AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 1999.
REGISTRATION NO. 333-60627
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
PACKAGED ICE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 2097 76-0316492
(STATE OR OTHER (PRIMARY STANDARD
JURISDICTION OF INDUSTRIAL
INCORPORATION OR CLASSIFICATION CODE (I.R.S. EMPLOYER
ORGANIZATION) NUMBER) IDENTIFICATION NO.)
------------------------
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(713) 464-9384
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JAMES F. STUART
CHIEF EXECUTIVE OFFICER
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(713) 464-9384
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
ALAN SCHOENBAUM T. MARK KELLY
AKIN, GUMP, STRAUSS, HAUER & FELD, MICHAEL P. FINCH
L.L.P. VINSON & ELKINS L.L.P.
300 CONVENT STREET, SUITE 1500 1001 FANNIN, 2300 FIRST CITY TOWER
SAN ANTONIO, TEXAS 78205 HOUSTON, TEXAS 77002
(210) 281-7234 (713) 758-2222
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 26, 1999
9,000,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE 9,000,000 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE (THE
"COMMON STOCK"), OFFERED HEREBY ARE BEING SOLD BY PACKAGED ICE, INC.
("PACKAGED ICE" OR THE "COMPANY").
PRIOR TO THIS OFFERING (THE "OFFERING"), THERE HAS BEEN NO PUBLIC MARKET
FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL
PUBLIC OFFERING PRICE OF THE COMMON STOCK WILL BE BETWEEN $11.00 AND $13.00 PER
SHARE. FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE, SEE "UNDERWRITING." A TOTAL OF 250,000 SHARES
OF COMMON STOCK ARE BEING RESERVED FOR SALE TO CERTAIN EMPLOYEES AND BUSINESS
ASSOCIATES OF, AND CERTAIN OTHER PERSONS DESIGNATED BY, THE COMPANY, AT THE
INITIAL PUBLIC OFFERING PRICE. THE COMPANY HAS RECEIVED APPROVAL TO HAVE THE
COMMON STOCK INCLUDED ON THE NATIONAL ASSOCIATION OF SECURITIES DEALERS
AUTOMATED QUOTATION ("NASDAQ") NATIONAL MARKET SYSTEM (THE "NASDAQ NATIONAL
MARKET") UNDER THE SYMBOL "ICED."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------
<S> <C>
PER SHARE......... $ $ $
TOTAL(3).......... $ $ $
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"). SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30
DAYS AFTER THE DATE HEREOF, TO PURCHASE UP TO 1,350,000 ADDITIONAL SHARES OF
COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS
EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNT AND
PROCEEDS TO COMPANY WILL BE $ , $ AND $ , RESPECTIVELY. SEE
"UNDERWRITING."
------------------------
THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS, SUBJECT TO
PRIOR SALE, WHEN, AS AND IF ISSUED TO AND ACCEPTED BY THE UNDERWRITERS AGAINST
PAYMENT THEREFOR, SUBJECT TO CERTAIN CONDITIONS. THE UNDERWRITERS RESERVE THE
RIGHT TO WITHDRAW, CANCEL OR MODIFY SUCH OFFER AND TO REJECT ORDERS IN WHOLE OR
IN PART. IT IS EXPECTED THAT DELIVERY OF THE SHARES OF COMMON STOCK WILL BE MADE
IN NEW YORK, NEW YORK ON OR ABOUT , 1999.
------------------------
JOINT LEAD MANAGERS
NationsBanc Montgomery Securities LLC Jefferies & Company, Inc.
BOOK-RUNNING MANAGER
Bear, Stearns & Co. Inc. Stephens Inc.
, 1999
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
AS USED IN THIS PROSPECTUS, THE TERMS "COMPANY" OR "PACKAGED ICE" MEAN
PACKAGED ICE, INC., A TEXAS CORPORATION, AND ITS SUBSIDIARIES, EXCEPT WHERE THE
CONTEXT OTHERWISE REQUIRES. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION,
(II) THE CONVERSION OF ALL SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK AND
SERIES B CONVERTIBLE PREFERRED STOCK INTO 574,831 SHARES OF COMMON STOCK UPON
CONSUMMATION OF THE OFFERING (THE "CONVERSIONS") AND (III) NO EXERCISE OF
OPTIONS OR WARRANTS TO PURCHASE SHARES OF THE COMPANY'S COMMON STOCK.
THE COMPANY
The Company is the largest manufacturer and distributor of packaged ice in
the United States and currently serves over 70,000 customer locations in 26
states and the District of Columbia. Based on revenues, management believes that
the Company is more than five times larger than its next largest competitor. The
Company has grown primarily through the implementation of its consolidation
strategy within the highly fragmented packaged ice industry. Since April 1997,
the Company has completed 53 acquisitions principally in the southern half of
the United States. These acquisitions have added annual revenues of
approximately $196 million and have enabled the Company to enter new geographic
regions, increase its presence in established markets, gain additional
production capacity, realize cost savings from economies of scale and leverage
the acquired companies' relationships with grocery and convenience store
customers. The Company also installs proprietary machines which produce,
package, store and merchandise ice at the point of sale through an automated,
self-contained system (the "Ice Factory"). As a result of the successful
execution of the Company's growth strategy, revenues have increased from $4.4
million in 1996 to $202.9 million (pro forma) in 1997, and from $21.0 million
for the nine months ended September 30, 1997 to $177.4 million (pro forma) for
the nine months ended September 30, 1998. EBITDA for such periods has increased
from $0.6 million in 1996 to $45.8 million (pro forma) in 1997, and from $4.6
million for the nine months ended September 30, 1997 to $39.9 million (pro
forma) for the nine months ended September 30, 1998. (EBITDA, which represents
earnings before interest, income taxes, depreciation, amortization and
extraordinary items, is not a measure of financial performance under generally
accepted accounting principles ("GAAP").) Net loss before extraordinary items
for such periods increased from $1.0 million in 1996 to $9.8 million (pro forma)
in 1997, and decreased from $2.0 million for the nine months ended September 30,
1997 to $1.8 million (pro forma) for the nine months ended September 30, 1998.
Following the Offering, the Company believes that it will have the capital
resources necessary to continue to lead the consolidation of the packaged ice
industry.
THE INDUSTRY
The packaged ice industry has attractive fundamental characteristics,
including highly fragmented ownership and stable demand. Additionally, since
retailers generally purchase packaged ice from only one supplier, there is
minimal brand competition at the point of sale. Due to high product
transportation and storage costs, the ice business has historically been a
regional service business and is comprised primarily of smaller privately-owned
packaged ice companies that lack significant capital resources. Traditional ice
manufacturers, including the Company, produce and package ice at
centrally-located facilities and normally distribute to a limited market radius
of 100 miles from the point of production. As a result of these geographic
constraints, success in the ice business depends upon an efficient manufacturing
and distribution system with high density customer distribution routes in a
region, high customer concentration within a market area and the ability to
ensure prompt and reliable delivery during peak seasonal months. The Company
believes that its consolidation of traditional ice manufacturers within a
geographic region provides efficiencies in manufacturing and distribution which
gives it an advantage over its competitors due
1
<PAGE>
to higher density of customer sites and the flexibility to shift production
among its manufacturing plants within a region.
The Company believes that packaged ice products are purchased as needed by
consumers and that such purchases are relatively price insensitive due
principally to the low cost of the product and absence of substitute products.
The industry is seasonal, characterized by peak demand occurring during the
warmer months of April through September, with an extended selling season
occurring in the southern United States. On a year-to-year basis, demand remains
stable and is generally only adversely affected by abnormally cool or rainy
weather within a region. Management believes that the Company's geographic
diversification helps mitigate the potential adverse impact of abnormal weather
patterns in any particular market.
BUSINESS STRATEGY
The Company's business strategy is to strengthen its position as the
leading packaged ice company in North America and to increase revenues and
profitability through an aggressive acquisition strategy, internal growth,
margin enhancement, and expansion into related businesses. The Company believes
its size, national scope, industry experience, proven ability to complete and
integrate acquisitions, and its proprietary Ice Factory give it significant
competitive advantages in pursuing its business strategy. These advantages have
enabled the Company to develop an efficient regional production and distribution
network and to service national accounts through its expanded geographic
presence. As a result, management believes Packaged Ice competes very
effectively with smaller, local packaged ice companies. The key elements of the
Company's business strategy are described below.
ACQUIRE TRADITIONAL ICE MANUFACTURING COMPANIES. Management believes that
the highly fragmented packaged ice industry contains numerous additional
acquisition opportunities. The Company's proven ability to enter new markets
through traditional acquisitions, coupled with its unique combination of ice
delivery systems and significant capital resources, has positioned the Company
to continue to be the leader in the consolidation of the industry. The Company's
acquisition strategy is to target well-managed, traditional ice producers and
distributors with attractive customer bases in both new and existing market
areas. The Company typically retains the former owners and other key personnel
of acquired packaged ice companies in an effort to ensure the continuation of
high quality services and the maintenance of customer relationships.
Packaged Ice has completed 53 acquisitions since April 1997, representing
annual revenues of approximately $196 million. On July 31, 1998, the Company
acquired all of the outstanding stock of Cassco Ice & Cold Storage, Inc.
("Cassco") from WLR Foods, Inc. for approximately $59 million in cash (the
"Cassco Acquisition"). Cassco is a leading regional producer and distributor
of packaged ice products and an owner/operator of cold storage warehouses in the
Mid-Atlantic region, with revenues of approximately $28.7 million and $12.9
million for the twelve months ended December 31, 1997 and the six months ended
June 30, 1998, respectively. On April 30, 1998, the Company acquired Reddy Ice
Corporation ("Reddy") from Suiza Foods Corporation for $180.8 million (the
"Reddy Acquisition") which added over $85 million in pro forma annual
revenues. Prior to the Reddy Acquisition, Reddy had been active in the
consolidation of the packaged ice industry, having made 28 acquisitions from
January 1997 to April 1998 when it was purchased. The Company's other
acquisitions, except for SWI, Mission and STPI (each as defined) generally have
been small, single location market leaders and smaller "tuck-ins" that
singularly and in the aggregate are not as significant as the Reddy Acquisition.
The Company's acquisitions have provided it with (i) a source of increased cash
flow, (ii) a national scope to better service large customers, (iii) economies
of scale and cost savings through the consolidation of redundant manufacturing
and distribution facilities, and administration and selling functions and (iv)
improved access to key markets and new customers.
2
<PAGE>
EXPLOIT NATIONAL MARKET PRESENCE. The Company's enhanced service
capabilities and geographic presence have enabled it to satisfy the desire of
many of its customers to source products from one national or regional supplier.
The Company has also capitalized on the decision of certain large retailers to
outsource ice production. Since 1997, the Company has entered into national or
regional supply arrangements with Circle K, Wal-Mart, 7-Eleven, Texaco, Diamond
Shamrock, Publix, Albertson's, Safeway, Vons, Winn-Dixie, HEB, L'il Champs,
Randall's and Kroger. As the Company continues to expand its operations into new
markets, management anticipates entering into additional national and regional
supply arrangements with major retailers.
EXPAND MARKET PRESENCE THROUGH THE ICE FACTORY. Through its Ice Factory,
the Company is the only provider of on-site, automated ice manufacturing and
bagging systems at retail locations. The Ice Factory has gained strong market
acceptance by providing high volume retailers with cost and service advantages
as compared to traditional packaged ice delivery methods. This proprietary
system uses state-of-the-art technology to produce, package and store up to
40,000 bags of ice per year directly at customer locations. The Company retains
ownership of the Ice Factory and charges customers on a usage basis.
The Ice Factory, when combined with traditional delivery methods, provides
the Company with numerous unique advantages, including (i) a flexible delivery
system designed to supply high volume locations and capable of cost-effectively
servicing a market in excess of 100 miles from traditional ice manufacturing
facilities, (ii) the ability to redistribute production from its traditional ice
facilities to new customers as well as satisfy seasonal peak demand at stores
with Ice Factories and (iii) higher operating margins, due to significantly
reduced production, storage and distribution costs.
As part of the Company's consolidation strategy, the Ice Factory gives the
Company the ability to develop a customer base in new markets where it does not
currently own traditional ice companies. The Ice Factory has led the Company's
expansion into several markets such as Houston, Dallas, Phoenix and Seattle and
should continue to drive entry into new markets and expansion in existing
markets.
ENHANCE OPERATING MARGINS OF EXISTING AND ACQUIRED BUSINESSES. The
Company's consolidation strategy provides management with significant
opportunities to enhance operating margins of its acquired businesses. Upon
closing an acquisition, the Company seeks to reduce operating costs and working
capital requirements through (i) consolidation of redundant manufacturing and/or
storage facilities, (ii) rationalization of distribution routes and service
operations, (iii) combination of administrative and marketing functions and (iv)
leveraging of economies of scale in purchasing and operations.
PURSUE EXPANSION INTO RELATED BUSINESSES. In connection with certain
acquisitions of traditional ice manufacturers, the Company's business has
expanded into areas which leverage the Company's competitive position and
expertise in the packaged ice industry. Management is currently evaluating the
expansion of its institutional ice machine leasing, public cold storage and
bottled water businesses.
LEVERAGE MANAGEMENT EXPERTISE. The Company believes that it is well
positioned to execute its business strategy given the depth, experience and
ability of its management team. The Company's executive officers are led by
James F. Stuart, Chairman and Chief Executive Officer, who founded Packaged Ice
in 1990, A. J. Lewis III, President, and Jimmy C. Weaver, Executive Vice
President and Chief Operating Officer, who together have more than 30 years of
industry experience. Mr. Stuart is chiefly responsible for the development of
the Ice Factory and, together with Messrs. Lewis and Weaver, has developed and
executed the Company's strategic plan. The Company also benefits from the local
operating knowledge and goodwill developed by the management of the companies it
acquires by retaining a significant number of the principals of such companies.
3
<PAGE>
THE OFFERING
Common Stock offered................. 9,000,000 Shares
Common Stock to be outstanding after
the Offering(1).................... 16,493,693 Shares
Use of Proceeds...................... To repurchase all outstanding shares of
13% Exchangeable Preferred Stock for
approximately $47.5 million and to repay
approximately $51.3 million of debt under
the Company's current revolving credit
facility. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol............................. "ICED"
- ------------
(1) Gives effect to the Conversions. Excludes (i) 637,920 shares of Common Stock
issuable upon exercise of currently outstanding stock options granted to
officers, employees and consultants at a weighted average exercise price of
$12.48 per share, (ii) 2,099,151 shares of Common Stock issuable upon the
exercise of Culligan Warrants (as defined) at an exercise price of $13 per
share issued to Culligan Water Technologies, Inc. ("Culligan") and a
private investor, (iii) 100,000 shares of Common Stock issuable upon the
exercise of SV Warrants (as defined) at an exercise price of $14 per share
issued to SV Capital Partners, L.P., currently known as Silver Brands
Partners, L.P. ("SV"), and (iv) 15,000 shares of Common Stock issuable
upon the exercise of certain warrants at an exercise price of $15 per share.
Includes 1,871,552 shares of Common Stock issuable upon the exercise of
warrants at an exercise price of $.01 per share.
4
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
FINANCIAL INFORMATION
The following table sets forth for the dates and periods indicated, summary
historical and pro forma financial data of the Company. Such data has been
derived from the information contained in the Selected Historical Financial Data
and the Unaudited Pro Forma Combined Condensed Financial Statements included
elsewhere in this
Prospectus. See "The Company," "Use of Proceeds," "Selected Historical
Financial Data," "Unaudited Pro Forma Combined Condensed Financial Data" and
the Company's consolidated financial statements and the notes thereto.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------------------------- AS ADJUSTED
NINE MONTHS ENDED ------------------------------
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED NINE MONTHS
------------------------------- -------------------- DECEMBER 31, ENDED SEPT. 30,
1995 1996 1997 1997 1998 1997(1) 1998(2)
--------- --------- --------- --------- --------- ------------ ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................... $ 2,830 $ 4,427 $ 28,981 $ 20,963 $ 137,650 $ 202,876 $ 177,411
Cost of sales...................... 1,251 2,035 18,724 12,336 81,035 133,195 108,639
Operating expenses................. 1,515 1,981 7,636 4,566 22,013 24,919 29,373
Depreciation and amortization...... 751 1,456 5,130 3,443 12,830 26,272 19,703
--------- --------- --------- --------- --------- ------------ ---------------
Income (loss) from operations...... (687) (1,045) (2,509) 618 21,772 18,490 19,696
Interest expense................... (76) (130) (6,585) (3,177) (16,457) (29,295) (21,971)
Other income....................... 75 185 655 577 498 992 453
--------- --------- --------- --------- --------- ------------ ---------------
Net income (loss) before
extraordinary item and preferred
dividends........................ (688) (990) (8,439) (1,982) 5,813 (9,813) (1,822)
Extraordinary item................. -- -- -- -- (17,387) -- (6) -- (6)
--------- --------- --------- --------- --------- ------------ ---------------
Net loss........................... (688) (990) (8,439) (1,982) (11,574) (9,813) (1,822)
Preferred dividends................ -- -- 199 -- 3,950 2,563 2,102
--------- --------- --------- --------- --------- ------------ ---------------
Net loss to common shareholders.... $ (688) $ (990) $ (8,638) $ (1,982) $ (15,524) $ (12,376) $ (3,924)
========= ========= ========= ========= ========= ============ ===============
NET INCOME (LOSS) PER SHARE OF COMMON
STOCK:
Basic:
Net income (loss) before
extraordinary item available to
common shareholders.............. $ (0.26) $ (0.35) $ (2.40) $ (0.57) $ 0.39 $ (0.85) $ (0.27)
============ ===============
Extraordinary item................. -- -- -- -- (3.60)
--------- --------- --------- --------- ---------
Net loss to common shareholders.... $ (0.26) $ (0.35) $ (2.40) $ (0.57) $ (3.21)
========= ========= ========= ========= =========
Diluted:
Net income (loss) before
extraordinary
item available to common
shareholders..................... $ (0.26) $ (0.35) $ (2.40) $ (0.57) $ 0.28 $ (0.85) $ (0.27)
============ ===============
Extraordinary item................. -- -- -- -- (2.61)
--------- --------- --------- --------- ---------
Net loss to common shareholders.... $ (0.26) $ (0.35) $ (2.40) $ (0.57) $ (2.33)
========= ========= ========= ========= =========
Weighted average common shares:
Basic............................ 2,682 2,826 3,600 3,459 4,828 14,598 14,622
Diluted.......................... 2,682 2,826 3,600 3,459 6,666 14,598 14,622
OTHER FINANCIAL DATA:
Cash flows -- operating
activities....................... $ 148 $ 1,094 $ (3,292) $ 347 $ 7,180
Cash flows -- investing
activities....................... (2,961) (5,925) (61,541) (32,559) (307,724)
Cash flows -- financing
activities....................... 3,034 3,968 79,488 36,724 291,375
EBITDA(3).......................... 139 596 3,276 4,638 35,100 $ 45,754 $ 39,852
Ratio of earnings to fixed
charges(4)....................... N/A N/A N/A N/A 0.35 N/A N/A
</TABLE>
5
<PAGE>
SEPTEMBER 30, 1998
--------------------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(5)
---------- ------------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and equivalents............... $ 5,656 $ 5,656
Working capital.................... 17,469 17,469
Property, net...................... 168,301 168,301
Total assets....................... 452,004 452,004
Total long term obligations, net of
current maturities............... 341,781 288,241
Total preferred stock.............. 67,682 27,075
Common Stock with put redemption... 1,972 --
Shareholders' equity............... 14,787 110,905
- ------------
(1) Gives effect to (i) the 1997 Acquisitions, (ii) the 1998 Acquisitions, (iii)
the Recapitalization, (iv) the Culligan Investment, (v) the Offering and the
application of the estimated net proceeds therefrom and (vi) the
Conversions, each as defined, as if they had occurred on January 1, 1997.
See "The Company."
(2) Gives effect to (i) the 1998 Acquisitions, (ii) the Recapitalization, (iii)
the Offering and the application of the estimated net proceeds therefrom and
(iv) the Conversions, as if they had occurred on January 1, 1997.
(3) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and extraordinary items. The Company has included EBITDA (which
is not a measure of financial performance under GAAP) because it understands
that EBITDA is one measure used by certain investors to determine a
company's historical ability to service its indebtedness. EBITDA should not
be considered by an investor as an alternative to net income, as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity.
(4) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings from continuing operations before income taxes and
fixed charges. Fixed charges consist of interest expense. Earnings were not
sufficient during the three years ended December 31, 1997 or the nine months
ended September 30, 1997, to cover fixed charges. On a historical basis, the
deficiencies were $688,000 in 1995, $990,000 in 1996, $8,439,000 in 1997,
and $1,982,000 for the nine months ended September 30, 1997. On a pro forma
as adjusted basis, the deficiencies were $9,813,000 and $1,822,000 for the
year ended December 31, 1997 and the nine months ended September 30, 1998,
respectively.
(5) Gives effect to (i) the Offering and the application of the estimated net
proceeds therefrom and (ii) the Conversions, as if they had occurred on
September 30, 1998.
(6) The pro forma information excludes the extraordinary item as it presents
only continuing operations.
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS
WELL AS OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE PURCHASING THE
COMMON STOCK OFFERED HEREBY.
SUBSTANTIAL LEVERAGE AND LACK OF HISTORICAL CASH FLOW TO SERVICE DEBT
The Company is highly leveraged with substantial debt service and planned
capital expenditures. At September 30, 1998, the Company's total indebtedness
(excluding debt discount) was approximately $342 million, consisting primarily
of $270 million of 9 3/4% Senior Notes (as defined) and $71.5 million of
borrowings under the Company's Credit Facility (as defined). See
"Capitalization" and "Selected Historical Financial Data."
The Company's level of indebtedness will have several important effects on
its future operations, and could have important consequences to the holders of
Common Stock, including, without limitation, (i) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of interest
and principal on its indebtedness, (ii) covenants contained in the indenture
(the "Indenture") governing the 9 3/4% Senior Notes and in the Credit Facility
will require the Company to meet certain financial tests, and other restrictions
will limit its ability to pay dividends, borrow additional funds or to dispose
of assets, and may affect the Company's flexibility in planning for, and
reacting to, changes in its business, including possible acquisition activities,
(iii) the Company's leveraged position will substantially increase its
vulnerability to adverse changes in general economic, industry and competitive
conditions, (iv) the Company's ability to obtain additional financing for
working capital, capital expenditures, acquisitions, general corporate and other
purposes may be limited and (v) upon a change of control of the Company, the
Company may be required to purchase all of the outstanding 9 3/4% Senior Notes
at 101% of the principal amount thereof plus any accrued and unpaid interest
thereon to the date of purchase. The exercise by the holders of the 9 3/4%
Senior Notes of their rights to require the Company to offer to purchase 9 3/4%
Senior Notes upon a change of control could also result in a default under other
indebtedness of the Company, including the Credit Facility.
The Company's ability to meet its debt service obligations and to reduce
its total indebtedness will be dependent upon its future performance, which will
be subject to general economic, industry and competitive conditions and to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control. If the Company is unable to generate
sufficient cash flow from operations to service its debt, it may be required,
among other things, to seek additional financing in the debt or equity markets,
to refinance or restructure all or a portion of its indebtedness, including the
9 3/4% Senior Notes and the Credit Facility, to sell selected assets, or to
reduce or delay planned capital expenditures. There can be no assurance that any
such measures would be sufficient to enable the Company to service its debt, or
that any of these measures could be effected on satisfactory terms, if at all.
See "The Company" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
RISKS OF ACQUISITIONS
Continued expansion of the Company's business is dependent upon the
Company's ability to acquire other companies, assets and product lines that
either complement or expand its existing business. Future acquisitions, as well
as those acquisitions the Company has already made, involve a number of special
risks, including, without limitation, (i) the diversion of management's
attention to the assimilation of the operations and personnel of the acquired
companies, (ii) potential failure of gaining operating efficiencies and
difficulty of integrating acquisitions into the Company's existing operations,
(iii) unexpected costs or liabilities in the acquired business, (iv) adverse
short-term effects on the Company's operating results (particularly upon the
completion of acquisitions in the off-season) and (v) the amortization of
acquired intangible assets. To the extent future acquisitions are consummated
for cash, a substantial portion of the Company's surplus borrowing capacity and
available cash (including the proceeds of the Offering) would be allocated to
consummate any such acquisition, thereby limiting the ability to utilize cash
for other
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purposes. See "Use of Proceeds." There can be no assurance that the Company
will be able to continue to identify additional suitable acquisition
opportunities or successfully complete acquisitions in the future.
In addition, acquisitions often result in the recording of goodwill and
other intangible assets.
o Immediately following the Offering on a pro forma basis, goodwill and
other intangible assets will represent 49.8% of total assets and will
exceed shareholders' equity by $114.0 million.
o Goodwill arises when an acquirer pays more for a business than the
fair value of the tangible and separately measured intangible net
assets. GAAP requires that this and all other intangible assets be
amortized over the period benefited. Management has determined that
period to be no less than 40 years.
o If management were not to separately recognize a material intangible
asset having a benefit period less than 40 years, or were not to give
effect to shorter benefit periods of factors giving rise to a material
portion of the goodwill, earnings reported in periods immediately
following the acquisition would be overstated. In later years, the
Company would be burdened by a continuing charge against earnings
without the associated benefit to income valued by management in
arriving at the consideration paid for the business. Earnings in later
years also could be significantly affected if management determined
then that the remaining balance of goodwill was impaired.
o Management has reviewed all of the factors and related future cash
flows which it considered in arriving at the amount incurred to
acquire each of the acquired companies. Management concluded that the
anticipated future cash flows associated with intangible assets
recognized in the acquisitions will continue indefinitely, and there
is no persuasive evidence that any material portion will dissipate
over a period shorter than 40 years.
See "Prospectus Summary," "Unaudited Pro Forma Combined Condensed
Financial Statements" and "Business -- Business Strategy."
SEASONALITY OF ICE BUSINESS AND WEATHER
The Company experiences seasonal fluctuations in its net sales and
profitability with a disproportionate amount of the Company's net sales and a
majority of its net income typically realized in its second and third calendar
quarters (April through September). The Company believes that over 60% of its
revenues will occur during the second and third calendar quarters when the
weather conditions are generally warmer and demand is greater while less than
40% of its revenues will occur during the first and fourth calendar quarters
when the weather is generally cooler. As a result of these seasonal revenue
declines and the lack of proportional corresponding expense decreases, the
Company will most likely experience lower profit margins and possibly experience
losses during the first and fourth calendar quarters. In addition, because the
Company's operating results depend significantly on sales during its peak
season, the Company's quarterly results of operations may fluctuate
significantly as a result of adverse weather during this period (such as an
unusually cool or rainy period). Because inclement weather such as the type
caused by the "El Nino" weather phenomenon is believed to be a primary cause
for decreased volume in the ice industry, the Company could be adversely
affected by this and other weather phenomena. See "-- Substantial Net Operating
Losses" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General Economic Trends and Seasonality."
COMPETITION
The packaged ice business is highly competitive. The Company faces a number
of competitors in the packaged ice business, including other ice manufacturers,
convenience and grocery retailers that operate captive commercial ice plants,
and retailers that manufacture and package ice at store locations. Competition
exists primarily on a regional basis, with service, price and quality as the
principal competitive factors. A significant increase in the utilization of
captive commercial ice plants, on-site manufacturing and packaging by operators
of large retail chains the Company serves, or the successful roll out by a
competitor of a machine which duplicates the function of the Ice Factory could
have a material adverse effect on the Company's operations. See
"Business -- The Ice Factory" and "Business -- Competition."
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SUBSTANTIAL NET OPERATING LOSSES
Packaged Ice has incurred substantial net operating losses since its
inception. At September 30, 1998, Packaged Ice had an accumulated deficit since
inception of $23.1 million. The Company also anticipates that it will incur net
operating losses for the year ended December 31, 1998, primarily as a result of
the increased interest expense associated with the 9 3/4% Senior Notes and the
Credit Facility and substantial depreciation and amortization associated with
the Company's acquisitions and capital expenditures. While management believes
that it has developed a plan of operations that, if successfully implemented,
should permit the Company to achieve and sustain profitable operations, no
assurance can be given that the Company's operations will be profitable in the
future. See "The Company," "Unaudited Pro Forma Combined Condensed Financial
Statements," "Selected Historical Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Company's consolidated financial statements and the notes thereto.
DEPENDENCE ON SINGLE MANUFACTURER
The Company's proprietary bagging device used in the Ice Factory is
manufactured by Lancer Corporation ("Lancer") under an exclusive original
equipment manufacturing agreement ("OEM Agreement"). The bagging device is
highly technical in nature and there can be no assurance that the Company would
be able to locate, on a timely basis or at all, alternative sources of supply
for the bagging device if Lancer was unable to meet its obligations under the
OEM Agreement.
EFFECTS OF PRICE CHANGES IN RAW MATERIALS
The Company uses large quantities of water and energy in the manufacture
and storage of its packaged ice products. The Company also uses large quantities
of plastic bags. If the prices of such resources should increase from recent
levels, the Company could experience sudden and significant increases in the
cost of plastic bags, fuel, or utilities such as water and electricity. The
Company may be unable to pass these increases along to its customers.
Historically, market prices for plastic bags have fluctuated in response to a
number of factors, including changes in polyethylene prices. The Company
historically has not attempted to pass through changes in the price of plastic
bags; therefore, a large, abrupt change in the price of plastic bags could have
a material adverse effect on the Company's operating margins. There can be no
assurance that significant changes in plastic bag, water, electricity, fuel or
other commodity prices would not have a material adverse effect on the Company's
business, results of operations and debt service capabilities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISK OF PRODUCT LIABILITY
The Company is subject to the inherent business risk of product liability
claims and adverse publicity if any of its products are alleged to have resulted
in adverse effects to a user of such products. The Company currently carries
product liability insurance that management believes is adequate under the
Company's current circumstances, although there can be no assurance that such
circumstances will not change and that such insurance will remain available at
reasonable costs, if at all. In the event of an inadequately insured product
liability claim, the Company's business and financial condition could be
materially adversely affected.
LIMITED PATENT PROTECTION
Other than patents which it owns or licenses on the bagging devices used as
a component of the Ice Factory, the Company currently does not have patents
relating to its products. While the Company views the patents relating to the
bagging device as important to the value of the Ice Factory as a whole, there
can be no assurance that any issued patent will provide the Company with a
meaningful competitive advantage, that competitors will not design alternatives
to reduce or eliminate the benefits of any issued patent or that challenges will
not be instituted against the validity or enforceability of these patents. Other
companies may obtain patents claiming products or processes that are necessary
for, or useful to, the development of the Company's products, in which event the
Company may be required to obtain licenses for patents or for
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proprietary technology to develop, manufacture or market its products. There can
be no assurance that the Company would be able to obtain such licenses on
commercially reasonable terms, if at all.
It is the Company's practice to protect certain of its proprietary
materials and processes by relying on trade secret laws and non-disclosure and
confidentiality agreements. There can be no assurance that confidentiality or
trade secrets will be maintained or that others will not independently develop
or obtain access to such materials or processes. See "Business -- Intellectual
Property."
DEPENDENCE ON KEY PERSONNEL
The future success of the Company's business operations is dependent in
part on the efforts and skills of certain key members of management, including
James F. Stuart, Chairman and Chief Executive Officer, A.J. Lewis III,
President, and Jimmy C. Weaver, Executive Vice President and Chief Operating
Officer. The loss of any of its key members of management could have an adverse
effect on the Company. The Company maintains $2 million of key-man life
insurance on James F. Stuart. The success of the Company will also depend in
part upon the Company's ability to find, hire and retain additional key
management personnel, including senior management. See "Management."
ENVIRONMENTAL MATTERS
The Company's business and operations are subject to federal, state and
local environmental laws and regulations. In particular, the Company generates
and handles hazardous substances, including various refrigerants, in connection
with the manufacture, storage and transportation of packaged ice. Historically,
these refrigerants have included various "freon" refrigerants that have since
been banned from production, which has required the Company to obtain
alternative compliant refrigerants. As a result of these environmental laws and
regulations, the Company may become involved in administrative or legal
proceedings related to environmental matters, and these proceedings could result
in material costs to the Company. In addition, the Company cannot predict (i)
the types of environmental laws or regulations that federal, state and local
governments may enact in the future, (ii) how existing or future laws or
regulations will be enforced and (iii) what types of environmental conditions
may be found at its facilities. If more stringent laws or regulations or
stricter interpretations of existing laws and regulations were to develop, the
Company may be required to incur additional expenditures, which could be
material, to satisfy such laws, regulations and interpretations. See
"Business -- Environmental Matters."
GOVERNMENT REGULATION
The packaged ice industry is subject to various federal, state and local
laws and regulations which require the Company, among other things, to obtain
licenses for its manufacturing plants and machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding its plants and its Ice Factories and to control the quality and
quantity of its ice continuously. Compliance with such laws and regulations may
require significant capital expenditures or may increase operating costs.
Although such compliance costs to date have not had a material effect on the
Company, application of these requirements, or adoption of new requirements
could have a material adverse effect on the Company. See
"Business -- Government Regulation."
POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
After the Offering, the Company will have an aggregate of 29,898,456 shares
of Common Stock authorized but not outstanding and not reserved for specific
purposes. All of such shares may be issued without any action or approval by the
Company's shareholders. Management intends to pursue actively acquisitions of
competitors and related businesses and may issue shares of Common Stock in
connection with these acquisitions. In addition, 1,393,700 shares of Common
Stock are reserved for issuance (with respect to which options on 637,920 shares
of Common Stock are outstanding) under the Company's stock option plans.
