================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-29357
PACKAGED ICE, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0316492
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(Address of principal executive offices)
(713) 464-9384
(Issuer's telephone number, including area code)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The total number of shares of common stock, par value $0.01 per share,
outstanding as of November 2, 1999 was 19,286,209.
================================================================================
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 ........................ 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998
(unaudited) ............................................... 4
Condensed Consolidated Statement of Shareholders' Equity
as of September 30, 1999 (unaudited) ...................... 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (unaudited) . 6
Notes to the Condensed Consolidated Financial Statements ..... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 18
Item 2. Changes in Securities and Use of Proceeds ......................... 19
Item 3. Default Upon Senior Securities .................................... 19
Item 4. Submission of Matters to Vote of Security Holders ................. 19
Item 5. Other Information ................................................. 19
Item 6. Exhibits and Reports on Form 8-K .................................. 22
SIGNATURES ................................................................ 23
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................................................... $ 2,397 $ 3,427
Accounts receivable, net ........................................................................ 29,665 16,692
Inventories ..................................................................................... 7,984 7,695
Prepaid expenses ................................................................................ 1,865 1,688
------------ ------------
Total current assets ......................................................................... 41,911 29,502
PROPERTY, net ...................................................................................... 186,094 169,208
GOODWILL AND OTHER INTANGIBLES, net ................................................................ 244,897 240,750
OTHER ASSETS ....................................................................................... 757 797
------------ ------------
TOTAL .............................................................................................. $ 473,659 $ 440,257
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term obligations ........................................................ $ 9,295 $ 231
Accounts payable ................................................................................ 10,026 5,714
Payable to affiliates ........................................................................... 879 615
Accrued expenses ................................................................................ 14,370 22,506
------------ ------------
Total current liabilities .................................................................... 34,570 29,066
LONG TERM OBLIGATIONS .............................................................................. 315,793 338,150
COMMITMENTS AND CONTINGENCIES ...................................................................... -- --
MANDATORILY REDEEMABLE PREFERRED STOCK:
10% Exchangeable - 286,422 shares issued and outstanding at September 30, 1999 and
272,890 at December 31, 1998, liquidation preference of $100 per share ....................... 29,843 27,745
13% Exchangeable - 423,525 shares issued and outstanding at
December 31, 1998, liquidation preference of $100 per share .................................. -- 38,801
PREFERRED STOCK WITH PUT REDEMPTION OPTION:
Series A Convertible - 450,000 shares issued and outstanding at December 31, 1998 ............... -- 2,497
Series B Convertible - 124,831 shares issued and outstanding at December 31, 1998 ............... -- 726
COMMON STOCK WITH PUT REDEMPTION OPTION:
420,000 shares issued and outstanding at December 31, 1998 ...................................... -- 1,972
SHAREHOLDERS' EQUITY:
Preferred stock, Series C, $0.01 par value, 100 shares authorized and outstanding ............... -- --
Common stock, $0.01 par value, 50,000,000 shares authorized; 19,584,440 shares
issued at September 30, 1999, and 4,925,541 shares issued at December 31, 1998 ............... 196 49
Additional paid-in capital ...................................................................... 125,179 37,250
Less: 298,231 shares of treasury stock, at cost ................................................ (1,491) (1,491)
Accumulated deficit ............................................................................. (30,431) (34,508)
------------ ------------
Total shareholders' equity ................................................................... 93,453 1,300
------------ ------------
TOTAL .............................................................................................. $ 473,659 $ 440,257
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................................... $ 87,400 $ 78,234 $ 186,067 $ 137,650
Cost of sales...................................................... 48,708 45,561 109,113 81,035
------------ ------------- ------------- -------------
Gross profit....................................................... 38,692 32,673 76,954 56,615
Operating expenses................................................. 10,326 10,250 28,121 22,013
Depreciation and amortization expense.............................. 7,843 6,008 22,089 12,830
------------ ------------- ------------- -------------
Income from operations............................................. 20,523 16,415 26,744 21,772
Other income, net.................................................. 22 353 19 498
Interest expense................................................... (7,481) (7,730) (22,686) (16,457)
------------ ------------- ------------- -------------
Income before income taxes......................................... 13,064 9,038 4,077 5,813
Income taxes....................................................... - - - -
------------ ------------- ------------- -------------
Income before extraordinary item
and preferred dividends......................................... 13,064 9,038 4,077 5,813
Extraordinary loss on refinancing.................................. - - - (17,387)
------------ ------------- ------------- -------------
Net income (loss) before preferred dividends....................... 13,064 9,038 4,077 (11,574)
Preferred dividends................................................ 722 1,942 2,332 3,949
------------ ------------- ------------- -------------
Net income (loss) attributable to common shareholders.............. $ 12,342 $ 7,096 $ 1,745 $ (15,523)
============ ============= ============= =============
Net income (loss) per share of common stock:
Basic:
Net income before extraordinary item
attributable to common shareholders.......................... $ 0.65 $ 1.41 $ 0.10 $ 0.39
Extraordinary item.............................................. - - - (3.60)
------------ ------------- ------------- -------------
Net income (loss) attributable to common shareholders........... $ 0.65 $ 1.41 $ 0.10 $ (3.21)
============ ============= ============= =============
Diluted:
Net income before extraordinary item
attributable to common shareholder........................... $ 0.63 $ 0.97 $ 0.10 $ 0.28
Extraordinary item.............................................. - - - (2.61)
------------ ------------- ------------- -------------
Net income (loss) attributable to common shareholders........... $ 0.63 $ 0.97 $ 0.10 $ (2.33)
============ ============= ============= =============
Weighted average common shares outstanding:
Basic........................................................... 18,938 5,046 16,983 4,828
============ ============= ============= =============
Diluted......................................................... 19,676 7,309 17,721 6,666
============ ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------
NUMBER
OF PAR PAID-IN TREASURY ACCUMULATED
SHARES VALUE CAPITAL STOCK DEFICIT TOTAL
