. Holder of Preferred Stock on such exchange will be equal to
the excess of the fair market value of the Exchange Debentures over such U.S.
Holder's adjusted tax basis in the Preferred Stock exchanged therefor. In
determining whether the redemption is treated as a dividend, the holder must
take into account not only stock he actually owns, but also stock he
constructively owns within the meaning of section 318 of the Code. A
distribution to a U.S. Holder will be "not essentially equivalent to a dividend"
if it results in a "meaningful reduction" in the U.S. Holder's stock interest in
the Company. For these purposes, a redemption of the Preferred Stock for cash
that results in a reduction in the proportionate interest in the Company (taking
into account any ownership of other stock of the Company and any stock of the
Company that is constructively owned) of a U.S. Holder whose relative stock
interest in the Company is minimal (an interest of less than one percent should
satisfy this requirement) and who exercises no control over corporate affairs
should be regarded as a meaningful reduction in the holder's stock interest in
the Company.
If a redemption of the Preferred Stock is treated as a distribution,
the amount of the distribution will be measured by the amount of cash (or the
value of the Exchange Debentures) received by a holder. As described above, the
distribution will be taxable as a dividend to the extent of the Company's
earnings and profits (but not, in the case of the receipt of Exchange
Debentures, in excess of the gain realized upon the exchange). The amount of the
distribution in excess of the Company's earnings and profits will reduce the
holder's basis in the redeemed Preferred Stock, and, to the extent the amount of
the distribution exceeds such basis, will result in capital gain. If a holder is
left with basis in the redeemed Preferred Stock, such basis will be transferred
to any remaining stock holdings in the Company.
Under section 1059 of the Code, as discussed above, the term
extraordinary dividend includes any redemption of stock that is treated as a
dividend and that is non-pro rata as to all holders of the stock of the Company,
irrespective of the holding period. Consequently, to the extent an exchange of
the Preferred Stock constitutes a dividend, it will constitute an extraordinary
dividend to a corporate holder. See "Certain Federal Income Tax
Considerations--Dividends on the Preferred Stock or the Common Stock."
SALE, EXCHANGE OR OTHER DISPOSITION OF PREFERRED STOCK
Upon the sale, exchange or retirement (other than a redemption) of the
Preferred Stock, other than the exchange of Series A Preferred Stock for Series
B Preferred Stock, a U.S. Holder of Preferred Stock generally will recognize
gain or loss in an amount equal to the difference between the amount of cash and
the fair market value of any property received on the sale, exchange or
retirement of the Preferred Stock and such U.S. Holder's adjusted tax basis in
the Preferred Stock. Such gain or loss will be capital gain or loss, and will
generally be long-term capital gain taxable at a rate of 20% if the Preferred
Stock is held for more than 18 months, mid-term capital gain taxable at a rate
of 28% if the Preferred Stock is held for 18 months or less but more than 12
months, and short-term capital gain taxable at ordinary income tax rates if the
Preferred Stock is held for 12 months or less. Subsequent to December 31, 2000,
subject to certain limitations, the capital gain rate would be reduced to 18%
for Preferred Stock held for more than five years. The deductibility of capital
losses is subject to limitations.
Under recently proposed legislation, the capital gains rate for
securities held for more than one year would be reduced to 20%.
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BACKUP WITHHOLDING
In general, information reporting requirements will apply to dividend
payments on the Preferred Stock made to U.S. Holders other than exempt
recipients (such as corporations) and to proceeds realized by U.S. Holders on
dispositions of Preferred Stock. A 31% backup withholding tax will apply to such
amounts only if the U.S. Holder: (i) fails to furnish its social security or
other taxpayer identification number ("TIN") within a reasonable time after
request therefor, (ii) furnishes an incorrect TIN, (iii) fails to report
properly interest or dividend income, or (iv) fails, under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not subject
to backup withholding. Any amount withheld from a payment to a U.S. Holder under
the backup withholding rules is allowable as a refund or as a credit against
such U.S. Holder's federal income tax liability, provided that the required
information is furnished to the Service. U.S. Holders of Preferred stock should
consult their tax advisors as to their qualification for exemption from backup
withholding and the procedure for obtaining such an exemption.
EXCHANGE DEBENTURES
PAYMENT OF INTEREST
Interest on an Exchange Debenture generally will be includable in the
income of a U.S. Holder as ordinary income at the time such interest is received
or accrued, in accordance with such U.S. Holder's method of accounting for
United States federal income tax purposes.
ORIGINAL ISSUE DISCOUNT
If the Exchange Debentures are not issued with original issue discount
or are deemed to be issued with no original issue discount because such discount
is de minimis, a U.S. Holder will include in income as ordinary interest income
the gross amount of interest paid or payable in respect of the Exchange
Debentures as provided above in "--Payment of Interest." Original issue discount
(hereinafter sometimes referred to as "OID") will be considered de minimis and,
thus, will be treated as zero discount if the original issue discount is less
than one-fourth (1/4) of one percent of the stated redemption price at maturity
of the Exchange Debentures, multiplied by their number of complete years to
maturity.