Likewise, 4,085,703 shares of Common Stock at a weighted average exercise price
of $7.08 per share are reserved for issuance upon the exercise of outstanding
warrants with expiration dates as follows: 100,000 -- July 17, 2002;
15,000 -- June 30, 2003; 895,800 -- April 15, 2004; 2,099,151 -- April
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15, 2005; and 975,752 -- May 1, 2005. See "Description of Capital
Stock -- Warrants." Any shares issued in connection with future acquisitions,
exercise of stock options or otherwise would further dilute the percentage
ownership of the Company held by the investors in the Offering. Further, the
Company's ability to obtain additional capital on favorable terms may be
adversely affected because of potential dilutive effect of the shares granted
under the Company's existing stock option plans. See "Management -- Stock
Option Plans" and "Description of Capital Stock."
Based on an assumed public offering price of $12 per share, purchasers of
Common Stock in the Offering will experience immediate and substantial dilution
of $19.80 per share in the net tangible book value of their shares. See
"Dilution."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or,
if one develops, that it will be maintained. The initial public offering price
of the Common Stock will be established by negotiation between the Company and
the Underwriters. See "Underwriting" for a discussion of factors to be
considered in determining the initial public offering price. The market price of
the shares of Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors, including general
economic and market conditions. In addition, the stock market in recent years
has experienced and continues to experience extreme price and volume
fluctuations, which have affected the market price of the stock of many
companies and which have been often unrelated or disproportionate to the
operating performances of these companies. These fluctuations, as well as a
shortfall in sales or earnings compared to securities analysts' expectations,
changes in analysts' recommendations or projections or general economic and
market conditions, may adversely affect the market price of the Common Stock. In
the past, securities class action litigation has often been instituted following
periods of volatility in the market price for a company's securities. Such
litigation could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition, cash flows and operating results.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the open market
after the Offering could adversely affect the trading price of the Common Stock.
Immediately after the Offering, affiliates and holders of Restricted Shares (as
defined) will own 5,622,141 shares, representing approximately 38.4% of the
outstanding shares of Common Stock. A decision by such persons to sell shares of
Common Stock could adversely affect the trading price of the Common Stock. Upon
consummation of the Offering, the Company will have 14,622,141 shares of Common
Stock outstanding (15,972,141 shares if the Underwriters' over-allotment option
is exercised in full). Of these shares, all shares sold in the Offering (other
than those sold to affiliates of the Company) will be freely tradable. The
remaining 5,622,141 shares may not be sold unless the sale is registered under
the Securities Act, or an exemption from registration is available, including
the exemption provided by Rule 144 under the Securities Act ("Rule 144"). In
addition to the shares discussed above, a total of 4,085,703 shares of Common
Stock have been reserved for issuance upon the exercise of outstanding warrants
at exercise prices of $.01 per share to $15.00 per share (and a weighted average
exercise price of $7.08 per share). All of such shares of Common Stock have the
benefit of "demand" registration rights and will be freely transferable after
such registration. See "Description of Capital Stock -- Registration Rights
Agreements." The executive officers and directors and certain shareholders of
the Company have agreed that, for 180 days following the date of this
Prospectus, they will not, without the prior written consent of NationsBanc
Montgomery Securities LLC, directly or indirectly, sell, offer, contract or
grant any option to sell, pledge, transfer, establish an open put equivalent
position or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable or exercisable for
or convertible into shares of Common Stock. A total of 1,393,700 shares of
Common Stock have been reserved for issuance under the stock option plans,
393,700 of which are issuable upon exercise of options outstanding and
exercisable at the closing of this Offering. The Company will
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register on Form S-8 under the Securities Act the offering and sale of Common
Stock issuable under its stock option plans. See "Management -- Stock Option
Plans," and "Shares Eligible For Future Sale."
ANTI-TAKEOVER CONSIDERATIONS
Certain provisions of the Company's Articles of Incorporation (the
"Articles"), the Company's Bylaws (the "Bylaws") and the Texas Business
Corporation Act ("TBCA") may have the effect of discouraging unsolicited
proposals for acquisition of the Company. Pursuant to the Articles, shares of
preferred stock may be issued by the Company in the future without shareholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
any such preferred stock. The issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions, financings and
other corporate transactions, could have the effect of discouraging a third
party's acquisition of a majority of the Common Stock. The Company has no
present plans to issue any shares of preferred stock other than as payment of
in-kind dividends. Finally, the TBCA restricts certain business combinations and
provides that directors serving on staggered boards of directors may be removed
only for cause unless the articles of incorporation otherwise provide. The
Company's Articles do not otherwise so provide. See "Description of Capital
Stock -- Anti-Takeover Considerations."
DIVIDEND POLICY AND RESTRICTIONS
The Company has never declared or paid any cash dividends on the Common
Stock. In addition, the Company's Credit Facility, the 10% Exchangeable
Preferred Stock and, in some instances, the Indenture, prohibit the Company from
paying dividends on its Common Stock. Following the Offering, the Company
intends to retain any future earnings to fund growth and does not anticipate
paying any cash dividends in the foreseeable future. Any future determination as
to the Company's dividend policy will be made at the discretion of the Company's
Board of Directors and will depend on a number of factors, including the
Company's future earnings, capital requirements, financial condition and future
prospects, restrictions on dividend payments pursuant to any of the Company's
credit or other agreements and such other factors as the Board of Directors may
deem relevant. See "Dividend Policy" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
CONTROL BY EXISTING SHAREHOLDERS
At the closing, the Company's officers and directors will beneficially own
up to approximately 17.2% of the Common Stock. Because the holders of a majority
of the Common Stock have the ability to appoint a majority or all of the Board
of Directors, and to approve certain fundamental corporate transactions, the
Company's officers and directors will have significant influence over the voting
on such matters. See "Principal Shareholders" and "Description of Capital
Stock."
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") which represent the Company's
expectations and beliefs concerning future events that involve risks and
uncertainties, including those associated with the effects of national and
regional economic conditions and the effect of unseasonably cool weather. Such
forward-looking statements may be deemed to include plans for, and successful
closing and integration of, future acquisitions, the Company's capacity to
integrate successfully acquisitions that have already been completed and the
adequacy of anticipated sources of cash, including the proceeds from the
Offering, to fund the Company's future capital requirements. Words such as
"believes," "anticipates," "expects," "intends" and similar expressions
are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. Investors are cautioned that all
forward-looking statements involve risks and uncertainty. Discussions containing
such forward-looking statements may be found in the material set forth under
"Prospectus Summary," "Summary Historical and Unaudited Pro Forma Combined
Financial Data," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma Combined
Condensed Financial Statements," and "Business," as well as elsewhere herein.
Actual results may differ materially from those projected in the forward-looking
statements. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included in this Prospectus will prove to be
accurate. Important factors that could cause actual results to differ materially
from the Company's expectations are disclosed in this Prospectus. In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. In addition, the protections accorded by
Section 27A of the Securities Act and Section 21E of the Exchange Act are not
applicable to initial public offerings.
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THE COMPANY
The Company is the largest manufacturer and distributor of packaged ice in
the United States and currently serves over 70,000 customer locations in 26
states. The Company has grown primarily through the implementation of its
consolidation strategy within the highly fragmented packaged ice industry and,
to a lesser extent, through the installation of its Ice Factory. The Company has
pursued a strategy of acquiring packaged ice companies, principally in the
southern half of the United States and has completed 53 acquisitions since April
1997. This program has been financed almost exclusively through the incurrence
of debt and the issuance of capital stock.
FINANCINGS
On September 20, 1995, the Company completed the private offering (the
"Norwest Offering") of 450,000 shares of Series A Convertible Preferred Stock
(the "Series A Convertible Preferred Stock") at a price of $5.56 per share and
420,000 shares of Common Stock (the "Put Option Common Stock") for $5 per
share to Norwest Equity Partners V ("Norwest"), a partnership managed by
Norwest Venture Capital Management, Inc., a venture capital firm with over $1
billion under management, and The Food Fund Limited Partnership (the "Food
Fund"). In addition, concurrently with the Norwest Offering, the Company issued
280,000 shares of Common Stock to various investors at a price of $5 per share.
On January 17, 1997, the Company completed the private offering (the "Second
Norwest Offering") of 124,831 shares of Series B Convertible Preferred Stock
(the "Series B Convertible Preferred Stock" and, together with the Series A
Convertible Preferred Stock, the "Convertible Preferred Stock"). Unless a
public offering of Common Stock occurs, such as the one contemplated hereby, the
holders of the Series A Convertible Preferred Stock and the Put Option Common
Stock have a contractual right to require the Company to repurchase such stock
beginning in September 2004.
On April 17, 1997, the Company completed the private offering (the
"Original 12% Note Offering") of $50 million aggregate principal amount of 12%
Senior Notes due 2004 (the "Original 12% Senior Notes") with detachable
warrants to purchase 511,885 shares of Common Stock for $.01 per share. In
connection with the Original 12% Note Offering, the Company issued warrants (the
"Jefferies Warrants") to purchase 127,972 shares of Common Stock for $.01 per
share to Jefferies & Company, Inc. ("Jefferies"). Concurrent with the Original
12% Note Offering, the Company completed the acquisitions (the "SWI, Mission
and STPI Acquisitions") of Southwestern Ice, Inc. ("SWI"), Mission Party Ice,
Inc. ("Mission") and Southwest Texas Packaged Ice, Inc. ("STPI").
On July 17, 1997, the Company completed the private offering to SV of
300,000 shares of Common Stock at a price of $10 per share and a warrant to
purchase 100,000 shares (the "SV Warrants") at an exercise price of $14 per
share until July 17, 2002.
In September 1997, the Company entered into a six-year senior credit
facility with Frost National Bank and Zion's National Bank (the "Old Credit
Facility") which provided for borrowings of up to $20 million.
On October 16, 1997, the Company completed the private offering (the
"Subsequent 12% Note Offering" and, together with the Original 12% Note
Offering, the "12% Note Offerings") of $25 million aggregate principal amount
of 12% Senior Notes due 2004 (the "Subsequent 12% Senior Notes" and, together
with the Original 12% Senior Notes, the "12% Senior Notes") with detachable
warrants to purchase 255,943 shares of Common Stock for $.01 per share
(together, with the detachable warrants to purchase 511,885 shares of Common
Stock, the "12% Senior Note Warrants"). The net proceeds of the Subsequent 12%
Note Offering were used to retire amounts outstanding under the Old Credit
Facility, fund additional acquisitions and for working capital.
On December 2, 1997, (i) Culligan, which U.S. Filter, Inc. has subsequently
acquired, purchased 235,000 shares of 10% Exchangeable Preferred Stock (the
"10% Exchangeable Preferred Stock"), 94 shares of Series C Preferred Stock
(the "Series C Preferred Stock"), and warrants ("Original Culligan
Warrants"), having an exercise price of $13 per share, to purchase 1,807,692
shares of Common Stock, for an aggregate of $23.5 million (the "Culligan
Investment") and (ii) a certain shareholder purchased 15,000 shares of 10%
Exchangeable Preferred Stock, six shares of Series C Preferred Stock and
Original Culligan
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Warrants to purchase an aggregate of 115,385 shares of Common Stock, for an
aggregate of $1.5 million. Holders of 10% Exchangeable Preferred Stock are
entitled to receive (i) dividends at the rate of 10% of its liquidation
preference and (ii) if such dividends are paid in kind, additional warrants to
purchase Common Stock for $13 per share (the "In-Kind Culligan Warrants" and,
together with the Original Culligan Warrants, the "Culligan Warrants").
On January 28, 1998, Packaged Ice completed a private offering (the
"Original 9 3/4% Note Offering") of $145 million aggregate principal amount of
9 3/4% Senior Notes due 2005 (the "Original 9 3/4% Senior Notes"). A portion
of the proceeds from the sale of the Original 9 3/4% Senior Notes was used to
repurchase all of the 12% Senior Notes. In connection with the repurchase of the
12% Senior Notes, the Company recorded an extraordinary charge of $17.4 million.
On April 30, 1998, the Company consummated the Reddy Acquisition. In
connection with funding this acquisition, the Company completed on such date (i)
a private offering (the "Subsequent 9 3/4% Note Offering" and, together with
the Original 9 3/4% Note Offering, the "9 3/4% Note Offerings") of $125
million aggregate principal amount of 9 3/4% Senior Notes due 2005 (the
"Subsequent 9 3/4% Senior Notes" and, together with the Original 9 3/4% Senior
Notes, the "9 3/4% Senior Notes") and (ii) a private offering (the "Ares
Equity Investment") of $40 million of 13% Exchangeable Preferred Stock (the
"13% Exchangeable Preferred Stock") and warrants to purchase 975,752 shares of
Common Stock for $0.01 per share to SV and Ares Leveraged Investment Fund, L.P.
("Ares"), a $1.2 billion investment partnership managed by Ares Management,
L.P. (A portion of the proceeds from this Offering will be used to repurchase
all of the 13% Exchangeable Preferred Stock.) Certain of the principals of Ares
Management L.P. were founding principals and remain senior principals of the
Apollo Investment Funds. On April 30, 1998, the Company also entered into an $80
million five-year senior credit facility (the "Credit Facility") with Antares
Leveraged Capital Corp. consisting of a revolving working capital facility of
$15 million and a revolving acquisition loan facility of $65 million. On such
date the Company drew down $15 million under the Credit Facility. The Credit
Facility replaced the Old Credit Facility. The (i) Ares Equity Investment, (ii)
9 3/4% Note Offerings, (iii) retirement of the 12% Senior Notes, (iv) the entry
into the Credit Facility and (v) the termination of the Old Credit Facility, are
collectively referred to as the "Recapitalization."
ACQUISITIONS
The Company made 33 acquisitions (the "1997 Company Acquisitions") in
1997 including the SWI, Mission and STPI Acquisitions. In addition, in 1997,
Reddy completed 21 acquisitions (the "1997 Reddy Acquisitions" and, together
with the 1997 Company Acquisitions, the "1997 Acquisitions"). From January 1,
1998 through December 15, 1998, the Company completed 20 acquisitions (the
"1998 Company Acquisitions"), including the Reddy and Cassco Acquisitions. In
addition, prior to its acquisition by the Company, Reddy acquired 7 companies in
1998 (the "1998 Reddy Acquisitions" and, together with the 1998 Company
Acquisitions, the "1998 Acquisitions").
GENERAL
The Company was incorporated as a Texas corporation and commenced
operations in August 1990. The Company's principal executive office is located
at 8572 Katy Freeway, Suite 101, Houston, Texas 77024. The Company's telephone
number at that address is (713) 464-9384, and its facsimile number is (713)
464-4681.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 9,000,000 shares of
Common Stock offered hereby are estimated to be approximately $98.8 million
($113.9 million if the Underwriters' over-allotment options are exercised in
full) based on an assumed public offering price of $12 per share. The Company
intends to apply the proceeds as follows: (i) approximately $47.5 million to
repurchase the Company's 13% Exchangeable Preferred Stock plus accrued and
unpaid dividends and (ii) approximately $51.3 million to pay amounts outstanding
under the Company's revolving Credit Facility. See "Description of Capital
Stock -- 13% Exchangeable Preferred Stock."
Of the Company's indebtedness under the Credit Facility, which totaled
$66.5 million as of November 30, 1998, $15 million was borrowed on April 30,
1998 to finance the Reddy Acquisition, $52 million was borrowed on July 31, 1998
to finance the Cassco Acquisition and $0.5 million (net) has been repaid from
working capital proceeds. The Credit Facility matures on March 31, 2003.
Interest under the Credit Facility accrues at the Company's option at a
fluctuating rate equal to (i) LIBOR plus 2.75% per annum or (ii) the "prime"
rate plus 1.0%, with interest rates subject to a pricing grid. See "Description
of Capital Stock -- 10% Exchangeable Preferred Stock" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. In addition, the Company's Credit Facility, the 10% Exchangeable
Preferred Stock and, in some instances, the Indenture, prohibit the Company from
paying dividends on its Common Stock. Following the Offering, the Company
intends to retain any future earnings to fund growth and does not anticipate
paying any cash dividends in the foreseeable future. Any future determination as
to the Company's dividend policy will be made at the discretion of the Company's
Board of Directors and will depend on a number of factors, including the
Company's future earnings, capital requirements, financial condition and future
prospects, restrictions on dividend payments pursuant to any of the Company's
credit or other agreements and such other factors as the Board of Directors may
deem relevant. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
16
<PAGE>
DILUTION
At September 30, 1998, after giving effect to the Conversions as if they
had occurred at such date, the deficit in pro forma as adjusted net tangible
book value of the Company would have been $213.4 million, or approximately
$37.96 per share. The deficit in pro forma as adjusted net tangible book value
is equal to the aggregate net tangible book value (tangible assets less total
liabilities) of the Company after giving effect to the Conversions. The number
of shares used for the per share calculation includes the 5,047,310 shares
outstanding prior to the Offering and 574,831 shares related to the Conversions.
After giving effect to the sale by the Company of the 9,000,000 shares offered
hereby (asuming an initial offering price of $12.00 per share and after
deducting underwriting discounts and commissions), the deficit in pro forma as
adjusted net tangible book value of the Company would have been $114.0 million,
or $7.80 per share. This represents an immediate increase in pro forma net
tangible book value of $30.16 per share to the existing shareholders and an
immediate dilution in net tangible book value of $19.80 per share to new
investors purchasing shares of Common Stock in the Offering. The following table
illustrates this per share dilution:
Assumed initial public offering
price.............................. $ 12.00
Net tangible book value per
common share after giving
effect to the Conversions at
September 30, 1998............ $ (37.96)
Increase of net tangible book
value per common share
attributable to new
investors..................... 30.16
---------
Pro forma combined net tangible book
value per common share after the
Offering........................... (7.80)
Dilution of net tangible book value
per common share attributable to
new investors...................... $ 19.80
The following table summarizes, as of September 30, 1998, after giving
effect to the Offering and the Conversions, the number of shares of Common Stock
purchased from the Company, the total consideration paid therefor and the
average price per share paid by the existing shareholders and by the new
investors purchasing shares in the Offering:
<TABLE>
<CAPTION>
SHARES OF COMMON TOTAL
STOCK ACQUIRED CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)............. 7,493,693 45.4% $ 43,090,094 28.5% $ 5.75
New investors........................ 9,000,000 54.6 108,000,000 71.5 12.00
---------- ------- ------------ ------- ---------
Total........................... 16,493,693 100.0% $151,090,094 100.0% $ 9.16
========== ======= ============ ======= =========
</TABLE>
- ------------
(1) The amount of Common Stock and price thereof held by existing shareholders
includes shares of Common Stock to be issued (i) at the closing of the
Offering in the Conversions and (ii) upon the exercise of warrants to
purchase 1,871,552 shares of Common Stock at an exercise price of $.01 per
share. The computations in the table set forth above exclude (i) 637,920
shares of Common Stock issuable upon exercise of currently outstanding stock
options granted to officers, employees and consultants at a weighted average
exercise price of $12.48 per share, (ii) 2,099,151 shares of Common Stock
issuable upon the exercise of the Culligan Warrants at an exercise price of
$13 per share, (iii) 100,000 shares of Common Stock issuable upon the
exercise of the SV Warrants at an exercise price of $14 per share and (iv)
15,000 shares of Common Stock issuable upon the exercise of certain warrants
at an exercise price of $15 per share. To the extent any of the outstanding
options or warrants is exercised, there will be further dilution to holders
of Common Stock. See "Management -- Stock Option Plans" and "Description
of Capital Stock -- Warrants."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as of
September 30, 1998 and (ii) on a pro forma as adjusted basis to give effect to
the Offering and the application of the estimated net proceeds therefrom and the
Conversions.
SEPTEMBER 30, 1998
-----------------------------
PRO FORMA
HISTORICAL AS ADJUSTED(1)
----------- --------------
(IN THOUSANDS)
Cash and equivalents................. $ 5,656 $ 5,656
=========== ==============
Long-term obligations, less current
portion:
Credit Facility................. $ 71,500 $ 17,960
9 3/4% Senior Notes............. 270,000 270,000
Other indebtedness.............. 531 531
Debt discount................... (250) (250)
----------- --------------
Total long-term
obligations............. 341,781 288,241
----------- --------------
Preferred stock:
Series A Convertible Preferred
Stock, $0.01 par value, 450,000
shares authorized, 450,000
shares issued and
outstanding.................... 2,497 --
Series B Convertible Preferred
Stock, $0.01 par value, 200,000
shares authorized, 124,831
shares issued and
outstanding.................... 726 --
10% Exchangeable Preferred
Stock, 500,000 shares
authorized, 259,860 shares
issued and outstanding......... 27,075 27,075
13% Exchangeable Preferred
Stock, 800,000 shares
authorized,
411,500 shares issued and
outstanding.................... 37,384 --
----------- --------------
Total preferred stock...... 67,682 27,075
----------- --------------
Common Stock with put redemption,
420,000 shares outstanding(2)...... 1,972 --
----------- --------------
Shareholders' equity:
Preferred Stock, Series C, $0.01
par value, 100 shares
authorized and outstanding..... -- --
Common Stock, $.01 par value,
50,000,000 shares authorized,
4,925,541
shares issued and outstanding;
and 14,920,372 shares issued
and outstanding, pro forma as
adjusted(3).................... 49 149
Additional paid-in capital...... 39,337 135,356
Treasury stock (298,231 shares,
at cost)....................... (1,491) (1,491)
Accumulated deficit............. (23,109) (23,109)
----------- --------------
Total shareholders'
equity.................. 14,786 110,905
----------- --------------
Total
capitalization..... $ 426,221 $426,221
=========== ==============
- ------------
(1) Gives effect to (i) the Offering and the application of the estimated net
proceeds therefrom and (ii) the Conversions, as if they occurred on
September 30, 1998. See "Use of Proceeds."
(2) The put redemption option will expire at the closing of the Offering and
such stock will be reclassified as Common Stock.
(3) Excludes (i) 637,920 shares of Common Stock issuable upon exercise of
currently outstanding stock options granted to officers, employees and
consultants at a weighted average exercise price of $12.48 per share, (ii)
1,871,552 shares of Common Stock issuable upon exercise of warrants at an
exercise price of $.01 per share, (iii) 2,099,151 shares of Common Stock
issuable upon exercise of the Culligan Warrants at an exercise price of $13
per share, (iv) 100,000 shares of Common Stock issuable upon exercise of the
SV Warrants at an exercise price of $14 per share and (v) 15,000 shares of
Common Stock issuable upon the exercise of certain warrants at an exercise
price of $15 per share.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combined condensed balance sheet as of September
30, 1998, gives effect to (i) the Offering and the application of the estimated
net proceeds therefrom and (ii) the Conversions, as if they had occurred on
September 30, 1998.
The unaudited pro forma combined condensed statement of operations for the
year ended December 31, 1997, gives effect to (i) the 1997 Acquisitions, (ii)
the 1998 Acquisitions, (iii) the Recapitalization, (iv) the Culligan Investment,
(v) the Offering and the application of the estimated net proceeds therefrom and
(vi) the Conversions, as if they had occurred on January 1, 1997. The unaudited
pro forma combined condensed statement of operations for the year ended December
31, 1997 is derived from (a) the audited historical financial statements of
Packaged Ice, Reddy and Cassco for such year and (b) the unaudited historical
financial statements of the 1997 Acquisitions and the 1998 Acquisitions
(excluding Reddy and Cassco, collectively, the "Other Acquisitions"), of which
76 are insignificant, for the applicable periods prior to their respective
acquisition dates.
The unaudited pro forma combined condensed statement of operations for the
nine months ended September 30, 1998, gives effect to (i) the 1998 Acquisitions,
(ii) the Recapitalization, (iii) the Offering and the application of the
estimated net proceeds therefrom and (iv) the Conversions, as if they had
occurred on January 1, 1997. The unaudited pro forma combined condensed
statement of operations for the nine months ended September 30, 1998, is derived
from (a) the unaudited historical financial statements of Packaged Ice for such
period, (b) the unaudited historical financial statements of Reddy and Cassco
for the period prior to acquisition and (c) the unaudited financial statements
of the companies purchased in the 1998 Acquisitions (excluding Reddy and Cassco,
collectively, the "Other 1998 Acquisitions"), of which 25 are insignificant,
for the applicable periods prior to their respective acquisition dates.
The pro forma adjustments which give effect to the various events described
above are based upon currently available information and upon certain
assumptions that management believes are reasonable. The Company has accounted
for all acquisitions under the purchase method and the resulting assets acquired
and liabilities assumed are recorded at their estimated fair market values at
the respective dates of acquisition. The adjustments included in the unaudited
pro forma combined condensed financial statements reflect the Company's
preliminary assumptions and estimates based upon available information. The
Company is in the process of evaluating the allocation of purchase price to
other intangible assets such as customer lists, tradenames and trademarks in
connection with the 1998 acquisitions of Reddy and Cassco. The Company expects
to finalize the allocation during the fourth quarter of 1998 and does not
believe the impact of the final allocation will differ materially from the
preliminary estimates. See "Risk Factors -- Risk of Acquisitions."
The unaudited pro forma combined condensed financial statements do not
purport to be indicative of the results of operations that would have occurred
or that may be obtained in the future if the transactions described had occurred
as presented in such statements. In addition, future results may vary
significantly from the results reflected in such statements due to general
economic conditions, utility prices, labor costs, competition, the Company's
ability to integrate the operations of the companies the Company acquires with
its current business successfully and several other factors, many of which are
beyond the Company's control. See "Risk Factors."
The unaudited pro forma combined condensed financial statements should be
read in conjunction with the notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the historical
financial statements of Packaged Ice, Reddy and Cassco, including notes thereto,
included elsewhere herein.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL AND OFFERING PRO FORMA
PACKAGED ICE ADJUSTMENTS AS ADJUSTED
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents.................. $ 5,656 $ -- (a) $ 5,656
Accounts and notes receivable......... 28,166 -- 28,166
Inventories........................... 7,926 -- 7,926
Prepaid expenses and other assets..... 1,504 -- 1,504
------------ ------------ -----------
Total current assets............... 43,252 -- 43,252
Property, net........................... 168,301 -- 168,301
Other assets, net....................... 15,523 -- 15,523
Goodwill................................ 224,928 -- 224,928
------------ ------------ -----------
Total assets....................... $452,004 $ -- $ 452,004
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term
obligations........................ $ 88 $ -- $ 88
Accounts payable...................... 11,245 -- 11,245
Accrued expenses...................... 14,450 -- 14,450
------------ ------------ -----------
Total current liabilities.......... 25,783 -- 25,783
Long-term obligations:
Credit Facility....................... 71,500 (53,540)(a) 17,960
9 3/4% Senior Notes................... 270,000 -- 270,000
Other indebtedness.................... 531 -- 531
Debt discount......................... (250) -- (250)
------------ ------------ -----------
Total long-term obligations........ 341,781 (53,540) 288,241
Mandatorily redeemable preferred stock:
10% exchangeable...................... 27,075 -- 27,075
13% exchangeable...................... 37,384 (37,384)(a) --
Preferred stock with put redemption
option:
Series A.............................. 2,497 (2,497)(b) --
Series B.............................. 726 (726)(b) --
Common stock with put redemption
option................................ 1,972 (1,972)(b) --
Shareholders' equity:
Preferred stock, series C............. -- -- --
Common stock.......................... 49 10(b) 149
90(a)
Additional paid-in capital............ 39,337 90,834(a) 135,356
5,185(b)
Treasury stock........................ (1,491) -- (1,491)
Retained earnings (accumulated
deficit)........................... (23,109) -- (23,109)
------------ ------------ -----------
Total shareholders' equity......... 14,786 96,119(c) 110,905
------------ ------------ -----------
Total liabilities and
shareholders' equity....... $452,004 $ -- $ 452,004
============ ============ ===========
</TABLE>
See notes to unaudited pro forma combined condensed financial statements.
20
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL HISTORICAL HISTORICAL OTHER AND OFFERING
PACKAGED ICE REDDY CASSCO ACQUISITIONS ADJUSTMENTS
------------ ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues............................. $ 28,981 $ 66,449 $ 28,675 $ 78,771 --
Cost of sales........................ 18,724 41,713 19,547 53,211 --
------------ ---------- ---------- ------------ ------------
Gross profit......................... 10,257 24,736 9,128 25,560 --
Operating expenses................... 7,636 10,952 705 8,469 $ (155)(a)
(1,545)(b)
(446)(c)
(72)(d)
(499)(e)
(126)(f)
Depreciation and amortization........ 5,130 6,070 3,062 6,719 5,291(g)
Interest expense..................... 6,585 7,168 217 1,910 13,415(h)
Other income (expense)............... 655 580 (390) 302 (155)(a)
------------ ---------- ---------- ------------ ------------
Income (loss) before taxes........... (8,439) 1,126 4,754 8,764 (16,018)
Income taxes......................... -- 441 1,788 -- (2,229)(j)
------------ ---------- ---------- ------------ ------------
Net income (loss).................... (8,439) 685 2,966 8,764 (13,789)
Preferred dividends.................. 199 -- -- -- 2,364(i)
------------ ---------- ---------- ------------ ------------
Net income (loss) to common
shareholders....................... $ (8,638) $ 685 $ 2,966 $ 8,764 $ (16,153)
============ ========== ========== ============ ============
Net loss per share to common
shareholders....................... $ (2.40)
============
Weighted average number of common
shares outstanding................. 3,600,109 10,997,404
============ ============
</TABLE>
PRO FORMA
AS ADJUSTED
------------
Revenues............................. $ 202,876
Cost of sales........................ 133,195
------------
Gross profit......................... 69,681
Operating expenses................... 24,919
Depreciation and amortization........ 26,272
Interest expense..................... 29,295
Other income (expense)............... 992
------------
Income (loss) before taxes........... (9,813)
Income taxes......................... --
------------
Net income (loss).................... (9,813)
Preferred dividends.................. 2,563
------------
Net income (loss) to common
shareholders....................... $ (12,376)
============
Net loss per share to common
shareholders....................... $ (0.85)
============
Weighted average number of common
shares outstanding................. 14,597,513
============
See notes to unaudited pro forma combined condensed financial statements.
21
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO FORMA
HISTORICAL REDDY CASSCO OTHER 1998 AND OFFERING
PACKAGED ICE (PRE-ACQUISITION) (PRE-ACQUISITION) ACQUISITIONS ADJUSTMENTS
------------ ----------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues............................. $ 137,650 $17,858 $16,935 $ 4,968 --
Cost of sales........................ 81,035 13,871 11,974 1,759 --
------------ -------- -------- ------------ --------------
Gross profit......................... 56,615 3,987 4,961 3,209 --
Operating expenses................... 22,013 4,179 481 2,700 --
Depreciation and amortization........ 12,830 3,089 1,835 423 $ 1,526(g)
Interest expense..................... 16,457 4,376 87 281 770(h)
Other income (expense)............... 498 218 (371) 108 --
------------ -------- -------- ------------ --------------
Income (loss) before taxes........... 5,813 (7,439) 2,187 (87) (2,296)
Income taxes......................... -- -- 394 -- (394)(j)
------------ -------- -------- ------------ --------------
Net income (loss) before
extraordinary items and preferred
dividends.......................... 5,813 (7,439) 1,793 (87) (1,902)
------------ -------- -------- ------------ --------------
Preferred dividends.................. 3,950 -- -- -- (1,848)(i)
------------ -------- -------- ------------ --------------
Net income (loss) before
extraordinary items available to
common shareholders................ $ 1,863 $(7,439) $ 1,793 $ (87) $ (54)
============ ======== ======== ============ ==============
Net income (loss) per share before
extraordinary items available to
common shareholders................ $ 0.39
============
Weighted average number of common
shares outstanding................. 4,828,254 9,793,887
============ ==============
</TABLE>
PRO FORMA
AS ADJUSTED
-------------
Revenues............................. $ 177,411
Cost of sales........................ 108,639
-------------
Gross profit......................... 68,772
Operating expenses................... 29,373
Depreciation and amortization........ 19,703
Interest expense..................... 21,971
Other income (expense)............... 453
-------------
Income (loss) before taxes........... (1,822)
Income taxes......................... --
-------------
Net income (loss) before
extraordinary items and preferred
dividends.......................... (1,822)
-------------
Preferred dividends.................. 2,102
-------------
Net income (loss) before
extraordinary items available to
common shareholders................ $ (3,924)
=============
Net income (loss) per share before
extraordinary items available to
common shareholders................ $ (0.27)
=============
Weighted average number of common
shares outstanding................. 14,622,141
=============
See notes to unaudited pro forma combined condensed financial statements.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA AND PERCENTAGES)
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(a) Pro forma sources of cash from the Offering are calculated as follows:
Proceeds from the Offering (net
of Offering costs)................. $ 99,400
----------
Less cash used for:
Repurchase of 13%
Exchangeable Preferred Stock
(includes $3,600 of
repurchase premium)...... 45,860
Repayment of Credit
Facility....................... 53,540
----------
Total...................... 99,400
----------
Pro forma cash proceeds......... $ --
==========
Assumes gross proceeds from the Offering of $108,000 based on an
assumed price to the public of $12.00 per share.
(b) Reflects the conversion of the 450,000 shares Series A Convertible
Preferred Stock with a put redemption option and 124,831 shares Series
B Convertible Preferred Stock with a put redemption option into
574,831 shares of Common Stock. In conjunction with the Offering, the
registration rights underlying the put redemption feature on the
420,000 shares of Common Stock with a put redemption option were
satisfied.