----------- ---------- ---------- ---------- ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998............... 4,926 $ 49 $ 37,250 $ (1,491) $ (34,508) $ 1,300
Issuance of common stock................... 10,750 108 91,267 - - 91,375
Conversion of preferred and
common stock with put
redemption option.................... 994 10 5,185 - - 5,195
Conversion of warrants..................... 1,131 11 (10) - - 1
Common stock issued for
redemption premium on 13%
exchangeable preferred stock......... 482 5 (5) - - -
Common stock issued in
consideration for acquisitions....... 1,301 13 6,945 - - 6,958
Issuance cost of common stock.............. - - (8,550) - - (8,550)
Dividends accumulated on
10% exchangeable
preferred stock...................... - - (2,097) - - (2,097)
Dividends accumulated on 13%
exchangeable preferred stock......... - - (235) - - (235)
Net fair value of warrants issued
in connection with 13%
exchangeable preferred stock......... - - (4,571) - - (4,571)
Net income................................. - - - - 4,077 4,077
----------- ---------- ---------- ---------- ------------ -------------
Balance at September 30, 1999.............. 19,584 $ 196 $ 125,179 $ (1,491) $ (30,431) $ 93,453
=========== ========== ========== ========== ============ =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................................ $ 4,077 $ (11,574)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities (excluding working capital from acquisitions):
Depreciation and amoritzation............................................................... 22,089 12,830
Amortization of debt discount, net.......................................................... 30 114
Gain from disposal of assets................................................................ (19) -
Extraordinary loss on refinancing........................................................... - 17,387
Change in assets and liabilities:
Accounts receivable, inventory and prepaid expenses.................................... (13,972) (11,557)
Accounts payable and accrued expenses.................................................. (4,255) (20)
------------ ----------
Net cash provided by operating activities........................................................ 7,950 7,180
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions............................................................................... (28,145) (15,970)
Cost of acquisitions............................................................................. (10,565) (294,029)
Purchase of short term cash investments.......................................................... - 4,543
Increase in other noncurrent assets.............................................................. (424) (2,268)
Proceeds from disposition of assets.............................................................. 4,390 -
------------ ----------
Net cash used in investing activities............................................................ (34,744) (307,724)
------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock............................................. 82,825 39,237
Proceeds from conversion of warrants............................................................. 1 -
Repurchase of common and preferred stock......................................................... (43,607) -
Proceeds from debt issuance, net................................................................. - 260,046
Borrowings from lines of credit.................................................................. 49,845 89,550
Repayment of lines of credit..................................................................... (63,090) (18,050)
Repayment of debt................................................................................ (210) (75,470)
Cost of refinancing.............................................................................. - (3,938)
------------ ----------
Net cash provided by financing activities........................................................ 25,764 291,375
------------ ----------
NET DECREASE IN CASH AND EQUIVALENTS................................................................... (1,030) (9,169)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................................................... 3,427 14,825
------------ ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................................... $ 2,397 $ 5,656
============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest....................................................................... $ 29,180 $ 17,393
============ ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in consideration for business acquisitions................................... $ 6,958 $ 10,565
============ ==========
Accretion of warrants in connection with 13% exchangeable preferred stock........................ $ 43 $ 189
============ ==========
Fair value of warrants issued in connection with 13% exchangeable preferred stock................ $ - $ 4,878
============ ==========
Conversion of common and preferred stock with put redemption
options into common stock................................................................... $ 5,195 $ -
============ ==========
Conversion of warrants in exchange for common stock.............................................. $ 10 $ -
============ ==========
Common stock issued for redemption premium on
13% exchangeable preferred stock............................................................ $ 5 $ -
============ ==========
Long term debt incurred to purchase assets....................................................... $ 109 $ -
============ ==========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
1. GENERAL
The condensed consolidated financial statements of Packaged Ice, Inc. and
its wholly owned subsidiaries (the "Company") included herein are unaudited,
except for the balance sheet as of December 31, 1998 that has been prepared from
the audited financial statements for that date. These financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission, and as applicable under such regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. All significant intercompany balances and
transactions have been eliminated upon consolidation, and all adjustments which,
in the opinion of management, are necessary for a fair presentation of the
financial position, results of operations and cash flow for the periods covered
have been made and are of a normal and recurring nature. Accounting measurements
at interim dates inherently involve greater reliance on estimates than at year
end and are not necessarily indicative of results for the full year. The
financial statements included herein should be read in conjunction with the
consolidated financial statements and the related notes thereto included in the
Company's annual report on Form 10-K/A for the year ended December 31, 1998.
Certain amounts from the prior year have been reclassified to conform to the
current presentation.
2. ACQUISITIONS
During the nine months ended September 30, 1999, the Company acquired
certain traditional ice businesses and certain assets. The purchase prices of
the acquisitions totaled approximately $16.7 million of which $9.7 million was
in cash and $7.0 million was in the Company's common stock (1,301,456 shares)
valued between $4.82 and $6.31 per share. Further, the Company paid $0.9 million
cash related to acquisitions closed during the current and prior reporting
periods.
The acquisitions have been accounted for using the purchase method of
accounting, and, accordingly, the purchase price preliminarily has been
allocated to the assets and liabilities acquired based on fair value at the date
of the acquisitions. The acquisitions included, at fair value, current assets of
$0.4 million, property plant and equipment of $7.4 million and current
liabilities of $0.6 million. The excess of the aggregate purchase price over the
fair market value of the net assets acquired of approximately $9.5 million was
recorded as goodwill and other intangibles and is being amortized over 40 years.
Total amortization expense of goodwill and other intangible assets resulting
from the Company's acquisitions was $1.6 million and $1.3 million for the three
months ended September 30, 1999 and 1998, respectively, and $4.5 million and
$2.6 million for the nine months ended September 30, 1999 and 1998,
respectively.