If the Exchange Debentures were issued at a discount equal to more
than a de minimis amount, such Exchange Debentures would be treated as having
original issue discount. In such circumstance, regardless of such holder's
regular method of accounting each U.S. Holder would include in his income as
ordinary income each year (in addition to the amount of cash interest) a portion
of the original issue discount on the Exchange Debentures so as to provide a
constant yield to maturity. Qualified stated interest (as defined below) is
included in a holder's gross income under such holder's regular method of
accounting. Qualified stated interest is stated interest that is unconditionally
payable in cash or property (other than debt instruments of the issuer) at least
annually at a single fixed rate. It is likely that the interest paid on the
Exchange Debentures will not be qualified stated interest. The rules on when the
Company is deemed to exercise or not exercise its option to distribute PIK
Debentures are provided below.
The total amount of original issue discount with respect to each
Exchange Debenture would equal the excess of its stated redemption price at
maturity over its issue price, as defined in Section 1273 of the Code. The
stated redemption price at maturity is the sum of all payments to be made on the
Exchange Debentures other than qualified stated interest payments. The issue
price of an Exchange Debenture will be (i) if there is adequate stated interest,
the stated principal amount of the Exchange Debenture or (ii) if there is not
adequate stated interest, the imputed principal amount. An Exchange Debenture
will be treated as having adequate stated interest if the stated principal
amount of such Exchange Debenture is less than or equal to the imputed principal
amount. The imputed principal amount of an Exchange Debenture is determined by
adding the present values of all payments due under such Exchange Debenture
using a discount rate equal to the applicable federal rate, compounded
semiannually. The rules provided in this paragraph for determining the issue
price of an Exchange Debenture will apply only if the stated redemption price at
maturity of the Exchange Debenture exceeds (i) where there is adequate stated
interest, the stated principal amount and (ii) where there is not adequate
stated interest, the imputed principal amount. If the above rules are not
applicable, the issue price of an Exchange Debenture will be its stated
redemption price at maturity.
As noted above, the accrual of OID is determined based on a constant
yield to maturity. The yield to maturity of a debt instrument is generally the
discount rate that, when used in computing the present value of all principal
and interest payments to be made under the debt instrument, produces an amount
equal to the issue price of the debt instrument. The yield must be constant over
the term of the debt instrument. The constant yield to maturity of the Exchange
Debentures will also depend on the effects of certain contingencies and options
related to the Exchange Debentures.
Generally, an issuer is deemed to exercise an option or not exercise
an option (or combination of options) in a manner that minimizes the yield on
the debt instrument. The yield to maturity is then determined based upon the
payment schedule pursuant to which the issuer is deemed to exercise or not
exercise its options in accordance with the previous rule. If the Company's
option to pay interest on the Exchange Debentures by the distribution of PIK
Debentures minimizes the yield on such instruments, then the yield to maturity
of the Exchange Debentures will be determined using the payment schedule that
assumes the distribution of PIK Debentures. If, on the other hand, the payment
of interest in kind through the distribution of PIK Debentures does not minimize
the yield on the Exchange Debentures, the yield to maturity will be determined
based upon a payment schedule that assumes that the PIK Debentures will not be
distributed in lieu of interest. The Company's option to redeem the Exchange
Debentures must also be taken into account in determining the payment schedule
that minimizes the Company's yield.
If a contingency actually occurs, contrary to the assumptions made
above, then the Exchange Debenture is treated as retired and then reissued on
the date of the change in circumstances for an amount equal to its adjusted
issue price (generally the issue price of a debt instrument, increased by the
amount of OID previously includible in the gross income of a holder, and
decreased by the amount of any payment previously made, other than a payment of
qualified stated interest) on such date. The Internal Revenue Service could
disagree with the treatment of the accrual of OID on the Exchange Debentures as
described above and instead treat the Exchange Debentures as contingent payment
debt instruments subject to the rules of Treasury Regulations Section 1.1275-4.
If the Company distributes PIK Debentures in lieu of a payment of
interest on an Exchange Debenture, then the PIK Debentures are not considered to
be a payment made on the original Exchange Debenture. Additionally, the PIK
Debenture is treated for federal income tax purposes as aggregated into a single
instrument with the original Exchange Debenture. The issue date of the
aggregated Exchange Debenture is the same as that of the original Exchange
Debenture.
THE RULES ABOVE FOR DETERMINING THE AMOUNT OF OID TO BE ACCRUED BY A
U.S. HOLDER ON AN EXCHANGE DEBENTURE ARE COMPLEX. U.S. HOLDERS ARE URGED TO
CONSULT THEIR TAX ADVISORS WITH REGARD TO THE TAX CONSEQUENCES TO THEM OF THE
DISTRIBUTION OF THE EXCHANGE DEBENTURES.
EFFECT OF CHANGE OF CONTROL
Upon the occurrence of a public offering of the stock of the Company,
the Company may redeem the Exchange Debentures for a price equal to 113% of the
principal amount thereof, plus accrued and unpaid interest. Under the Treasury
Regulations, such a change of control redemption will not affect the yield or
maturity date of the Exchange Debentures unless, based on all of the facts and
circumstances as of the issue date of the Exchange Debentures, it is more likely
than not that such public offering of stock of the Company giving rise to the
redemption would occur. At the time of the issuance of the Exchange Debentures,
the Company will determine, based on all of the facts and circumstances at such
time, whether such a redemption is more likely than not to occur.