(c) Excludes an additional $2,301 of pro forma dividends on the 10%
Exchangeable Preferred Stock that would be deducted from shareholders'
equity had the stock been outstanding as of January 1, 1997.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(a) Elimination of intercompany revenues/expenses with respect to
equipment leasing and service agreements between Packaged Ice and
certain acquired companies purchased during 1997.
(b) The decrease in operating expenses reflects the elimination or net
reduction of salaries and related benefits of owners and officers of
certain companies acquired by the Company, whose positions and
salaries have either been eliminated or who have taken positions at
lower salaries pursuant to contractual agreements resulting from the
acquisitions.
(c) Elimination of costs associated with operations not acquired.
(d) Elimination of lease costs related to facilities not contemplated
under the respective acquisition agreements.
(e) As a result of the acquisitions, the Company is no longer required to
pay management fees to the predecessor parent of the acquired
entities.
(f) Reduction of defined contribution plan matching costs to conform with
the Company's existing benefit plans.
23
<PAGE>
(g) The excess of total purchase price for the 1997 Acquisitions and the
1998 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:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -----------------
Value of common stock
consideration........................ $ 23,362 $ 23,362
Cash consideration................... 330,355 330,355
------------ -----------------
Total purchase price....... 353,717 353,717
Total net assets acquired............ 125,611 125,611
------------ -----------------
Goodwill............................. 228,106 228,106
============ =================
Calculated amortization, 40
year estimated life........ 5,703 4,292
Less: historical
amortization............... (412) (2,766)
------------ -----------------
Adjustment to
amortization............... $ 5,291 $ 1,526
============ =================
The Company has not completed an assessment of the fair value of the net
assets acquired in the Reddy and Cassco Acquisitions for the purpose of
allocating the purchase price. To the extent that such an assessment indicates
the fair value of the fixed assets is in excess of net book value, this excess
would be allocated to fixed assets or other intangible assets and would reduce
the goodwill calculated above. Assuming a weighted average depreciable life for
fixed assets of five years, every $500 allocated to fixed assets rather than
goodwill would increase depreciation and amortization expense for the pro forma
year ended December 31, 1997 and the nine months ended September 30, 1998 by $87
and $65, respectively.
(h) Interest expense adjustments are as follows:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -----------------
9 3/4% Senior Notes.................. $270,000 $ 270,000
============ =================
Pro forma interest expense on 9 3/4%
Senior Notes....................... $ 26,325 $ 19,744
Pro forma interest on Credit
Facility........................... 1,527 1,145
Less: Packaged Ice historical
interest expense..................... (6,585) (16,457)
Reddy historical interest
expense......................... (7,168) (4,376)
Cassco historical interest
expense......................... (217) (87)
Other Acquisitions historical
interest expense.............. (1,910) (281)
Plus: Additional interest on
amortization of debt issue costs:
Total debt issue costs of
$9,820
Calculated amortization, 7
year life.................. 1,403 1,052
Amortization of discount on
9 3/4% Senior Notes:
Total discount of $280
Calculated amortization, 7
year life.................. 40 30
------------ -----------------
Net adjustment to interest expense... $ 13,415 $ 770
============ =================
(i) Dividends on the 10% Exchangeable Preferred Stock and elimination of
dividends on the 13% Exchangeable Preferred Stock.
(j) The elimination of Reddy's and Cassco's income tax expense assumes
that the combined Company was in a loss position, therefore the
Company would not incur income tax expense.
24
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data derived
from the audited financial statements of Packaged Ice for each of the five years
in the period ended December 31, 1997 and contains selected financial data
derived from the unaudited financial statements of Packaged Ice for the nine
months ended September 30, 1997 and 1998. The unaudited financial statements of
Packaged Ice as of and for the nine months ended September 30, 1997 and 1998
reflect all adjustments necessary in the opinion of management (consisting only
of normal recurring adjustments) for a fair presentation of such financial data.
The following information should be read in conjunction with the Company's
financial statements, including the notes thereto, "The Company,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial Statements, including the
notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................... $ 155 $ 784 $ 2,830 $ 4,427 $ 28,981 $ 20,963 $ 137,650
Cost of sales...................... 56 352 1,251 2,035 18,724 12,336 81,035
--------- --------- --------- --------- --------- --------- ----------
Gross profit....................... 99 432 1,579 2,392 10,257 8,627 56,615
Operating expenses................. 431 974 1,515 1,981 7,636 4,566 22,013
Depreciation and amortization...... 48 224 751 1,456 5,130 3,443 12,830
Interest expense................... (11) (25) (76) (130) (6,585) (3,177) (16,457)
Other income....................... -- 69 75 185 655 577 498
Extraordinary loss on
refinancing........................ -- -- -- -- -- -- (17,387)
--------- --------- --------- --------- --------- --------- ----------
Net loss........................... $ (391) $ (722) $ (688) $ (990) $ (8,439) $ (1,982) $ (11,574)
========= ========= ========= ========= ========= ========= ==========
Net loss to common shareholders.... $ (391) $ (722) $ (688) $ (990) $ (8,638) $ (1,982) $ (15,524)
========= ========= ========= ========= ========= ========= ==========
NET INCOME (LOSS) PER SHARE OF COMMON
STOCK:
Basic:
Net income (loss) before
extraordinary item available to
common shareholders.............. $ (0.25) $ (0.28) $ (0.26) $ (0.35) $ (2.40) $ (0.57) $ 0.39
Extraordinary item................. -- -- -- -- -- -- (3.60)
--------- --------- --------- --------- --------- --------- ----------
Loss to common shareholders........ $ (0.25) $ (0.28) $ (0.26) $ (0.35) $ (2.40) $ (0.57) $ (3.21)
========= ========= ========= ========= ========= ========= ==========
Diluted:
Net income (loss) before
extraordinary item available to
common shareholders.............. $ (0.25) $ (0.28) $ (0.26) $ (0.35) $ (2.40) $ (0.57) $ 0.28
Extraordinary item................. -- -- -- -- -- -- (2.61)
--------- --------- --------- --------- --------- --------- ----------
Loss to common shareholders........ $ (0.25) $ (0.28) $ (0.26) $ (0.35) $ (2.40) $ (0.57) $ (2.33)
========= ========= ========= ========= ========= ========= ==========
Weighted average common shares:
Basic............................ 1,538 2,615 2,682 2,826 3,600 3,459 4,828
Diluted.......................... 1,538 2,615 2,682 2,826 3,600 3,459 6,666
OTHER FINANCIAL DATA:
Cash flows -- operating
activities....................... $ (289) $ (647) $ 148 $ 1,094 $ (3,292) $ 347 $ 7,180
Cash flows -- investing
activities....................... (292) (3,497) (2,961) (5,925) (61,541) (32,559) (307,724)
Cash flows -- financing
activities....................... 492 4,897 3,034 3,968 79,488 36,724 291,375
EBITDA(1).......................... (332) (473) 139 596 3,276 4,638 35,100
Ratio of earnings to fixed
charges(3)......................... N/A N/A N/A N/A N/A N/A .35
Revenue growth..................... 434.5% 405.8% 261.0% 56.4% 554.6% 465.2% 556.6%
BALANCE SHEET DATA:
Cash and equivalents............... $ 58 $ 812 $ 1,033 $ 170 $ 14,825 $ 4,682 5,656
Working capital (deficiency)....... (137) 639 696 (1,228) 16,553 3,927 17,469
Total assets....................... 618 5,513 8,050 11,523 122,300 82,824 452,004
Total long-term obligations, net of
discount........................... 125 566 211 3,582 67,501 50,768 341,781
13% Exchangeable Preferred Stock... -- -- -- -- -- -- 37,384
10% Exchangeable Preferred Stock... -- -- -- -- 25,199 -- 27,075
Convertible Preferred Stock with
put redemption option(2)......... -- -- 2,497 2,497 3,223 3,223 3,223
Common Stock with put redemption
option(2)........................ -- -- 1,972 1,972 1,972 1,972 1,972
Total shareholders' equity......... 247 4,427 2,582 1,597 15,819 19,265 14,787
</TABLE>
- ------------
(1) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and extraordinary items. The Company has included EBITDA (which
is not a measure of financial performance under GAAP) because it understands
that EBITDA is one measure used by certain investors to determine a
company's historical ability to service its indebtedness. EBITDA should not
be considered by an investor as an alternative to net income, as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity.
(2) 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 nine months
ended September 30, 1997, 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, and $1,982,000 for the nine months ended September 30,
1997.
(3) The put redemption option will expire at the closing of the Offering and
such stock will be reclassified as Common Stock.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH "SELECTED
HISTORICAL FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
INCLUDING NOTES THERETO AND OTHER INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
The Company is the largest manufacturer and distributor of packaged ice in
the United States and currently serves over 70,000 customer locations in 26
states, with Texas, Arizona, California and Florida constituting over 62% of the
Company's sales. The Company services all significant markets of the ice
industry, including supermarket and convenience store retailers, restaurants,
commercial users and the agricultural sector.
The Company derives its revenues primarily from the sale of packaged ice.
Prices for packaged ice have historically been stable with some price variation
between markets based on geography, weather and the customer base. Management
believes that the Company's geographic and customer diversification insulate it
from both price and demand fluctuations due to regional weather conditions. The
Company also derives revenue from other goods and services including cold
storage rental, the manufacturing and sale of bottled water and institutional
ice machine leasing.
The Company operates predominantly in one business segment, the
manufacturing and sale of packaged ice products. These revenues are derived from
the sale of packaged ice through traditional delivery methods, whereby ice is
manufactured, packaged and stored at a central facility and transported to the
retail location when needed, and through its proprietary Ice Factories which
automatically manufacture, package and store ice at the retail location.
The Company's cost of sales includes costs associated with both traditional
ice delivery and the Ice Factories. In the traditional ice business, plant
occupancy, plastic bags, delivery, labor and utility-related expenses account
for the largest costs. Costs vary significantly by region and fluctuate based
upon, among other things, freezer capacity and local utility rates. With the Ice
Factory, plant occupancy, delivery and utility costs are eliminated, but the
costs associated with customer service representatives and machine technicians
are added to the cost of sales.
The Company's operating expenses include costs associated with selling,
general and administrative functions. These costs include executive officers'
compensation, office and administrative salaries and costs associated with
leasing office space. Selling, general and administrative functions for sales
from traditional plants and Ice Factories are similar. The Company typically
enters new markets for traditional ice by acquiring existing companies. In such
cases, the Company assumes the ongoing cost of operations and attempts to reduce
those costs through the integration of the acquired company. Upon entering into
new markets in which it intends to place Ice Factories, the Company incurs
operating expenses related to new marketing programs, accounting systems and
office facilities that are typically consistent with operating expenses
experienced in the Company's existing markets. As part of the Company's
continuing examination of its power costs, the Company has engaged in
discussions with power suppliers related to the potential provision of the
Company's electrical power requirements.
The Company has grown primarily through the implementation of its
consolidation strategy within the highly fragmented packaged ice industry where
it has completed 53 acquisitions since April 1997 for an aggregate purchase
price of $353.7 million and, to a lesser extent, through the installation of Ice
Factories. The Company's acquisition program has resulted in $228.1 million of
goodwill and other intangible assets on the Company's books which will be
amortized over a 40-year period. This program has been financed almost
exclusively through the incurrence of debt and the issuance of capital stock. In
connection with the Recapitalization, the Company recorded an extraordinary
charge against earnings of $17.4 million in the first quarter of 1998.
For a more complete discussion of the Company's capital and acquisition
transactions, see "The Company," "Capitalization" and "Description of
Capital Stock."
26
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, selected
operating data and supplemental data expressed as a percentage of total revenues
at the end of each period.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 44.2 46.0 64.6 58.8 58.9
Gross profit....................... 55.8 54.0 35.4 41.2 41.1
Operating expenses(1).............. 53.5 44.7 26.3 21.8 16.0
Depreciation and amortization...... 26.5 32.9 17.7 16.4 9.3
Interest expense................... 2.7 2.9 22.7 15.2 12.0
Other income....................... 2.7 4.2 2.3 2.8 0.4
Net income (loss) before
extraordinary item and preferred
dividends........................ (24.2) (22.3) (29.0) (9.4) 4.2
</TABLE>
- ------------
(1) Excludes depreciation and amortization.
HISTORICAL RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
REVENUES. Revenues increased $116.7 million from $20.9 million in the nine
months ended September 30, 1997 to $137.6 million in the nine months ended
September 30, 1998. Revenues increased $112.2 million as a result of revenue
contributed by the acquisitions of traditional ice companies and $4.5 million
due to the placement of additional Ice Factories since September 30, 1997.
Additionally, unprecedented hot, dry weather during the 1998 summer period,
throughout the southeastern portion of the United States and Texas, resulted in
much greater sales than anticipated and has more than offset the shortfall of
sales during the first quarter of 1998.
COST OF SALES. Cost of sales increased $68.7 million from $12.3 million in
the nine months ended September 30, 1997 to $81.0 million in the nine months
ended September 30, 1998. This increase was primarily due to acquisitions of
traditional ice companies. The cost of sales as a percentage of revenues
increased from 58.8% to 58.9%. The greater revenue experienced during the nine
months ended September 30, 1998 benefited gross profit. This benefit was
completely offset by the additional costs directly related to the cumulative
effect of the unprecedented heat experienced during the 1998 summer period.
Additional costs included the cost of purchasing ice from third parties and
transporting both purchased and Company-produced ice into other Company-serviced
regions that were unable to meet demand with local ice producing capacity.
GROSS PROFIT. Gross profit increased $48.0 million from $8.6 million in
the nine months ended September 30, 1997 to $56.6 million in the nine months
ended September 30, 1998. This increase primarily resulted from acquisitions of
traditional ice companies completed during 1997 and 1998. As a percentage of
revenues, gross profit decreased from 41.2% to 41.1%.
OPERATING EXPENSES. Operating expenses, exclusive of depreciation and
amortization, increased $17.4 million from $4.6 million in the nine months ended
September 30, 1997 to $22.0 million in the nine months ended September 30, 1998.
This increase was primarily due to acquisitions of traditional ice companies
completed during 1997 and 1998. As a percentage of revenues, operating expenses
decreased from 21.8% to 16.0%. This decrease was due to greater efficiencies
realized by the Company as its general and administrative expenses were spread
over the larger base of revenues resulting from the Company's acquisitions of
traditional ice businesses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$9.4 million from $3.4 million in the nine months ended September 30, 1997 to
$12.8 million in the nine months ended September 30, 1998. As a percentage of
revenues, depreciation and amortization decreased from 16.4% to 9.3%. This
decrease was due primarily to the lower historical depreciation and amortization
percentages of
27
<PAGE>
traditional ice businesses the Company has acquired. These percentages reflect
the longer estimated useful lives of traditional ice plant and equipment, as
compared to Ice Factories.
INTEREST EXPENSE. Interest expense increased $13.3 million from $3.2
million in the nine months ended September 30, 1997 to $16.5 million in the nine
months ended September 30, 1998. This increase was a result of higher levels of
the Company's debt outstanding during the nine months ended September 30, 1998,
resulting from the debt financing used in connection with the closing of
acquisitions the Company made in 1998.
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. Net income increased $7.8
million from a $2.0 million loss in the nine months ended September 30, 1997 to
$5.8 million in the nine months ended September 30, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
REVENUES. Revenues increased $24.6 million from $4.4 million for the year
ended December 31, 1996 to $29.0 million for the year ended December 31, 1997.
Revenues increased $2.7 million due to the placement of additional Ice Factories
(which was the only method of distribution prior to the SWI, Mission and STPI
Acquisitions in April 1997) and $21.9 million as a result of revenues
contributed by acquisitions the Company made in 1997.
COST OF SALES. Cost of sales increased $16.7 million from $2.0 million for
the year ended December 31, 1996 to $18.7 million for the year ended December
31, 1997. This increase was due to the closing of acquisitions the Company made
in 1997. The cost of sales as a percentage of revenues increased from 46.0% to
64.6%. This increase reflects the higher cost associated with traditional ice
production as compared to the Ice Factory.
GROSS PROFIT. Gross profit increased $7.9 million from $2.4 million for
the year ended December 31, 1996 to $10.3 million for the year ended December
31, 1997. Acquisitions the Company completed in 1997 contributed $7.2 million of
the increase in gross profit. As a percentage of revenues, gross profit
decreased from 54.0% to 35.4%. Gross margins decreased because of the higher
cost of sales reflected in the traditional ice businesses acquired in 1997.
Traditional ice companies have higher costs of sales than the costs associated
with the on-site manufacturing and delivery of the Ice Factory.
OPERATING EXPENSES. Operating expenses, exclusive of depreciation and
amortization, increased $5.6 million from $2.0 million for the year ended
December 31, 1996 to $7.6 million for the year ended December 31, 1997. As a
percentage of revenues, operating expenses decreased from 44.7% to 26.3%. This
decrease was due to greater efficiencies realized by Packaged Ice as its general
and administrative expenses were spread over the larger base of revenues
resulting from the acquisitions the Company completed in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$3.6 million from $1.5 million for the year ended December 31, 1996 to $5.1
million for the year ended December 31, 1997. As a percentage of revenues,
depreciation and amortization decreased from 32.9% to 17.7%. This decrease was
due primarily to the lower historical depreciation and amortization percentages
resulting from the acquisitions the Company completed in 1997. These percentages
reflect the longer estimated useful lives of traditional ice plant and equipment
as compared to Ice Factories. This decrease more than offset the increase
related to the amortization of goodwill resulting from such acquisitions.
INTEREST EXPENSE. Interest expense increased $6.5 million from $0.1
million for the year ended December 31, 1996 to $6.6 million for the year ended
December 31, 1997. This increase was a result of higher levels of debt
outstanding during 1997.
NET LOSS. Net loss increased $7.4 million from $1.0 million for the year
ended December 31, 1996 to $8.4 million for the year ended December 31, 1997.
This increase in loss is due to the increases in depreciation and amortization
related to the acquisitions closed in 1997 and interest expense related to the
increased level of debt necessary to close such acquisitions.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
REVENUES. Revenues increased $1.6 million from $2.8 million for the year
ended December 31, 1995 to $4.4 million for the year ended December 31, 1996.
Revenues increased due to Packaged Ice's continued
28
<PAGE>
success in penetrating existing markets and its entry into the Arizona market
under the terms of a master lease arrangement with SWI.
COST OF SALES. Cost of sales increased $0.7 million from $1.3 million for
the year ended December 31, 1995 to $2.0 million for the year ended December 31,
1996. This increase was due principally to the increased number of Ice Factories
in service (from 417 at December 31, 1995 to 658 at December 31, 1996).
GROSS PROFIT. Gross profit increased $0.8 million from $1.6 million for
the year ended December 31, 1995 to $2.4 million for the year ended December 31,
1996. As a percentage of revenues, gross profit decreased from 55.8% to 54.0%.
Gross margins decreased primarily as a result of purchases of manufactured ice
bought from outside vendors to meet increased demand due to unseasonably hot
weather in the Company's primary markets. Purchases of manufactured ice as a
percentage of total revenues increased from 0.6% to 1.9%.
OPERATING EXPENSES. Operating expenses increased $0.5 million from $1.5
million for the year ended December 31, 1995 to $2.0 million for the year ended
December 31, 1996. As a percentage of revenues, operating expenses decreased
from 53.5% to 44.7%. This decrease was due primarily to salary-related expenses
that, as a percentage of revenues, decreased from 25.4% to 21.0% as a result of
greater efficiencies realized by the Company from its consolidation of its sales
force in its primary markets.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$0.7 million from $0.8 million for the year ended December 31, 1995 to $1.5
million for the year ended December 31, 1996. This increase was due primarily to
an increase in capital expenditures principally for newly installed Ice
Factories from $2.7 million to $5.7 million.
INTEREST EXPENSE. Interest expense increased $0.05 million from $0.08
million for the year ended December 31, 1995 to $0.13 million for the year ended
December 31, 1996. This increase was a result of higher levels of indebtedness
associated with the Company borrowing $3.5 million from its prior credit
facility with Bank One, Texas, N.A. and $0.8 million of convertible notes from
its shareholders to finance equipment placements in fiscal 1996. The convertible
notes were converted into Series B Convertible Preferred Stock in January 1997.
NET LOSS. Net loss increased $0.3 million from $0.7 million for the year
ended December 31, 1995 to $1.0 million for the year ended December 31, 1996.
This increase in loss is due to increased depreciation and amortization as a
result of the aggressive Ice Factory installation program.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from the sale of packaged ice through
traditional delivery methods, whereby ice is manufactured, packaged and stored
at a central facility and transported to retail locations when needed, and
through Ice Factories, which manufacture, package and store ice in retail
locations. The Company's primary uses of cash are (i) cost of sales, (ii)
operating expenses, (iii) debt service, (iv) capital expenditures related to
acquiring additional Ice Factories and replacing and modernizing the Company's
other capital equipment and (v) acquisitions.
For the nine months ended September 30, 1998, net cash provided by
operating activities was $7.2 million and net cash used in investing activities
was $307.7 million, principally for acquisitions of traditional ice companies
($294.0 million) and property additions ($16.0 million). Net cash provided by
financing activities was $291.4 million, principally from proceeds of the 9 3/4%
Senior Notes, net of refinancing the existing 12% Senior Notes and the related
costs ($180.6 million), the net proceeds from issuance of stock ($39.2 million)
and the net increase in borrowings under the Credit Facility ($71.5 million).
The resulting change in cash and equivalents was a decrease of $9.1 million.
For the nine months ended September 30, 1997, net cash provided by
operating activities was $0.3 million and net cash used by investing activities
was $32.6 million, principally for acquisitions of traditional ice companies
($25.7 million) and property additions ($6.7 million). Net cash provided by
financing activities was $36.7 million, principally from net proceeds from the
issuance of the Original 12% Senior Notes ($45.0 million) which was partially
offset by repayment of debt ($12.1 million). The net resulting change to cash
and cash equivalents was an increase of $4.5 million.
29
<PAGE>
The Company intends to pursue a growth oriented strategy, which is to be
implemented through an aggressive acquisition strategy, internal growth, margin
enhancement and expansion into related businesses. The Company is currently
evaluating certain business acquisition and expansion opportunities, but it
currently has no contracts or capital commitments relating to any potential
acquisitions or developments. See "Risk Factors -- Risk of Acquisitions."
The Company at September 30, 1998 had approximately $341.9 million of debt
outstanding as follows: (i) $270 million of 9 3/4% Senior Notes due 2005 and
(ii) $71.5 million outstanding under the Company's $80 million Credit Facility,
which, at the Company's option, bears interest at LIBOR plus 2.75% or the
"prime" rate plus 1.00%, with interest rates subject to a pricing grid. The
amounts under the revolving acquisition loan portion of the Credit Facility will
be due beginning June 30, 2000 in 12 equal quarterly installments. The Credit
Facility contains financial covenants which include limitations on capital
expenditures and the maintenance of minimum levels of ratios of EBITDA to fixed
charges, interest coverage and leverage as defined in the agreements and is
secured by all of the Company's assets and the capital stock of all of the
Company's significant subsidiaries. After the Offering, the Company will also
have two classes of preferred stock outstanding as follows: (a) 100 shares of
$10 per share in liquidation preference of Series C Preferred Stock and (b)
259,860 shares of $100 per share in liquidation preference of 10% Exchangeable
Preferred Stock, which may be optionally redeemed at the liquidation preference
per share, subject to certain adjustments. Payments of cash dividends and
redemption of the 10% Exchangeable Preferred Stock is restricted by certain
covenants under the Indenture and Credit Facility. See "Risk
Factors -- Substantial Leverage and Ability to Service Debt."
Capital expenditures for the Company's Ice Factories are expected to be
approximately $8.7 million in 1998 and $6.8 million in 1999. Capital
expenditures to maintain and expand traditional ice facilities are expected to
be approximately $13.0 million in 1998 and $15.5 million in 1999.
The Company expects to continue acquiring traditional ice companies using a
combination of cash and common stock. There can be no assurance that
acquisitions based upon the Company's criteria can be obtained or that funds
will be available in sufficient amounts to finance such acquisitions. In
connection with such acquisitions, the Company intends to file an "acquisition
shelf" registration statement to register the sale of up to five million shares
of Common Stock.
Although the Company has periodically reported negative cash flows from
operations on a historical basis, the Company has experienced a significant
increase in positive cash flow from operations attributable to the acquisitions
during the nine months ended September 30, 1998. Historically, Reddy and Cassco
have combined to report in excess of $10 million in operating cash flows in each
of their most recent fiscal years. The Company believes 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
through the next 12 to 18 months.
The Company may need to raise additional funds through public or private
debt or equity financing to take advantage of opportunities that may become
available to the Company, including acquisitions and more rapid expansion. The
availability of such capital will depend upon prevailing market conditions and
other factors over which the Company has no control, as well as the Company's
financial condition and results of operations. There can be no assurance that
sufficient funds will be available to finance intended acquisitions or capital
expenditures to sustain the Company's recent rate of growth.
YEAR 2000
The Company is exposed to the risk that the year 2000 issue (the "Year
2000 Issue") could cause system failures or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
During 1998, the Company undertook a corporate-wide initiative designed to
assess the impact of the Year 2000 Issue on software and hardware utilized in
the Company's operations, including information technology infrastructure
("IT") and embedded manufacturing control technology ("Non-IT").
The Company's initiative is to be conducted in three phases: assessment,
implementation and testing. During the assessment phase, the Company completed a
comprehensive inventory of IT and Non-IT systems and equipment. Many of the
Company's IT systems include hardware and packaged software
30
<PAGE>
purchased from large vendors who have represented that these systems are already
year 2000 compliant. However, the Company has determined that it will be
necessary to modify portions of its financial and accounting software. The
Company believes that its Non-IT systems, which include the Ice Factory, are not
at risk to the Year 2000 Issue.
The Company believes that with modifications to its existing software, the
Year 2000 Issue can be mitigated. The implementation of these remediation
efforts is underway and is expected to be completed by March 31, 1999. However,
if such modifications are not made, or are not completed timely, the Year 2000
Issue could have a material impact on the Company's operations. The Company
plans to complete the testing of the year 2000 modifications by early 1999. The
Company has not established a contingency plan but intends to formulate one to
address unavoidable risks, and it expects to have the contingency plan
formulated by mid-1999.
The Company does not currently rely on the IT systems of other companies;
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 Company
intends to continue to pursue an acquisition strategy; and as a result, there
can be no assurance that the IT systems being used by an acquired company will
be compliant with the Year 2000 Issue or that any such conversion or failure to
convert an acquired system would not have an adverse effect on the Company.
The Company's 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 the Company's operations and
have not represented a material expense to the Company. The Company has not
completed its assessment but currently believes that the costs of addressing the
Year 2000 Issue should not be significant and should not have a material adverse
impact on the Company's 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. The Company uses large quantities of water and energy in the
manufacture and storage of its packaged ice products. The Company also uses
large quantities of plastic bags. If the prices of such resources should
increase from recent levels, the Company could experience sudden and significant
increases in the cost of plastic bags, fuel, or utilities such as water and
electricity. The Company may be unable to pass these increases along to its
customers. Historically, market prices for plastic bags have fluctuated in
response to a number of factors, including changes in polyethylene prices. The
Company historically has not attempted to pass through changes in the price of
plastic bags; therefore, a large, abrupt change in the price of plastic bags
could have a material adverse effect on the Company's operating margins,
although such adverse effects historically have been temporary. There can be no
assurance that significant changes in plastic bag, water, electricity, fuel or
other commodity prices would not have a material adverse effect on the Company's
business, results of operations and debt service capabilities. See "Risk
Factors -- Effects of Price Changes in Raw Materials."
The Company experiences seasonal fluctuations in its net sales and
profitability with a disproportionate amount of the Company's net sales and a
majority of its net income typically realized in its second and third calendar
quarters (May through September). The Company believes that over 60% of its
revenues will occur during the second and third calendar quarters when the
weather conditions are generally warmer and demand is greater while less than
40% of its revenues will occur during the first and fourth calendar quarters
when the weather is generally cooler. As a result of these seasonal revenue
declines and the lack of proportional corresponding expense decreases, the
Company will most likely experience lower profit margins and possibly experience
losses during the first and fourth calendar quarters. In addition, because the
Company's operating results depend significantly on sales during its peak
season, the Company's quarterly results of operations may fluctuate
significantly as a result of adverse weather during this period (such as an
unusually cool or rainy period). Because inclement weather such as the type
caused by the "El Nino" weather phenomenon is believed to be a primary cause
for decreased volume in the ice industry, the Company could be adversely
affected by this and other weather phenomena. See "Risk Factors -- Seasonality
of Ice Business and Weather."
31
<PAGE>
BUSINESS
COMPANY OVERVIEW
The Company is the largest manufacturer and distributor of packaged ice in
North America and currently serves over 70,000 customer locations in 26 states
and the District of Columbia. Based on revenues, management believes that the
Company is more than five times larger than its next largest competitor. The
Company has grown primarily through the implementation of its consolidation
strategy within the highly fragmented packaged ice industry. Since April 1997,
the Company has completed 53 acquisitions principally in the southern half of
the United States. These acquisitions have added annual revenues of
approximately $196 million and have enabled the Company to enter new geographic
regions, increase its presence in established markets, gain additional
production capacity, realize cost savings from economies of scale and leverage
the acquired companies' relationships with grocery and convenience store
customers. The Company also installs proprietary Ice Factories. As a result of
the successful execution of the Company's growth strategy, revenues have
increased from $4.4 million in 1996 to $202.9 million (pro forma) in 1997, and
from $21.0 million for the nine months ended September 30, 1997 to $177.4
million (pro forma) for the nine months ended September 30, 1998. EBITDA for
such periods has increased from $0.6 million in 1996 to $45.8 million (pro
forma) in 1997, and $4.6 million for the nine months ended September 30, 1997 to
$39.9 million (pro forma) for the nine months ended September 30, 1998. Net loss
before extraordinary items for such periods has increased from $1.0 million in
1996 to $9.8 million (pro forma) in 1997, and decreased from $2.0 million for
the nine months ended September 30, 1997 to $1.8 million (pro forma) for the
nine months ended September 30, 1998. Following the Offering, the Company
believes that it will have the capital resources necessary to continue to lead
the consolidation of the packaged ice industry.
THE INDUSTRY
The packaged ice industry has attractive fundamental characteristics,
including highly fragmented ownership and stable demand. Additionally, since
retailers generally purchase packaged ice from only one supplier, there is
minimal brand competition at the point of sale. Due to high product
transportation and storage costs, the ice business has historically been a
regional service business and is comprised primarily of smaller packaged ice
companies that lack significant capital resources. Traditional ice
manufacturers, including the Company, produce and package ice at
centrally-located facilities and normally distribute to a limited market radius
of 100 miles from the point of production. As a result of these geographic
constraints, success in the ice business depends upon an efficient manufacturing
and distribution system with high density customer distribution routes in a
region, high customer concentration within a market area and the ability to
ensure prompt and reliable delivery during peak seasonal months. The Company
believes that its consolidation of traditional ice manufacturers within a
geographic region provides efficiencies in manufacturing and distribution which
gives it an advantage over its competitors due to higher density of customer
sites and the flexibility to shift production among its manufacturing plants
within a region.
The Company believes that packaged ice products are purchased as needed by
consumers and that such purchases are relatively price insensitive due
principally to the low cost of the product and absence of substitute products.
The industry is seasonal, characterized by peak demand occurring during the
warmer months of May through September, with an extended selling season
occurring in the southern United States. On a year-to-year basis, demand remains
stable and is generally only adversely affected by abnormally cool or rainy
weather within a region. Management believes that the Company's geographic
diversification helps mitigate the potential adverse impact of abnormal weather
patterns in any particular market.
BUSINESS STRATEGY
The Company's business strategy is to strengthen its position as the
leading packaged ice company in North America and to increase revenues and
profitability through an aggressive acquisition strategy, internal growth,
margin enhancement, and expansion into related businesses. The Company believes
its size, national scope, industry experience, proven ability to complete and
integrate acquisitions, and its proprietary Ice Factory give it significant
competitive advantages in pursuing its business strategy. These
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<PAGE>
advantages have enabled the Company to develop an efficient regional production
and distribution network and to service national accounts through its expanded
geographic presence. As a result, management believes Packaged Ice competes very
effectively with smaller, local packaged ice companies. The key elements of the
Company's business strategy are described below.
ACQUIRE TRADITIONAL ICE MANUFACTURING COMPANIES. Management believes that
the highly fragmented packaged ice industry contains numerous additional
acquisition opportunities. The Company's proven ability to enter new markets
through traditional acquisitions, coupled with its unique significant capital
resources and combination of ice delivery systems through traditional delivery
methods and the proprietary Ice Factory, has positioned the Company to continue
to be the leader in the consolidation of the industry. The Company's acquisition
strategy is to target well-managed, traditional ice producers and distributors
with attractive customer bases in both new and existing market areas. The
Company typically retains the former owners and other key personnel of acquired
packaged ice companies in an effort to ensure the continuation of high quality
services and the maintenance of customer relationships.