The operating results of the acquisitions have been included in the
Company's condensed consolidated financial statements from the date of their
respective purchases. The following unaudited pro forma information presents (i)
a summary of the consolidated results of operations for the three and nine
months ended September 30, 1999 and 1998 as if the acquisitions during 1999 and
1998 had occurred as of January 1 of the immediately preceding year and (ii) a
summary of the consolidated results of operations for
7
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
the three and nine months ended September 30, 1998 as if the acquisitions during
the first nine months of 1998 had occurred as of January 1 of the immediately
preceding year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Acquisitions during 1999 and 1998:
Revenues ........................................................... $ 88,701 $ 88,221 $ 192,155 $ 189,140
Net income (loss) attributable to common
shareholders .................................................... 12,866 10,200 2,682 (17,968)
Basic earnings (loss) per share .................................... 0.67 1.61 0.15 (2.83)
Diluted earnings (loss) per share .................................. 0.64 1.18 0.14 (2.83)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------- -------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Acquisitions for the first nine months of 1998:
Revenues ................................................................................... $ 82,875 $ 178,003
Net income (loss) attributable to common shareholders ...................................... 8,190 (20,564)
Basic earnings (loss) per share ............................................................ 1.62 (4.07)
Diluted earnings (loss) per share .......................................................... 1.12 (4.07)
</TABLE>
3. INVENTORY
Inventories contain raw materials, supplies and finished goods. Raw
materials and supplies consist of ice packaging polyethylene bags, spare parts,
bottled water supplies and merchandiser parts. Finished goods consist of
packaged ice and bottled water. Inventories are valued at the lower of cost or
market basis. Cost is determined using the first-in, first-out and average cost
methods.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies ................................................................. $ 7,073 $ 6,560
Finished goods ............................................................................. 911 1,135
------------ ------------
Total ................................................................................... $ 7,984 $ 7,695
============ ============
</TABLE>
4. EARNINGS PER SHARE
The computation of earnings (loss) per share is based on net income
(loss), after deducting the dividend requirement of preferred stock, divided by
the weighted average number of shares outstanding. Options and warrants to
purchase 3,137,198 and 2,510,730 shares of common stock issuable under stock
options or warrants that are outstanding but exercisable at prices above the
Company's average common stock
8
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
price for the three and nine months ended September 30, 1999 and 1998 have not
been included in the computation of earnings per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Earnings (Loss) for Basic and Diluted Computation:
Net income before extraordinary item
and preferred dividends...................................... $ 13,064 $ 9,038 $ 4,077 $ 5,813
Extraordinary loss on refinancing............................... - - - (17,387)
Preferred dividends............................................. (722) (1,942) (2,332) (3,949)
------------ ------------- ------------ -------------
Net income (loss) attributable to common shareholders........... $ 12,342 $ 7,096 $ 1,745 $ (15,523)
============ ============= ============ =============
Basic Earnings (Loss) Per Share:
Weighted average common shares outstanding...................... 18,938 5,046 16,983 4,828
============ ============= ============ ==============
Net income before extraordinary item
attributable to common shareholders.......................... $ 0.65 $ 1.41 $ 0.10 $ 0.39
Extraordinary loss on refinancing............................... - - - (3.60)
------------ ------------- ------------ -------------
Net income (loss) attributable to common shareholders........... $ 0.65 $ 1.41 $ 0.10 $ (3.21)
============ ============= ============ =============
Diluted Earnings (Loss) per Share:
Weighted average common shares outstanding...................... 18,938 5,046 16,983 4,828
Shares issuable from assumed conversion of stock
options and warrants......................................... 738 2,263 738 1,838
------------ ------------- ------------ --------------
Weighted average common shares outstanding,
as adjusted.................................................. 19,676 7,309 17,721 6,666
============ ============= ============ ==============
Net income before extraordinary item
attributable to common shareholders.......................... $ 0.63 $ 0.97 $ 0.10 $ 0.28
Extraordinary loss on refinancing............................... - - - (2.61)
------------ ------------- ------------ --------------
Net income (loss) attributable to common shareholders........... $ 0.63 $ 0.97 $ 0.10 $ (2.33)
============ ============= ============ =============
</TABLE>
5. LONG TERM OBLIGATIONS
On April 30, 1998, the Company entered into an $80 million, five year
senior credit facility with Antares Capital Corporation, as amended, (the
"Credit Facility") consisting of a revolving working capital facility of $25
million (the "Working Capital Loan") and a revolving acquisition loan facility
of $55 million (the "Acquisition Loan").
The outstanding principal balance under the Credit Facility bears interest
per annum, at the Company's option, at LIBOR plus 2.75% per annum or at the
"prime" rate plus 1.0% with interest rates subject to a pricing grid.
Additionally, the Company pays a 0.5% commitment fee quarterly on the average
availability under the Credit Facility. Amounts outstanding under the Working
Capital Loan of the Credit Facility are due March 31, 2003. Amounts outstanding
under the Acquisition Loan of the Credit Facility will amortize in 12 equal
quarterly installments commencing June 30, 2000. The Credit Facility contains
financial covenants which include limitations on capital expenditures and the
maintenance of minimum ratio levels of earnings before interest, taxes and
depreciation and amortization ("EBITDA") to fixed charges, interest coverage and
leverage, as defined in the Credit Facility, and is secured by substantially all
of the Company's assets and the capital stock of all of the Company's
significant subsidiaries.
9
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
At September 30, 1999 and December 31, 1998, long term obligations
consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
9 3/4% senior notes......................................................................... $ 270,000 $ 270,000
Less: Unamortized debt discount on 9 3/4% senior notes..................................... (213) (243)
Credit Facility............................................................................. 54,255 67,500
Other....................................................................................... 1,046 1,124
--------------- ---------------
Total....................................................................................... 325,088 338,381
Less: Current maturities................................................................... (9,295) (231)
--------------- ---------------
Long term obligations, net............................................................ $ 315,793 $ 338,150
=============== ===============
</TABLE>
6. CAPITAL STOCK
The Company currently is authorized to issue up to 50,000,000 shares of
common stock, par value $0.01 per share, of which 19,286,209 shares were
outstanding at September 30, 1999 and up to 5,000,000 shares of preferred stock,
par value $0.01 per share, of which the board of directors has authorized the
designation of 500,100 shares. As of September 30, 1999, the two classes of
preferred stock were as follows: (i) 500,000 shares as 10% exchangeable
preferred stock, of which 286,422 shares are outstanding; and (ii) 100 shares as
Series C preferred stock, of which 100 shares are outstanding. As of September
30, 1999, 393,700 shares and 1,000,000 shares of common stock have been reserved
for issuance upon the exercise of stock options under the 1994 and 1998 Stock
Option Plans, respectively, of which 391,200 shares and 427,752 shares,
respectively, have been exercised and are outstanding. In addition, 3,057,924
shares have been reserved for issuance upon the exercise of outstanding
warrants.
On February 3, 1999, the Company completed an initial public offering of
10,750,000 shares of common stock, par value $0.01 per share. The net proceeds
from the sale were approximately $85 million before deducting estimated expenses
related to the offering of approximately $1.9 million. The use of proceeds was
approximately $43.6 million to repurchase the Company's 13% exchangeable
preferred stock, which included approximately $1.3 million of accrued but unpaid
dividends and approximately $39.5 million to pay amounts outstanding under the
Credit Facility. The redemption premium on the 13% exchangeable preferred stock
of approximately $3.8 million was paid with 481,887 shares of common stock at
$7.91 per share.
In connection with this offering of common stock, the put redemption
feature on the 420,000 shares of common stock with put redemption option was
satisfied. In addition, the holders of the Series A and Series B preferred stock
with put redemption option exercised their respective conversion features to
obtain 450,000 and 124,831 shares of common stock, respectively.
7. SUBSIDIARY GUARANTORS
The Company's 9 3/4% senior 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, wholly owned subsidiaries
(the "Subsidiary Guarantors"). The following table sets forth the "summarized
financial information" of the Subsidiary Guarantors. Full financial statements
of the Subsidiary Guarantors are not presented because management believes they
are not material to the investors. There are currently no
10
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data:
Current assets........................................................................ $ 39,457 $ 29,373
Property and equipment................................................................ 186,089 169,208
Total assets.......................................................................... 461,385 429,508
Current liabilities................................................................... 19,684 14,864
Long term debt........................................................................ 794 893
Total shareholders' equity............................................................ 265,411 257,722
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Data:
Net revenues................................................ $ 87,400 $ 73,207 $ 186,067 $ 126,055
Gross profit................................................ 38,692 29,423 76,954 50,587
Net income.................................................. 14,134 8,706 7,689 10,743
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
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.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" ("SFAS 137"). SFAS 137 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. FASB Statement No. 133, as amended by SFAS 137,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Company is currently evaluating what impact adoption of
this statement will have on the Company's consolidated financial statements.