MARKET DISCOUNT
If a U.S. Holder purchases an Exchange Debenture for less than the
stated redemption price at maturity (the sum of all payments on the Exchange
Debenture other than qualified stated interest), the difference is considered
"market discount," unless such difference is de minimis. A discount will be
considered de minimis if it is less than one-fourth (1/4) of one percent of the
issue price of the debt instrument, multiplied by the number of complete years
to maturity (after the holder acquires such debt instrument). Under the market
discount rules, any gain realized by the U.S. Holder on the sale, exchange,
retirement or other disposition of an Exchange Debenture having "market
discount," as well as on any partial principal payment made with respect to such
Exchange Debenture, will be treated as ordinary income to the extent of the
market discount which has not previously been included in income and is treated
as having accrued on such Exchange Debenture on or prior to the time of such
payment or disposition. An overview of the rules concerning the calculation of
"accrued market discount" is set forth in the paragraph immediately below. In
addition, a U.S. Holder of such Exchange Debenture may be required to defer the
deduction of all or a portion of the interest expense on any indebtedness
incurred or continued to purchase or carry an Exchange Debenture.
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Any market discount will accrue ratably from the date of acquisition to
the maturity date of the Exchange Debenture, unless the U.S. Holder elects,
irrevocably, to accrue market discount on a constant interest rate method. The
constant interest rate method generally accrues interest at times and in amounts
equivalent to the result which would have occurred had the market discount been
original issue discount computed from the U.S. Holder's acquisition of the
Exchange Debenture through the maturity date. Accrual of market discount will
not cause the accrued amounts to be included currently in a U.S. Holder's
taxable income, in the absence of a disposition of, or principal payment on, the
Exchange Debenture. The election to accrue market discount on a constant
interest rate method may be made separately as to each Exchange Debenture held
by the U.S. Holder. However, a U.S. Holder of an Exchange Debenture may elect to
include market discount in income currently as it accrues on either a ratable or
constant interest rate method. In such event, interest expense relating to the
acquisition of an Exchange Debenture which would otherwise be deferred would be
currently deductible to the extent otherwise permitted by the Code. The election
to include market discount in income currently, once made, applies to all market
discount obligations acquired by a holder on or after the first day of the first
taxable year to which the election applies, and may not be revoked without the
consent of the Service. Accrued market discount which is included in a U.S.
Holder's gross income will increase the adjusted tax basis of the Exchange
Debenture in the hands of the U.S. Holder.
ACQUISITION PREMIUM
A U.S. Holder of Exchange Debentures will be entitled to a reduction in
the amount of original issue discount required to be included in its income if
such Holder purchases such Exchange Debenture with "acquisition premium." A U.S.
Holder of an Exchange Debenture will have acquisition premium if its adjusted
tax basis in the Exchange Debenture is less than or equal to the stated
redemption price at maturity and exceeds the adjusted issue price of such
Exchange Debenture. The acquisition premium is the amount by which the purchase
price exceeds the adjusted issue price. The adjusted issue price of an Exchange
Debenture will be the issue price increased by the amount of original issue
discount previously includable in the gross income of any U.S. Holder
(determined without regard to any reduction for acquisition premium or
amortizable bond premium (as defined below)), reduced by any payments on the
Exchange Debentures (other than payments of qualified stated interest). The
amount of the reduction to which a U.S. Holder may be entitled in any given year
is equal to a fraction, the numerator of which is the amount of the acquisition
premium and the denominator of which is the excess of the sum of all payments
payable on the Exchange Debenture (other than payments of qualified stated
interest) over the adjusted issue price of the Exchange Debenture on the date of
purchase.
AMORTIZABLE BOND PREMIUM
If a U.S. Holder acquires an Exchange Debenture for an amount which is
greater than the sum of all amounts payable at maturity (other than qualified
stated interest), such holder will be considered to have purchased such Exchange
Debenture with "amortizable bond premium" equal to the amount of such excess.
The U.S. Holder may elect to amortize the premium, using a constant yield to
maturity method (employing six month compounding), over the period from the
acquisition date to the maturity date of the Exchange Debenture. The "amount
payable at maturity" will be determined as of an earlier call date, using the
call price payable on such earlier date, if the combination of such earlier date
and call price will produce a smaller amortizable bond premium than would result
from using the scheduled maturity date and its amount payable. If an earlier
call date is used and the Exchange Debenture is not called, the Exchange
Debenture will be treated as having matured on such earlier call date and then
as having been reissued on such date for the amount so payable. Amortized
amounts may be offset only against interest payments due under the Exchange
Debenture and will reduce the U.S. Holder's adjusted tax basis in the Exchange
Debenture to the extent so used.
Once made, an election to amortize and offset interest on bonds, such
as the Exchange Debentures, will apply to all bonds in respect of which the
election was made that were owned by the taxpayer on the first day of the
taxable year to which the election relates and to all bonds of such class or
classes subsequently acquired by the taxpayer. Such election may only be revoked
with the consent of the Service. If a U.S. Holder of an Exchange Debenture does
not elect to amortize the premium, the premium will decrease the gain or
increase the loss which would otherwise be recognized upon disposition of the
Exchange Debenture. Holders of Exchange Debentures with amortizable bond premium
should consult their tax advisors regarding recently finalized Regulations
promulgated under Code Section 171 in connection with amortizable bond premium.
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SALE, EXCHANGE OR RETIREMENT OF EXCHANGE DEBENTURES
Upon the sale, exchange or retirement of an Exchange Debenture, a U.S.