Packaged Ice has completed 53 acquisitions since April 1997, representing
annual revenues of approximately $196 million. On July 31, 1998, the Company
acquired all of the outstanding stock of Cassco from WLR Foods, Inc. for
approximately $59 million in cash. Cassco is a leading regional producer and
distributor of packaged ice products and an owner/operator of cold storage
warehouses in the Mid-Atlantic Region, with revenues of approximately $28.7
million and $12.9 million for the twelve months ended December 31, 1997 and the
six months ended June 30, 1998, respectively. On April 30, 1998, the Company
acquired Reddy from Suiza Foods Corporation for $180.8 million, which added over
$85 million in pro forma annual revenues. Prior to the Reddy Acquisition, Reddy
had been active in the consolidation of the packaged ice industry, having made
28 acquisitions from January 1997 to April 1998 when it was purchased. The
Company's other acquisitions, except for SWI, Mission and STPI generally have
been small, single location market leaders and smaller "tuck-ins" that
singularly and in the aggregate are not as significant as the Reddy Acquisition.
The Company's acquisitions have provided it with (i) a source of increased cash
flow, (ii) national scope to better service large customers, (iii) economies of
scale and cost savings through the consolidation of redundant manufacturing and
distribution facilities, and administration and selling functions and (iv)
improved access to key markets and new customers.
EXPLOIT NATIONAL MARKET PRESENCE. The Company's enhanced service
capabilities and geographic presence have enabled it to satisfy the desire of
many of its customers to source products from one national or regional supplier.
The Company has also capitalized on the decision of certain large retailers to
outsource ice production. Since 1997, the Company has entered into national or
regional supply arrangements with Circle K, Wal-Mart, 7-Eleven, Texaco, Diamond
Shamrock, Publix, Albertson's, Safeway, Vons, Winn-Dixie, HEB, L'il Champs,
Randall's and Kroger. As the Company continues to expand its operations into new
markets, management anticipates entering into additional national and regional
supply arrangements with major retailers.
EXPAND MARKET PRESENCE THROUGH THE ICE FACTORY. Through its Ice Factory,
the Company is the only provider of on-site, automated ice manufacturing and
bagging systems at retail locations. The Ice Factory has gained strong market
acceptance by high volume retailers with cost and service advantages as compared
to traditional packaged ice delivery methods. This proprietary system uses
state-of-the-art technology to produce, package and store up to 40,000 bags of
ice per year directly at customer locations. The Company retains ownership of
the Ice Factory and charges customers on a usage basis.
The Ice Factory, when combined with traditional delivery methods, provides
the Company with numerous unique advantages, including (i) a flexible delivery
system designed to supply high volume locations and capable of cost-effectively
servicing a market in excess of 100 miles from traditional ice manufacturing
facilities, (ii) the ability to redistribute production from its traditional ice
facilities to new customers as well as satisfy seasonal peak demand at stores
with Ice Factories and (iii) higher operating margins, due to significantly
reduced production, storage and distribution costs.
As part of the Company's consolidation strategy, the Ice Factory gives the
Company the ability to develop a customer base in new markets where it does not
currently own traditional ice companies. The Ice
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Factory has led the Company's expansion into several markets such as Houston,
Dallas, Phoenix and Seattle and should continue to drive entry into new markets
and expansion in existing markets.
ENHANCE OPERATING MARGINS OF EXISTING AND ACQUIRED BUSINESSES.The Company's
consolidation strategy provides management with significant opportunities to
enhance operating margins of its acquired businesses. Upon closing an
acquisition, the Company seeks to reduce operating costs and working capital
requirements through (i) consolidation of redundant manufacturing and/or storage
facilities, (ii) rationalization of distribution routes and service operations,
(iii) combination of administrative and marketing functions and (iv) leveraging
of economies of scale in purchasing and operations.
PURSUE EXPANSION INTO RELATED BUSINESSES.In connection with certain
acquisitions of traditional ice manufacturers, the Company's business has
expanded into areas which leverage the Company's competitive position and
expertise in the packaged ice industry. Management is currently evaluating the
expansion of its institutional ice machine leasing, public cold storage and
bottled water businesses.
LEVERAGE MANAGEMENT EXPERTISE.The Company believes that it is well
positioned to execute its business strategy given the depth, experience and
ability of its management team. The Company's executive officers are led by
James F. Stuart, Chairman and Chief Executive Officer, who founded Packaged Ice
in 1990, A. J. Lewis III, President, and Jimmy C. Weaver, Executive Vice
President and Chief Operating Officer, who together have more than 30 years of
industry experience. Mr. Stuart is chiefly responsible for the development of
the Ice Factory and, together with Messrs. Lewis and Weaver, has developed and
executed the Company's strategic plan. The Company also benefits from the local
operating knowledge and goodwill developed by the management of the companies it
acquires by retaining a significant number of the principals of such companies.
ACQUISITIONS
The Company's acquisition strategy is focused on expanding its traditional
ice operations and related businesses into new markets across the United States
and increasing its presence in markets it currently serves. In evaluating
specific acquisitions, the Company considers such factors as quality of customer
relationships, market demographics, manufacturing plant efficiency, potential
for expansion and improved profitability and management expertise. In all
acquisitions, the Company requires the seller or its principal shareholders to
enter into a covenant not to compete. In addition, the Company seeks to retain
key management of the acquired companies in most instances. The major factors in
establishing the purchase price for each acquisition are historical operating
results, future prospects of the acquiree and the ability of that business to
complement the services offered by the Company. Consideration for acquisitions
has generally been comprised of cash and, to a lesser extent, Common Stock or a
combination thereof. Since the Company typically attempts to retain the owners
of acquired companies, management believes that the Company's ability to offer
publicly traded common equity as consideration will be attractive to potential
acquisition targets. Accordingly, following the Offering, the Company intends to
register the sale of up to five million additional shares of Common Stock under
the Securities Act for its use in connection with future acquisitions.
The Company's acquisitions of traditional ice companies generally can be
classified into one of two categories.
MARKET LEADERS. As part of its strategy to expand its traditional ice
operations into new markets and strengthen its national presence, the Company
focuses its acquisition efforts on companies with a leading market share
position in an identified market area. Such acquisitions may represent an
initial entry into a geographic area, or, alternatively, be made subsequent to
the placement of Ice Factories with key customer accounts in a region. Acquiring
a leading competitor gives the Company (i) the critical mass required to provide
a high level of service, (ii) additional customer relationships for the
potential placement of Ice Factories and (iii) a platform to integrate
"tuck-in" acquisitions.
TUCK-INS. Tuck-in acquisitions are smaller acquisitions intended to add
incremental production and/or distribution capabilities in an established
market. Since existing operations can be leveraged, substantial cost savings can
be realized while generating incremental revenues and enhancing the Company's
market
34
<PAGE>
presence and ability to service customer accounts. If the tuck-in acquisition
results in redundant ice manufacturing capacity, the related production
equipment can be readily dismantled and redeployed to a region in need of
additional capacity.
THE ICE FACTORY
Through the Ice Factory, a proprietary, state-of-the-art system, the
Company is the only provider of an on-site, automated ice manufacturing and
bagging system to retailers. The Ice Factory is capable of producing, packaging
and storing up to 40,000 bags of ice per year and is most frequently used in
high volume supermarkets and convenience stores and other commercial locations,
such as airport catering facilities, construction staging areas, and large
manufacturing plants. The placement of the Ice Factory at customer locations is
based upon a thorough review of each site, which primarily focuses on historical
ice sales at the site. Also included in the site review is an analysis of the
surrounding trade area, the level of overall retail activity, the level of
direct competition and the proximity of the site to other Ice Factories the
Company operates. Upon completion of this review, the Company makes a
determination as to the viability of the location and whether a single machine
or multiple machines is required at the time of initial installation. Multiple
machines may be installed at a site if warranted. The Company maintains
ownership of the machines and charges its customers for each bag purchased. The
Company will generally pay for all installation costs, while the retailer
provides and pays for the cost of utilities.
The Ice Factory's prices are competitive with prices for delivered bagged
ice. The Company believes that the Ice Factory provides numerous cost and
service advantages to retailers compared to traditional delivery, including (i)
a continuous supply of ice, thus reducing the frequency of product shortages
typical of traditional ice delivery, (ii) a reduction of costs associated with
delivery and storage at the retail location, (iii) the satisfaction of consumer
demand for a higher quality and more sanitary ice than is typically found with
traditional ice delivery, (iv) effective management of inventory through
computerized production tracking and dedicated technical support and (v) an
increase in safety by reducing the potential for "slip and fall" accidents
caused by water spills. As a result, the Ice Factory has gained strong market
acceptance. The Company has increased the number of installed Ice Factories from
271 as of December 31, 1994 to 1,835 as of December 31, 1998.
An Ice Factory typically consists of one or more standard Hoshizaki
America, Inc. ("Hoshizaki") ice cuber(s), an ice merchandiser built to
Packaged Ice's specifications by Beverage Air Corporation and a bagging machine,
the heart of the Ice Factory, which Lancer, a Company shareholder, manufactures
under an exclusive original equipment manufacturing agreement. Lancer is an
engineering and manufacturing company that is a primary vendor of fountain soft
drink dispensing machines for Coca-Cola, Inc. To guard against product
contamination and satisfy consumer demand for high quality, sanitary ice, the
Ice Factory has been engineered to meet all National Sanitation Foundation
specifications for ice production, contains a patented automatic sanitizing
system and is U.L. approved. The Company has obtained patents on certain of the
technologies used in the bagging device component of the Ice Factory. The
Company believes that these patents cover all patentable technology of a
material nature currently being used in the bagging device. Accordingly, the
Company believes that there are significant barriers to entry for new and
existing competitors with respect to developing a competitive and reliable
machine that performs the same functions as the Ice Factory.
DISTRIBUTION
Due to high product transportation and shipping costs, the ice business has
historically been a regional service business in which manufacturers produce and
package ice at centrally-located facilities and distribute to a limited market
radius of approximately 100 miles. Due to these geographic constraints and the
limited amount of product differentiation in the packaged ice industry, the
Company focuses on maintaining an efficient service, distribution and pricing
system in each of its markets. The Company delivers ice through both traditional
distribution and the on-site Ice Factory system. Management believes that this
combined distribution platform enables it to redistribute ice production
efficiently from its
35
<PAGE>
traditional ice facilities to additional customers and to supplement Ice Factory
production during seasonal peak demand.
TRADITIONAL DISTRIBUTION. The Company produces and bags ice at its
centrally-located manufacturing facilities and subsequently stores the ice or
transports it directly to retail and commercial customers. To store ice
inventory, the Company owns or rents refrigerated facilities and incurs utility
costs to maintain temperatures below freezing. During the peak summer months,
the Company may lease additional trucks and purchase additional ice from other
producers to maintain high service levels and customer goodwill.
The Company currently serves over 70,000 customer locations principally
through, among other things, the use of its approximately 56,000 ice
merchandisers (small cold storage boxes) that are installed at store locations.
The Company's recent growth has allowed it to develop an efficient production
and distribution network by providing it with customer density, additional
production capacity and dedicated distribution centers. Because of this
increasing customer density, the Company has improved routing efficiencies and
reduced its transportation cost which represents its largest cost component. In
addition, the acquisition of additional production capacity in selected markets
has allowed the Company to avoid "stock outs" and lost sales during peak
periods. Further, by acquiring dedicated distribution centers and cold storage
facilities, the Company has reduced its storage costs.
ICE FACTORY. By producing and bagging the ice at the customer's location,
the Ice Factory reduces the Company's distribution, labor and energy costs
because retailers provide and pay for the cost of utilities. The transportation
costs which are characteristic of traditional delivery are also eliminated by
on-site production. As a result of these cost savings, management believes that
the Ice Factory provides the Company with superior operating margins in high
volume locations compared to traditional ice delivery.
The Company believes that providing frequent, regular and reliable service
and support is one of the most important elements in operating its Ice Factory
network. Remote communications systems between the Ice Factory and the Company's
national service center enable monitoring of on-site inventories and usage,
thereby enhancing the Company's service quality and efficiency. In severe
weather conditions, this technology provides instant information on the need for
supplemental ice deliveries and allows rapid, cost-effective responses to each
customer's product and servicing needs. The Company has also implemented a
routine route servicing system, using trained service representatives to perform
the Company's regularly scheduled service procedures. In addition, the Company
maintains 24-hour, toll-free telephone support for responding to customer calls
regarding repairs and maintenance.
PRODUCTS
The Company markets its ice products to satisfy a broad range of customers,
including retailers, commercial users, restaurants and agricultural users under
a variety of brand names, including Reddy Ice, Mission Party Ice and Crystal
Ice. In addition, through a licensing agreement with Culligan, the Company has
obtained the right to use the name "Ice by CulliganT" in connection with
production from the Ice Factories. To date, the Company has not used such
license.
The Company produces its ice in cube, half-moon, cylindrical and crushed
forms to satisfy customer demands. The Company's primary ice product is cocktail
ice packaged in seven and eight pound bags, which it sells principally to
convenience stores and supermarkets. The Company also sells cocktail ice in
assorted bag sizes ranging from 20 to 40 pounds to restaurants, bars, stadiums,
vendors and caterers. In addition, the Company sells block ice in ten and 300
pound sizes, primarily to commercial, agricultural and industrial customers. The
Company also derives revenues from other goods and services including cold
storage rental, the manufacturing and sale of bottled water and institutional
ice machine leasing.
CUSTOMERS
The Company markets its ice products to a broad range of customers,
including supermarket chains, convenience stores, commercial users, agricultural
buyers, resorts and restaurants, wholesale ice and food distributors and
competitive producers and self-suppliers who experience supply shortages.
Management believes that the Company's geographic diversification and the
superior economics and advantages to the
36
<PAGE>
retailer of the Ice Factory have helped it in developing relationships with
certain high volume national supermarket chains, and will continue to assist in
its planned penetration into this market.
Retailers with no internal ice production capacity are the primary
purchasers of the Company's manufactured ice products and users of its Ice
Factory. Management believes that reasonable pricing, when combined with quality
service, results in customer loyalty. The Company has a diversified customer
base, with its largest customer accounting for less than 5% of pro forma sales
in 1998. In addition, the Company has a geographically diversified customer
base, with operations in 26 states throughout the southern half of the United
States. Some of the Company's regional and national accounts include Circle K,
Wal-Mart, 7-Eleven, Texaco, Diamond Shamrock, Publix, Albertson's, Safeway,
Vons, Winn-Dixie, HEB, L'il Champs, Randall's and Kroger. The Company believes
the geographic breadth of its customer base helps to protect it from adverse
weather in a particular region, such as abnormally cool or rainy conditions. See
"Risk Factors -- Seasonality of Ice Business and Weather."
COMPETITION
The traditional packaged ice industry is highly competitive. In addition to
the Company's direct competition, numerous convenience and grocery retailers
operate commercial ice plants for internal use or manufacture and bag ice at
their store locations. Because only one ice manufacturer typically serves a
retail site, the Company's ice products generally do not face competition within
a particular store. The traditional packaged ice industry in the United States
is led by the Company and several regional, multi-facility competitors, and
includes numerous local and regional companies of varying sizes and competitive
resources.
Competition in the packaged ice industry is based primarily on service,
price and quality. To compete successfully, an ice manufacturer must be able to
increase production and distribution capacity substantially on a seasonal basis
while maintaining cost efficiency. Management believes that the Company's high
quality traditional production facilities, comparatively substantial financial
resources, high regional market share and associated route density and
proprietary ice machine technology provide it with numerous competitive
advantages. See "Risk Factors -- Competition."
INFORMATION SYSTEMS
Internal information systems are critical to the Company's ability to
operate efficiently. Packaged Ice is able to monitor individual manufacturing
plant and Ice Factory performance on a daily basis through automated reporting
systems. This information enables management to track profitability, monitor the
integration of acquired companies, identify opportunities to redistribute
traditional manufacturing capacity among markets, assess the cost-effectiveness
of an Ice Factory at a particular location and analyze market sales trends. In
addition, the Company is currently converting its accounting and financial
reporting functions to the system developed by Reddy. This satellite-based
system, which has been installed in all operating locations other than Cassco's,
will facilitate centralized cash management, more timely financial reporting, a
consistent reporting format and improved inventory tracking. Cassco will be
converted to the Company's system in 1999. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000."
INTELLECTUAL PROPERTY
The Company regards the Ice Factory as proprietary and relies primarily on
a combination of patents, nondisclosure and confidentiality agreements, and
other copyright protection methods to secure and protect its intellectual
property rights. The Company holds or has exclusive rights to several patents
relating to the Ice Factory. In addition, the Company has developed or acquired
a number of trademarks (both registered and common law) and trade names for use
in its ice business, and holds licenses for the use of additional trademarks
from third parties. Although the Company's use of its trademarks has created
goodwill and results in product differentiation, management does not believe
that the loss of any of the Company's trademarks would have a material adverse
effect on its operations. See "Risk Factors -- Limited Patent Protection."
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FACILITIES
The Company currently has 80 manufacturing plants located throughout the
United States. These plants, together with the current installed base of 1,835
Ice Factories, have a combined manufacturing capacity of approximately 13,600
tons per day. In addition, the Company has regional service centers for its Ice
Factories located throughout its market areas.
The Company currently owns or leases 80 manufacturing, 39 distribution and
9 cold storage facilities, which, in conjunction with ice factories, serve
customers in a total of 26 states and the District of Columbia. Certain
manufacturing and distribution facilities may be permanently closed in
conjunction with the Company's continuing acquisition integration plans, while
others may be closed on a seasonal basis depending upon production demand. The
following is a list of the current facilities.
<TABLE>
<CAPTION>
COMBINED
NO. OF NO. OF NO. OF COLD MANUFACTURING
MANUFACTURING DISTRIBUTION STORAGE CAPACITY
FACILITIES(1) FACILITIES(1) FACILITIES (TONS/DAY)
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Alabama................................. 5 2 0 492
Arkansas................................ 2 4 0 240
Arizona................................. 5 1 1 1,136
California.............................. 4 0 1 487
Colorado................................ 1 0 1 200
Florida................................. 13 3 0 1,797
Georgia................................. 4 5 0 1,199
Louisiana............................... 4 4 0 794
Mississippi............................. 1 1 1 60
Maryland................................ 1 0 0 9
New Mexico.............................. 1 1 0 160
Nevada.................................. 1 0 0 140
North Carolina.......................... 0 0 1 0
Oklahoma................................ 4 1 0 500
Tennessee............................... 6 0 0 304
Texas................................... 19 13 0 3,290
Utah.................................... 1 0 0 120
Virginia................................ 6 4 3 912
West Virginia........................... 1 0 1 120
Washington D.C.......................... 1 0 0 98
-- -- -
-------------
Total.............................. 80 39 9 12,058
== == = =============
</TABLE>
- ------------
(1) Includes manufacturing facilities for other than production of ice, such as
bottled water and merchandisers.
GOVERNMENT REGULATION
The packaged ice industry is subject to various federal, state and local
laws and regulations, which require the Company, among other things, to obtain
licenses for its business plants and machines, to pay annual license and
inspection fees, to comply with certain detailed design and quality standards
regarding its plants and the Ice Factories and to control the quality and
quantity of its ice continuously.
The Company's packaged ice products are subject to federal and state
regulation as a food pursuant to the Federal Food, Drug and Cosmetic Act,
regulations promulgated thereunder by the Food and Drug Administration and
analogous state statutes. These statutes and regulations impose comprehensive
good manufacturing practices requirements governing the sanitary conditions of
the facilities where ice is manufactured, the design and maintenance of the
equipment used to manufacture the ice, the quality of source water and the
sanitary practices of employees during ice production. The State of Florida has
imposed additional requirements including quarterly testing of the ice for the
presence of microbes and certain substances regulated under the federal Safe
Drinking Water Act, specific requirements for keeping ice packaging operations
separate from other activities and labeling requirements for the bags used
including the name of the company and the net weight. Certain of the Company's
Ice Factories and ice manufacturing facilities are subject to routine and random
safety, health and quality inspections. The Company believes that its
facilities, manufacturing practices and Ice Factories are in substantial
compliance with all applicable federal, state and local laws and regulations and
that the Company will be able to maintain such substantial compliance in the
future.
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The Company is subject to certain health and safety regulations including
regulations issued pursuant to the Occupational Safety and Health Act. These
regulations require the Company to comply with certain manufacturing, health and
safety standards to protect its employees from accidents. See "Risk Factors --
Government Regulation."
ENVIRONMENTAL MATTERS
The Company's ice manufacturing and ice storage operations are subject to
federal, state and local environmental laws and regulations. As a result, the
Company has the potential to be involved from time to time in administrative or
legal proceedings relating to environmental matters. There can be no assurance
that the aggregate amount of any environmental liabilities that might be
asserted in any such proceeding will not be material. The Company cannot predict
the types of environmental laws or regulations that may from time to time be
enacted in the future by federal, state or local governments, how existing or
future laws or regulations will be interpreted or enforced or what types of
environmental conditions may be found to exist at its facilities. The enactment
of more stringent laws or regulations or a stricter interpretation of existing
laws and regulations may require additional expenditures by the Company, some of
which could be material.
The Company generates and handles certain hazardous substances in
connection with the manufacture and storage of packaged ice. The handling and
disposal of these substances and wastes is subject to federal, state and local
regulations, and site contamination originating from the release or disposal of
such substances or wastes can lead to significant liabilities. In addition,
although the Company has historically used "freon" refrigerants, which have
been banned from production, several alternate unregulated refrigerants exist
which have similar or better economic basis. The most prominent banned product
used by the Company was R-12 (freon) which is easily exchanged by the Company's
own qualified service personnel during the course of ordinary servicing of ice
merchandising equipment. The Company believes that the numerous, economically
neutral refrigerants available assures that the ban will have little, if any,
effect on the Company's operations or results therefrom.
Certain of the Company's current and former facilities are located in
industrial areas and have been in operation for many years. As a consequence, it
is possible that historical activities on property currently or formerly owned
by the Company or that current or historical activities on neighboring
properties have affected properties currently or formerly owned by the Company
and that, as a result, additional environmental issues may arise in the future,
the precise nature of which the Company cannot now predict.
The Company thus may become liable for site contamination at properties
currently or formerly owned by the Company. Although such liability has not had
a material adverse affect on the financial condition or operating results of the
Company in the past, and management has no knowledge of claims that could be
expected to have a material adverse affect on its financial condition or
operations, there can be no assurance that the Company will not incur
significant costs in connection with historical handling or disposal of such
substances and wastes. See "Risk Factors -- Environmental Matters."
INSURANCE
The Company carries general and product liability insurance. Its combined
coverage per occurrence and aggregate loss coverages are in amounts the Company
believes to be adequate. Although the Company is not aware of any actions having
been filed and believes that the technology used at its manufacturing facilities
and contained in its machines makes any contamination of the ice manufactured at
its plants or dispensed by its machines unlikely, any significant damage awards
against the Company in excess of the Company's insurance coverage could result
in a material loss to the Company.
EMPLOYEES AND LABOR RELATIONS
At its seasonal peak during the 1998 summer, the Company had approximately
2,600 employees, of which 73 were represented by a union or were subject to a
collective bargaining agreement. The majority of these employees are full-time
employees. The Company generally has not experienced difficulty in meeting its
seasonal employment needs which may comprise as much as 30% of the total
employees noted above. The Company has never experienced a work stoppage due to
labor difficulties, and management believes its relationship with its employees
is good.
LEGAL PROCEEDINGS
The Company is a party in certain legal proceedings that have resulted from
the ordinary conduct of its business, including several personal injury
lawsuits. In the opinion of the Company's management, none of these proceedings
is expected to have a material adverse effect on the Company.
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<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Company has assembled an experienced management team to oversee its
development and operations. The name, age and respective position of each
director and executive officer of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ------------------------------------------------------------------------
<S> <C>
James F. Stuart...................... 56 Chairman of the Board of Directors and Chief Executive Officer
A.J. Lewis III....................... 43 President, Director and Secretary
Jimmy C. Weaver...................... 45 Executive Vice President and Chief Operating Officer
James C. Hazlewood................... 51 Chief Financial Officer
H.D. Wiginton........................ 61 Senior Vice President -- Marketing
Leonard A. Bedell.................... 53 Senior Vice President -- Central Operations
Graham D. Davis...................... 44 Senior Vice President -- Western Operations
Neil D. Showalter.................... 41 Senior Vice President -- Mid-Atlantic Operations
William H. Gibbons................... 56 Treasurer
Steven P. Rosenberg.................. 40 Director
Richard A. Coonrod................... 67 Director
Robert G. Miller..................... 48 Director
Rod J. Sands......................... 50 Director
Arthur E. Biggs...................... 69 Director
</TABLE>
The following is a brief description of the background and principal
occupation of each director and executive officer:
JAMES F. STUART, Chairman of the Board of Directors, Chief Executive
Officer and a founder of Packaged Ice, served as President of Packaged Ice from
1990 until January 1997, when he was elected Chairman of the Board of Directors
and Chief Executive Officer.
A.J. LEWIS III became President and Secretary of the Company in January
1997. Mr. Lewis has been a shareholder and director of the Company since 1991,
and until the closing of the Offering, will have served on the Audit Committee
of the Board of Directors. Mr. Lewis acquired Mission in 1988 and was its
president and the sole director until its acquisition by Packaged Ice. He
founded STPI in 1991 and was its president and a director from inception until
its acquisition by Packaged Ice. Since 1989, Mr. Lewis has been a director and
president of Southwest Texas Equipment Distributors, Inc., which is a
distributor of Hoshizaki ice equipment. See "Certain Transactions."
JIMMY C. WEAVER became Executive Vice President and Chief Operating Officer
of the Company on April 30, 1998. Mr. Weaver joined Reddy in September 1996 and
was President of Reddy prior to its acquisition by Packaged Ice. From May 1993
until August 1996, Mr. Weaver was Vice President of Sales and Marketing of
Booth/Crystal Tips, a manufacturing division of Scotsman Industries based in
Dallas, Texas that produces and sells ice making equipment.
JAMES C. HAZLEWOOD is the Company's Chief Financial Officer. Mr. Hazlewood
joined the Company in October 1997. From September 1996 until October 1997, Mr.
Hazlewood was Chief Financial Officer of Harrison Electronics, Inc., a privately
owned electronics distribution company based in Stafford, Texas. From September
1994 until September 1996, Mr. Hazlewood was Chief Financial Officer at Intile
Designs, Inc., a publicly held, wholesale distributor of floor coverings
headquartered in Houston, Texas. From September 1993 to September 1994, Mr.
Hazlewood was an independent consultant. From April 1993 until September 1993,
Mr. Hazlewood was president of Gulf Environmental Corporation of Kellogg, Idaho,
a wholly owned subsidiary of Gulf U.S.A. Mr. Hazlewood initiated his career with
Arthur Andersen LLP.
H.D. WIGINTON is the Company's Senior Vice President -- Marketing. Mr.
Wiginton joined the Company in November 1996. From September 1991 until he
joined the Company, Mr. Wiginton was Executive Vice President of Tower
Marketing, a Texas-based, regional food brokerage concern.
40
<PAGE>
LEONARD A. BEDELL is the Company's Senior Vice President -- Central
Operations. Mr. Bedell joined the Company effective January 1, 1998. From March
1995 until December 1997, Mr. Bedell was a management consultant specializing in
operations and profitability improvement and merger and acquisition projects for
businesses engaged in the distribution, delivery, equipment rental and event
production industries. From January 1992 until March 1995, Mr. Bedell was
Executive Vice President, Chief Financial Officer and a member of the Board of
Directors of American Medical Technologies, Inc., a Nasdaq reporting company,
and its two principal operating subsidiaries. From March 1990 to December 1991,
Mr. Bedell was President and Chief Executive Officer of Medcon, Inc., a medical
transportation and disposal company.
GRAHAM D. DAVIS became the Company's Senior Vice President -- Western
Operations on April 30, 1998. Mr. Davis joined Reddy, a division of The
Southland Corporation, in 1977 as Controller. For the five years prior to
joining the Company, Mr. Davis was Executive Vice President of Operations of
Reddy.
NEIL D. SHOWALTER became the Company's Senior Vice
President -- Mid-Atlantic Operations on August 1, 1998. Mr. Showalter joined
Cassco, a division of WLR Foods, Inc. ("WLR"), in 1989, and became President
of that division in 1996. In November 1997, he was designated the Vice-President
of Finance for WLR, and became its Chief Financial Officer in June 1998. Before
joining Cassco, Mr. Showalter served as a CPA for McGladrey & Pullen, a public
accounting firm, from 1979 to 1989.
WILLIAM H. GIBBONS became the Company's Treasurer in July 1998. Prior to
joining the Company, Mr. Gibbons was the President of William H. Gibbons, a sole
proprietorship, providing financial consulting services to domestic and
international oil and gas companies since 1991. His clientele included private
and public companies, with financial consulting services focused on financing,
treasury and reporting activities.
STEVEN P. ROSENBERG has been a shareholder and director of the Company
since 1991 and is a member of the Audit Committee of the Board of Directors.
Since August 1997, Mr. Rosenberg has been Chairman of the Board and Chief
Executive Officer of Nutricept, Inc., a development stage company engaged in the
manufacture and distribution of dietary supplements. From 1992 to February 1997,
Mr. Rosenberg was President of Arrow Industries, now a wholly owned subsidiary
of ConAgra.
RICHARD A. COONROD has been a director since 1995 and is a member of the
Compensation Committee of the Board of Directors. Mr. Coonrod was designated to
be elected as a director by the Food Fund, a shareholder of the Company. Mr.
Coonrod has been a general partner of the Food Fund, a Minneapolis-based limited
partnership specializing in food-related investments, since 1989 and has been
President of Coonrod Agriproduction Corporation, a food and agribusiness
consulting and investment firm, since 1985. Mr. Coonrod has been a director of
Orange-Co, Inc. since 1987, and has been a director of Michael Foods, Inc. since
1994. See "Certain Transactions -- Voting Agreement."
ROBERT G. MILLER has been a director of the Company since April 1997. Mr.
Miller is a private investor and was Chairman of the Board of Directors of SWI
from February 1992 until its acquisition by Packaged Ice. From 1980 to 1992, Mr.
Miller was President and Chief Executive Officer of Glacier Water, Inc., a
publicly traded water vending company.
ROD J. SANDS is a director of the Company and is a member of the
Compensation Committee of the Board of Directors. Mr. Sands has been a Managing
Director of SV since 1997. Mr. Sands is a limited partner in SV, and a member of
its investment committee. From 1992 to 1997, Mr. Sands served as President and
Chief Operating Officer of Pace Foods, Inc., a leading producer of picante sauce
products.
ARTHUR E. BIGGS is a shareholder and director of the Company. Mr. Biggs has
been a private investor since March 1998 and was Chairman of the Board of
Directors of Artic Ice preceding its acquisition by Packaged Ice in March 1998.
From 1974 to 1982, Mr. Biggs was Executive Vice President and Chief Operating
Officer of Mobil Chemical Co. and served as President of Mobil Chemical Co. from
1983 to 1986. Mr. Biggs initiated his career with McKinsey & Company, Inc. in
1957.
41
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
Chief Executive Officer of the Company and the four additional most highly
compensated executive officers for the year ended December 31, 1998 (the "Named
Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
----------------------------------- OPTIONS/ ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS SARS COMPENSATION
- ------------------------------------- --------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
James F. Stuart...................... 1998 $209,269 $ 302,500 60,000 $ 5,000(1)
Chairman, Chief Executive Officer 1997 125,000 50,000 30,000 2,500(1)
1996 125,000 -- -- 1,827(1)
A.J. Lewis III....................... 1998 192,884 280,000 50,000 5,000(1)
President 1997(2) 83,173 50,000 25,000 1,663(1)
Jimmy C. Weaver...................... 1998(3) 120,961 166,500 56,000 7,000(5)
Executive Vice President, Chief
Operating Officer
James C. Hazlewood................... 1998 118,891 74,750 8,333 4,985(5)
Chief Financial Officer 1997(4) 14,873 -- 20,000 738(5)
H.D. Wiginton........................ 1998 131,775 65,734 8,333 9,556(1)(5)
Senior Vice President -- Marketing 1997 110,000 32,810 5,000 6,000(5)
1996(6) 18,333 -- 6,000 1,000(5)
</TABLE>
- ------------
(1) Contributions to Packaged Ice's 401(k) plan made by Packaged Ice.
(2) Represents partial year compensation of an annual salary of $125,000. No
compensation is provided for prior years as Mr. Lewis' employment commenced
April 1997.
(3) Represents partial year compensation at an annual salary of $185,000. No
compensation is provided for prior years as Mr. Weaver's employment
commenced April 1998.
(4) Represents partial year compensation of an annual salary of $105,000. No
compensation is provided for prior years as Mr. Hazlewood's employment
commenced October 1997.
(5) Automobile allowance.
(6) Represents partial year compensation of an annual salary of $110,000, as Mr.