10. SEGMENT INFORMATION
The Company has two reportable segments: (1) ice products and (2) non-ice
products and services. Ice products include the manufacture and distribution of
packaged ice products through traditional ice manufacturing and delivery and the
Ice Factory. Non-ice products and services include refrigerated warehouses,
bottled water and leasing of ice production equipment. The Company evaluates
performance of each segment based on earnings before interest, taxes,
depreciation and amortization ("EBITDA") and does
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PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
not allocate assets by segments. Inter-segment sales are accounted for at
current market prices. Segment information for the three months ended September
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999 THREE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------- -------------------------------------------------
ICE NON-ICE ELIMINATION TOTAL ICE NON-ICE ELIMINATION TOTAL
---------- ---------- ---------- ---------- ----------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $ 82,545 $ 4,855 $ - $ 87,400 $ 74,152 $ 4,712 $ (630) $ 78,234
Cost of sales................ 45,707 3,001 - 48,708 42,946 3,117 (502) 45,561
---------- ---------- ---------- ---------- ----------- ----------- ---------- ----------
Gross profit................. 36,838 1,854 - 38,692 31,206 1,595 (128) 32,673
Operating expenses........... 9,552 774 - 10,326 9,613 637 - 10,250
Other income (expense)....... 22 - - 22 351 2 - 353
---------- ---------- ---------- ---------- ----------- ----------- ---------- ----------
EBITDA................. $ 27,308 $ 1,080 $ - $ 28,388 $ 21,944 $ 960 $ (128) $ 22,776
========== ========== ========== ========== =========== =========== ========== ==========
</TABLE>
Segment information for the nine months ended September 30, 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------- -------------------------------------------------
ICE NON-ICE ELIMINATION TOTAL ICE NON-ICE ELIMINATION TOTAL
---------- ---------- ---------- ---------- ----------- ----------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $ 171,064 $ 16,273 $ (1,270) $ 186,067 $ 131,013 $ 7,677 $ (1,040) $ 137,650
Cost of sales................ 100,317 9,868 (1,072) 109,113 76,894 4,961 (820) 81,035
---------- ---------- ---------- ---------- ----------- ----------- ---------- ----------
Gross profit................. 70,747 6,405 (198) 76,954 54,119 2,716 (220) 56,615
Operating expenses........... 25,914 2,207 - 28,121 20,760 1,253 - 22,013
Other income (expense)....... 19 - - 19 496 2 - 498
---------- ---------- ---------- ---------- ----------- ----------- ---------- ----------
EBITDA................. $ 44,852 $ 4,198 $ (198) $ 48,852 $ 33,855 $ 1,465 $ (220) $ 35,100
========== ========== ========== ========== =========== =========== ========== ==========
</TABLE>
Reconciliation of EBITDA to net income before extraordinary item and
preferred dividends for the three and nine month periods ended September 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA................................................................ $ 28,388 $ 22,776 $ 48,852 $ 35,100
Depreciation and amortization......................................... (7,843) (6,008) (22,089) (12,830)
Interest expense...................................................... (7,481) (7,730) (22,686) (16,457)
Income taxes.......................................................... - - - -
------------- ------------ ------------- -------------
Income (loss) before extraordinary item and
preferred dividends........................................ $ 13,064 $ 9,038 $ 4,077 $ 5,813
============= ============ ============= =============
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the company's financial condition
and results of operations should be read in conjunction with the company's
consolidated financial statements and the notes thereto and other information
included elsewhere in this Form 10-Q and the company's Form 10-K/A, previously
filed with the Securities and Exchange Commission.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
Other than statements of historical facts, statements made in this Form
10-Q, statements made by us in periodic press releases or oral statements made
by our management to analysts and shareholders in the course of presentations
about our company constitute "forward-looking statements". The words and phrases
"should be", "will be", "believe", "expect", "anticipate" and similar
expressions identify forward-looking statements. We believe the expectations
reflected in such forward-looking statements are accurate. However, we cannot
assure you that such expectations will occur. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
actual future results expressed or implied by the forward-looking statements.
You should not unduly rely on these forward-looking statements as they speak
only as of the date of this report. Except as required by law, we are not
obligated to publicly release any revisions to these forward looking statements
to reflect events or circumstances occurring after the date of this report or to
reflect the occurrence of unanticipated events.
GENERAL
Packaged Ice, Inc. is the largest manufacturer and distributor of packaged
ice in the United States and currently serves over 74,000 customer locations in
27 states and the District of Columbia. The company has grown significantly
since its incorporation in 1990, primarily through the implementation of a
consolidation strategy within the highly fragmented packaged ice industry,
principally in the southern half of the United States. These acquisitions have
enabled us to enter new geographic regions, increase our presence in established
markets, gain additional production capacity, realize cost savings from
economies of scale and leverage the acquired companies' relationships with
grocery and convenience store customers.
The company predominantly operates in two business segments, ice products
and non-ice operations. Ice products accounted for approximately 93% of revenues
in 1998 and approximately 92% for the nine months ended September 30, 1999. Ice
products consist of the following two activities:
o The manufacture and delivery of traditional ice from a central point of
production to the point of sale; and
o The installation of Ice Factories, our proprietary machines that
produce, package, store and merchandise ice at the point of sale
through an automated, self-contained system.
Our other business segment, non-ice, consists of refrigerated warehousing,
bottled water and the leasing of ice production equipment. The majority of
non-ice operations was acquired through acquisitions completed in 1998.
Our cost of sales includes costs associated with plant occupancy, raw
materials, delivery, labor and utility related expenses. With the Ice Factory,
plant occupancy, delivery and utility costs are eliminated, but costs associated
with customer service representatives and machine technicians are added to the
cost of sales.
Our operating expenses are 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.
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At September 30, 1999, the company owned or operated 84 ice manufacturing
plants, two facilities for other than ice production, 40 distribution centers,
10 refrigerated warehouses and had an installed base of 2,249 Ice Factories.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES: Revenues increased $9.2 million, from $78.2 million for the
three months ended September 30, 1998 to $87.4 million for the three months
ended September 30, 1999. Revenues increased $7.0 million as a result of
revenues contributed by traditional ice companies, $1.4 million due to the
placement of Ice Factories and $0.8 million due to non-ice operations,
principally acquired cold storage operations. The increases in traditional ice
and non-ice operations primarily were due to acquisitions of traditional ice
companies and cold storage operations of Cassco Ice & Cold Storage.