Holder of an Exchange Debenture generally will recognize gain or loss in an
amount equal to the difference between the amount of cash and the fair market
value of any property received on the sale, exchange or retirement of the
Exchange Debenture (other than in respect of accrued and unpaid interest on the
Exchange Debenture, which such amounts are treated as ordinary interest income)
and such U.S. Holder's adjusted tax basis in the Exchange Debenture. Such gain
or loss will be capital gain or loss, except to the extent of any market
discount (see "--Market Discount" above), and will generally be long-term
capital gain taxable at a rate of 20% if the Exchange Debenture is held for more
than 18 months, mid-term capital gain taxable at a rate of 28% if the Exchange
Debenture is held for 18 months or less but more than 12 months, and short-term
capital gain taxable at ordinary income tax rates if the Exchange Debenture is
held for 12 months or less. Subsequent to December 31, 2000, subject to certain
limitations, the capital gain rate would be reduced to 18% if an Exchange
Debenture has been held for more than five years. The deductibility of capital
losses is subject to limitations.
Under recently proposed legislation, the capital gains rate for
securities held for more than one year would be reduced to 20%.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to interest
payments on the Exchange Debentures made to U.S. Holders other than certain
exempt recipients (such as corporations) and to proceeds realized by such U.S.
Holders on dispositions of Exchange Debentures. A 31% backup withholding tax
will apply to such amounts only if the U.S. Holder: (i) fails to furnish its
social security or other taxpayer identification number ("TIN") within a
reasonable time after request therefor, (ii) furnishes an incorrect TIN, (iii)
fails to report properly interest or dividend income, or (iv) fails, under
certain circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that it is not subject
to backup withholding. Any amount withheld from a payment to a U.S. Holder under
the backup withholding rules is allowable as a refund or as a credit against
such U.S. Holder's federal income tax liability, provided that the required
information is furnished to the Service. U.S. Holders of Exchange Debentures
should consult their tax advisors as to their qualification for exemption from
backup withholding and the procedure for obtaining such an exemption.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Series B Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Series B Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Series B Securities received in
exchange for Series A Securities, where such Series A Securities were acquired
as a result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer for
use in connection with any such resale. In addition, until October 11, 1998, all
dealers effecting transactions in the Series B Securities may be required to
deliver a prospectus.
The Company will not receive any proceeds from any sale of Series B
Securities by broker-dealers. Series B Securities received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Series B Securities, or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commission or
concessions from any such broker-dealer and/or the purchasers of any such Series
B Securities. Any broker-dealer that resells Series B Securities that were
received by it for its own account pursuant to the Exchange Offer and any broker
or dealer that participates in a distribution of such Series B Securities may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of Series B Securities and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensations under the Securities Act. The Letters of Transmittal state that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
142
<PAGE> 143
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letters of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify the holders of the Series A Securities
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters regarding the Notes and the Preferred Stock will
be passed upon for the Company by Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Cecil Schenker, a shareholder of the Company, is a partner of Akin, Gump,
Strauss, Hauer & Feld, L.L.P. Alan Schoenbaum, the son of a shareholder of the
Company, is a partner of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
EXPERTS
The (i) consolidated financial statements of Packaged Ice, Inc. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, and (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, 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 such reports given
upon the authority of that firm as experts in accounting and auditing.
143
<PAGE> 144
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PACKAGED ICE, INC. AND SUBSIDIARIES
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at March 31, 1998 (unaudited) and
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated 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-4
Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 1998
and 1997 (unaudited) and for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998
and 1997 (unaudited) and 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-16
Balance Sheets at March 31, 1998 (unaudited) and at December 31, 1997 and 1996 . . . . . . . F-17
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-18
Statements of Shareholders' Deficit for the Three Months Ended March 31, 1998 and 1997
(unaudited) and for the Years Ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . F-19
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-20
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
</TABLE>
F-1
<PAGE> 145
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> 146
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
March 31, -------------------------------
1998 1997 1996
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents ....................................... $ 16,655,963 $ 14,825,259 $ 169,535
Short-term cash investment ................................. 4,913,170 4,543,552 --
Accounts-receivable:
Trade ................................................... 5,207,014 4,038,582 213,811
Affiliates .............................................. 62,150 64,727 119,476
Inventory .................................................. 2,591,994 1,347,496 115,825
Prepaid expense ............................................ 748,541 321,492 29,309
------------- ------------- ------------
Total current assets ............................... 30,178,832 25,141,108 647,956
PROPERTY, net ................................................ 64,259,193 43,297,449 9,887,687
OTHER ASSETS:
Goodwill, net .............................................. 81,287,505 44,280,568 --
Debt issuance cost, net ...................................... 5,731,887 6,297,712 144,460
Other ...................................................... 4,059,263 3,283,617 842,685
------------- ------------- ------------
TOTAL .............................................. $ 185,516,680 $ 122,300,454 $ 11,522,788
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations ................... $ -- $ -- $ 703,077
Accounts payable ........................................... 2,885,948 1,965,093 324,624
Payable to affiliates ...................................... 353,413 1,309,083 634,585
Accrued expense ............................................ 3,060,674 1,461,030 170,750
Accrued interest ........................................... 2,515,695 1,875,972 39,272
Notes payable .............................................. -- 1,975,968 3,425
------------- ------------- ------------
Total current liabilities ............................... 8,815,730 8,587,146 1,875,733
LONG-TERM OBLIGATIONS, NET ................................... 144,095,200 67,501,537 2,831,955
CONVERTIBLE NOTES ............................................ -- -- 750,000
COMMITMENTS AND CONTINGENCIES.................................