Wiginton's employment commenced November 1996.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding the number of
options to purchase shares of the Company's Common Stock granted to the Named
Executive Officers during the year ended December 31, 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE ANNUAL RATE OF STOCK
SECURITIES OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS PER SHARE OPTION TERM
OPTIONS GRANTED IN EXERCISE OR EXPIRATION ----------------------
NAME GRANTED FISCAL 1998 BASE PRICE DATE 5% 10%
- ------------------------------------- ----------- ----------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
James F. Stuart...................... 30,000 8.3 $13.00 5/1/2008 $ 245,269 $ 621,560
30,000 8.3 15.00 6/19/2008 283,003 717,184
A.J. Lewis III....................... 30,000 8.3 13.00 5/1/2008 245,269 621,560
20,000 5.5 15.00 6/19/2008 188,467 478,123
Jimmy C. Weaver...................... 40,000 11.0 14.00 5/1/2008 352,181 892,496
16,000 4.4 15.00 6/19/2008 150,935 382,498
James C. Hazlewood................... 8,333 2.3 15.00 6/19/2008 78,609 199,210
H.D. Wiginton........................ 8,333 2.3 15.00 6/19/2008 78,609 199,210
</TABLE>
42
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table provides certain information regarding the exercise of
options to purchase shares of the Company's Common Stock during the year ended
December 31, 1998, by the Named Executive Officers, and the fiscal year-end
value of stock options held by such officers.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR END FISCAL YEAR END(1)
ACQUIRED ON ------------------------------ ------------------------------
NAME EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
James F. Stuart...................... -- 6,000 84,000 $ 12,000 $ 48,000
A.J. Lewis III....................... -- 5,000 70,000 10,000 40,000
Jimmy C. Weaver...................... -- -- 56,000 -- --
James C. Hazlewood................... -- 4,000 24,333 8,000 32,000
H.D. Wiginton........................ -- 3,400 15,933 12,800 24,200
</TABLE>
- ------------
(1) Based on a price per share of $12, the mid-point of the Offering range. The
value of in-the-money options is calculated as the difference between the
fair market value of the Common Stock underlying the options at fiscal year
end and the exercise price of the options. Exercisable options refer to
those options that are exercisable as of December 31, 1998, while
unexercisable options refer to those options that become exercisable at
various times thereafter.
DIRECTOR COMPENSATION
Directors of the Company are elected annually and hold office until the
next annual meeting of shareholders or until their successors are elected and
qualified. Directors are not compensated for their services as directors.
Directors are reimbursed, however, for ordinary and necessary expenses incurred
in attending board or committee meetings.
COMMITTEES OF THE BOARD OF DIRECTORS; COMPENSATION COMMITTEE INTERLOCKS
The Company has an Audit Committee and a Compensation Committee.
The Audit Committee reviews and reports to the Board of Directors the scope
and results of audits by the Company's outside auditor. The committee also
recommends the firm of certified public accountants to serve as the Company's
independent public accountants, subject to nomination by the Board of Directors
and approval of the stockholders, authorizes all audit and other professional
services rendered by the auditor and periodically review the independence of the
auditor. Membership of the Audit Committee is restricted to those directors who
are not active or retired officers or employees of the Company. Messrs. Lewis
and Rosenberg are members of the Audit Committee. At the closing of the
Offering, Mr. Biggs will replace Mr. Lewis on the Audit Committee.
The Compensation Committee oversees the compensation of the Company's
senior management and grants under the Stock Option Plans. The Compensation
Committee is currently comprised of Messrs. Sands, Coonrod and Stuart. At the
closing of the Offering, Mr. Stuart will resign from the Compensation Committee.
At the closing of the Offering, no member of the Compensation Committee
will be a present or former officer or employee of the Company or any
subsidiary. No executive officer or director of the Company serves as an
executive officer, director, or member of a compensation committee of any other
entity, for which an executive officer, director, or member of such entity is a
member of the Board of Directors or the Compensation Committee of the Company.
There are no other interlocks.
STOCK OPTION PLANS
1994 STOCK OPTION PLAN. The Company adopted the 1994 Packaged Ice, Inc.
Stock Option Plan on July 26, 1994 (the "1994 Option Plan"), as amended
effective December 1997. Under the 1994 Option Plan, options to purchase up to
400,000 shares of Common Stock may be granted to employees, outside directors
and consultants and advisers to the Company or any subsidiary. The purposes of
the 1994 Option
43
<PAGE>
Plan are to further the growth, development and financial success of the Company
by providing additional financial incentives to key personnel and to retain and
attract qualified individuals who will contribute to the overall success of the
Company. Shares that by reason of the expiration of an option (other than
because of exercise) or which are no longer subject to purchase pursuant to an
option granted under the 1994 Option Plan may be reoptioned thereunder. The 1994
Option Plan is currently administered by the Compensation Committee which has
the authority to set specific terms and conditions of options granted under the
1994 Option Plan and administer the 1994 Option Plan. Options granted under the
1994 Option Plan are non-qualified options and are not intended to be
"incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended. Stock options granted under the 1994 Option Plan may be
granted for a term not to exceed ten years and are not transferable other than
by will or the laws of descent and distribution. Each option may be exercised
within the term of the option pursuant to which it was granted (so long as the
optionee, if an employee, continues to be employed by the Company). In addition,
an option may be exercised as to vested shares within 90 days after the
termination of employment of the optionee (except in the case of a termination
for cause, in which case the option shall automatically expire on termination),
and in the event of a termination in case of death, disability or eligible
retirement, all options shall become exercisable and may be exercised until the
earlier of the first anniversary of such event or the stated expiration date.
The exercise price of all stock options must be at least equal to the fair
market value of the Common Stock on the date of grant. Stock options may be
exercised by payment in cash of the exercise price with respect to each share to
be purchased, or by a method in which a concurrent sale of the acquired stock is
arranged, with the exercise price payable in cash from such sale proceeds.
At December 31, 1998, Packaged Ice had outstanding options for 393,700
shares of Common Stock at a weighted average exercise price of $10.87 (of which
27,600 were exercisable) under the 1994 Option Plan. All options granted under
the 1994 Option Plan to date have a five-year vesting period, which will be
accelerated upon the closing of the 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,
options to purchase 6,300 shares of Common Stock have been exercised under the
1994 Option Plan. No more options may be granted under the 1994 Option Plan.
1998 STOCK OPTION PLAN. The Company has adopted the 1998 Stock Option Plan
(the "1998 Option Plan"). One million shares of Common Stock are subject to
issuance under the 1998 Option Plan. The 1998 Option Plan provides for the grant
of stock options (including incentive stock options as defined in Section 422 of
the Internal Revenue Code of 1986, as amended, and non-qualified stock options),
stock appreciation rights ("SARs") and other stock awards (including
restricted stock awards and stock bonuses) to any officer, director or employee
of the Company, its subsidiaries, affiliates or any consultant or advisor
engaged by the Company who renders bona fide services to the Company or the
Company's subsidiaries or affiliates in connection with their businesses;
provided, that such services are not in connection with the offer or sale of
securities in a capital raising transaction. Prior to the date when securities
are first registered pursuant to Section 12 of the Exchange Act, the 1998 Option
Plan will be administered by the Company's Board of Directors. Upon registration
of the Common Stock, the 1998 Option Plan will be administered by the
Compensation Committee which will be comprised of "disinterested persons"
within the meaning of Rule 16b-3 of the Exchange Act. The Company's full Board
of Directors must approve any grant of options to a member of the Compensation
Committee. Such member of the Compensation Committee shall not participate in
the vote approving such grant. Stock options may be granted by the Compensation
Committee on such terms, including vesting and payment forms, as it deems
appropriate in its discretion; provided, that no option may be exercised later
than ten years after its grant, and the purchase price for incentive stock
options and non-qualified stock options shall not be less than 100% and 85% of
the fair market value of the Common Stock at the time of grant, respectively.
SARs may be granted by the Compensation Committee on such terms, including
payment forms, as the Compensation Committee deems appropriate, provided that an
SAR granted in connection with a stock option shall become exercisable and lapse
according to the same vesting schedule and lapse rules established for the stock
option (which shall not exceed ten years from the date of grant). An SAR shall
not be exercisable during the first six months of its term and only when the
fair
44
<PAGE>
market value of the underlying Common Stock exceeds the SAR's exercise price and
is exercisable subject to any other conditions on exercise imposed by the
Compensation Committee. Unless terminated by the Board of Directors, the 1998
Option Plan continues for ten years from the date of adoption. Upon the
occurrence of an event constituting a change in control of the Company, in the
sole discretion of the Compensation Committee, all options, SARs and other
awards will become immediately exercisable in full for the remainder of their
terms and restrictions on stock granted pursuant to a restricted stock award
will lapse. At December 31, 1998, Packaged Ice had outstanding options for
244,220 shares of Common Stock at a weighted exercise price of $15.00 (of which
2,600 were exercisable) under the 1998 Option Plan. All options granted under
the 1998 Option Plan to date have a five-year vesting period. All of the
outstanding options were granted at the exercise price of $15.00 determined by
the Board of Directors to be greater than or equal to the fair market value of
the Common Stock on the date of grant. To date no options have been exercised
under the 1998 Option Plan.
EMPLOYMENT AND TERMINATION
JAMES F. STUART, the Company's Chairman of the Board of Directors and Chief
Executive Officer, has entered into an employment agreement, effective August 1,
1998, with a term of two years, which establishes a base salary of $225,000 per
year and provides for certain cash bonus incentives relating to the Company's
performance. Mr. Stuart's employment agreement also provides that, in certain
circumstances, he will receive severance payments equal to two years of his then
current base salary upon termination of his employment by the Company. Mr.
Stuart is subject to a non-competition agreement for three years after voluntary
or involuntary termination of his employment.
A.J. LEWIS III, the Company's President and Secretary, has entered into an
employment agreement, effective August 1, 1998, with a term of one year, which
establishes a base salary of $200,000 per year and provides for certain cash
bonus incentives relating to the Company's performance. Mr. Lewis' employment
agreement also provides that, in certain circumstances, he will receive
severance payments equal to one year of his then current base salary upon
termination of his employment by the Company. Mr. Lewis is subject to a
non-competition agreement for three years after voluntary or involuntary
termination of his employment.
JIMMY C. WEAVER, the Company's Executive Vice President and Chief Operating
Officer, has entered into an employment agreement, effective May 1, 1998, with a
term of two years, which establishes a base salary of $185,000 per year,
provides for certain cash bonus incentives relating to the Company's performance
and grants Mr. Weaver the right to purchase 40,000 shares of Common Stock under
the 1994 Option Plan at an exercise price of $14 per share. Mr. Weaver's
employment agreement provides that, in certain circumstances, he will receive
severance payments equal to six months of his then current base salary upon
termination of his employment by the Company. Mr. Weaver is subject to a
non-competition agreement for two years after voluntary or involuntary
termination of his employment.
JAMES C. HAZLEWOOD, the Company's Chief Financial Officer, entered into an
employment agreement effective November 1, 1997, which establishes a base salary
of $105,000 per year. In addition, Mr. Hazlewood is eligible for certain cash
bonus incentives relating to the Company's performance. Mr. Hazlewood's
employment agreement provides that, in certain circumstances, he will receive
severance payments of one year of his then current base salary upon termination
of his employment by the Company. Mr. Hazlewood is subject to a non-competition
agreement for two years after voluntary or involuntary termination of his
employment.
45
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of December 30, 1998
with respect to the beneficial ownership of the Company's Common Stock, assuming
conversions of the Convertible Preferred Stock by: (i) each director of the
Company, (ii) each Named Executive Officer, (iii) each other person known to
beneficially own 5% or more of the outstanding shares of Common Stock and (iv)
all current executive officers (regardless of salary and bonus level) and
directors of the Company as a group. Unless otherwise indicated, (i) the persons
listed in the table below have sole voting and investment powers with respect to
the shares indicated and (ii) each person's address is 8572 Katy Freeway, Suite
101, Houston, Texas 77024.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------------------
SHARES BENEFICIALLY PRIOR TO AFTER
OWNED THE OFFERING THE OFFERING
------------------- ------------- -------------
<S> <C> <C> <C>
James F. Stuart(1)...................... 412,700 7.3 2.8
A. J. Lewis III(2)...................... 448,943 7.9 3.1
Jimmy C. Weaver (3)..................... 40,000 * *
James C. Hazlewood(4)................... 20,000 * *
H. D. Wiginton(5)....................... 17,000 * *
Steven P. Rosenberg
5430 LBJ Freeway, Suite 1600
Dallas, Texas 75219................... 438,423 7.8 3.0
Richard A. Coonrod(6)
5720 Smetana Drive, Suite 300
Minnetonka, Minnesota 55343........... 91,161 1.6 *
Robert G. Miller(7)
30518 Via Maria Elena
Bonsall, California 92003............. 309,040 5.5 2.1
Rod J. Sands(8)(9)
5121 Broadway
San Antonio, Texas 78209.............. 582,953 9.9 3.9
Arthur E. Biggs
3210 St. Charles Place
Boca Raton, Florida 33434............. 233,849 4.2 1.6
Norwest Equity Partners V(10)
222 South Ninth St., Suite 2800
Minneapolis, Minnesota 55402-3388..... 820,449 14.6 5.6
Culligan Water Technologies, Inc.(11)
One Culligan Parkway
Northbrook, IL 60062-6209............. 1,972,968 26.2 11.9
SV Capital Partners, L.P.(9)(12)
200 Concord Plaza, Suite 620
San Antonio, Texas 78216.............. 582,953 9.9 3.9
Ares Leveraged Investment Fund, L.P.(13)
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067......... 792,799 12.4 5.1
All directors and executive officers as
a group
(14 people)........................... 2,594,069 42.4 17.2
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
46
<PAGE>
- ------------
* Less than 1%
(1) Includes stock options to purchase 60,000 shares of Common Stock at a
weighted average price of $11.50 per share, all of which will vest upon the
closing of the Offering.
(2) Includes (i) stock options to purchase 55,000 shares of Common Stock at a
weighted average price of $11.64 per share, all of which will vest upon the
closing of the Offering, (ii) 2,000 shares of Common Stock held by Mr.
Lewis, as Trustee, (iii) 25,000 shares owned by Southwest Texas Equipment
Distributors, Inc., a corporation owned by Mrs. A. J. Lewis III and (iv)
69,350 shares held by Mr. and Mrs. Lewis as tenants in common.
(3) Includes stock options to purchase 40,000 shares of Common Stock at a
weighted average price of $14.00 per share, all of which will vest upon the
closing of the Offering.
(4) Includes stock options to purchase 20,000 shares of Common Stock at a
weighted average price of $10.00 per share, all of which will vest upon the
closing of the Offering.
(5) Includes stock options to purchase 11,000 shares of Common Stock at a
weighted average price of $8.64 per share, all of which will vest upon the
closing of the Offering.
(6) Mr. Coonrod does not own any shares of record. However, as general partner
of the Food Fund, Mr. Coonrod may be deemed to be the beneficial owner of
the shares held by the Food Fund. Mr. Coonrod disclaims beneficial
ownership of the Common Stock held by the Food Fund.
(7) Includes stock options to purchase 22,500 shares of Common Stock at $10.00
per share, all of which will vest upon the closing of the Offering.
(8) Comprised of 300,000 shares of Common Stock that SV holds. Mr. Sands, a
limited partner of SV and a member of its investment committee, may be
deemed to have indirect beneficial ownership of the Common Stock that SV
owns. Mr. Sands disclaims any such beneficial ownership.
(9) Includes 282,953 shares of Common Stock issuable upon exercise of currently
exercisable warrants.
(10) Includes Common Stock issuable upon conversion of 405,000 shares of Series
A Convertible Preferred Stock and 37,449 shares of Series B Convertible
Preferred Stock.
(11) Includes 1,972,968 shares of Common Stock issuable upon exercise of
currently exercisable warrants.
(12) Christopher Goldsbury, Jr. is a director, majority limited partner and
controlling shareholder of the corporate general partner of SV. As a
result, Mr. Goldsbury may be deemed to have indirect beneficial ownership
of the Common Stock that SV owns.
(13) Includes 792,799 shares of Common Stock issuable upon exercise of currently
exercisable warrants.
47
<PAGE>
CERTAIN TRANSACTIONS
AGREEMENTS WITH A. J. LEWIS III. Mrs. A. J. Lewis III owns Southwest Texas
Equipment Distributors, Inc., an ice equipment sales and rental company, which
has the exclusive right to supply Hoshizaki ice cubers to the Company under an
agreement dated September 9, 1991. Mr. Lewis owns real estate on which Mission's
facilities are located. As part of the Mission and STPI Acquisitions, the
Company leases these facilities from Mr. Lewis for $355,200 per year until
February 28, 2008. Such agreement was made in an arms'-length negotiation
submitted to the disinterested members of the Company's Board of Directors who
voted in favor of the agreement upon review of the relevant information.
INDEMNITY AGREEMENTS. The Company has entered into indemnification
agreements with each of its directors and certain of its executive officers. The
indemnification agreements provide that the Company shall indemnify these
individuals against certain liabilities (including settlements) and expenses
actually and reasonably incurred by them in connection with any threatened or
pending legal action, proceeding or investigation (other than actions brought by
or in the right of the Company) to which any of them is, or is threatened to be,
made a party by reason of their status as a director, officer or agent of the
Company; provided that, with respect to a civil, administrative or investigative
(other than criminal) action, such individual acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the Company, and with respect to any criminal proceedings, he or
she had no reasonable cause to believe his or her conduct was unlawful. With
respect to any action brought by or in the right of the Company, such
individuals may be indemnified, to the extent not prohibited by applicable laws
or as determined by a court of competent jurisdiction, against expenses actually
and reasonably incurred by them in connection with such action if they acted in
good faith and in a manner they reasonably believed to be in, or not opposed to,
the best interests of the Company. The agreements also require indemnification
of such individuals for all reasonable expenses incurred in connection with the
successful defense of any action or claim and provide for partial
indemnification in the case of any partially successful defense.
VOTING AGREEMENTS. Each of the following voting agreements will terminate
at the close of the Offering. In excess of 80% of the shareholders have entered
into a voting agreement (the "Voting Agreement") which fixes the number of
directors at no more than twelve and provides for the election to the Board of
Directors of the Company of (i) James F. Stuart, (ii) one representative
designated by The Food Fund, who shall initially be Richard A. Coonrod, (iii)
one representative designated by Norwest, who initially was Stephen R. Sefton
who has since resigned from the Board of Directors, (iv) one representative
designated by Steven P. Rosenberg, who shall initially be Steven P. Rosenberg,
and (v) A. J. Lewis III. The Voting Agreement terminates upon the earlier of (i)
the agreement of the holders of 80% of the Company's Common Stock, Series A
Preferred Stock and Series B Preferred Stock voting as a single class on an as
converted basis, (ii) the completion by the Company of a public offering of its
Common Stock resulting in aggregate net proceeds to the Company and any selling
shareholders of $7,500,000 or more, (iii) the merger or consolidation of the
Company with or into another entity which results in the shareholders holding
less than 50% of the voting securities of the surviving entity, or the sale of
all or substantially all of the Company's assets, or (iv) as to any party's
right to designate a director, the reduction of such shareholder's holdings to
less than 50% of the September 20, 1995 levels. Amendments to the Voting
Agreement require the agreement of holders of 80% of the Company's Common Stock,
Series A Preferred Stock and Series B Preferred Stock voting on an as converted
basis. In addition, certain holders of in excess of 50% of the Company's voting
stock have entered into a Voting Agreement with certain former shareholders of
SWI to elect Robert G. Miller to the Board of Directors. In connection with the
investment in the Company by SV on July 17, 1997, the holders of at least 60% of
the outstanding voting stock of the Company executed a voting agreement pursuant
to which SV may designate a representative to be elected to the Board of
Directors of the Company. SV has designated Rod J. Sands to be its board
representative. In addition, holders of Series C Preferred Stock have the right
to elect two directors, such right being effective only at such time or times
that Culligan owns less than 20% of the fully diluted Common Stock.
On April 17, 1997 the Company entered into a consulting arrangement with
Robert G. Miller. Under the terms of the arrangement Mr Miller would be paid
$125,000 per year. Such arrangement terminated on May 1, 1998.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, of which 14,622,141 shares will be outstanding immediately
following the Offering, and 5,000,000 shares of preferred stock, par value $.01
per share. The Company's Board of Directors has authorized the designation of
2,750,100 shares of preferred stock as follows: 450,000 shares as the Series A
Convertible Preferred Stock, all of which are outstanding; 200,000 shares as the
Series B Convertible Preferred Stock, of which 124,831 shares are outstanding;
500,000 shares as the 10% Exchangeable Preferred Stock, of which 259,860 shares
are outstanding; 100 shares as the Series C Preferred Stock, of which 100 shares
are outstanding; and 1,600,000 shares of 13% Exchangeable Preferred Stock, of
which no shares will be outstanding at the closing of the Offering. In addition,
393,700 shares and 1,000,000 shares of Common Stock have been reserved for
issuance upon exercise of stock options under the 1994 and 1998 Stock Option
Plans, respectively, 574,831 shares of Common Stock have been reserved for
issuance upon conversion of the Convertible Preferred Stock (such Common Stock
will be issued upon the completion of the Offering), and 4,085,703 shares have
been reserved for issuance upon exercise of warrants.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders of the Company. Subject to any
preferential rights of any outstanding series of preferred stock designated by
the Board of Directors, the holders of Common Stock are entitled to receive,
ratably, with the holders of the Convertible Preferred Stock, such dividends, if
any, as may be declared from time to time by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to receive pro rata
all assets of the Company available for distribution to such holders after
distribution in full of the preferential amount to be distributed to holders of
shares of the Company's Preferred Stock then outstanding. The Company's Articles
of Incorporation deny preemptive rights and cumulative voting. The Common Stock
has no conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the Common Stock.
SERIES A CONVERTIBLE PREFERRED STOCK
The Series A Convertible Preferred Stock has no rights of redemption or
sinking fund provisions, but upon liquidation of the Company, the Company must
pay the holders of Series A Convertible Preferred Stock $5.56 per share (an
aggregate of $2.5 million) before any amounts may be paid to the holders of
Common Stock. Holders of Series A Convertible Preferred Stock are entitled to
vote on all matters upon which the holders of Common Stock have the right to
vote and are generally entitled to vote as a class on any matters adversely
affecting their rights as holders of this series of preferred stock. Each share
of Series A Convertible Preferred Stock entitles the holder thereof to such
number of votes per share as equals the whole number of shares of Common Stock
into which each share of Series A Convertible Preferred Stock is then
convertible. Upon the closing of the Offering, each share of Series A
Convertible Preferred Stock will be automatically converted into Common Stock
without payment of additional consideration at a conversion price of $5.56 per
share, subject to anti-dilution adjustments. The Company may not reissue the
Series A Convertible Preferred Stock once it has been converted into Common
Stock.
SERIES B CONVERTIBLE PREFERRED STOCK
The Series B Convertible Preferred Stock has no rights of redemption or
sinking fund provisions, but upon liquidation of the Company, the Company must
pay the holders of Series B Convertible Preferred Stock $6.07 per share (an
aggregate of $757,724) before any amounts may be paid to the holders of Common
Stock. Holders of Series B Convertible Preferred Stock are entitled to vote on
all matters upon which the holders of Common Stock have the right to vote and
are generally entitled to vote as a class on any matters adversely affecting
their rights as holders of this series of preferred stock. Each share of Series
B Convertible Preferred Stock entitles the holder thereof to such number of
votes per share as equals the whole number of shares of Common Stock into which
each share of Series B Convertible Preferred
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<PAGE>
Stock is then convertible. Upon the closing of the Offering, each share of
Series B Convertible Preferred Stock shall be automatically converted into
Common Stock without payment of additional consideration at a conversion price
of $6.07 per share, subject to anti-dilution adjustments. The Company may not
reissue the Series B Convertible Preferred Stock once it has been converted into
Common Stock.
10% EXCHANGEABLE PREFERRED STOCK
The 10% Exchangeable Preferred Stock has a liquidation preference of $100
per share plus accrued and unpaid dividends thereon. Holders of the 10%
Exchangeable Preferred Stock are entitled to receive dividends equal to $10.00
per share per annum, of the liquidation preference thereof, and all dividends
are fully cumulative and accrue on a daily basis. Dividends may be paid in cash
or in kind by issuing a number of additional shares of 10% Exchangeable
Preferred Stock. If dividends are paid in kind, the Company is also required to
issue additional In-Kind Culligan Warrants to purchase a number of shares of
Common Stock (including fractional shares) in an amount equal to the liquidation
preference of such additional shares of 10% Exchangeable Preferred Stock divided
by the per share exercise price of the Culligan Warrants in effect immediately
prior to such dividend payment date. Holders of the 10% Exchangeable Preferred
Stock have no voting rights other than approval rights with respect to the
issuance of parity or senior securities or amendments to the Certificate of
Resolution establishing the series of 10% Exchangeable Stock which adversely
affect the holders thereof. The Company may exchange the 10% Exchangeable Stock
for subordinated notes in an aggregate principal amount equal to the liquidation
preference of the shares exchanged. The Company may redeem the 10% Exchangeable
Stock at any time at a cash redemption price equal to the liquidation preference
of the shares redeemed. The Company is obligated to redeem the 10% Exchangeable
Stock on April 14, 2005, at the cash redemption price.
Payments of cash dividends, redemption of the 10% Exchangeable Preferred
Stock and the exchange of the 10% Exchangeable Preferred Stock for subordinated
notes is restricted by covenants under the Indenture and Credit Facility.
SERIES C PREFERRED STOCK
The Series C Preferred Stock has a liquidation preference of $10 per share
and was created to provide the holders thereof with the right to vote a number
of shares equal to the number of Culligan Warrants issued to them, such rights
to be effective only at such time or times that Culligan owns less than 20% of
the fully diluted Common Stock. The Company may redeem all (but not less than
all) of the Series C Preferred Stock at such time as the investors cease to own
at least 50% of the Fully Diluted Warrant Common Stock (as defined in the
Certificate of Designation of the Series C Preferred Stock).
13% EXCHANGEABLE PREFERRED STOCK
In April 1998, the Board of Directors authorized the designation of an
aggregate of 1,600,000 shares of the 13% Exchangeable Preferred Stock with a
liquidation preference of $100 per share plus accrued and unpaid dividends
thereon. The 13% Exchangeable Preferred Stock will be repurchased with proceeds
of this Offering. Holders of the 13% Exchangeable Preferred Stock currently are
entitled to receive dividends at a rate of $11.50 per share per annum. Dividends
are fully cumulative and payable quarterly in cash, except that dividends may be
paid in kind by issuing a number of additional shares of 13% Exchangeable
Preferred Stock.
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WARRANTS
The following table delineates the terms of certain warrants the Company
has outstanding. Among other terms, these warrants contain certain anti-dilution
provisions and certain registration rights. See "-- Registration Rights."
<TABLE>
<CAPTION>
UNDERLYING EXERCISE EXPIRATION
NAME COMMON SHARES PRICE DATE
- ---------------------------------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
12% Senior Note Warrants(1)............. 767,828 $0.01/Share April 15, 2004
Jefferies Warrants(1)................... 127,972 $0.01/Share April 15, 2004
Culligan Warrants(2).................... 2,099,151 $13.00/Share April 15, 2005(3)
SV Warrants(4).......................... 100,000 $14.00/Share July 17, 2002
Ares Warrants(5)........................ 975,752 $0.01/Share May 1, 2005(6)
Others.................................. 15,000 $15.00/Share June 30, 2003
------------- ------------
Total.............................. 4,085,703 $7.08/Share(7)
============= ============
</TABLE>
- ------------
(1) Issued in connection with the issuance of 12% Senior Notes.
(2) Issued pursuant to warrant agreements entered into in connection with an
issuance of 10% Exchangeable Preferred Stock and Series C Preferred Stock.
(3) Required to be exercised on or before the earlier to occur of (i) April 15,
2005 or (ii) the first anniversary of the last day of the first period of 20
consecutive trading days following the closing of the Offering during which
the closing price of the Common Stock is above $26 per share.
(4) Issued in connection with the issuance of 300,000 shares of Common Stock.
(5) Issued pursuant to warrant agreements entered into in connection with the
issuance of 13% Exchangeable Preferred Stock.
(6) Required to be exercised on or before the earlier to occur of (i) May 1,
2005 or (ii) 10 business days following the closing of the Offering.
(7) Weighted average exercise price.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Company's Articles provide that the Board of Directors is vested with
authority to establish, from time to time, series of unissued shares of any
class, to determine and fix the designation and the relative rights, preferences
and limitations of the shares of each series so established, and to increase or
decrease the number of shares within each such series. The relative rights and
preferences of shares may vary in any respect among series, but all shares of
the same series shall be identical in all respects. The authority possessed by
the Board of Directors to issue different classes and series of stock could
potentially be used to discourage attempts by others to obtain control of the
Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult to achieve or more costly. The Board of Directors
may issue preferred stock with voting and conversion rights that could adversely
affect the voting power of the holders of Common Stock.
Article 1302-7.06 of the Texas Miscellaneous Corporation Act ("TMCA")
authorizes a Texas corporation to include a provision in its articles of
incorporation limiting or eliminating the personal liability of its directors to
the corporation and its shareholders for monetary damages for breach of
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors exercise an informed business judgment
based on all material information reasonably available to them. Absent the
limitations authorized by such provision, directors are accountable to
corporations and their shareholders for monetary damages for conduct
constituting gross negligence in the exercise of their duty of care. Although
Article 1302-7.06 of the TMCA does not change a director's duty of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission. Pursuant to such provision, the Articles of
Incorporation limit the personal liability of directors of the Company (in their
capacity as directors but not in their capacity as officers) to the Company or
its shareholders to the fullest extent permitted by the TMCA. Specifically, a
director of the Company will not be personally liable to the corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for (i) any breach of the director's duty of loyalty to the Company or
its shareholders, (ii) acts or omissions not
51
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in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions, and (iv) any transaction from which the
director derived an improper personal benefit.
The inclusion of this provision may have the effect of reducing the
likelihood of derivative litigation against directors and may discourage or
deter shareholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have benefited the Company and its shareholders. However, the
inclusion of this provision together with a provision which requires the Company
to indemnify its officers and directors against certain liabilities, is intended
to enable the Company to attract qualified persons to serve as directors who
might otherwise be reluctant to do so. The Commission has taken the position
that this provision will have no effect on claims arising under the federal
securities laws.
ANTI-TAKEOVER CONSIDERATIONS
ANTI-TAKEOVER STATUTE. On September 1, 1997, the Company became subject to
newly-enacted Part 13 of the TBCA ("Part 13"), which subject to certain
exceptions, prohibits a Texas corporation from engaging in any "business
combination" with an "affiliated shareholder" for three years following the
date that such shareholder became an affiliated shareholder, unless: (i) prior
to such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the shareholder
becoming an affiliated shareholder or (ii) the business combination is
authorized at a meeting of shareholders called not less than six months after
such date by the affirmative vote of at least two-thirds of the outstanding
voting shares not owned by the affiliated shareholder.
Part 13 generally defines a "business combination" to include: (i) any
merger, share exchange or conversion involving the corporation and the
affiliated shareholder, (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of 10% or more of the assets of the corporation to
the affiliated shareholder, (iii) subject to certain exceptions, any transaction
that results in the issuance or transfer by the corporation of any stock of the
corporation to the affiliated shareholder, (iv) any transaction involving the
corporation that has the effect of increasing the proportionate ownership
percentage of the stock of any class or series of the corporation beneficially
owned by the affiliated shareholder, (v) any receipt by the affiliated
shareholder of the benefit of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation, or (vi) any adoption
of a plan or proposal for the liquidation or dissolution of the corporation
proposed by, or pursuant to any agreement or understanding with, an affiliated
shareholder. In general, Part 13 defines an "affiliated shareholder" as any
entity or person beneficially owning 20% or more of the outstanding voting stock
of the corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. The provisions of Part 13 could have the
effect of delaying, deferring or preventing a change of control of the Company
even if a change of control were in the shareholders' interests.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
REGISTRATION RIGHTS AGREEMENTS
Approximately 1,810,790 shares of Common Stock, 4,085,703 shares of Common
Stock underlying warrants and 574,831 shares of Common Stock underlying
Convertible Preferred Stock have the benefit of "demand" registration rights
that allow the holder to require the Company at any time, subject to certain
limitations, to file a registration statement under the Securities Act at the
Company's expense covering all or part of such securities. In addition, holders
of these securities and an additional 722,960 shares of Common Stock have the
benefit of "piggyback" registration rights that allow the holders thereof to
require the Company to register the underlying shares of common stock if the
Company files a registration statement under the Securities Act. If such
registration statement is with respect to an underwritten offering, the
underwriter thereof may reduce the amount of "piggyback" shares to be
registered in the underwriting in its discretion. These registration rights
agreements include traditional covenants and indemnification provisions
including the indemnification of the selling shareholders for violations of the
Securities Act.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of a substantial number of shares of Common Stock in the
public market could adversely affect trading prices prevailing from time to
time.
Upon completion of the Offering, the Company will have outstanding
14,622,141 shares of Common Stock (15,972,141 shares if the Underwriters'
over-allotment option is exercised in full). The shares sold in the Offering
will be freely tradable without restriction under the Securities Act, unless
purchased by "affiliates" of the Company as that term is defined in Rule 144,
which is summarized below. All of the remaining 5,622,141 shares are
"restricted securities" as that term is defined in Rule 144 ("Restricted
Shares"). Restricted Shares may be sold in the public market only if such sale
is registered under the Securities Act or if such sale qualifies for an
exemption from registration, such as the one provided by Rule 144. Sales of the
Restricted Shares in the open market, or the availability of such shares for
sale, could adversely affect the trading price of the Common Stock.
In addition, a total of 4,085,703 shares of Common Stock have been reserved
for issuance upon the exercise of outstanding warrants at a weighted average
exercise price of $7.08 per share with expiration dates ranging from July 2002
to May 2005. See "Description of Capital Stock -- Warrants." A total of
1,393,700 shares of Common Stock have been reserved for issuance under stock
option plans, 393,700 of which are issuable upon exercise of options outstanding
and exercisable at the closing of this Offering.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year following the later of the date of the acquisition of such shares
from the issuer or an affiliate of the issuer would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(i) 1% of the number of shares of Common Stock then outstanding (approximately
146,221 shares immediately after the Offering) or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years following the later of the date of
the acquisition of such shares from the issuer or an affiliate of the issuer, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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UNDERWRITING
The underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, Jefferies & Company, Inc., Bear, Stearns
& Co. Inc. and Stephens Inc. (the "Representatives"), have severally agreed,
subject to the terms and conditions in the underwriting agreement (the
"Underwriting Agreement") by and among the Company and the Underwriters, to
purchase from the Company the number of shares of Common Stock indicated below
opposite its name, at the initial public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent and that the Underwriters are committed to purchase
all of the shares of Common Stock, if they purchase any.