COST OF SALES: Cost of sales increased $3.1 million, from $45.6 million
for the three months ended September 30, 1998 to $48.7 million for the three
months ended September 30, 1999. This increase primarily resulted from
acquisitions of traditional ice companies. As a percentage of revenues, cost of
sales decreased from 58.2% for the three months ended September 30, 1998 to
55.7% for the three months ended September 30, 1999. This decrease resulted from
the combined effect of price increases and improved operating costs.
GROSS PROFIT: Gross profit increased $6.0 million, from $32.7 million for
the three months ended September 30, 1998 to $38.7 million for the three months
ended September 30, 1999. As a percentage of revenues, gross profit increased
from 41.8% for the three months ended September 30, 1998 to 44.3% for the three
months ended September 30, 1999. Gross profit from ice operations increased from
42.1% to 44.6%, and gross profit on non-ice operations increased from 33.8% to
38.2%.
OPERATING EXPENSES: Operating expenses were $10.3 million for both the
three months ended September 30, 1998 and the three months ended September 30,
1999. The increase resulting from acquisitions of traditional ice companies was
offset by better efficiencies at existing plants. As a percentage of revenues,
operating expenses decreased from 13.1% for the three months ended September 30,
1998 to 11.8% for the three months ended September 30, 1999. This decrease was
due to greater efficiencies as our current period general and administrative
expenses were spread over the larger base of revenues resulting primarily from
the acquisitions. Operating expenses from ice operations decreased from 13.0% to
11.6%, and operating expenses on non-ice operations increased from 13.5% to
15.9%.
DEPRECIATION AND AMORTIZATION EXPENSES: Depreciation and amoritzation
increased $1.8 million, from $6.0 million for the three months ended September
30, 1998 to $7.8 million for the three months ended September 30, 1999. This
increase was primarily due to property additions as a result of acquisitions,
installations of Ice Factories and new plant additions. As a percentage of
revenues, depreciation and amortization increased from 7.7% for the three months
ended September 30, 1998 to 9.0% for the three months ended September 30, 1999.
This increase was primarily due to the acquisition of Cassco Ice & Cold Storage
in August 1998 that resulted in a greater percentage of fixed assets to goodwill
than our previous acquisitions. As a result, the depreciation and amortization
from these acquisitions is relatively higher as a percentage of revenues than
the company's historic percentages.
INTEREST EXPENSE: Interest expense decreased $0.2 million, from $7.7
million for the three months ended September 30, 1998 to $7.5 million for the
three months ended September 30, 1999. As a percentage of revenues, interest
expense decreased from 9.9% for the three months ended September 30, 1998 to
8.6% for
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<PAGE>
the three months ended September 30, 1999. The dollar decrease in interest
expense was a result of lower levels of debt during the period that was
partially offset by higher interest rates.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
REVENUES: Revenues increased $48.4 million, from $137.7 million for the
nine months ended September 30, 1998 to $186.1 million for the nine months ended
September 30, 1999. Revenues increased $36.2 million as a result of revenues
contributed by traditional ice companies, $3.8 million due to the placement of
Ice Factories and $8.4 million due to non-ice operations, principally acquired
cold storage operations. The increases in traditional ice and non-ice operations
primarily were due to acquisitions of traditional ice companies.
COST OF SALES: Cost of sales increased $28.1 million, from $81.0 million
for the nine months ended September 30, 1998 to $109.1 million for the nine
months ended September 30, 1999. This increase primarily resulted from
acquisitions of traditional ice companies. As a percentage of revenues, cost of
sales decreased slightly from 58.9% for the nine months ended September 30, 1998
to 58.6% for the nine months ended September 30, 1999. This percentage decrease
is the result of increased prices and improved operating efficiencies during
1999.
GROSS PROFIT: Gross profit increased $20.4 million, from $56.6 million for
the nine months ended September 30, 1998 to $77.0 million for the nine months
ended September 30, 1999. As a percentage of revenues, gross profit increased
slightly from 41.1% for the nine months ended September 30, 1998 to 41.4% for
the nine months ended September 30, 1999. This increase resulted from increased
prices and more efficient operations, as discussed above. Gross profit from ice
operations increased slightly from 41.3% to 41.4%, and gross profit on non-ice
operations increased from 35.4% to 39.4%.
OPERATING EXPENSES: Operating expenses increased $6.1 million, from $22.0
million for the nine months ended September 30, 1998 to $28.1 million for the
nine months ended September 30, 1999. This increase primarily resulted from
acquisitions of traditional ice companies. As a percentage of revenues,
operating expenses decreased from 16.0% for the nine months ended September 30,
1998 to 15.1% for the nine months ended September 30, 1999. This decrease was
due to greater efficiencies realized as our current period general and
administrative expenses were spread over the larger base of revenues resulting
primarily from the acquisitions. Operating expenses from ice operations
decreased from 15.8% to 15.1%, and operating expenses on non-ice operations
decreased from 16.3% to 13.6%.
DEPRECIATION AND AMORTIZATION EXPENSES: Depreciation and amoritzation
increased $9.3 million, from $12.8 million for the nine months ended September
30, 1998 to $22.1 million for the nine months ended September 30, 1999. This
increase was primarily due to property additions as a result of acquisitions,
installations of Ice Factories and new plant additions. As a percentage of
revenues, depreciation and amortization increased from 9.3% for the nine months
ended September 30, 1998 to 11.9% for the nine months ended September 30, 1999.
This increase was primarily due to the 1998 acquisitions of Reddy Ice and Cassco
Ice & Cold Storage that resulted in a greater percentage of fixed assets to
goodwill than our previous acquisitions. As a result, the depreciation and
amortization from these acquisitions is relatively higher as a percentage of
revenues than the historic percentages.
INTEREST EXPENSE: Interest expense increased $6.2 million, from $16.5
million for the nine months ended September 30, 1998 to $22.7 million for the
nine months ended September 30, 1999. As a percentage of revenues, interest
expense increased slightly from 12.0% for the nine months ended September 30,
1998 to 12.2% for the nine months ended September 30, 1999. The dollar increase
and percentage increase in interest expense was a result of higher levels of
debt associated with our borrowing of $270 million through the
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<PAGE>
issuance of the 9 3/4% senior notes in January and April, 1998 and borrowings
associated with the 1998 acquisitions.