MANDATORILY REDEEMABLE PREFERRED STOCK .......................
Series C, 10%, Exchangeable -- 250,000 shares issued and
outstanding at March 31, 1998 and December 31, 1997,
liquidation preference of $100 per share................. 25,812,404 25,198,630 --
PREFERRED STOCK WITH PUT REDEMPTION OPTION:
Series A Convertible -- 450,000 shares issued and
outstanding at March 31, 1998 and December 31, 1997
and 1996 ................................................ 2,496,527 2,496,527 2,496,527
Series B Convertible -- 124,831 shares issued and
outstanding at March 31, 1998 and December 31, 1997 ..... 726,226 726,226 --
COMMON STOCK WITH PUT REDEMPTION OPTION,
420,000 shares issued and outstanding at 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 .............................. -- -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
shares issued of 4,922,541 at March 31, 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 ................................. 38,753,968 28,804,811 4,669,301
Less: 298,231 shares of treasury stock, at cost ............ (1,491,155) (1,491,155) --
Accumulated deficit ........................................ (35,713,296) (11,535,279) (3,096,643)
------------- ------------- ------------
Total shareholders' equity ......................... 1,598,742 15,818,537 1,596,722
------------- ------------- ------------
TOTAL .............................................. $ 185,516,680 $ 122,300,454 $ 11,522,788
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 147
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED 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>
Revenues .................................. $ 8,401,157 $ 845,732 $ 28,980,564 $ 4,426,860 $ 2,830,493
Cost of sales ............................. 6,394,028 459,780 18,723,786 2,034,828 1,251,527
------------ ----------- ------------ ----------- -----------
Gross profit .............................. 2,007,129 385,952 10,256,778 2,392,032 1,578,966
Selling, general and administrative ....... 3,853,919 574,638 7,635,538 1,981,278 1,514,542
Depreciation and amortization ............. 2,071,065 478,836 5,129,879 1,455,693 751,291
------------ ----------- ------------ ----------- -----------
Loss from operations ...................... (3,917,855) (667,522) (2,508,639) (1,044,939) (686,867)
Other income, net ......................... 699 160,645 655,320 184,982 75,314
Interest expense .......................... (2,873,971) (85,302) (6,585,317) (130,475) (76,929)
------------ ----------- ------------ ----------- -----------
Loss before income taxes .................. (6,791,127) (592,179) (8,438,636) (990,432) (688,482)
Income taxes .............................. -- -- -- -- --
------------ ----------- ------------ ----------- -----------
Net loss before extraordinary items ....... (6,791,127) (592,179) (8,438,636) (990,432) (688,482)
Extraordinary loss on refinancing ......... (17,386,893) -- -- -- --
------------ ----------- ------------ ----------- -----------
Net loss .................................. $(24,178,017) $ (592,179) $ (8,438,636) $ (990,432) $ (688,482)
============ =========== ============ =========== ===========
Net loss to common shareholders ........... $(24,794,456) $ (592,179) $ (8,637,266) $ (990,432) $ (688,482)
============ =========== ============ =========== ===========
Loss per share of common stock -- basic and
diluted ................................... $ (5.64) $ (0.21) $ (2.40) $ (0.35) $ (0.26)
============ =========== ============ =========== ===========
Weighted average common shares outstanding 4,395,175 2,827,571 3,600,109 2,826,371 2,682,261
============ =========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 148
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 Total
---------- ------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT December
31, 1994 .............. 2,626,371 $26,264 $ 5,853,334 $(34,399) $ -- $ (1,417,729) $ 4,427,470
Issuance of common
stock .............. 280,000 2,800 1,311,767 29,600 1,344,167
Repurchase of common
stock .............. (500,000) (5,000) (2,495,800) (2,500,800)
Net loss .............. (688,482) (688,482)
---------- ------- ------------ -------- ----------- ------------ -----------
BALANCE AT December
31, 1995 .............. 2,406,371 24,064 4,669,301 (4,799) -- (2,106,211) 2,582,355
Issuance of common
stock .............. 4,799 4,799
Net loss .............. (990,432) (990,432)
---------- ------- ------------ -------- ----------- ------------ -----------
BALANCE AT December
31, 1996 .............. 2,406,371 24,064 4,669,301 -- -- (3,096,643) 1,596,722
Issuance of common
stock .............. 1,609,610 16,096 15,767,822 15,783,918
Issuance of
detachable
warrants to
purchase common
stock .............. 9,422,335 9,422,335
Accretion of
mandatorily
Redeemable
preferred
stock .............. (856,017) (856,017)
Dividends
accumulated on
mandatorily
redeemable
preferred
stock .............. (198,630) (198,630)
Purchase of treasury
stock .............. (1,491,155) (1,491,155)
Net loss .............. (8,438,636) (8,438,636)
---------- ------- ------------ -------- ----------- ------------ -----------
BALANCE AT December
31, 1997 .............. 4,015,981 $40,160 $ 28,804,811 $ -- $(1,491,155) $(11,535,279) $15,818,537
Issuance of common
stock (Unaudited)... 906,560 9,065 10,565,596 10,574,661
Accrued dividend on
preferred stock
(Unaudited)......... (616,439) (616,439)
Net loss (Unaudited)... (24,178,017) (24,178,017)
---------- ------- ------------ -------- ----------- ------------ -----------
BALANCE AT
March 31, 1998
(Unaudited)......... 4,922,541 $49,225 $ 38,753,968 $ -- $(1,491,155) $(35,713,296) $ 1,598,742
========== ======= ============ ======== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 149
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
------------------------------ ----------------------------
1998 1997 1997 1996
------------- ------------ ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (24,178,017) $ (592,179) $ (8,438,636) $ (990,432)
Adjustments to reconcile net loss to net cash provided by
used in) operating activities (excluding working capital
from Acquisitions):
Depreciation and amortization .............................. 2,071,065 478,835 5,129,879 1,455,693
Amortization of debt discount .............................. 83,316 -- 576,805 --
Gain from disposal of assets ............................... -- (3,356) (4,030) (2,584)
Extraordinary loss from refinancing ........................ 17,386,893 -- -- --
Changes in assets and liabilities:
Accounts receivable, inventory and prepaid expenses ..... (895,256) (234,790) (996,731) (26,189)