NUMBER
UNDERWRITERS OF SHARES
- ---------------------------------------- ---------
NationsBanc Montgomery Securities
LLC ....................................
Jefferies & Company, Inc. ..............
Bear, Stearns & Co. Inc. ...............
Stephens Inc. ..........................
---------
Total...................... 9,000,000
=========
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow selected dealers a
concession of not more than $ per share; and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $ per share to
certain other dealers. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 1,350,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise such over-allotment
option, the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be expected
to make in respect thereof.
The Company's officers and directors and certain stockholders of the
Company holding beneficially approximately 7,619,230 shares of Common Stock
prior to the Offering have agreed that during the 180-day period following the
date of the Prospectus (the "Lock-up Period"), they will not, without the
prior written consent of NationsBanc Montgomery Securities LLC, directly or
indirectly sell, offer, contract or grant any option to sell, pledge, transfer,
establish an open put equivalent position or otherwise dispose of any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable or exercisable for or convertible into shares of Common
Stock. The Company has also agreed not to issue, offer, sell, grant options to
purchase or otherwise dispose of any of the Company's equity securities during
the Lock-up Period without the prior written consent of NationsBanc Montgomery
Securities LLC, except for securities issued by the Company in connection with
acquisitions and for grants and exercises of stock options, subject in each case
to any remaining portion of the Lock-up Period applying to shares issued or
transferred. In evaluating any request for a waiver of the Lock-up Period,
NationsBanc Montgomery Securities LLC will consider, in accordance with its
customary practice, all relevant facts and circumstances at the time of the
request, including without limitation, the recent trading market for the Common
Stock, the
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<PAGE>
size of the request, and, with respect to a request by the Company to issue
additional equity securities, the purpose of such an issuance. See "Shares
Eligible for Future Sale."
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Securities Exchange Act of 1934 (the
"Exchange Act"), pursuant to which such persons may bid for or purchase Common
Stock for the purpose of stabilizing its market price. The Underwriters may also
create a short position for the account of the Underwriters by selling more
Common Stock in connection with the Offering than they are committed to purchase
from the Company and, in such case, may purchase Common Stock in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 1,350,000 shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. In addition, NationsBanc
Montgomery Securities LLC, on behalf of the Underwriters, may impose "penalty
bids" under contractual arrangement with the Underwriters whereby it may
reclaim from an Underwriter (or dealer participating in the Offering), for the
account of the other Underwriters, the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
expect to make sales of Common Stock offered by this Prospectus to accounts over
which they exercise discretionary authority in excess of 5% of the number of
shares of Common Stock offered hereby.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock will be determined by negotiations between the Company and the
Representatives. Among the factors to be considered in such negotiations will be
the results of operations of the Company in recent periods, the prospects for
the Company and the industry in which the Company competes, an assessment of the
Company's management, its financial condition, the prospects for future earnings
of the Company, the present state of the Company's development, the general
condition of the economy and the securities markets at the time of the Offering
and the market prices of and demand for publicly traded common stock of
comparable companies in recent periods.
The Underwriters have reserved for sale, at the initial public offering
price, up to 250,000 shares of Common Stock for certain employees and business
associates of, and certain other persons designated by, the Company who have
expressed an interest in purchasing such shares of Common Stock. The number of
shares available for sale to the general public in the Offering will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered to the general public on the same basis as
other shares offered hereby.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Jefferies has provided financial advisory services to the Company in the
past for which it has received usual and customary compensation, some of which
has been paid in the form of warrants to purchase Common Stock, and may provide
such services to the Company in the future. In particular, Jefferies acted as
(i) the initial purchaser in connection with the issuance and sale of the 9 3/4%
Senior Notes, (ii) the initial purchaser in connection with the issuance and
sale of the 12% Senior Notes and (iii) financial advisor to the Company with
respect to the Reddy Acquisition. Jefferies has agreed to pay a finder's fee
equal to 10% of the total underwriting discount that it receives in the Offering
to Williams Financial Group, an NASD member, who will remit 95% of such finder's
fee to James M. Raines, an independent financial consultant to the Company, who
is associated with Williams Financial Group. Mr. Raines beneficially owns a
total of 47,734 shares of Common Stock.
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<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the sale of the Common Stock
offered hereby are being passed upon for the Company by Akin, Gump, Strauss,
Hauer & Feld, L.L.P. and for the Underwriters by Vinson & Elkins L.L.P.,
Houston, Texas.
Cecil Schenker, a holder of 4,000 shares of Common Stock, is a partner of
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
EXPERTS
The (i) consolidated financial statements of Packaged Ice, Inc. as of
December 31, 1996 and 1997 and for each of the three years in the period ended
December 31, 1997, (ii) the financial statements of Reddy Ice Corporation as of
December 31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997, and (iii) the combined financial statements of Mission Party
Ice, Inc. and Southwest Texas Packaged Ice, Inc. as of and for the year ended
December 31, 1996, included in this Prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and have been so included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Cassco Ice and Cold Storage, Inc. as of June
27, 1998 and June 28, 1997 and for the years then ended have been included
herein and in the registration statement in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
The financial statements of Southwestern Ice, Inc. as of and for the years
ended December 31, 1996 and 1995, included in this Prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (including any and all amendments thereto, the "Registration Statement")
under the Securities Act and the rules and regulations promulgated thereunder,
with respect to the Common Stock offered hereby. This Prospectus omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits and schedules thereto for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained in this Prospectus concerning the provisions or contents of
any contract, agreement or any other document referred to herein are not
necessarily complete with respect to each such contract, agreement or document
filed as an exhibit to the Registration Statement, and reference is made to such
exhibit for a more complete description of the matters involved, and each such
statement shall be deemed qualified by such reference. The Company is subject to
the information requirements of the Exchange Act, and in accordance therewith
will file reports, proxy statements and other information with the Commission.
Such reports, proxy statements and other information, as well as the
Registration Statement, including the exhibits and schedules thereto, may be
inspected and copied at the public reference facilities maintained by 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, 13th Floor, New York, New York 10048 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be
obtained from such offices, upon payment of fees prescribed by the Commission.
The Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that submit electronic filings to the Commission.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and an opinion thereon
expressed by an independent public accounting firm, and with quarterly reports
for the first three quarters of each fiscal year containing unaudited interim
consolidated financial information.
56
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INDEX TO FINANCIAL STATEMENTS
PAGE
-----
PACKAGED ICE, INC. AND SUBSIDIARIES
Independent Auditors' Report....... F-2
Consolidated Balance Sheets at
September 30, 1998 (unaudited) and
December 31, 1997
and 1996......................... F-3
Consolidated Statements of
Operations for the Nine Months
Ended September 30, 1998 and 1997
(unaudited) and for the Years
Ended December 31, 1997, 1996
and 1995......................... F-4
Consolidated Statements of
Shareholders' Equity for the Nine
Months Ended September 30, 1998
(unaudited) and for the Years
Ended December 31, 1997, 1996 and
1995.............................. F-5
Consolidated Statements of Cash
Flows for the Nine Months Ended
September 30, 1998 and 1997
(unaudited) and for the Years
Ended December 31, 1997, 1996 and
1995.............................. F-6
Notes to Consolidated Financial
Statements........................ F-7
REDDY ICE CORPORATION
Independent Auditor's Report....... F-19
Balance Sheets at March 31, 1998
(unaudited) and December 31, 1997
and 1996.......................... F-20
Statements of Operations for the
Three Months Ended March 31, 1998
and 1997 (unaudited) and for the
Years Ended December 31, 1997,
1996 and 1995..................... F-21
Statements of Shareholders' Deficit
for the Three Months Ended March
31, 1998 (unaudited) and for the
Years Ended December 31, 1997,
1996
and 1995......................... F-22
Statements of Cash Flows for the
Three Months Ended March 31, 1998
and 1997 (unaudited) and for the
Years Ended December 31, 1997,
1996 and 1995..................... F-23
Notes to Financial Statements...... F-24
CASSCO ICE AND COLD STORAGE, INC.
Independent Auditors' Report....... F-32
Balance Sheets at June 27, 1998 and
June 28, 1997..................... F-33
Statements of Earnings for the
Years Ended June 27, 1998 and June
28, 1997.......................... F-34
Statements of Shareholder's Equity
for the Years Ended June 27, 1998
and June 28, 1997................. F-35
Statements of Cash Flows for the
Years Ended June 27, 1998 and June
28, 1997.......................... F-36
Notes to Financial Statements...... F-37
MISSION PARTY ICE, INC. AND SOUTHWEST
TEXAS PACKAGED ICE, INC.
Independent Auditor's Report....... F-43
Combined Balance Sheets at March
31, 1997 (unaudited) and at
December 31, 1996................. F-44
Combined Statements of Operations
and Retained Earnings for the
Three Months Ended March 31, 1997
(unaudited) and for the Year Ended
December 31, 1996................. F-45
Combined Statements of Cash Flows
for the Three Months Ended March
31, 1997 (unaudited) and for the
Year Ended December 31, 1996...... F-46
Notes to Combined Financial
Statements........................ F-47
Independent Auditors' Report on
Additional Information............ F-53
Combined Balance Sheet with
Combining Information at December
31, 1996.......................... F-54
Combined Statement of Operations
with Combining Information for the
Year Ended December 31, 1996...... F-55
SOUTHWESTERN ICE, INC.
Report of Independent
Accountants....................... F-56
Balance Sheets at March 31, 1997
(unaudited) and December 31, 1996
and 1995.......................... F-57
Statements of Operations and
Changes in Retained Earnings for
the Three Months Ended March 31,
1997 and 1996 (unaudited) and for
the Years Ended December 31, 1996
and 1995.......................... F-58
Statements of Cash Flows for the
Three Months Ended March 31, 1997
and 1996 (unaudited) and for the
Years Ended December 31, 1996 and
1995.............................. F-59
Notes to Financial Statements...... F-60
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Packaged Ice, Inc.:
We have audited the accompanying consolidated balance sheets of Packaged
Ice, Inc. and its subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1997 and 1996, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 27, 1998
F-2
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1998 1997 1996
------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents............... $ 5,655,765 $ 14,825,259 $ 169,535
Short-term cash investment......... -- 4,543,552 --
Accounts-receivable:
Trade............................ 28,165,462 4,038,582 213,811
Affiliates....................... 79 64,727 119,476
Inventory.......................... 7,925,596 1,347,496 115,825
Prepaid expense.................... 1,504,014 321,492 29,309
------------- ------------- ------------
Total current assets........ 43,250,916 25,141,108 647,956
PROPERTY, net........................ 168,301,464 43,297,449 9,887,687
OTHER ASSETS:
Goodwill, net...................... 224,928,280 44,280,568 --
Debt issuance cost, net............ 9,139,090 6,297,712 144,460
Other.............................. 6,383,832 3,283,617 842,685
------------- ------------- ------------
TOTAL....................... $452,003,582 $ 122,300,454 $ 11,522,788
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
obligations........................ $ 87,568 $ -- $ 703,077
Accounts payable................... 11,245,228 1,965,093 324,624
Payable to affiliates.............. -- 1,309,083 634,585
Accrued expense.................... 9,783,815 1,461,030 170,750
Accrued interest................... 4,558,349 1,875,972 39,272
Notes payable...................... 107,652 1,975,968 3,425
------------- ------------- ------------
Total current liabilities... 25,782,612 8,587,146 1,875,733
LONG-TERM OBLIGATIONS................ 341,780,639 67,501,537 2,831,955
CONVERTIBLE NOTES.................... -- -- 750,000
COMMITMENTS AND CONTINGENCIES........
MANDATORILY REDEEMABLE PREFERRED
STOCK:
10%, Exchangeable -- 259,860 shares
issued and
outstanding at September 30, 1998
and 250,000 shares issued and
outstanding at December 31, 1997,
liquidation preference of $100
per share........................ 27,075,343 25,198,630 --
13% Exchangeable, 411,500 shares
issued and outstanding at
September 30, 1998, liquidation
preference of $100 per share..... 37,383,611 -- --
PREFERRED STOCK WITH PUT REDEMPTION
OPTION:
Series A Convertible -- 450,000
shares issued and outstanding at
September 30, 1998 and December
31, 1997 and 1996................ 2,496,528 2,496,527 2,496,527
Series B Convertible -- 124,831
shares issued and outstanding at
September 30, 1998 and December
31, 1997......................... 726,226 726,226 --
COMMON STOCK WITH PUT REDEMPTION
OPTION, 420,000 shares issued and
outstanding at September 30, 1998
and December 31, 1997, and 1996.... 1,971,851 1,971,851 1,971,851
SHAREHOLDERS' EQUITY:
Preferred stock, Series C, $.01 par
value, 100 shares
authorized and outstanding at
September 30, 1998............... -- -- --
Common stock, $.01 par value;
50,000,000 shares authorized;
shares issued of 4,925,541 at
September 30, 1998 and 4,015,981
at December 31, 1997, and
2,406,371 at December 31, 1996... 49,255 40,160 24,064
Additional paid-in capital......... 39,337,389 28,804,811 4,669,301
Less: 298,231 shares of treasury
stock, at cost..................... (1,491,155) (1,491,155) --
Accumulated deficit................ (23,108,717) (11,535,279) (3,096,643)
------------- ------------- ------------
Total shareholders'
equity...................... 14,786,772 15,818,537 1,596,722
------------- ------------- ------------
TOTAL....................... $452,003,582 $ 122,300,454 $ 11,522,788
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------- --------------------------------------------
1998 1997 1997 1996 1995
--------------- -------------- -------------- -------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 137,650,144 $ 20,963,363 $ 28,980,564 $ 4,426,860 $ 2,830,493
Cost of sales........................ 81,034,845 12,336,269 18,723,786 2,034,828 1,251,527
--------------- -------------- -------------- -------------- ------------
Gross profit......................... 56,615,299 8,627,094 10,256,778 2,392,032 1,578,966
Selling, general and
administrative..................... 22,013,281 4,565,962 7,635,538 1,981,278 1,514,542
Depreciation and amortization........ 12,830,246 3,443,480 5,129,879 1,455,693 751,291
--------------- -------------- -------------- -------------- ------------
Income (loss) from operations........ 21,771,772 617,652 (2,508,639) (1,044,939) (686,867)
Other income, net.................... 498,373 577,167 655,320 184,982 75,314
Interest expense..................... (16,456,690) (3,176,603) (6,585,317) (130,475) (76,929)
--------------- -------------- -------------- -------------- ------------
Net income (loss) before income
taxes.............................. 5,813,455 (1,981,784) (8,438,636) (990,432) (688,482)
Income taxes......................... -- -- -- -- --
--------------- -------------- -------------- -------------- ------------
Net income (loss) before
extraordinary item................. 5,813,455 (1,981,784) (8,438,636) (990,432) (688,482)
Extraordinary loss on refinancing.... (17,386,893) -- -- -- --
--------------- -------------- -------------- -------------- ------------
Net loss............................. $ (11,573,438) $ (1,981,784) $ (8,438,636) $ (990,432) $ (688,482)
=============== ============== ============== ============== ============
Net loss to common shareholders...... $ (15,523,413) $ (1,981,784) $ (8,637,266) $ (990,432) $ (688,482)
=============== ============== ============== ============== ============
Loss per share of common stock:
Basic:
Net income (loss) before
extraordinary item available to
common shareholders............. $ 0.39 $ (0.57) $ (2.40) $ (0.35) $ (0.26)
Extraordinary item.............. (3.60) -- -- -- --
--------------- -------------- -------------- -------------- ------------
Net loss to common shareholders.... $ (3.21) $ (0.57) $ (2.40) $ (0.35) $ (0.26)
=============== ============== ============== ============== ============
Diluted:
Net income (loss) before
extraordinary item available to
common shareholders............. $ 0.28 $ (0.57) $ (2.40) $ (0.35) $ (0.26)
Extraordinary item................. (2.61) -- -- -- --
--------------- -------------- -------------- -------------- ------------
Net loss to common shareholders.... $ (2.33) $ (0.57) $ (2.40) $ (0.35) $ (0.26)
=============== ============== ============== ============== ============
Weighted average common shares
outstanding:
Basic.............................. 4,828,254 3,458,605 3,600,109 2,826,371 2,682,261
=============== ============== ============== ============== ============
Diluted............................ 6,666,272 3,458,605 3,600,109 2,826,371 2,682,261
=============== ============== ============== ============== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------
NUMBER OF PAR PAID-IN SUBSCRIPTION TREASURY ACCUMULATED
SHARES VALUE CAPITAL RECEIVABLE STOCK DEFICIT
---------- ------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT December 31, 1994............ 2,626,371 $26,264 $ 5,853,334 $(34,399) $ -- $ (1,417,729)
Issuance of common stock............ 280,000 2,800 1,311,767 29,600 -- --
Repurchase of common stock.......... (500,000) (5,000) (2,495,800) -- -- --
Net loss............................ -- -- -- -- -- (688,482)
---------- ------- ------------- ------------ ----------- ------------
BALANCE AT December 31, 1995............ 2,406,371 24,064 4,669,301 (4,799) -- (2,106,211)
Issuance of common stock............ -- -- -- 4,799 -- --
Net loss............................ -- -- -- -- -- (990,432)
---------- ------- ------------- ------------ ----------- ------------
BALANCE AT December 31, 1996............ 2,406,371 24,064 4,669,301 -- -- (3,096,643)
Issuance of common stock............ 1,609,610 16,096 15,767,822 -- -- --
Issuance of detachable warrants to
purchase common stock............. -- -- 9,422,335 -- -- --
Issuance costs of 10% exchangeable
preferred stock................... -- -- (856,017) -- -- --
Dividends accumulated on 10%
exchangeable preferred stock...... -- -- (198,630) -- -- --
Purchase of treasury stock.......... -- -- -- -- (1,491,155) --
Net loss............................ -- -- -- -- -- (8,438,636)
---------- ------- ------------- ------------ ----------- ------------
BALANCE AT December 31, 1997............ 4,015,981 $40,160 28,804,811 -- (1,491,155) (11,535,279)
Issuance of common stock
(unaudited)....................... 909,560 9,095 10,595,567 -- -- --
Dividends accumulated on
exchangeable preferred stocks
(unaudited)....................... -- -- (3,949,975) -- -- --
Issuance costs on 13% exchangeable
preferred stock (unaudited)....... -- -- (802,665) -- -- --
Warrants issued in connection with
13% exchangeable preferred stock
(unaudited)....................... -- -- 4,878,760 -- -- --
Amortization of warrants
(unaudited)....................... -- -- (189,109) -- -- --
Net loss (unaudited)................ -- -- -- -- -- (11,573,438)
---------- ------- ------------- ------------ ----------- ------------
BALANCE AT September 30, 1998
(unaudited)........................... 4,925,541 $49,255 $ 39,337,389 $ -- $(1,491,155) $(23,108,717)
========== ======= ============= ============ =========== ============
TOTAL
-------------
BALANCE AT December 31, 1994............ $ 4,427,470
Issuance of common stock............ 1,344,167
Repurchase of common stock.......... (2,500,800)
Net loss............................ (688,482)
-------------
BALANCE AT December 31, 1995............ 2,582,355
Issuance of common stock............ 4,799
Net loss............................ (990,432)
-------------
BALANCE AT December 31, 1996............ 1,596,722
Issuance of common stock............ 15,783,918
Issuance of detachable warrants to
purchase common stock............. 9,422,335
Issuance costs of 10% exchangeable
preferred stock................... (856,017)
Dividends accumulated on 10%
exchangeable preferred stock...... (198,630)
Purchase of treasury stock.......... (1,491,155)
Net loss............................ (8,438,636)
-------------
BALANCE AT December 31, 1997............ 15,818,537
Issuance of common stock
(unaudited)....................... 10,604,662
Dividends accumulated on
exchangeable preferred stocks
(unaudited)....................... (3,949,975)
Issuance costs on 13% exchangeable
preferred stock (unaudited)....... (802,665)
Warrants issued in connection with
13% exchangeable preferred stock
(unaudited)....................... 4,878,760
Amortization of warrants
(unaudited)....................... (189,109)
Net loss (unaudited)................ (11,573,438)
-------------
BALANCE AT September 30, 1998
(unaudited)........................... $ 14,786,772
=============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $ (11,573,438) $ (1,981,784) $ (8,438,636) $ (990,432) $ (688,482)
Adjustments to reconcile net loss
to net cash provided by (used
in) operating activities
(excluding working capital from
Acquisitions):
Depreciation and amortization.... 12,830,246 3,443,480 5,129,879 1,455,693 751,291
Amortization of debt discount.... 113,296 -- 576,805 -- --
Gain from disposal of assets..... -- (59,158) (4,030) (2,584) --
Extraordinary loss from
refinancing.................... 17,386,893 -- -- -- --
Changes in assets and
liabilities:
Accounts receivable, inventory
and prepaid expenses........ (11,556,986) (3,431,232) (996,731) (26,189) (106,107)
Accounts payable and accrued
expenses.................... (19,887) 2,376,018 440,928 657,540 191,181
------------- ------------- ------------ ------------ ------------
Net cash provided by (used
in) operating
activities................ 7,180,124 347,324 (3,291,785) 1,094,028 147,883
------------- ------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions................. (15,970,055) (6,708,069) (10,764,733) (5,744,900) (2,717,444)
Cost of acquisitions............... (294,029,426) (25,731,249) (44,144,926) -- --
Investment in short-term cash
investments...................... 4,543,552 --
Purchase of short-term cash
investments...................... -- -- (4,499,415) -- --
Increase in other assets........... (2,268,299) (255,554) (2,279,504) (333,918) (243,621)
Proceeds from disposition of
property......................... -- 135,874 147,776 153,733 --
------------- ------------- ------------ ------------ ------------
Net cash used in investing
activities................ (307,724,228) (32,558,998) (61,540,802) (5,925,085) (2,961,065)
------------- ------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
and preferred stock.............. 39,237,474 2,956,807 27,100,791 -- 5,812,545
Repurchase of common stock and
preferred stock.................. -- (1,491,155) (1,491,155) -- (2,500,800)
Proceeds from debt issuance, net... 260,044,825 44,954,082 69,562,179 3,604,403 82,232
Cost of refinancing................ (3,937,500) --
Issuance costs on convertible
demand notes..................... -- (23,774) (23,774) -- --
Proceeds from issuance and
conversion of convertible demand
notes............................ -- -- -- 750,000 --
Borrowings from lines of credit.... 89,550,000 5,900,000 9,900,000 -- --
Repayment of lines of credit....... (18,050,000) (3,485,000) (13,385,000) -- --
Repayment of debt.................. (75,470,189) (12,086,591) (12,174,730) (386,622) (359,510)
------------- ------------- ------------ ------------ ------------
Net cash provided by
financing activities...... 291,374,610 36,724,369 79,488,311 3,967,781 3,034,467
------------- ------------- ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS........................ (9,169,494) 4,512,695 14,655,724 (863,276) 221,285
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD............................. 14,825,259 169,535 169,535 1,032,811 811,526
------------- ------------- ------------ ------------ ------------
CASH AND EQUIVALENTS, END OF
PERIOD............................. $ 5,655,765 $ 4,682,230 $ 14,825,259 $ 169,535 $ 1,032,811
============= ============= ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments for interest......... $ 17,392,995 $ 213,810 $ 4,748,482 $ 114,383 $ 75,606
============= ============= ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued in
consideration for business
acquisitions..................... $ 10,564,523 $ 11,449,110 $ 12,814,283 $ -- $ --
============= ============= ============ ============ ============
Fair value of warrants issued in
connection with debt............. $ -- $ 6,735,335 $ 9,422,335 $ -- $ --
============= ============= ============ ============ ============
Fair value of warrants issued in
connection with 13% Exchangeable
Preferred Stock.................. $ 4,878,760 $ -- $ -- $ -- --
============= ============= ============ ============ ============
Accretion of warrants in connection
with 13% Exchangeable Preferred
Stock............................ $ (189,109) $ -- $ -- $ -- $ --
============= ============= ============ ============ ============
Demand notes converted to preferred
stock............................ $ -- $ 750,000 $ 750,000 $ -- $ --
============= ============= ============ ============ ============
Note payable incurred to purchase
assets........................... $ -- $ 188,862 $ 188,862 $ -- $ --
============= ============= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Packaged Ice, Inc. and its wholly owned subsidiaries (the "Company")
manufacture and distribute packaged ice by traditional delivery methods and
stand-alone automated merchandising ice systems ("ice systems") installed
primarily in retail locations. The ice systems produce and package bags of cubed
ice at the customer's location. At December 31, 1997, the Company's customers
were located primarily in the southern half of the United States.
2. RECENT EVENTS
On January 28, 1998, the Company completed a private offering of
$145,000,000 aggregate principal amount of its 9 3/4% Series A Senior Notes due
2005 (the "New Senior Notes"). The New Senior Notes are general unsecured
obligations of the Company, senior in right of payment to all existing and
future Subordinated Indebtedness of the Company and PARI PASSU to all senior
indebtedness of the Company except the New Senior Notes will be effectively
subordinated to the Existing Credit Facility and any future credit facility. The
New Senior Notes contain certain covenants that, among other things, limit the
ability of the Company and its restricted subsidiaries to pay any cash dividends
or make distributions with respect to the Company's capital stock, to incur
indebtedness or to create liens. Net proceeds from the sale of the New Senior
Notes were applied to (i) repurchase the Series B Notes and Series C Notes as
(see Note 6), (ii) repay all outstanding obligations under the Existing Credit
Facility, (iii) fund acquisitions of traditional ice companies and (iv) for
working capital and general corporate purposes.
Simultaneous with the issuance of the New Senior Notes, the Company
purchased and retired the $75 million of 12% Senior Notes due 2004 (see Note 6),
the Company will record an extraordinary charge of approximately $18.3 million
for such debt extinguishment relating to the write-off of debt discount, and
associated redemption premiums and issuance costs.
The Company's New Senior Notes are guaranteed, fully, jointly and
severally, and unconditionally, on a senior unsecured basis by each of the
Company's current and future wholly owned subsidiaries. (see Note 11 regarding
condensed financial information on subsidiary guarantors).
From January 1, 1998 through March 27, 1998, the Company has acquired
fifteen (15) traditional ice companies for a total purchase price of $55.9
million. In the aggregate, the Company paid $45.3 million in cash and issued
900,260 shares of stock valued at between $10 and $13 per share. The Company
issued the stock in reliance upon the exemption from registration under Section
4 (2) of the Securities Act of 1933, as amended. Each investor represented to
the Company that the investor acquired the stock for the investor's own account
and not with a view to distribution. The investor had access to all available
material information concerning the Company. The certificates evidencing the
stock bear an appropriate restrictive legend under the Securities Act of 1933,
as amended. The Company has not completed an assessment of the fair value of the
net assets acquired for purposes of allocating the excess of the purchase price
over the net book value of the acquired businesses. In conjunction with the
Company's ongoing assessment of the fair value of the net assets acquired from
the acquisitions discussed above, management has estimated the amortization
period of goodwill to be 40 years. The amortization period reflects management's
current estimate of the ultimate period to be benefited by these intangible
assets. The acquired businesses will be recorded using the purchase method of
accounting, and therefore, the results of their operations will be included in
the Company's unaudited consolidated financial statements from the date of their
respective purchase.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Packaged Ice, Inc. and its wholly owned subsidiaries.
All significant intercompany transactions have been eliminated upon
consolidation.
F-7
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION -- The consolidated
financial statements presented herein at September 30, 1998 and for the
nine-month periods ended September 30, 1998 and 1997 are unaudited; however, all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations, and cash flows
for the periods covered have been made and are of a normal recurring nature. At
certain interim reporting dates the Company's inventory includes packaged ice
for sale, which is accounted for at the lower of average cost or market.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year-end. The results of the interim periods are not
necessarily indicative of results to be expected for the full year.
INVENTORIES -- Inventories consist of ice packaging polyethylene bags and
spare parts, and are valued at the lower of first-in first-out cost or market
basis.
PROPERTY -- Property is carried at cost and is being depreciated on a
straight-line basis over an estimated life of three to seven years. Maintenance
and repairs are charged to expense as incurred, while capital improvements that
extend the useful lives of the underlying assets are capitalized.
GOODWILL -- Goodwill is being amortized on a straight-line basis, primarily
over 40 years. Accumulated amortization of goodwill was $411,541, $0, and $0 at
December 31, 1997, 1996, and 1995, respectively.
OTHER ASSETS -- Other assets, consisting primarily of costs to acquire a
competitor's ice system location contracts, ice system patents and deferred
financing costs, are being amortized over 5, 17 and 3 years, respectively (see
Note 5).
LONG-LIVED ASSETS -- The Company records impairment losses on long-lived
assets, including goodwill, used in operations when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets.
INCOME TAXES -- The Company accounts for income taxes under the liability
method, which requires, among other things, recognition of deferred income tax
liabilities and assets for the expected future tax consequences of events that
have been recognized in the Company's consolidated financial statements or tax
returns. Under this method, deferred income tax liabilities and assets are
determined based on the temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and the
recognition of available tax carryforwards.
REVENUE RECOGNITION -- Revenue from owned ice systems is recognized based
upon the number of ice packaging bags delivered to and accepted by customers
under contract terms. Once accepted, there is no right of return with respect to
the bags delivered. Revenue from the sale of ice systems is recognized when the
equipment is shipped. Revenues resulting from leased ice systems is recognized
as earned under contract terms.
EARNINGS PER SHARE -- The computation of earnings per share is based on net
income (loss), after deducting the dividend requirement of preferred stock
($198,630 in 1997), divided by the weighted average number of shares
outstanding. Shares of common stock issuable under stock options have not been
included in the computation of earnings per share as their effect is
antidilutive. For the years ended December 31, 1997, 1996 and 1995, all
potentially dilutive securities are anti-dilutive and therefore are not included
in the earnings per share calculation.
F-8
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information necessary to calculate basic
earnings per share for the periods indicated, with 1996 and 1995 being restated
to conform to the requirements of the Statement of Financial Accounting
Standards No. 128, Earnings Per Share, described below:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------------- ------------ ------------
BASIC EARNINGS PER SHARE
Weighted Average Common Shares
Outstanding.................. 3,600,109 2,826,371 2,682,261
============== ============ ============
Basic and Diluted Loss Per
Share........................ $ (2.40) $ (0.35) $ (0.26)
============== ============ ============
EARNINGS FOR BASIC AND DILUTED
COMPUTATION
Net Loss....................... $ (8,438,636) $ (990,432) $ (688,482)
Preferred Share Dividends...... (198,630) -- --
-------------- ------------ ------------
Net Loss to Common
Shareholders................. $ (8,637,266) $ (990,432) $ (688,482)
============== ============ ============
CASH FLOWS -- The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The Company's financial instruments
consist primarily of cash, accounts receivable, accounts payable and debt
obligations. The carrying amount of cash, trade accounts receivable and trade
accounts payable are representative of their respective fair values due to the
short-term maturity of these instruments. It is not practicable to estimate the
fair values of the affiliate amounts due to their related party nature. The fair
values of the Company's debt obligations (see Note 6) are representative of
their carrying values based upon the variable rate terms for the Senior Credit
Facility and management's opinion that the current rates offered to the Company
for fixed-rate long-term debt with the same remaining maturities and security
structure are equivalent to that of the Company's 12% Senior Notes.
USE OF ESTIMATES -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STOCK BASED COMPENSATION -- In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 123,
Accounting for Stock Based Compensation ("SFAS 123"), effective for the
Company on January 1, 1996. SFAS 123 permits, but does not require, a fair value
based method of accounting for employee stock option plans, resulting in
compensation expense being recognized in the results of operations when stock
options are granted. The Company plans to continue the use of its current
intrinsic value based method of accounting for stock option plans where no
compensation expense is recognized.
NEW ACCOUNTING PRONOUNCEMENTS -- In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. SFAS No. 128, which was effective for
periods ending after December 15, 1997, specifies the computation, presentation
and disclosure requirements of earnings per share and supersedes Accounting
Principles Board Opinion No. 15. SFAS No. 128 requires a dual presentation of
basic and diluted earnings per share. Basic earnings per share, which excludes
the impact of potential common share equivalents, replaces primary earnings per
share. Diluted earnings per share, which utilizes the average market price per
share when applying the treasury stock method in determining potential common
share equivalents, replaces fully diluted earnings per share.
F-9
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the FASB also issued SFAS No. 129, Disclosure of
Information about Capital Structure, which establishes standards for disclosing
information about an entity's capital structure. SFAS No. 129 was effective for
periods ending after December 15, 1997. The adoption of SFAS No. 129 did not
impact the Company's capital structure disclosures.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS No. 131 will not impact the Company's financial statements as it reports as
a single segment. SFAS Nos. 130 and 131 are effective for fiscal years beginning
after December 15, 1997. For the six months ended June 30, 1998, the Company had
no items of comprehensive income, and as a result the Company's reported net
income was the same as comprehensive income.
RECLASSIFICATION -- Certain amounts from previous years have been
reclassified to conform to the current presentation.