EXTRAORDINARY LOSS ON REFINANCING: During the first quarter of 1998,
simultaneously with the issuance of the 9 3/4% senior notes and in conjunction
with the repurchase of $75 million of Series B notes and Series C notes, we
recorded an extraordinary loss on refinancing of $17.4 million for such debt
extinguishment that related to the write-off of the debt discount, associated
redemption premiums and issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The company generates cash primarily from the sale of packaged ice through
traditional delivery methods and through Ice Factories and, to a lesser extent,
through the non-ice operations. Our primary uses of cash are (a) cost of sales,
(b) operating expenses, (c) debt service, (d) capital expenditures related to
replacing and modernizing other capital equipment and related to the
manufacturing and installation of additional Ice Factories and (e) acquisitions.
We have budgeted approximately $18.9 million of capital expenditures
during 1999 for traditional ice and non-ice operations. These expenditures
primarily include amounts that we will spend to maintain and expand traditional
ice facilities. In addition, based on current installation plans, we expect to
spend approximately $9.7 million for the purchase and installation of Ice
Factories. During the nine months ended September 30, 1999, capital expenditures
have been funded with operating cash flow, with proceeds of borrowings under the
acquisition loan of the credit facility and, in part, with the proceeds from the
disposition of various assets that totaled $4.4 million during the nine-month
period.
During the nine months ended September 30, 1999, we acquired 22
traditional ice companies and certain assets. The purchase price of these
acquisitions was approximately $16.7 million of which $9.7 million was in cash
and $7.0 million was common stock (1,301,456 shares) valued between $4.82 and
$6.31 per share.
We believe that we will have adequate working capital to meet debt service
requirements and to satisfy working capital and general corporate needs. At
September 30, 1999, we had working capital of approximately $7.3 million,
including approximately $2.4 million of cash and cash equivalents. In addition,
we had $23.0 million available under the working capital loan of the credit
facility (after $2.0 million of availability supporting outstanding letters of
credit) and $0.7 million available under the acquisition loan of the credit
facility.
At September 30, 1999, we had approximately $315.8 million of long term
debt, net of current maturities, outstanding as follows:
o $270.0 million of 9 3/4% senior notes due 2005;
o $45.2 million outstanding under the company's credit facility; and
o $0.6 million of other debt, net of debt discount.
Our credit facility provides for an $80 million line of credit consisting
of a $25 million revolving working capital loan and a $55 million revolving
acquisition loan. At September 30, 1999, we had no borrowings outstanding under
the working capital loan and approximately $54.3 million outstanding under the
acquisition loan. The revolving credit facility bears interest per annum, at the
company's option, at LIBOR plus 2.75% or the "prime" rate plus 1.0% with
interest rates subject to a pricing grid. The amounts under the working capital
loan will be due March 31, 2003. The amounts under the acquisition loan will be
due beginning June 30, 2000 in 12 equal quarterly installments.
16
<PAGE>
Covenants contained in the credit facility and the indenture governing the
9 3/4% senior notes require the company to meet certain financial tests, and
other restrictions limit the company's ability to pay dividends, borrow
additional funds or to acquire or dispose of assets. The credit facility is
secured by all of the company's assets and the capital stock of all of the
company's significant subsidiaries. The 9 3/4% senior notes are generally
unsecured obligations of the company and are senior in right of payment to all
existing and future subordinated debt (as defined in the indenture) and PARI
PASSU to all senior indebtedness of the company. The 9 3/4% senior notes are
effectively subordinated to the credit facility.
On February 3, 1999, we completed its initial public offering of
10,750,000 shares of common stock at $8.50 per share. The net proceeds of the
sale of approximately $85 million were applied as follows: (i) $43.6 million to
repurchase the company's 13% exchangeable preferred stock (including repurchase
premium) plus accrued and unpaid dividends, (ii) $39.5 million to pay amounts
outstanding under the working capital loan and the acquisition loan of the
credit facility and (iii) approximately $1.9 million of estimated expenses
related to the offering.
In connection with this offering of common stock, the put redemption
feature on the 420,000 shares of common stock with put redemption option was
satisfied. In addition, the holders of the Series A and Series B preferred stock
with put redemption option exercised their respective conversion features to
obtain 450,000 and 124,831 shares of common stock, respectively.
We expect to continue acquiring traditional ice companies using a
combination of cash and common stock. There can be no assurance that
acquisitions based upon our criteria can be obtained or funds will be available
in sufficient amounts to finance such acquisitions. On April 14, 1999, the
company filed an "acquisition shelf" registration statement to register the sale
of up to 5,000,000 shares of common stock that can be used in connection with
future acquisitions of which 3,956,780 remain unissued. During the nine months
ended September 30, 1999, the company issued 1,301,456 shares of common stock in
connection with acquisitions, including 1,043,220 shares of "acquisition shelf"
common stock.
Although the company has periodically reported negative cash flows from
operations on a historical basis, we believe that its overall treasury
management of cash on hand and available borrowings under the credit facility
will be adequate to meet debt service requirements, fund ongoing capital
requirements and satisfy working capital and general corporate needs.
We may need to raise additional funds through public or private debt or
equity financing to take advantage of opportunities that may become available,
including acquisitions and more rapid expansion. The availability of such
capital will depend upon prevailing market conditions and other factors over
which we have no control, as well as our financial condition and results of
operations. There can be no assurance that sufficient funds will be available to
finance intended acquisitions or capital expenditures to sustain our recent rate
of growth.
YEAR 2000
The company is exposed to the risk that the year 2000 issue could cause
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. During 1998, we
undertook a corporate-wide initiative designed to assess the impact of the year
2000 issue on software and hardware utilized in our operations, including
information technology infrastructure ("IT") and embedded manufacturing control
technology ("Non-IT").
Our initiative has been conducted in three phases: assessment,
implementation and testing. During the assessment phase, we completed a
comprehensive inventory of IT and Non-IT systems and equipment.
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<PAGE>
Many of our IT systems include hardware and packaged software purchased from
large vendors who have represented that these systems are already year 2000
compliant. However, we determined that it would be necessary to modify portions
of our financial and accounting software. We believe that our Non-IT systems,
which include the Ice Factory, are not at risk to the year 2000 issue.
We believe that with modifications to existing software, the year 2000
issue can be mitigated. The installation of software modifications has been
completed. During the third quarter, we performed a test of our primary system,
the purpose of which was to change the computer dates forward past January 1,
2000 in an attempt to evaluate the system performance using test transactions.
The tests were successful, and it was determined that our primary systems
performed correctly. However, if such modifications ultimately do not operate
properly or prove not to be adequate, the year 2000 issue could have an adverse
impact on our operations. Based on our overall assessment of the impact of the
year 2000 issue and the results of our inquiries and testing, we do not plan to
develop a contingency plan at this time. We will continue, however, to monitor
our systems as we approach the year 2000, and if any unexpected developments
arise that would require a contingency plan, we will develop such a plan.