Accounts Payable and accrued expenses ................... (1,485,167) 1,424,078 440,928 657,540
------------- ------------ ------------ -----------
Net cash provided by (used in) operating activities ... (7,017,166) 1,072,588 (3,291,785) 1,094,028
------------- ------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ........................................... (4,025,788) (1,280,741) (10,764,733) (5,744,900)
Cost of acquisitions ......................................... (45,287,072) -- (44,144,926) --
Purchase of short-term cash investments ...................... (369,268) -- (4,499,415) --
Increase in other assets ..................................... (962,424) (249,799) (2,279,504) (333,918)
Proceeds from disposition of property ........................ -- -- 147,776 153,733
------------- ------------ ------------ -----------
Net cash used in investing activities ................. (50,644,902) (1,530,540) (61,540,802) (5,925,085)
------------- ------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock ......... 37,473 771,226 27,100,791 --
Repurchase of common stock and preferred stock ............... -- -- (1,491,155) --
Proceeds from debt issuance, net ............................. 138,392,799 302,407 69,562,179 3,604,403
Costs of Refinancing ......................................... (3,937,500) -- -- --
Proceeds from issuance and conversion of convertible
demand notes .......................................... -- -- (23,774) 750,000
Borrowings from lines of credit .............................. 10,000,000 -- 9,900,000 --
Repayment of lines of credit ................................. (10,000,000) -- (13,385,000) --
Repayment of debt ............................................ (75,000,000) (506,645) (12,174,730) (386,622)
------------- ------------ ------------ -----------
Net cash provided by financing activities ............. 59,492,772 566,988 79,488,311 3,967,781
------------- ------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ................ 1,830,704 109,036 14,655,724 (863,276)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD ...................... 14,825,259 169,535 169,535 1,032,811
------------- ------------ ------------ -----------
CASH AND EQUIVALENTS, END OF PERIOD ............................ $ 16,655,963 $ 278,571 $ 14,825,259 $ 169,535
============= ============ ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -- CASH
payments for interest ........................................ $ 2,610,231 $ 97,176 $ 4,748,482 $ 114,383
============= ============ ============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued in consideration for business
acquisitions ................................................. $ 10,534,521 $ -- $ 12,814,283 $ --
============= ============ ============ ===========
Fair value of warrants issued in connection with debt and
acquisitions ............................................... $ -- $ -- $ 9,422,335 $ --
============= ============ ============ ===========
Demand notes converted to preferred stock .................... $ -- $ -- $ 750,000 $ --
============= ============ ============ ===========
<CAPTION>
Year Ended December 31,
-----------------------
1995
-----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $ (688,482)
Adjustments to reconcile net loss to net cash provided by
used in) operating activities (excluding working capital
from Acquisitions):
Depreciation and amortization .............................. 751,291
Amortization of debt discount .............................. --
Gain from disposal of assets ............................... --
Extraordinary loss from refinancing ........................ --
Changes in assets and liabilities:
Accounts receivable, inventory and prepaid expenses ..... (106,107)
Accounts Payable and accrued expenses ................... 191,181
-----------
Net cash provided by (used in) operating activities ... 147,883
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ........................................... (2,717,444)
Cost of acquisitions ......................................... --
Purchase of short-term cash investments ...................... --
Increase in other assets ..................................... (243,621)
Proceeds from disposition of property ........................ --
-----------
Net cash used in investing activities ................. (2,961,065)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock ......... 5,812,545
Repurchase of common stock and preferred stock ............... (2,500,800)
Proceeds from debt issuance, net ............................. 82,232
Costs of Refinancing ......................................... --
Proceeds from issuance and conversion of convertible
demand notes .......................................... --
Borrowings from lines of credit .............................. --
Repayment of lines of credit ................................. --
Repayment of debt ............................................ (359,510)
-----------
Net cash provided by financing activities ............. 3,034,467
-----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ................. 221,285
CASH AND EQUIVALENTS, BEGINNING OF PERIOD ....................... 811,526
-----------
CASH AND EQUIVALENTS, END OF PERIOD ............................. $ 1,032,811
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION --
Cash payments for interest .................................... $ 75,606
===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued in consideration for business
acquisitions ................................................. $ --
===========
Fair value of warrants issued in connection with debt and
acquisitions ............................................... $ --
Demand notes converted to preferred stock .................... $ --
===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 150
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 subordinated 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.
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.
F-7
<PAGE> 151
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.
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) $ (984,196) $ (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
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<PAGE> 152
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 supercedes 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.
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. Management is evaluating what, if any,
additional disclosures may be required upon the implementation of SFAS No. 130
and 131.