4. PROPERTY AND EQUIPMENT
Property and equipment were as follows at December 31:
1997 1996
-------------- --------------
Land................................. $ 1,880,974 $ --
Buildings............................ 5,159,086 --
Ice Systems Equipment................ 19,518,650 11,634,671
Plant Equipment & Machinery.......... 10,662,952 --
Furniture & Fixtures................. 134,455 32,278
Computer equipment................... 481,470 65,725
Vehicles............................. 4,509,823..... 25,492
Leasehold improvements............... 1,400,891 16,526
Merchandisers........................ 4,970,400 --
Construction in Progress............. 253,892 --
-------------- --------------
Total property and equipment......... 48,972,593 11,774,692
Less: accumulated depreciation and
amortization....................... 5,675,144 1,887,005
-------------- --------------
Total........................... $ 43,297,449 $ 9,887,687
============== ==============
Depreciation and amortization expense for the three years ended December
31, 1997 was $3,788,139, $1,147,540, and $502,161, respectively.
5. ACQUISITIONS
Through December 31, 1997, the Company has acquired certain traditional ice
business and certain assets (the "Acquisitions") to compliment its core
business for purchase prices totaling approximately $44.1 million in cash, $13.5
of assumed liabilities paid at closing and $12.8 million in common stock
(approximately 1.3 million shares) reflected at the Company's valuation of
$10.00 per share.
The Acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been preliminarily allocated
to the assets and liabilities acquired based on fair value at the date of the
Acquisitions. As a result of the number of acquisitions and their proximity to
year-end, the Company has not completed the assessment of the fair value of the
net assets acquired for the purposes of allocating the purchase price. The
Acquisitions included at fair value current assets of $4,341,282, property
F-10
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plant and equipment of $26,576,914, and current liabilities of $5,613,070. The
excess of aggregate purchase price over of the fair market value of the net
assets acquired of approximately $44,692,109 was recognized as goodwill and is
being amortized over 40 years. Amortization expense of Goodwill and Other Assets
for the three years ended December 31, 1997 was $1,341,740, $308,153, and
$249,130, respectively.
The operating results of the Acquisitions have been included in the
Company's consolidated financial statements from the date of their respective
purchases. The following unaudited pro forma information presents a summary of
consolidated results of operations as if the Acquisitions had occurred on
January 1, 1997.
Revenue.............................. $ 53,901,660
Net loss............................. 11,564,921
Loss per share....................... 2.81
6. LONG-TERM OBLIGATIONS
In December 1996 the Company received $750,000 in exchange for convertible
demand notes bearing interest at a 10% annual rate. The notes were issued in
contemplation of converting into a new class of preferred stock, subject to
appropriate shareholder approval. Such approval occurred in January 1997 and the
notes plus accrued interest thereon were converted into 124,831 shares of Series
B Convertible Preferred Stock (see Note 9) at a conversion price of $6.07 per
share ($726,226 net of expenses).
On April 17, 1997 the Company completed the sale of $50 million 12% Series
A Senior Notes due 2004 (the "Series A Notes") in connection with a private
placement offering. In connection with the debt issuance, detachable warrants to
purchase 511,885 and 127,972 shares, respectively, of the Company's common stock
were issued to Series A note holders and the investment banking firm that
marketed the Series A Notes. The exercise price is $.01 per share. Concurrent
with the sale of the Series A Notes, the Company consummated agreements with
Mission Party Ice, Inc. and Southwest Texas Packaged Ice, Inc. (the "Mission
Acquisition" and "STPI Acquisition" , respectively) and SWI (the
"Southwestern Acquisition"). The Mission Acquisition and STPI Acquisition
companies are controlled by an existing shareholder of the Company and operate
separate and distinct ice manufacturing facilities primarily in South Texas. SWI
operates ice-manufacturing facilities in Arizona, New Mexico, California, Texas
and Tennessee. Total combined consideration for the Mission and STPI
Acquisitions was $10.4 million, consisting of $3.4 million in cash, $3.4 million
in the assumption and repayment of seller debt and $3.6 million in shares of the
Company's common stock. Total consideration for the SWI Acquisition was $18.8
million, consisting of $3.5 million in cash, $9.3 million in the assumption and
repayment of seller debt and $6.0 million in shares of the Company's common
stock. The Company sold the Series A Notes at a price of 96% of the par value,
or $48,000,000, which was used to finance the cash portion plus certain related
expenses of the purchase price for the above acquisitions, repay outstanding
indebtedness, make capital expenditures and provide additional working capital.
The Series A Notes are unconditionally guaranteed, on a senior subordinated
basis by each of the Company's current and future wholly-owned subsidiaries
other than unrestricted subsidiaries (the "Subsidiary Guarantors").
In August 1997, the Company issued 12% Senior Notes ("Series B Notes").
The Company offered to exchange all outstanding Series A Notes for the Series B
Notes which are identical in all material aspects to the form and term of the
Series A Notes except for certain transfer restrictions and registration rights
relating to the Series A Notes. On October 6, 1997, all of the Series A Notes
were exchanged for the Series B Notes. The Series B Notes are unconditionally
guaranteed, on a senior unsecured basis by the Subsidiary Guarantors (See Note
11). The Series B Notes bear an interest rate of 12 percent per annum. The
Series B Notes contain certain covenants that, among other things, limit the
ability of the Company and its
F-11
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subsidiaries to pay dividends or make distributions with respect to the
Company's capital stock or make certain other payments, to incur indebtedness,
or to create liens.
On October 16, 1997, the Company completed the sale of $25 million
principal amount 12% Series C Senior Notes due 2004 (the "Series C Notes") in
connection with a private placement offering. In connection with the debt
issuance, detachable warrants to purchase 255,943 shares of the Company's common
stock were issued to the holders of the Series C Notes at an exercise price of
$.01 per share. The Series C Notes were issued under the same terms, interest
rates and covenants as the Series A Notes and Series B Notes discussed above.
The net proceeds, after payment of fees and expenses, from the sale of the
Series C Notes were used to repay the outstanding indebtedness under the Senior
Credit Facility and for working capital purposes. The Series C Notes are
unconditionally guaranteed, on a senior subordinated basis by the Subsidiary
Guarantors.
In September 1997, the Company executed a six-year Senior Credit Facility
(the "Existing Credit Facility") with two banks that expires in September
2003. The Existing Credit Facility provides for borrowings of up to $20 million,
subject to a borrowing base limitation (as defined). Interest is payable at the
Company's option at the prime rate plus 1% or the London Interbank Offered Rate,
plus a defined margin. At December 31, 1997, the selected interest rate was
9.5%. There was no principal amount outstanding at that date. The Existing
Credit Facility is secured by substantially all of the Company's assets. In
addition, the Existing Credit Facility contains restrictive covenants that,
among other things, require the maintenance of certain financial ratios and
limits total indebtedness of the Company. All loans under the Existing Credit
Facility are guaranteed by each of the Company's current and future
subsidiaries.
See Note 2 regarding New Senior Notes issued to retire outstanding Series B
and C senior notes at December, 1997. At December 31, 1997 and 1996, long-term
obligations consisted of the following:
1997 1996
-------------- ------------
Senior notes......................... $ 75,000,000 $ --
Less: unamortized debt discount on
detachable warrants issued......... (7,498,463) --
Bank credit facilities............... -- 3,485,000
Other................................ -- 50,032
-------------- ------------
Total........................... 67,501,537 3,535,032
Less: current maturities............. -- 703,077
-------------- ------------
Long-tern debt, net.................. $ 67,501,537 $ 2,831,955
============== ============
There are no principal maturities of long-term obligations for any of the
next five years as of December 31, 1997.
See Note 11 for information regarding subsidiary guarantors of long-term
obligations.
7. INCOME TAXES
The Company incurred losses for each of the three years ended December 31,
1997, 1996 and 1995 for both financial reporting and tax return purposes. Due to
the uncertainty of being able to utilize such losses to reduce future taxes, a
valuation allowance has been provided to reduce to zero the net deferred tax
assets resulting primarily from the loss carryforwards available.
F-12
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total provision for income taxes varied from the U.S. federal statutory
rate due to the following:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------------- ------------ ------------
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....................... $ -- $ -- $ --
============== ============ ============
Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences were as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Deferred tax liabilities:
Property and equipment.......... $ (4,169,050) $ (780,604)
Deferred tax assets:
Other assets.................... 20,720 91,841
Net operating loss
carryforwards................. 5,354,991 1,694,418
-------------- --------------
Total deferred tax assets....... 5,375,711 1,786,259
-------------- --------------
Net deferred tax assets......... 1,206,661 1,005,655
Valuation allowance............. (1,206,661) (1,005,655)
-------------- --------------
Total deferred taxes............ $ -- $ --
============== ==============
At December 31, 1997, the Company had approximately $15 million of net
operating loss carryforwards that expire between 2006 and 2012.
8. RELATED PARTIES
On April 17, 1997 the Company entered into a consulting arrangement with
another individual affiliated through ownership with SWI. Under the terms of the
arrangement this individual would be paid $125,000 per year. At December 31,
1997 the Company has accrued $88,195 for these services.
F-13
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CAPITAL STOCK
PREFERRED STOCK -- During September 1995, the Company's Board of Directors
authorized the designation of 450,000 shares of $.01 par value Series A
convertible preferred stock ("Series A"). Series A has no sinking fund
provisions, but upon liquidation of the Company, the Company must pay the Series
A holders $5.56 per share (aggregate of $2,502,000) before any amounts may be
paid to the holders of common stock. Series A holders are entitled to vote on
all matters upon which the holders of common stock have the right to vote and
are generally entitled to vote as a class on any matters adversely affecting
their rights as holders of this series of preferred stock. Each Series A holder
is entitled to vote the number of equivalent common shares that underlie their
respective Series A investment. Each Series A share is convertible into common
stock without payment of additional consideration at a conversion price of $5.56
per share, subject to antidilution adjustments.
On September 20, 1995, the Company received net proceeds of approximately
$5.8 million from a private placement offering and, in exchange, issued 700,000
shares of common stock and 450,000 shares of Series A convertible preferred
stock. The proceeds from the offering were used (i) to repurchase and retire
420,000 shares of common stock from an unrelated shareholder for $2.5 million,
(ii) to finance the purchase and installation of ice systems in additional
customer locations, and (iii) for working capital and general corporate
purposes. The Company also repurchased and retired 80,000 shares of common stock
for $800. With respect to the above issuance of 700,000 common shares, 420,000
shares contain a "put" option that provides the respective shareholders with
the ability to require the Company to repurchase the common shares if certain
registration rights with respect to the Series A Convertible Preferred Stock are
not effected by September, 2004. The put price would be at the fair market
value, as defined, at the time the put option is exercised. The 420,000 common
shares subject to this redemption feature are shown on the consolidated balance
sheet under the heading "Common Stock With Put Redemption Option".
During January 1997, the Company's board of directors authorized and the
shareholders approved the designation of 200,000 shares of $.01 par value Series
B convertible preferred stock ("Series B"). The Company issued 124,831 Series
B shares in full satisfaction of the 10% convertible demand notes (see Note 6).
Series B has no sinking fund provisions, but upon liquidation of the Company,
the Company must pay the Series B holders $6.07 per share (aggregate $757,724)
before any amounts may be paid to the holders of common stock. Series B holders
are entitled to vote on all matters upon which the holders of common stock have
the right to vote and are generally entitled to vote as a class on any matters
adversely affecting their rights as holders of this series of preferred stock.
Each Series B holder is entitled to vote the number of equivalent common shares
that underlie their respective Series B investment. Each Series B share is
convertible into common stock without payment of additional consideration at a
conversion price of $6.07 per share, subject to antidilution adjustments.
The Series A and Series B convertible preferred shares are also subject to
the same put redemption option described above for the 420,000 common shares.
This redemption feature would be available beginning September, 2004 if the
preferred stockholder has converted its holding to common shares and if certain
registration rights with respect to the common shares are not effected by
September, 2004. The Series A and Series B shares are shown on the consolidated
balance sheet under the heading "Preferred Stock with Put Redemption Option".
On July 17, 1997, the Company sold to an unaffiliated entity 300,000 shares
of common stock for $10 per share and issued a warrant entitling the new
shareholder the right to purchase 100,000 shares of common stock at an exercise
price of $14. The warrant expires on July 17, 2002. During the first nine months
of 1997, the Company sold 26,899 shares of common stock to other investors not
related to any acquisitions at prices ranging from $7.50 to $10.00 per share.
F-14
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On July 24, 1997, the Company repurchased, at cost, treasury stock for
approximately $1,491,155 million from a customer.
On December 2, 1997, the Company's Board of Directors authorized the
designation of 500,000 shares of $0.01 par value 10% mandatorily redeemable
preferred stock, and 100 shares of $0.01 par value Series C preferred stock.
Holders of the 10% mandatorily redeemable preferred stock shall be entitled to
receive dividends equal to 10% of the liquidation preference of $100 per share,
and all dividends shall be fully cumulative. Dividends may be paid in cash or in
kind by issuing a number of additional shares of the 10% mandatorily redeemable
preferred stock. If dividends are paid in kind, the Company shall also issue to
holders of the 10% mandatorily redeemable preferred stock, additional warrants
to purchase common stock at an exercise price of $13.00 per share. Holders of
the 10% mandatorily redeemable preferred stock have no voting rights other than
approval rights with respect to the issuance of parity or senior securities. The
Company may redeem or exchange for subordinated rates the 10% mandatorily
redeemable preferred stock at any time subject to contractual and other
restrictions. The Company is obligated to redeem the 10% mandatorily redeemable
preferred stock for cash on April 14, 2005.
On December 2, 1997, the Company entered into a securities purchase
agreement with Culligan Water Technologies, Inc. and an existing shareholder
pursuant to which the Company issued 250,000 shares of the 10% mandatorily
redeemable preferred stock, 100 shares of Series C preferred stock and warrants,
with an exercise price of $13.00 per share, to purchase 1,923,077 shares of the
Company's common stock, in exchange for an aggregate price of $25.0 million less
issuance cost of $856,017. The warrants are valid until the earlier to occur of
(a) April 15, 2005 and (b) the first anniversary of the last day of the first
period of twenty consecutive days following a qualifying IPO, as defined, during
which there is a closing price on each such trading day and the closing price on
each such trading day equals or exceeds the threshold price, as defined. The
Series C preferred stock was created to provide Culligan and the existing
shareholder the right to vote a number of shares equal to the number of warrants
issued to them, such rights to be effective only at such time or times that
Culligan owns less than twenty percent of the fully diluted common stock of the
Company. The Company may redeem the outstanding Series C preferred stock (but
not less than 100%) at such time as the investors cease to own at least 50% of
the warrants.
COMMON STOCK HOLDERS -- of the Company's common stock are entitled to one
vote per share on all matters to be voted on by shareholders and are entitled to
receive dividends, if any, as may be declared from time to time by the Board of
Directors of the Company. Upon any liquidation or dissolution of the Company,
the holders of common stock are entitled, subject to any preferential rights of
the holders of preferred stock, to receive a pro rata share of all of the assets
remaining available for distribution to shareholders after payment of all
liabilities.
10. EMPLOYEE BENEFIT PLAN
During 1996 the Company established a 401(k) defined contribution savings
plan for the benefit of all employees who have completed one year of service and
have met the eligibility requirements to participate. Employees may contribute
up to the maximum amount allowed by the Internal Revenue Service, while Company
contributions are made at the discretion of the Board of Directors. The Company
contributed approximately $49,012 and $20,000 to the plan during 1997 and 1996,
respectively.
The Company adopted the Packaged Ice, Inc. Stock Option Plan on July 26,
1994 (the "Option Plan"), as amended effective December 1997. Under the Option
Plan, options to purchase up to 400,000 shares of Common Stock may be granted to
employees, outside directors and consultants and advisers to the Company or any
subsidiary. At December 31, 1997, 144,000 shares were available for future
grants.
F-15
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the two years ended December 31, 1997 is
summarized below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE EXERCISE PRICE
OPTIONS OF SHARES PER SHARE PER SHARE
- ------------------------------------- ---------- -------------- -----------------
<S> <C> <C> <C>
Granted during 1996.................. 6,000 $ 7.50 $ 7.50
Granted during 1997.................. 194,500 $ 10.00 $ 10.00
Outstanding at December 31, 1997..... 256,000 $ 6.22-$10.00 $ 9.28
</TABLE>
Such options vest ratably over five years and expire ten years from the date of
grant. The weighted average remaining contractual life of stock options
outstanding under the Option Plan was 5.3 years at December 31, 1997.
Exercisable stock options at December 31, 1997 and 1996 were 31,200 and 18,500,
respectively. The Company measures compensation cost for this Plan using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost has been recognized. Had compensation cost for the Option Plan
been determined using the fair value method of accounting as set forth in SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma
net loss and net loss per share would have been $(8,637,266) and $(2.45) in 1997
and $(1,017,747) and $(0.36) in 1996, respectively. Adjusted pro forma
information regarding net loss and net loss per share is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using the "minimal value"
method for option pricing with the following weighted average assumptions: risk
free interest rate of 6.4%; no expected dividend yield; expected life of 8.2
years; expected volatility of zero.
11. SUBSIDIARY GUARANTORS
The Company's Series B Notes and the Series C Notes are guaranteed, fully,
jointly and severally, and unconditionally, on a senior unsecured basis by all
of the Company's current and future, direct and indirect wholly-owned
subsidiaries (the "Subsidiary Guarantors"). The following table sets forth the
"summarized financial information" of the Subsidiary Guarantors. Full
financial statements of the Subsidiary Guarantors are not presented because
management believes they are not material to the investors. There are currently
no restrictions on the ability of the subsidiary guarantors to transfer funds to
the Company in the form of cash dividends, loans or advances.
AS OF DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Balance Sheet Data:
Current Assets.................. $ 6,591,604 $ 184,434
Property and Equipment.......... 32,622,152 5,422,595
Total Assets.................... 71,381,168 6,099,388
Current Liabilities............. 3,904,149 795,913
Long-Term Debt.................. -- 43,814
Total Shareholder's Equity...... 16,707,700 (1,195,995)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
-------------- -------------- ------------
Operating Data:
Net Revenue................ $ 24,811,023 $ 2,403,516 $ 2,123,701
Gross Profit............... 9,756,164 1,307,557 1,332,591
Net Loss................... (8,878,049) (235,960) (848,779)
F-16
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
In April 1993 the Company entered into an agreement to purchase all of the
ice system packaging components from a shareholder for a period of three years
or until a minimum of 3,600 components had been purchased. Since inception of
this agreement, the Company has purchased 1,253 components.
Beginning June, 1992, the Company has agreed to purchase all of the
merchandiser portions of the ice systems from an unaffiliated company for a
period of two years or until a minimum of 2,400 merchandisers is purchased.
Since inception of this agreement, the Company has purchased 1,251
merchandisers.
The Company entered into employment contracts with two executive officers
of the Company. The aggregate annual commitment for base salary under these
agreements is approximately $215,000.
As a result of the Acquisitions during 1997, the Company entered into
certain employment contracts with former employees of the acquired companies
with an aggregate annual commitment of approximately $868,000.
The Company has leased certain facilities in Texas, Arizona and California.
Under these and other operating leases, minimum annual rentals at December 31,
1997 aggregate approximately $1,040,141 in 1998, $889,269 in 1999, $800,419 in
2000, $723,563 in 2001, $687,735 in 2002 and $2,764,529 thereafter. Rent expense
was $751,641, $75,539 and $65,053 for the years ended December 31, 1997, 1996,
and 1995, respectively.
The Company is involved in various claims, lawsuits and proceedings arising
in the ordinary course of business. While there are uncertainties inherent in
the ultimate outcome of such matters and it is impossible to presently determine
the ultimate costs that may be incurred, management believes the resolution of
such uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
On October 31, 1997, the Company entered into a Trademark License Agreement
with Culligan Water (the "TLA") for $1,750,000. The TLA includes automatic
renewals for successive one-year terms through December 31, 2001, subject to
early termination and is being amortized over the automatic renewal period of
fifty months. The Company paid an initial license fee and is required to make
the greater of 1) minimum royalty payments of $0 in 1997, $50,000 in 1998,
$500,000 in 1999, $1,000,000 in 2000 and $1,500,000 in 2001 or 2) 2.5% of all
revenues, as defined.
13. SUBSEQUENT EVENTS (UNAUDITED)
On April 30, 1998 the Company issued an additional $125 million of Senior
Notes (the "Tack-on-Notes") due February 1, 2005. The Tack-on-Notes are of the
same series as the $145 million of New Senior Notes issued January 28, 1998, and
were issued under the indenture dated as of January 28, 1998, amended and
restated as of April 30, 1998, by and among the Company, the Subsidiary
Guarantors (as defined in the indenture) and the U.S. Trust Company of Texas,
N.A., as Trustee. The Tack-on-Notes were issued under the same terms, interest
rates and covenants as the New Senior Notes (See Note 2).
On April 30, 1998 the Company entered into an $80.0 million, five year
senior credit facility (the "New Credit Facility") with Antares Leveraged
Capital Corporation consisting of a revolving working capital facility of $15.0
million and a revolving acquisition loan facility (the "Acquisition Facility")
of $65.0 million. The New Credit Facility replaced the Company's Existing Credit
Facility (See Note 6). The outstanding principal balance under the New Credit
Facility bears interest at the Company's option at a fluctuating rate equal to
(i) LIBOR plus two and three quarters percent (2.75%) per annum, or (ii) the
"prime rate" plus one percent (1.00%) with interest rates subject to a pricing
grid. All amounts outstanding under the Acquisition Facility on the second
anniversary of the New Credit Facility will amortize in 12 equal installments
over the remaining term. The New Credit Facility contains financial covenants
which include limitations on capital expenditures and the maintenance of minimum
levels of certain ratios of earnings before interest, taxes, depreciation and
amortization to fixed charges, and is secured by substantially all of the
Company's assets and the capital stock of all of the Company's significant
subsidiaries.
On April 30, 1998 the Company entered into a Securities Purchase Agreement
(the "Securities Purchase Agreement") with Ares Leveraged Investment Fund,
L.P. ("Ares") and SV Capital Partners, L.P.
F-17
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("SV") pursuant to which Ares acquired 325,000 shares and SV acquired 75,000
shares of the 13% mandatorily redeemable preferred stock at $100 per share for
an aggregate amount of $40.0 million. Holders of the 13% mandatorily redeemable
preferred stock shall have no voting rights other than approval rights with
respect to the issuance of parity or senior securities. In addition, there are
various situations in which the Company may either elect or be required to
redeem the 13% mandatorily redeemable preferred stock. The Company is obligated
to redeem the 13% mandatorily redeemable preferred stock for cash on May 1,
2005. In connection with the Securities Purchase Agreement, Ares and SV entered
into warrant agreements granting warrants to purchase an aggregate of 975,732
shares of the Company's common stock with an exercise price of $0.01 per share.
The warrants are valid until May 31, 2005 but are exercisable only under certain
conditions, such as an initial public offering of common stock, change of
control, merger, asset sale or default. The 13% mandatorily redeemable preferred
stock bears a dividend rate of 13% per annum; however, during the first twelve
months following issuance the dividend rate will be 11.5% and 12.25% during the
second twelve months. Dividends shall be fully cumulative and payable quarterly
in cash, except that during the first five years after issuance, dividends may
be payable in kind by issuing additional shares of 13% mandatorily redeemable
preferred stock. In the event the Company is unable for any reason to pay
dividends in cash after the fifth anniversary, or in the event of a default, the
holders of the 13% mandatorily redeemable preferred stock will have the right to
add up to two directors to the Board of Directors and the dividend rate will be
increased until the default is cured. The Securities Purchase Agreement contains
certain restrictive administrative covenants and requires a vote of two-thirds
of the Board of Directors before the Company may take certain actions. The
Company may exchange the 13% mandatorily redeemable preferred stock for
subordinated notes at the Company's discretion.
On May 1, 1998, the Company purchased all of the outstanding capital stock
of Reddy Ice Corporation ("Reddy"), a subsidiary of Suiza Foods Corporation,
for total consideration of $180.8 million in cash (the "Reddy Acquisition").
The Reddy Acquisition was accounted for using the purchase method of accounting,
and accordingly, the results of its operations and its cash flows are included
in the consolidated financial statements for the periods subsequent to the date
of acquisition. The approximate $111 million excess of the aggregate purchase
price over the fair market value of the net assets acquired has been allocated
to goodwill and will be amortized over 40 years. The Reddy Acquisition was
funded from the proceeds of the Tack-on-Notes, the New Credit Facility,
Preferred Stock and available cash on hand.
On June 18, 1998 the Company adopted the 1998 Stock Option Plan and
Incentive Plan (the "1998 Option Plan"). The 1998 Option Plan provides for the
grant of stock options, stock appreciation rights and other stock awards to
employees of the Company, its subsidiaries, or affiliates. Pursuant to the 1998
Option Plan, the Company's Board of Directors has reserved for issuance 500,000
of the Company's common stock and has granted to employees 242,111 stock options
with an exercise price of $15.00.
In July 1998, the Company completed an offer to exchange the New Senior
Notes and the Tack-on-Notes (together the "Series 1 Notes") and the 13%
Exchangeable Preferred Stock (the "Series 1 Preferred Stock") with new debt
(the "Series 2 Notes") and new 13% Exchangeable Preferred Stock (the "Series
2 Preferred Stock") registered under the Securities Act of 1933. The form and
term of the Series 2 Notes and Series 2 Preferred Stock are identical in all
material respects to the form and term of the Series 1 Notes and Series 1
Preferred Stock, except for certain transfer restrictions and registration
rights relating to the Series 1 Notes and Series 1 Preferred Stock.
On July 31, 1998, the Company purchased all of the outstanding capital
stock of Cassco Ice & Cold Storage, Inc. ("Cassco"), a subsidiary of WLR, Inc.
for $59.0 million in cash (the "Cassco Acquisition"). The Cassco Acquisition
will be accounted for using the purchase method of accounting, and accordingly,
the results of its operations and its cash flows will be included in the
consolidated financial statements for the periods subsequent to the date of
acquisition. The purchase price will be allocated to the assets acquired and
liabilities assumed based on fair values at the date of acquisition. The excess
of the aggregate purchase price over the fair market value of the net assets
acquired will be recognized as goodwill and will be amortized over 40 years.
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder of Reddy Ice Corporation
Dallas, Texas
We have audited the accompanying balance sheets of Reddy Ice Corporation
(the "Company"), a wholly-owned subsidiary of Suiza Foods Corporation, as of
December 31, 1997 and 1996, and the related statements of operations,
shareholder's deficit and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 14, 1998
F-19
<PAGE>
REDDY ICE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------
1998 1997 1996
------------ --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,750,000 $ 994,595 $ 438,139
Receivables, net................ 5,706,000 5,451,013 3,076,414
Inventories..................... 3,925,000 2,943,155 1,732,610
Prepaid expenses and other
current assets................ 958,000 142,602 429,123
Deferred tax asset.............. -- 905,958 597,169
------------ --------------- ---------------
Total current assets.......... 12,339,000 10,437,323 6,273,455
PROPERTY, PLANT AND EQUIPMENT, NET... 69,116,000 66,212,840 36,407,092
DEFERRED TAX ASSET................... -- -- 295,808
GOODWILL, NET........................ 32,733,000 30,081,130 1,487,703
INTANGIBLE AND OTHER ASSETS, NET..... 3,157,000 3,892,025 3,482,037
ADVANCES TO SHAREHOLDER, NET......... -- -- 5,114,404
------------ --------------- ---------------
TOTAL................................ $117,345,000 $ 110,623,318 $ 53,060,499
============ =============== ===============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued
expenses...................... 7,180,000 $ 8,657,611 $ 5,143,508
Current portion of long-term
debt.......................... 204,000 220,452 204,248
------------ --------------- ---------------
Total current liabilities..... 7,384,000 8,878,063 5,347,756
ADVANCES FROM SHAREHOLDER, NET....... 124,334,000 42,927,599 --
SHAREHOLDER AND OTHER LONG-TERM
DEBT................................. 241,000 59,600,116 58,270,809
DEFERRED TAX LIABILITY............... -- 716,424 --
COMMITMENTS AND CONTINGENCIES (Note
13)
SHAREHOLDER'S DEFICIT:
Common share, par value $.01 per
share,
100 shares authorized, issued
and outstanding at
December 31, 1997 and 1996.... 1 1 1
Additional paid-in capital...... 1,647,999 10,022,204 1,648,004
Accumulated deficit............. (16,262,000) (11,521,089) (12,206,071)
------------ --------------- ---------------
Total shareholder's deficit... (14,614,000) (1,498,884) (10,558,066)
------------ --------------- ---------------
TOTAL................................ $117,345,000 $ 110,623,318 $ 53,060,499
============ =============== ===============
</TABLE>
See notes to financial statements.
F-20
<PAGE>
REDDY ICE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------
1998 1997 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES............................ $ 11,089,000 $ 8,249,000 $ 66,449,199 $ 52,992,207 $ 50,507,298
COST OF SALES........................ 4,790,000 3,137,000 41,713,350 31,742,587 30,884,846
-------------- -------------- -------------- -------------- --------------
GROSS PROFIT......................... 6,299,000 5,112,000 24,735,849 21,249,620 19,622,452
OPERATING COSTS AND EXPENSES:
Selling, general and
administrative.................. 7,428,000 5,047,000 10,471,877 6,759,323 6,279,524
Depreciation and amortization...... 2,301,000 1,075,000 6,070,256 3,632,204 3,771,540
Shareholder management fee......... -- -- 480,000 480,000 510,000
Merger costs....................... -- -- -- -- 938,538
-------------- -------------- -------------- -------------- --------------
Total operating costs and
expenses................... 9,729,000 6,122,000 17,022,133 10,871,527 11,499,602
-------------- -------------- -------------- -------------- --------------
INCOME FROM OPERATIONS............... (3,430,000) (1,010,000) 7,713,716 10,378,093 8,122,850
OTHER INCOME/EXPENSE:
Shareholder interest expense....... (3,283,000) (1,790,000) (7,119,600) (6,960,000) (5,179,795)
Other interest expense, net........ -- (1,000) (48,371) (48,306) (1,635,629)
Other income....................... 124,000 112,000 580,535 498,966 839,958
-------------- -------------- -------------- -------------- --------------
Total other expense........... (3,159,000) (1,679,000) (6,587,436) (6,509,340) (5,975,466)
-------------- -------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS................. (6,589,000) (2,689,000) 1,126,280 3,868,753 2,147,384
INCOME TAX EXPENSE (BENEFIT)......... -- -- 441,298 1,492,371 (81,776)
-------------- -------------- -------------- -------------- --------------
INCOME BEFORE EXTRAORDINARY LOSS..... (6,589,000) (2,689,000) 684,982 2,376,382 2,229,160
EXTRAORDINARY LOSS FROM EARLY
EXTINGUISHMENT OF DEBT............. -- -- -- -- (2,597,778)
-------------- -------------- -------------- -------------- --------------
NET INCOME (LOSS).................... $ (6,589,000) $ (2,689,000) $ 684,982 $ 2,376,382 $ (368,618)
============== ============== ============== ============== ==============
</TABLE>
See notes to financial statements.
F-21
<PAGE>
REDDY ICE CORPORATION
STATEMENTS OF SHAREHOLDER'S DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- --------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
BALANCE -- JANUARY 1, 1995........... 749,994 $ 7,500 $ 1,640,505 $ (14,213,835) $ (12,565,830)
Reorganization..................... (749,894) (7,499) 7,499 -- --
Net loss........................... -- -- -- (368,618) (368,618)
---------- --------- -------------- --------------- ---------------
BALANCE -- DECEMBER 31, 1995......... 100 1 1,648,004 (14,582,453) (12,934,448)
Net income......................... -- -- -- 2,376,382 2,376,382
---------- --------- -------------- --------------- ---------------
BALANCE -- DECEMBER 31, 1996......... 100 1 1,648,004 (12,206,071) (10,558,066)
Contributions...................... -- -- 8,374,200 -- 8,374,200
Net income......................... -- -- -- 684,982 684,982
---------- --------- -------------- --------------- ---------------
BALANCE -- DECEMBER 31, 1997......... 100 1 10,022,204 (11,521,089) (1,498,884)
Repayment of contributions
(unaudited)..................... -- -- (8,374,205) 1,848,089 (6,526,116)
Net loss (unaudited)............... -- -- -- (6,589,000) (6,589,000)
---------- --------- -------------- --------------- ---------------
BALANCE -- MARCH 31, 1998
(unaudited)........................ 100 $ 1 $ 1,647,999 $ (16,262,000) $ (14,614,000)
========== ========= ============== =============== ===============
</TABLE>
See notes to financial statements.