We do not currently rely on the IT systems of other companies; however,
failure of our suppliers or their customers to become year 2000 compliant might
have a material impact on our operations. Key suppliers and our largest
customers have been contacted and have indicated year 2000 compliance.
Our efforts with respect to the year 2000 issue have been handled
internally by management and other company employees. Costs of developing and
carrying out this initiative are being funded from operations and have not
represented a material expense. We have completed our cost assessment and
believe that the costs of addressing the year 2000 issue should not be
significant and should not have a material adverse impact on our financial
condition.
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 were to be encountered, we
believe that we will be able to pass on the higher costs to our customers.
The ice business is highly seasonal. We experiences seasonal fluctuations
in our net sales and profitability with a disproportionate amount of our net
sales and a majority of our net income typically realized in the second and
third calendar quarters. We believe that over 60% of our revenues will occur
during the second and third calendar quarters when the weather conditions are
generally warmer and demand is greater, while less than 40% of our revenues will
occur during the first and fourth calendar quarters when the weather is
generally cooler. As a result of seasonal revenue declines and the lack of
proportional corresponding expense decreases, we will most likely experience
lower profit margins and possibly experience losses during the first and fourth
calendar quarters. In addition, because our operating results depend
significantly on sales during our peak season, our quarterly results of
operations during this period may fluctuate significantly if the weather is
unusually cool or rainy.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company is from time to time party to legal proceedings that arise in
the ordinary course of business. Management does not believe that the resolution
of any threatened or pending legal proceedings will have a material adverse
affect on the company's financial position, results of operations or liquidity.
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<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 28, 1999, the company filed a Registration Statement on Form
S-3, which became effective on October 6, 1999, registering the resale by
holders of 931,328 shares of the company's common stock. Included in the shares
registered were 258,236 shares of common stock issued during the second quarter
of 1999 in connection with acquisitions made during that period at prices
ranging from $5.87 to $6.31 per share.
During the three months ended September 30, 1999, the company issued
1,043,220 shares of "acquisition shelf" common stock in connection with
acquisitions made during that period at prices ranging from $4.82 to $5.23 per
share.
On November 1, 1999, the company elected to pay in kind dividends on the
10% exchangeable preferred stock, which totaled 14,439 shares of 10%
exchangeable preferred stock and 6,676 warrants to purchase company common stock
at $13 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On October 29, 1999, the company's board of directors declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
the company's common stock. The dividend is payable on November 9, 1999 (the
"Record Date") to the shareholders of record on that date. Each Right entitles
the registered holder to purchase from the company one one-thousandth of a share
of Series D Participating Cumulative Preferred Stock, par value $0.01 per share
(the "Preferred Shares"), of the company at a price of $12 per one
one-thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in a Rights
Agreement (the "Rights Agreement") between the company and American Stock
Transfer & Trust Company as Rights Agent (the "Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding
common stock or (ii) 10 business days (or such later date as may be determined
by action of the board of directors prior to such time as any person or group of
affiliated persons becomes an Acquiring Person) following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of the outstanding common stock (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced, with
respect to any of the common stock certificates outstanding as of the Record
Date, by such common stock certificate with a copy of a Summary of Rights
attached thereto.
The Rights Agreement provides that, until the Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be transferred
with and only with the common stock. Until the Distribution Date (or earlier
redemption or expiration of the Rights), new common stock certificates issued
after the Record Date upon transfer or new issuance of common stock will contain
a notation incorporating the Rights Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the Rights), the
surrender for transfer of any certificates for common stock outstanding as of
the Record Date, even without such notation or
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<PAGE>
a copy of the Summary of Rights being attached thereto, will also constitute the
transfer of the Rights associated with the common stock represented by such
certificate. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of the common stock as of the close of business on the
Distribution Date and such separate Rights Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The Rights
will expire on November 9, 2009 (the "Expiration Date"), unless the Rights are
earlier redeemed or exchanged by the company, in each case, as described below.
The Purchase Price payable, and the number of Preferred Shares or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Shares, (ii) upon the grant to holders of the Preferred Shares of certain rights
or warrants to subscribe for or purchase Preferred Shares at a price, or
securities convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares, or (iii) upon the
distribution to holders of the Preferred Shares of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings or dividends payable in Preferred Shares) or of subscription
rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-thousandths of
a Preferred Share issuable upon exercise of each Right are also subject to
adjustment in the event of a stock split of the common stock or a stock dividend
on the common stock payable in common stock or subdivisions, consolidations or
combinations of the common stock occurring, in any such case, prior to the
Distribution Date.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 per share but will be entitled to an
aggregate dividend of 1,000 times the dividend declared per share of common
stock. In the event of liquidation, the holders of the Preferred Shares will be
entitled to a minimum preferential liquidation payment of $1,000 per share but
will be entitled to an aggregate payment of 1,000 times the payment made per
share of common stock. Each Preferred Share will have 1,000 votes, voting
together with the common stock. Finally, in the event of any merger,
consolidation or other transaction in which common stock is exchanged, each
Preferred Share will be entitled to receive 1,000 times the amount received per
share of common stock. These rights are protected by customary antidilution
provisions.
Because of the nature of the Preferred Shares' dividend, liquidation and
voting rights, the value of the one one-thousandth interest in a Preferred Share
purchasable upon exercise of each Right should approximate the value of one
share of common stock.
In the event that the company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. In the event that any person or group of affiliated
or associated persons becomes an Acquiring Person, proper provision shall be
made so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the right
to receive upon exercise that number of shares of common stock having a market
value of two times the exercise price of the Right.
20
<PAGE>
At any time after any person or group becomes an Acquiring Person and
prior to the acquisition by such person or group of 50% or more of the
outstanding common stock, the board of directors of the company may exchange the
Rights (other than Rights owned by such person or group which will have become
void), in whole or in part, at an exchange ratio of one share of common stock,
or one one-thousandth of a Preferred Share, per Right (subject to adjustment).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Preferred Shares will be issued (other than
fractions which are integral multiples of one one-thousandth of a Preferred
Share, which may, at the election of the company, be evidenced by depositary
receipts) and in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to the date
of exercise.
At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
common stock, the board of directors of the company may redeem the Rights in
whole, but not in part, at a price of $0.01 per Right (the "Redemption Price").
The redemption of the Rights may be made effective at such time on such basis
with such conditions as the board of directors in its sole discretion may
establish. Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The terms of the Rights may be amended by the board of directors of the
company without the consent of the holders of the Rights, except that from and
after such time as any person or group of affiliated or associated persons
becomes an Acquiring Person no such amendment may adversely affect the interests
of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the company, including, without limitation, the right
to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the company's board of directors, except pursuant to an
offer conditioned on a substantial number of Rights being acquired. The Rights
should not interfere with any merger or other business combination approved by
the board of directors since the Rights may be redeemed by the company at the
Redemption Price prior to the time that a person or group has acquired
beneficial ownership of 20% or more of the common stock.