Reclassification -- Certain amounts from previous years have been
reclassified to conform to the current presentation.
4. PROPERTY AND EQUIPMENT
Property and equipment were as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
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 .......... 48,972,623 11,774,692
Less: accumulated depreciation and
amortization .......................... 5,675,144 1,887,005
----------- -----------
Total ....................... $43,297,449 $ 9,887,687
=========== ===========
</TABLE>
F-9
<PAGE> 153
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 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.
<TABLE>
<S> <C>
Revenue ............ $53,901,660
Net loss ........... 11,564,921
Loss per share ..... 2.81
</TABLE>
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 subordinated 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
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<PAGE> 154
things, limit the ability of the Company and its subsidiaries to pay dividends
or make distributions with respect to the Company's capital stock of 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:
<TABLE>
<CAPTION>
1997 1996
------------ ----------
<S> <C> <C>
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
============ ==========
</TABLE>
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.
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:
F-11
<PAGE> 155
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
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 ............... $ -- $ --
=========== ===========
</TABLE>
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 had 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.
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
F-12
<PAGE> 156
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.
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 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 15, 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.
F-13
<PAGE> 157
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.
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>
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 subordinated basis by
all of the Company's current and future, direct and indirect subsidiaries (the
"Subsidiary Guarantors"), all wholly owned. 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.
<TABLE>
<CAPTION>
As of December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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)
</TABLE>
F-14
<PAGE> 158
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.
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"). The TLA includes automatic renewals for
successive one-year terms through December 31, 2001, subject to early
termination. 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)
The Company has signed a definitive agreement to purchase all of the common
stock of Reddy Ice Corporation (with 1997 revenues of $66.3 million) for
approximately $172 million in cash. The transaction is subject to customary
conditions including review under the Hart Scott Rodino Act and receipt of
financing by the Company. The Company intends to fund the acquisition through
a combination of financing sources including a new credit facility from a
banking institution, the sale of preferred stock and the issuance of additional
New Senior Notes. Management believes that these financing facilities will be
sufficient to conclude the proposed acquisition and provide the Company with
adequate liquidity for future working capital requirements. The Company
anticipates the transaction to close by the end of May 1998.
F-15
<PAGE> 159
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-16
<PAGE> 160
REDDY ICE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
------ -------------------------------
March 31,
1998 1997 1996
------------- ------------- ------------
(unaudited)
<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 .................................... 0 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 March 31, 1998 and 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-17
<PAGE> 161
REDDY ICE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31 December 31
------------------------------ ------------------------------
1998 1997 1997 1996
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES ........................................... $ 11,089,093 $ 8,249,330 $ 66,449,199 $ 52,992,207
COST OF SALES ....................................... 4,790,565 3,136,910 41,713,350 31,742,587
------------ ------------ ------------ ------------
GROSS PROFIT ........................................ 6,298,528 5,112,420 24,735,849 21,249,620
OPERATING COSTS AND EXPENSES:
Selling, general and administrative ............... 7,428,699 5,047,044 10,471,877 6,759,323
Depreciation and amortization ..................... 2,300,752 1,074,709 6,070,256 3,632,204
Shareholder management fee ........................ 480,000 480,000
Merger costs ...................................... --
------------ ------------ ------------ ------------
Total operating costs and expenses ........ 9,729,451 6,121,753 17,022,133 10,871,527
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS ....................... (3,430,923) (1,009,333) 7,713,716 10,378,093
OTHER INCOME/EXPENSE:
Shareholder interest expense ...................... (3,282,653) (1,789,840) (7,119,600) (6,960,000)
Other interest expense, net ....................... (991) (48,371) (48,306)
Other income ...................................... 124,210 111,711 580,535 498,966
------------ ------------ ------------ ------------
Total other expense ....................... (3,158,444) (1,679,120) (6,587,436) (6,509,340)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS .................................. (6,589,366) (2,688,453) 1,126,280 3,868,753
INCOME TAX EXPENSE (BENEFIT) ........................ 441,298 1,492,371
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS ............. (6,589,366) (2,688,453) 684,982 2,376,382
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT ..............................
------------ ------------ ------------ ------------
NET INCOME (LOSS) ................................... $ (6,589,366) $ (2,688,453) $ 684,982 $ 2,376,382
============ ============ ============ ============
<CAPTION>
Years Ended
December 31
------------
1995
------------
<S> <C>
NET SALES ........................................... $ 50,507,298
COST OF SALES ....................................... 30,884,846
------------
GROSS PROFIT ........................................ 19,622,452
OPERATING COSTS AND EXPENSES:
Selling, general and administrative ............... 6,279,524
Depreciation and amortization ..................... 3,771,540
Shareholder management fee ........................ 510,000
Merger costs ...................................... 938,538
------------
Total operating costs and expenses ........ 11,499,602
------------
INCOME FROM OPERATIONS .............................. 8,122,850
OTHER INCOME/EXPENSE:
Shareholder interest expense ...................... (5,179,795)
Other interest expense, net ....................... (1,635,629)
Other income ...................................... 839,958
------------
Total other expense ....................... (5,975,466)
------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS .................................. 2,147,384
INCOME TAX EXPENSE (BENEFIT) ........................ (81,776)
------------
INCOME BEFORE EXTRAORDINARY LOSS .................... 2,229,160
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT .............................. (2,597,778)
------------
NET LOSS ............................................ $ (368,618)
============
</TABLE>
See notes to financial statements.