The Rights Agreement, dated as of October 29, 1999, between the company
and American Stock Transfer & Trust Company, as Rights Agent, specifying the
terms of the Rights and including the form of Statement of Resolution setting
forth the terms of the Preferred Shares as an exhibit thereto, and the form of
press release announcing the declaration of the Rights are attached hereto as
exhibits and are incorporated herein by reference. The foregoing description of
the Rights is qualified in its entirety by reference to such exhibits.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
The following is a list of exhibits filed as part of this Form 10-Q. Where
so indicated by footnote, exhibits, which were previously filed, are
incorporated by reference.
EXHIBIT NO DESCRIPTION
- ---------- ---------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Packaged Ice filed with the
Secretary of State of the State of Texas on February 5, 1992.
(Exhibit 3.2)(1)
3.2 Articles of Amendment to the Restated Articles of Incorporation of
Packaged Ice filed with the Secretary of State of the State of Texas
on August 11, 1998. (Exhibit 3.2) (6)
3.3 Amended and Restated Bylaws of Packaged Ice, effective as of
January 20, 1997. (Exhibit 3.5)(1)
4.1 Certificate of Designation of Series C Preferred Stock. (Exhibit
4.1)(4)
4.2 Amended and Restated Certificate of Designation of 10%
Exchangeable Preferred Stock. (Exhibit 4.12)(5)
4.3 Indenture by and among Packaged Ice, as Issuer, the Subsidiary
Guarantors and U.S. Trust Company of Texas, N.A. as Trustee dated as
of January 28, 1998, Amended and Restated as of April 30, 1998.
(Exhibit 4.1)(5)
4.4 Registration Rights Agreement dated April 30, 1998 by and among
Packaged Ice, Ares and Silver Brands Partners, L.P. (formerly SV
Capital Partners, L.P.). (Exhibit 4.8)(5)
4.5 Common Stock Purchase Warrant, dated July 17, 1997, executed by
Packaged Ice for the benefit of Silver Brands Partners. (Exhibit
10.39)(2)
4.6 Registration Rights Agreement by and between Packaged Ice and
Ares, dated February 3, 1999. (7)
4.7 Registration Rights Agreement by and between Packaged Ice and
Silver Brands Partners, L.P., dated February 3, 1999. (7)
4.8 Registration Rights Agreement by and among Packaged Ice, and Dale
Johnson, Alan Bernstein and Robert Miller, dated as of April 17,
1997. (Exhibit 10.9)(1)
4.9 Warrant Agreement among Packaged Ice and U.S. Trust Company of Texas,
N.A., a national banking association, as Warrant Agent, dated as of
April 17, 1997. (Exhibit 10.12)(1)
4.10 Registration Rights Agreement, dated as of July 17, 1997, by and
between Packaged Ice and Silver Brands Partners. (Exhibit 10.41)(2)
4.11 Warrant Agreement among Packaged Ice and U.S. Trust Company of Texas,
N.A., a national banking association, as Warrant Agent, dated as of
October 16, 1997. (Exhibit 10.7)(3)
4.12 Common Stock Purchase Warrant Agreement issued by Packaged Ice and
issued to Culligan Water Technologies, Inc. issuing 1,807,692 fully
paid and nonassessable shares of Packaged Ice's common stock at an
exercise price of $13.00 per share dated December 2, 1997.
(Exhibit 10.3)(4)
4.13 Registration Rights Agreement by and among Packaged Ice, Culligan
Water Technologies, Inc. and Erica Jesselson. (Exhibit 10.5)(4)
4.14 Registration Rights Agreement by and among Packaged Ice, A. J. Lewis
III and Liza B. Lewis, dated as of April 17, 1997. (Exhibit
10.5)(1)
4.15 Rights Agreement, dated as of October 29, 1999, between Packaged Ice,
Inc. and American Stock Transfer & Trust Company, which includes the
form of Statement of Resolutions setting forth the terms of the
Series D Participating Cumulative Preferred Stock, par value $.01 per
share, as Exhibit A; the form of Rights Certificate, as Exhibit B;
and the Summary of Rights to Purchase Preferred Shares, as Exhibit C.
(Exhibit 1)(8)
22
<PAGE>
27.1+ Financial Data Schedule.
99.1 Press Release issued by the Company on November 1, 1999. (Exhibit
2)(8)
- --------------------------
+ Filed herewith.
(1) Filed as an Exhibit to Packaged Ice's Registration Statement on Form
S-4 (File No. 333-29357), filed with the Commission on June 16,
1997.
(2) Filed as an Exhibit to the Amendment No. 1 to Packaged Ice's
Registration Statement on Form S-4 (No. 333-29357), filed with the
Commission on July 29, 1997.
(3) Filed as an Exhibit to Packaged Ice's Third Quarter Disclosure on
Form 10-Q with the Commission on November 14, 1997.
(4) Filed as an Exhibit to Form 8-K filed on behalf of Packaged Ice with
the Commission on December 15, 1997.
(5) Filed as an Exhibit to Form 8-K/A filed on behalf of Packaged Ice
with the Commission on May 12, 1998.
(6) Filed as an Exhibit to Amendment No. 1 to Packaged Ice's
Registration Statement on Form S-1 (File No. 333-60627), filed with
the Commission on October 2, 1998.
(7) Filed as an Exhibit to Form 10-K, filed with the Commission on March
30, 1999.
(8) Filed as an Exhibit to Packaged Ice's Registration Statement on Form
8-A (File No. 000-24851), filed with the Commission on November 1,
1999.
(B) REPORTS ON FORM 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
PACKAGED ICE, INC.
Date: November 12, 1999 By: /S/ JAMES F. STUART
James F. Stuart
Chief Executive Officer
Date: November 12, 1999 By: /S/ JAMES C. HAZLEWOOD
James C. Hazlewood
Chief Financial and Accounting Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM COMPANY'S
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN THE COMPANY'S FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,397
<SECURITIES> 0
<RECEIVABLES> 29,874
<ALLOWANCES> 209
<INVENTORY> 7,984
<CURRENT-ASSETS> 41,911
<PP&E> 221,365
<DEPRECIATION> 35,271
<TOTAL-ASSETS> 473,659
<CURRENT-LIABILITIES> 34,570
<BONDS> 315,793
29,843
0
<COMMON> 196
<OTHER-SE> 93,257
<TOTAL-LIABILITY-AND-EQUITY> 473,659
<SALES> 186,067
<TOTAL-REVENUES> 186,067
<CGS> 109,113
<TOTAL-COSTS> 159,323
<OTHER-EXPENSES> (19)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,686
<INCOME-PRETAX> 4,077
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,077
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,077
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