F-18
<PAGE> 162
REDDY ICE CORPORATION
STATEMENTS OF SHAREHOLDER'S DEFICIT
Years Ended December 31, 1997, 1996 and 1995
Three Months Ended March 31, 1998 (unaudited)
<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 ... (8,374,205) 1,848,089 (6,526,116)
Net Loss ..................... (6,589,000) (6,589,000)
-------- ------- ------------ ------------ ------------
BALANCE-
MARCH 31, 1998 ................. 100 $ 1 $ 1,647,999 $(16,262,000) $(14,614,000)
======== ======= ============ ============ ============
</TABLE>
See notes to financial statements.
F-19
<PAGE> 163
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) $ (2,688,000) $ 684,982 $ 2,376,382 $ (368,618)
Adjustments to reconcile net income 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 9,732,000 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 (430,000) 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 $ 565,000 $ 994,595 $ 438,139 $ --
============ ============ ============ =========== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest ......................... $ 12,053 $ 9,940 $ 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 ................................... 40,330 33,475 393,401
------------ ------------ ------------ ----------- ------------
Total non-cash net asset additions .......... $ 40,330 $ 33,475 $ 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-20
<PAGE> 164
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:
<TABLE>
<CAPTION>
Asset Useful Life
- ------------------------------------ ---------------
<S> <C>
Buildings and improvements ......... 10 to 40 years
Machinery and equipment ............ 3 to 20 years
Furniture and fixture .............. 5 years
</TABLE>
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:
<TABLE>
<CAPTION>
Intangible Asset Useful Life
---------------- -----------
<S> <C>
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
Noncompetition agreements ..... Straight-line method over the terms of the agreements
</TABLE>
F-21
<PAGE> 165
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 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>
In connection with the acquisitions, assets were acquired and liabilities
were assumed as follows:
F-22
<PAGE> 166
<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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net sales .......... $84,132,384 $79,325,616
=========== ===========
Net income ......... $ 1,796,894 $ 2,951,656
=========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials and supplies ... $2,519,473 $1,430,004
Finished goods ............... 423,682 302,606
---------- ----------
$2,943,155 $1,732,610
========== ==========
</TABLE>
F-23
<PAGE> 167
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
6. GOODWILL, INTANGIBLE AND OTHER ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
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
============ ===========
</TABLE>
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
8. SHAREHOLDER AND OTHER LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
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.
Other Notes Payable -- Other notes payable include various promissory notes
for the purchase of property, plant, equipment and noncompete 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.
F-24
<PAGE> 168
The scheduled maturities of long-term debt, which include capitalized lease
obligations, at December 31, 1997, were as follows:
<TABLE>
<S> <C>
1998 ........................ $ 220,452
1999 ........................ 82,904
2000 ........................ 79,354
2001 ........................ 72,912
2002 ........................ 33,080
Thereafter .................. 59,331,866
-----------
$59,820,568
===========
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>
The following is a reconciliation of income taxes reported in the statements
of income:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
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)
========== =========== ===========
</TABLE>
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
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
========= ========
</TABLE>
F-25
<PAGE> 169
These net deferred income tax assets (liabilities) are classified in the
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Current assets .......... $ 905,958 $597,169
Noncurrent assets ....... 295,808
Noncurrent liabilities .. (716,424)
--------- --------
$ 189,534 $892,977
========= ========
</TABLE>
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.
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:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
Future minimum payments at December 31, 1997, under noncancelable capital and
operating leases with terms in excess of one year are summarized below:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
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
=======
</TABLE>
F-26
<PAGE> 170
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.
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-27
<PAGE> 171
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus, and if given
or made, such information or representations must not be relied upon as having
been authorized by the Company. This Prospectus does not constitute an offer
to sell or the solicitation of an offer to buy any security other than the
registered securities to which it relates, nor does it constitute an offer to
sell, or a solicitation of an offer to buy in any jurisdiction in which such
offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any exchange made hereunder will, under any circumstances,
create any implication that information herein is correct as of any time
subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information 6
Incorporation of Certain Documents by Reference 7
Prospectus Summary 8
Disclosure Regarding Forward-Looking Statements 21
Risk Factors 21
Use of Proceeds 28
Dividend Policy 28
Capitalization 29
Unaudited Pro Forma Combined Condensed Financial Statements 30
Selected Historical and Unaudited Pro Forma Combined Financial Data 35
Management's Discussion and Analysis of Financial Condition and
Results of Operations 37
Business 42
Management 49
Principal Shareholders 55
Certain Relationships and Related Transactions 57
The Exchange Offer 60
Description of Notes 67
Description of Preferred Stock and Exchange Debentures 91
Book-Entry; Delivery and Form 124
Transfer Restrictions on Series A Securities 125
Description of New Credit Facility 128
Description of Capital Stock and Warrants 129
Certain Federal Income Tax Considerations 132
Plan of Distribution 142
Legal Matters 143
Experts 143
Index to Financial Statements F-1
- ------
</TABLE>
PROSPECTUS
Offer to Exchange
$270,000,000 9 3/4% Series A Senior Notes due 2005
for
$270,000,000 9 3/4% Series B Senior Notes due 2005
and
400,000 13% Series A Exchangeable Preferred Stock
for
400,000 13% Series B Exchangeable Preferred Stock
PACKAGED ICE, INC. JULY 13, 1998