F-22
<PAGE>
REDDY ICE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (6,589,000) $ (2,689,000) $ 684,982 $ 2,376,382 $ (368,618)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.... 2,301,000 1,076,000 6,070,256 3,632,204 3,771,540
(Gain) loss on sale of assets.... (3,000) (6,000) 23,792 (27,850) (209,187)
Deferred income taxes............ -- -- 703,443 507,667 (1,400,644)
Extraordinary loss from early
extinguishment of debt......... -- -- -- -- 2,597,778
Changes in operating assets and
liabilities, net of
acquisitions:
Receivables.................... 37,000 (915,000) (2,528,000) (86,513) (449,557)
Inventories.................... (923,000) (305,000) (627,024) (302,827) (191,533)
Prepaid expenses and other
assets...................... (434,000) 50,000 286,521 (189,236) 312,840
Accounts payable and accrued
expenses.................... (1,481,000) 1,155,000 3,514,103 (2,014,587) 3,369,297
Other assets................... 15,639,000 11,365,000 (381,362) 9,575 (122,664)
------------ ------------ ------------- ------------ -------------
Net cash provided by operating
activities....................... 8,547,000 9,731,000 7,746,711 3,904,815 7,309,252
------------ ------------ ------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net additions to property, plant
and equipment.................... (3,170,000) (1,214,000) (9,195,321) (3,749,343) (3,593,762)
Cash outflows for acquisitions..... (4,612,000) (8,925,000) (45,826,967) (5,367,115) (2,233,392)
Proceeds from sale of assets....... 30,000 12,000 112,918 112,846 250,761
------------ ------------ ------------- ------------ -------------
Net cash used in investing
activities....................... (7,752,000) (10,127,000) (54,909,370) (9,003,612) (5,576,393)
------------ ------------ ------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of
debt............................. -- -- 77,604 23,568 62,500,000
Repayment of debt.................. (40,000) (35,000) (1,730,492) (232,933) (53,689,889)
Advances to/from shareholder....... -- -- 49,372,003 5,746,301 (15,360,705)
------------ ------------ ------------- ------------ -------------
Net cash provided by (used in)
financing activities............. (40,000) (35,000) 47,719,115 5,536,936 (6,550,594)
------------ ------------ ------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 755,000 (431,000) 556,456 438,139 (4,817,735)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 438,000 995,000 438,139 -- 4,817,735
------------ ------------ ------------- ------------ -------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 1,193,000 $ 564,000 $ 994,595 $ 438,139 $ --
============ ============ ============= ============ =============
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest............. $ 12,053 $ 9,900 $ 7,168,019 $ 7,008,348 $ 8,251,222
============ ============ ============= ============ =============
Net assets acquired by capital
contributions from shareholder... -- -- $ 8,374,200 $ -- $ --
Net assets acquired by assuming
notes payable.................... -- -- 1,668,399 148,383 270,000
Net assets acquired by decrease in
notes receivable................. 40,000 33,000 393,401 -- --
------------ ------------ ------------- ------------ -------------
Total non-cash net asset
additions...................... $ 40,000 $ 33,000 $ 10,436,000 $ 148,383 $ 270,000
============ ============ ============= ============ =============
Advances to shareholder converted
to (from) notes payable to
shareholder...................... $ -- $ -- $ 1,330,000 $ (4,500,000) $ --
============ ============ ============= ============ =============
</TABLE>
See notes to financial statements.
F-23
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS -- Reddy Ice Corporation (the "Company"), a wholly-owned
subsidiary of Suiza Foods Corporation ("Suiza"), manufactures and distributes
packaged and block ice products for retail, commercial and industrial use
through manufacturing facilities located in Texas, Florida, Georgia, Louisiana,
Tennessee, Arizona, New Mexico, Nevada, California, Alabama and Mississippi.
Prior to March 31, 1995, the Company operated as a separate business.
Effective March 31, 1995, the Company was acquired by and merged with Suiza in a
business combination transaction accounted for as a pooling of interests, and
incurred merger costs of $938,000 during 1995 in connection with this merger. As
a result of the merger, the Company repaid certain outstanding indebtedness and
recognized expenses of approximately $2,598,000 (net of income tax benefit of
$1,002,000) of debt issuance, legal and other costs associated with the debt
extinguishment. These amounts have been classified as an extraordinary loss in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 4, "Reporting Gains and Losses From the Extinguishment of
Debt."
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
INVENTORIES -- Inventories are stated at the lower of cost, using the
first-in, first-out ("FIFO") method, or market.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated
at cost. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the assets, as follows:
ASSET USEFUL LIFE
- ------------------------------------- ---------------
Buildings and improvements........... 10 to 40 years
Machinery and equipment.............. 3 to 20 years
Furniture and fixture................ 5 years
Capitalized lease assets are amortized over the shorter of their lease term
or their estimated useful lives. Expenditures for repairs and maintenance that
do not improve or extend the life of the assets are expensed as incurred.
GOODWILL, INTANGIBLE, AND OTHER ASSETS -- Goodwill and other intangible
assets include the following intangibles that are amortized over their related
useful lives:
INTANGIBLE ASSET USEFUL LIFE
- ----------------------------------------------------------------------------
Goodwill............................... Straight-line method over 20 to 40
years
Identifiable intangible assets:
Customer list..................... Straight-line method over seven to
ten years
Supply contract................... Straight-line method over the terms
of the agreement
Non-competition agreements........ Straight-line method over the terms
of the agreement
IMPAIRMENT -- Company management routinely reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
REVENUE -- Revenue is recognized when the product is shipped to the
customer. Revenue from owned ice systems is recognized based upon the number of
ice packaging bags delivered to and accepted by
F-24
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
customers under contractual terms. Once accepted, there is no right of return
with respect to the bags delivered.
INCOME TAXES -- Prior to March 31, 1995, the Company was organized as a
small business corporation under Subchapter S of the Internal Revenue Code. As a
result, no income taxes were provided in the financial statements since they
were the responsibility of the individual shareholders. However, had these
operations been subject to corporate income taxes, available net operating
losses would have been sufficient to eliminate any corporate income taxes due.
On March 31, 1995, the Company became a wholly owned subsidiary of Suiza
and since that date has been included in Suiza's consolidated tax return.
Federal and state income taxes are provided for in the Company's financial
statements on a separate company basis in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes." Deferred income taxes are provided for
temporary differences in the financial statement and tax basis of assets and
liabilities using current tax rates. Deferred tax assets, including the benefit
of net operating loss carryforwards, are evaluated based on the guidelines for
realization and may be reduced by a valuation allowance. Income taxes payable
are cleared through the intercompany accounts with Suiza.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
2. ACQUISITIONS
During 1997, 1996 and 1995, the Company completed the following
acquisitions, which were accounted for using the purchase method of accounting
as of their respective acquisition dates. Accordingly, only the results of
operations of the acquired companies subsequent to their respective acquisition
dates are included in the financial statements of the Company. These
acquisitions were funded primarily by advances from Suiza, along with the
assumption of certain notes payable of the acquired businesses. At the
acquisition date, the purchase price was allocated to assets acquired, including
identifiable intangibles, and liabilities assumed based on their fair market
values. The excess of the total purchase prices over the fair values of the net
assets acquired represented goodwill.
During 1995, the Company acquired all of the net assets, including customer
lists, patents and other intangible assets of four small ice companies for a
total purchase price of approximately $2,503,000.
During 1996, the Company acquired all of the net assets of ten small ice
companies for a total purchase price of approximately $5,515,000.
During 1997, the Company acquired the approximate net assets of the
following ice companies:
ACQUISITION DATE ACQUIRED COMPANY PURCHASE PRICE
- --------------------------- --------------------------------- --------------
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
F-25
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisitions, assets were acquired and liabilities
were assumed as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
-------------- ------------ ------------
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
============== ============ ============
The following table presents unaudited pro forma results of operations of
the Company as if the above described 1997 and 1996 acquisitions had occurred at
the beginning of 1996:
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Net sales............................ $ 84,132,384 $ 79,325,616
============== ==============
Net income........................... $ 1,796,894 $ 2,951,656
============== ==============
The unaudited pro forma results of operations are not necessarily
indicative of what the actual results of operations of the Company would have
been had the acquisitions occurred at the beginning of 1996, nor do they purport
to be indicative of the future results of operations of the Company.
3. ACCOUNTS RECEIVABLE
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Trade accounts receivable............ $ 4,913,804 $ 2,809,281
Other................................ 907,714 418,238
------------ ------------
5,821,518 3,227,519
Less allowance for doubtful
accounts........................... (370,505) (151,105)
------------ ------------
$ 5,451,013 $ 3,076,414
============ ============
4. INVENTORIES
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Raw materials and supplies........... $ 2,519,473 $ 1,430,004
Finished goods....................... 423,682 302,606
------------ ------------
$ 2,943,155 $ 1,732,610
============ ============
F-26
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
--------------------------------
1997 1996
--------------- ---------------
Land................................. $ 8,402,135 $ 5,631,592
Buildings and improvements........... 25,205,582 17,023,195
Machinery and equipment.............. 59,340,175 36,174,031
Furniture and fixtures............... 1,234,215 781,691
--------------- ---------------
94,182,107 59,610,509
Less accumulated depreciation........ (27,969,267) (23,203,417)
--------------- ---------------
$ 66,212,840 $ 36,407,092
=============== ===============
6. GOODWILL, INTANGIBLE AND OTHER ASSETS
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Goodwill............................. $ 30,782,684 $ 1,836,787
Identifiable intangibles............. 4,728,496 4,185,396
Deposits and other................... 603,700 117,441
-------------- --------------
36,114,880 6,139,624
Less accumulated amortization........ (2,141,725) (1,169,884)
-------------- --------------
$ 33,973,155 $ 4,969,740
============== ==============
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Accounts payable..................... $ 4,332,808 $ 2,850,286
Accrued payroll and benefits......... 1,309,626 855,642
Accrued insurance.................... 1,642,256 969,386
Other................................ 1,372,921 468,194
------------ ------------
$ 8,657,611 $ 5,143,508
============ ============
8. SHAREHOLDER AND OTHER LONG-TERM DEBT
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
Note payable to shareholder.......... $ 59,330,000 $ 58,000,000
Other notes payable.................. 427,359 468,504
Capital lease obligations............ 63,209 6,553
-------------- --------------
59,820,568 58,475,057
Less current portion................. (220,452) (204,248)
-------------- --------------
$ 59,600,116 $ 58,270,809
============== ==============
NOTE PAYABLE TO SHAREHOLDER -- This balance represents a promissory note
payable to Suiza. The note provides for interest at 12% per annum, paid twice a
year in June and December.
F-27
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
OTHER NOTES PAYABLE -- Other notes payable include various promissory notes
for the purchase of property, plant, equipment and non-compete agreements. The
various promissory notes payable provide for interest at rates ranging from 6.5%
to 12% and are payable in monthly installments of principal and interest until
maturity, when the remaining principal balances are due.
CAPITAL LEASE OBLIGATIONS -- Capital lease obligations represent machinery
and equipment financing obligations that are payable in monthly installments of
principal and interest and are collateralized by the related assets financed.
The scheduled maturities of long-term debt, which include capitalized lease
obligations, at December 31, 1997, were as follows:
1998................................. $ 220,452
1999................................. 82,904
2000................................. 79,354
2001................................. 72,912
2002................................. 33,080
Thereafter........................... 59,331,866
--------------
$ 59,820,568
==============
9. RELATED PARTY TRANSACTIONS
As necessary, Suiza funds acquisition and other costs for the Company.
These non-interest bearing fundings are recorded as advances to or from
shareholder. On January 1 of each year, the net increase or decrease in the
shareholder advances is converted to debt and added to the balance of the note
payable to shareholder. $49,690,000 and $1,330,000 were converted to debt at
January 1, 1998 and 1997, respectively.
Prior to March 31, 1995, the Company had consulting agreements with its
majority shareholders requiring monthly payments of $50,000. After March 31,
1995, the Company had a management agreement with Suiza to provide financial and
other advisory services which required monthly payments of $40,000. Amounts paid
to majority shareholders and Suiza under these agreements were recorded as
shareholder management fee.
10. INCOME TAXES
The income tax expense (benefit) is composed of the following:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ --------------
Current taxes payable (refundable):
Federal........................ $ (241,448) $ 893,445 $ 1,196,640
State.......................... (20,697) 91,259 122,228
Deferred income taxes............... 703,443 507,667 (1,400,644)
------------ ------------ --------------
$ 441,298 $ 1,492,371 $ (81,776)
============ ============ ==============
F-28
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes reported in the
statements of income:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ------------ --------------
Tax expense at statutory rates....... $ 394,199 $ 1,354,064 $ 1,921,682
State income taxes................... 47,099 138,307 196,286
Tax effect of change from S
Corporation to
C Corporation...................... -- -- (2,199,744)
---------- ------------ --------------
$ 441,298 $ 1,492,371 $ (81,776)
========== ============ ==============
The tax effects of temporary differences giving rise to deferred income tax
assets and liabilities were:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Deferred income tax assets:
Asset valuation reserves........... $ 84,537 $ 58,289
Nondeductible accruals............. 767,669 495,344
Depreciation and amortization...... -- 295,807
Other.............................. 53,752 43,537
---------- ----------
905,958 892,977
Deferred income tax
liabilities -- depreciation and
amortization....................... (716,424) --
---------- ----------
Net deferred income tax asset........ $ 189,534 $ 892,977
========== ==========
These net deferred income tax assets (liabilities) are classified in the
consolidated balance sheet as follows:
DECEMBER 31,
------------------------
1997 1996
------------ ----------
Current assets....................... $ 905,958 $ 597,169
Noncurrent assets.................... -- 295,808
Noncurrent liabilities............... (716,424) --
------------ ----------
$ 189,534 $ 892,977
============ ==========
11. SHAREHOLDERS' EQUITY
At January 1, 1995, 749,994 shares of Class A common stock were issued and
outstanding. In conjunction with the merger described in Note 1, the Company's
Certificate of Incorporation was amended to change the number of authorized
shares to 100. At the same time, a reverse stock split became effective,
converting the 749,994 shares of common stock issued and outstanding into 100
shares of common stock, which resulted in a decrease of $7,499 in common stock
and a corresponding increase in additional paid-in capital.
12. EMPLOYEE RETIREMENT PLAN
The Company maintains a 401(k) plan for the benefit of its full-time
employees, as defined by the plan. Contributions by the Company are made at the
discretion of the Board of Directors. The Company accrued contributions to the
plan of $60,000, $48,000 and $33,705, for the years ended December 31, 1997,
1996 and 1995, respectively.
F-29
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES
LEASES -- The Company leases certain property, plant and equipment used in
its operations under both capital and operating lease agreements. Such leases,
which are primarily for machinery and equipment and vehicles, have lease terms
ranging from one to nine years. Certain of the operating lease agreements
require the payment of additional rentals for maintenance, along with additional
rentals, based on miles driven or units produced. Rent expense, including
additional rent, was $2,231,652, $1,574,184 and $1,338,874 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The composition of capital leases that are reflected as property, plant and
equipment in the balance sheets is as follows:
DECEMBER 31,
----------------------
1997 1996
---------- ----------
Machinery and equipment.............. $ 77,604 $ 41,308
Furniture and fixtures............... 19,045 19,045
Vehicles............................. 8,569 8,569
Less accumulated amortization........ (19,720) (24,055)
---------- ----------
$ 85,498 $ 44,867
========== ==========
Future minimum payments at December 31, 1997, under noncancelable capital
and operating leases with terms in excess of one year are summarized below:
CAPITAL OPERATING
LEASES LEASES
---------- ------------
1998................................. $ 18,014 $ 918,601
1999................................. 15,836 847,213
2000................................. 17,245 765,796
2001................................. 18,802 696,052
2002................................. 10,025 576,928
Thereafter........................... -- 400,445
---------- ------------
Total minimum lease payments......... 79,922 $ 4,205,035
============
Less amount representing interest.... (16,713)
----------
Present value of capital lease
obligations........................ $ 63,209
==========
LITIGATION -- The Company is a party, in the ordinary course of business,
to certain claims and litigation. In management's opinion, the settlement of
such matters is not expected to have a material impact on the financial
statements.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-30
<PAGE>
REDDY ICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carrying value of cash and cash equivalents, accounts receivable, and
accounts payable and accrued expenses approximates fair value due to the
relatively short-term nature of the financial instruments. The carrying value of
the other notes payable and capital lease obligations approximates fair value
because the weighted average interest rate on the notes and obligations
approximates current interest rates to be received on similar installments. The
fair value of advances to or from shareholder and note payable to shareholder is
not practicable to estimate due to the lack of similar financial instruments to
develop fair values.
15. MAJOR CUSTOMERS
The Company has a supply contract with one customer which requires certain
of the customer's retail sites to purchase their ice requirements from the
Company at defined prices. This supply contract, which requires market pricing,
is renewable annually. Sales to this customer under the supply contract
approximated $7,422,000, or 11% of net sales, for the year ended December 31,
1997; $7,327,000, or 14% of net sales, for the year ended December 31, 1996; and
$7,997,440, or 16% of net sales, for the year ended December 31, 1995.
16. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company completed the acquisition of
substantially all of the assets of five small ice companies for a total purchase
price of approximately $5,100,000 which resulted in recorded goodwill of
approximately $2,928,000. These acquisitions were financed by funding from
Suiza.
On March 27, 1998, Suiza signed a stock purchase agreement to sell the
Company to privately held Packaged Ice, Inc. of Houston, Texas, for
approximately $172.5 million in cash.
F-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
Cassco Ice and Cold Storage, Inc.:
We have audited the accompanying balance sheets of Cassco Ice and Cold
Storage, Inc. (a wholly-owned subsidiary of WLR Foods, Inc.) as of June 27, 1998
and June 28, 1997 and the related statements of earnings, shareholder's equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cassco Ice and Cold Storage,
Inc. as of June 27, 1998 and June 28, 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
KPMG LLP
Richmond, Virginia
July 24, 1998
F-32
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
BALANCE SHEETS
JUNE 27, 1998 AND JUNE 28, 1997
1998 1997
--------------- --------------
ASSETS
Current Assets:
Cash............................ $ 118,362 143,326
Accounts receivable (notes 9 and
10):
Parent company................ 1,025,650 1,093,940
Other......................... 3,189,307 2,813,858
--------------- --------------
4,214,957 3,907,798
Notes receivable (note 2)....... 9,761 35,675
Inventories (note 3)............ 1,212,610 1,124,925
Deferred income taxes (note
5)............................ 246,347 205,861
Prepaid expenses................ 269,407 172,115
Due from parent company (note
10)........................... 957,919 --
--------------- --------------
Total current assets................. 7,029,363 5,589,700
--------------- --------------
Property, plant and equipment, net
(notes 4, 6 and 8)................. 23,878,030 24,626,766
Other assets......................... 385,337 399,235
--------------- --------------
Total assets......................... $ 31,292,730 30,615,701
=============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current installments of
long-term debt (note 6) 529,487 519,125
Current installments of
obligations under capital
leases (note 8)............... 268,678 110,699
Accounts payable................ 1,128,644 1,322,998
Accrued expenses................ 476,919 449,891
Due to parent company (note
10)........................... -- 1,356,999
--------------- --------------
Total current liabilities............ 2,403,728 3,759,712
--------------- --------------
Long-term debt, excluding current
installments (note 6).............. 1,975,701 2,506,616
Obligations under capital leases,
excluding current installations
(note 8)........................... 797,825 686,148
Deferred income taxes (note 5)....... 1,543,947 1,647,935
Other long-term liabilities.......... 110,734 140,364
--------------- --------------
Total liabilities.................... 6,831,935 8,740,775
=============== ==============
Shareholder's equity:
Common stock, $1,000 par value.
Authorized 5,000 shares;
issued and outstanding 70
shares........................ 70,000 70,000
Additional paid-in capital...... 10,613,855 10,513,855
Retained earnings............... 13,776,940 11,291,071
--------------- --------------
Total shareholder's equity........... 24,460,795 21,874,926
Commitments (note 8).................
--------------- --------------
Total liabilities and shareholder's
equity............................. $ 31,292,730 30,615,701
=============== ==============
See accompanying notes to financial statements.
F-33
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
STATEMENTS OF EARNINGS
YEARS ENDED JUNE 27, 1998 AND JUNE 28, 1997
1998 1997
-------------- ------------
Operating revenues (notes 9 and 10):
Parent company.................. $ 7,297,937 7,053,271
Other........................... 22,079,856 19,130,471
-------------- ------------
29,377,793 26,183,742
-------------- ------------
Operating expenses................... 16,996,578 15,885,712
-------------- ------------
Gross profit......................... 12,381,215 10,298,030
Selling, general and administrative
expenses........................... 7,636,595 6,232,423
-------------- ------------
Operating income..................... 4,744,620 4,065,607
Other expense (income):
Interest expense................ 73,065 272,195
Interest income................. (9,797) (8,797)
Other, net...................... 239,594 75,516
-------------- ------------
Total other expense.................. 302,862 338,914
-------------- ------------
Income before income taxes........... 4,441,758 3,726,693
Provision for income taxes (note
5)................................. 1,725,139 1,401,401
-------------- ------------
Net income........................... $ 2,716,619 2,325,292
============== ============
See accompanying notes to financial statements.
F-34
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
STATEMENTS OF SHAREHOLDER'S EQUITY
YEARS ENDED JUNE 27, 1998 AND JUNE 28, 1997
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------ PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at June 29, 1996............ 70 $70,000 9,940,105 9,211,732 19,221,837
Net income........................... -- -- -- 2,325,292 2,325,292
Dividends declared:
$3,513.61/share.................... -- -- -- (245,953) (245,953)
Issuance of WLR Foods, Inc. stock for
business acquisition (note 11)..... -- -- 573,750 -- 573,750
------- ------- ----------- ------------ ------------
Balances at June 28, 1997............ 70 $70,000 10,513,855 11,291,071 21,874,926
Net income........................... -- -- -- 2,716,619 2,716,619
Dividends declared:
$3,296.43/share.................... -- -- -- (230,750) (230,750)
Issuance of WLR Foods, Inc. stock for
business acquisition (note 11)..... -- -- 100,000 -- 100,000
------- ------- ----------- ------------ ------------
Balances at June 27, 1998............ 70 $70,000 10,613,855 13,776,940 24,460,795
======= ======= =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 27, 1998 AND JUNE 28, 1997
1998 1997
-------------- --------------
Cash flows from operating activities:
Net income......................... $ 2,716,619 2,325,292
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and
amortization............... 3,401,617 3,111,198
Deferred income taxes......... (144,474) (167,968)
Loss on sales of property,
plant and equipment........ 153,034 76,018
Change in assets and
liabilities:
Increase in accounts
receivable.............. (307,159) (470,392)
Increase in inventories.... (65,205) (47,425)
Increase in prepaid
expenses................ (97,292) (4,159)
Increase in other assets... 94,840 (278,737)
Decrease in accounts
payable and accrued
expenses................ (654,753) (498,043)
Change in due from/due to
parent company.......... (1,827,491) (2,686,972)
Decrease in other long-term
liabilities............. (29,630) (32,585)
-------------- --------------
Net cash provided by operating
activities......................... 3,240,106 1,326,227
-------------- --------------
Cash flows from investing activities:
Capital expenditures............... (1,683,293) (1,956,549)
Acquisition of businesses (note
11)............................. (650,000) (195,000)
Proceeds from sales of property,
plant and equipment............. 24,665 95,899
Payments from notes receivable..... 25,914 55,115
Proceeds from lease financing...... -- 1,761,078
-------------- --------------
Net cash used in investing
activities......................... (2,282,714) (239,457)
-------------- --------------
Cash flows from financing activities:
Principal payments on long-term
debt............................ (520,553) (511,757)
Principal payments under capital
lease obligations............... (231,053) (109,498)
Principal payments on notes payable
to bank......................... -- (300,000)
Dividends paid..................... (230,750) (245,953)
-------------- --------------
Net cash used in financing
activities......................... (982,356) (1,167,208)
-------------- --------------
Net decrease in cash................. (24,964) (80,438)
Cash at beginning of year............ 143,326 223,764
-------------- --------------
Cash at end of year.................. $ 118,362 143,326
============== ==============
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................ $ 262,484 273,657
============== ==============
Income taxes.................... $ 1,628,880 1,317,163
============== ==============
Supplemental schedule of non-cash
investing and financing activities:
During 1998, the Company recorded
additional paid-in capital as a
result of WLR Foods, Inc. stock
valued at $100,000 issued to
acquire a business (note 11).
During 1998, the Company recorded
capital lease obligations of
$500,709 related to the
acquisition of transportation
equipment.
During 1997, the Company recorded
additional paid-in capital as a
result of WLR Foods, Inc. stock
valued at $573,750 issued to
acquire a business (note 11).
During 1997, the Company recorded
capital lease obligations of
$582,843 related to the
acquisition of transportation
equipment.
See accompanying notes to financial statements.
F-36
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS
JUNE 27, 1998 AND JUNE 28, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cassco Ice and Cold Storage, Inc.'s (Cassco or the Company) operations are
devoted primarily to refrigerated warehousing and to the manufacturing,
packaging and sale of ice. Cassco operates primarily in the Mid-Atlantic region.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to June 30. Fiscal
years 1998 and 1997 ended on June 27 and June 28, respectively, and included 52
weeks in each year.
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of
packaging materials and packaged ice is determined by a method that approximates
the first-in, first-out (FIFO) method. The cost of icemaking systems and parts
is determined by the specific identification method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Equipment under capital
leases are stated at the present value of minimum lease payments. Equipment held
under capital leases are amortized straight line over the shorter of the lease
term or estimated useful life of the asset. Depreciation on property, plant and
equipment is computed using the straight-line method and useful lives of the
respective assets are as follows:
Land improvements.................... 10-15 years
Buildings and improvements........... 15-20 years
Machinery and equipment.............. 3-5 years
Transportation equipment............. 4-6 years
The costs of maintenance and repairs are charged to operations, while costs
associated with renewals, improvements and major replacements are capitalized.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income for the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company is included in the consolidated federal income tax return and
certain consolidated state income tax returns of WLR Foods, Inc. The Company
provides income taxes on a separate company basis.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
F-37
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, notes receivable, due
from/to parent company, accounts payable and accrued expenses approximate fair
value due to their short maturities. The fair value of long-term debt is
calculated by discounting scheduled cash flows through maturity using estimated
rates currently offered for debt with similar terms and average maturities. The
carrying amount of long-term debt approximates fair value.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
INTANGIBLES
Intangibles, primarily agreements not to compete, are stated at cost less
accumulated amortization and are included in other assets in the accompanying
balance sheets. Amortization is computed on the straight-line method over
periods of 3 to 5 years.
(2) NOTES RECEIVABLE
Notes receivable consist of the following:
1998 1997
--------- ---------
8.5% note receivable, due December
1996 (amended to August 1997)...... $ -- 30,272
8.5% note receivable, due August
1997............................... -- 5,403
12% note receivable, due July 23,
1998............................... 3,667 --
10% note receivable, due August 15,
1998............................... 6,094 --
--------- ---------
Total notes receivable............... $ 9,761 35,675
========= =========
(3) INVENTORIES
A summary of inventories follows:
1998 1997
------------ -----------
Packaging materials.................. $ 860,958 586,589
Package ice.......................... 235,978 417,079
Ice maker systems and parts.......... 105,505 120,139
Fuel and other....................... 10,169 1,118
------------ -----------
Total inventories.................... $ 1,212,610 1,124,925
============ ===========
F-38
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) PROPERTY, PLANT AND EQUIPMENT
The Company's investment in property, plant and equipment was as follows:
1998 1997
-------------- --------------
Land and improvements................ $ 2,931,282 2,930,878
Buildings and improvements........... 15,813,389 15,738,256
Machinery and equipment.............. 28,477,175 26,614,563
Transportation equipment............. 4,998,416 4,412,380
Construction in progress............. 13,041 430,426
-------------- --------------
52,233,303 50,126,503
Less accumulated depreciation and
amortization......................... 28,355,273 25,499,737
-------------- --------------
Total property, plant and equipment,
net................................ $ 23,878,030 24,626,766
============== ==============
(5) INCOME TAXES
The provision for income taxes was as follows for fiscal years 1998 and
1997:
1998 1997
------------ ------------
Current:
Federal......................... $ 1,646,703 1,360,235
State........................... 222,910 209,134
------------ ------------
Total current........................ 1,869,613 1,569,369
Deferred:
Federal......................... (137,440) (160,127)
State........................... (7,034) (7,841)
------------ ------------
Total deferred....................... (144,474) (167,968)
------------ ------------
Total income tax provision........... $ 1,725,139 1,401,401
============ ============
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets (liabilities) at June 27, 1998 and June 28, 1997
are listed below:
1998 1997
-------------- ------------
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences
in depreciation and
amortization................... $ (1,943,504) (1,980,911)
-------------- ------------
Gross deferred tax liabilities....... (1,943,504) (1,980,911)
Deferred tax assets:
Obligations under capital
leases......................... 415,936 310,771
Insurance accruals.............. 60,060 68,857
Tax credits..................... 27,016 27,016
Accrual of compensated
absences....................... 122,286 91,491
Other........................... 20,606 40,702
-------------- ------------
Gross deferred tax assets............ 645,904 538,837
-------------- ------------
Net deferred tax liability........... $ (1,297,600) (1,442,074)
============== ============
F-39
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In assessing the recoverability of deferred tax assets, management
considers whether it is more likely than not that some or all of the deferred
tax assets will not be realized. The ultimate realization of the deferred tax
assets is dependent on the generation of future taxable income, during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based on
the level of historical operating results and expectations of future taxable
income and reversals of deferred tax liabilities, management believes it is more
likely than not that the Company will realize the benefits of these deductible
differences as reflected at June 27, 1998 and June 28, 1997.
(6) LONG-TERM DEBT
Long-term debt as June 27, 1998 and June 28, 1997 consisted of the
following obligations:
1998 1997
------------ -----------
Industrial Revenue Development Bond,
due December 2001, payable in
initial monthly installments of
$3,305 plus interest (with annual
increases in monthly payments to
$11,598 plus interest by 2001) at
70% of the bank's prime lending
rate (year-end rate 7.163%).
Secured by property, plant and
equipment.......................... $ 397,846 500,396
Unsecured Bank Term Note, due June
2003, payable in monthly
installments of $33,389 plus
interest at 30 day LIBOR +85 basis
points (year-end rate 6.54%)....... 2,003,342 2,404,012
Unsecured Note Payable, due September
2003, payable in annual
installments of $17,333 plus
interest (year-end rate 7.5%)...... 104,000 121,333
------------ -----------
Total long-term debt................. 2,505,188 3,025,741
Less current installments............ 529,487 519,125
------------ -----------
Total long-term, excluding current
installments....................... $ 1,975,701 2,506,616
============ ===========
The net book value of all property, plant and equipment encumbered under
long-term debt agreements at June 27, 1998 and June 28, 1997 was approximately
$6,968,000 and $7,081,000, respectively.
The Company had no agreements to maintain compensating balances.
Required annual principal repayments of long-term debt are as follows:
FISCAL AMOUNT
- ------------------------------------- ----------
1999................................. $ 529,487
2000................................. 538,953
2001................................. 550,300
2002................................. 451,113
2003................................. 418,002
(7) EMPLOYEE BENEFITS
The Company participates in WLR Foods, Inc.'s Profit Sharing and Salary
Savings Plan that is available to substantially all employees who meet certain
age and service requirements. Participants may elect to make contributions of up
to 15% of their salary. For each employee dollar contributed (limited to the
first 4% of an employee's compensation), the Company is required to contribute a
matching amount of 50 cents. The Company can also make additional contributions
at its discretion. Cassco's total contributions under this plan were
approximately $94,000 for fiscal 1998 and $78,000 for fiscal 1997.
F-40
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) LEASES
The Company is obligated under various capital leases for certain
transportation equipment that expire at various dates during the next five
years. At June 27, 1998 and June 28, 1997, the gross amount of equipment and
related accumulated amortization recorded under capital leases were as follows:
1998 1997
------------ ------------
Transportation equipment............. $ 1,458,484 957,775
Less accumulated amortization........ 433,450 184,358
------------ ------------
$ 1,025,034 773,417
============ ============
Amortization of assets held under capital leases is included with
depreciation expenses.
The Company has also entered into various noncancelable operating leases
for machinery and equipment. The leases are noncancelable and expire on various
dates through fiscal 2003. Total rent expense was approximately $897,000 and
$872,000 for the years ended June 27, 1998 and June 28, 1997, respectively.
Future minimum lease payments under noncancelable operating leases and future
minimum capital lease payments as of June 27, 1998 are:
CAPITAL OPERATING
FISCAL LEASES LEASES
------ ---------- ---------
1999................................. $ 333,012 344,592
2000................................. 333,012 62,112
2001................................. 228,561 3,180
2002................................. 183,030 1,440
2003................................. 146,813 120
---------- ---------
Total minimum lease payments......... 1,224,428 $ 411,444
=========
Less amount representing interest (at
rates ranging from 6.29% to
7.31%)............................. 157,925
----------
Present value of net minimum capital
lease payments..................... 1,066,503
Less current installments of
obligations under capital leases... 268,678
----------
Obligations under capital leases,
excluding current installments..... $ 797,825
==========
(9) CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMERS
Most of the Company's customers are located in the Mid-Atlantic states.
Five customers, one of which is a related party, accounted for approximately 55%
of the Company's revenues in fiscal 1998. Four customers, one of which is a
related party, accounted for approximately 55% of the Company's revenues in
fiscal 1997. Three customers, one of which is a related party, accounted for 45%
of the Company's accounts receivable as of June 27, 1998. Six customers, one of
which is a related party, accounted for 66% of the Company's accounts receivable
as of June 28, 1997.
(10) RELATED PARTY TRANSACTIONS
Cassco is a 100% owned subsidiary of WLR Foods, Inc. (the Parent). The
Parent performs certain services for the Company. These services include cash
management, preparation of all income tax returns, information systems services
and the administration of worker's compensation, health and property insurance
and savings plans. The Company is charged a management fee for these services
provided by the Parent.
F-41
<PAGE>
CASSCO ICE AND COLD STORAGE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF WLR FOODS, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management fees paid to WLR Foods, Inc. were $434,000 and $309,760 for
fiscal 1998 and 1997, respectively. The Company provides refrigerated warehouse
services and sells ice to the Parent. The intercompany account is interest
bearing at a rate of 6.25% at June 27, 1998.
In management's opinion, all related party transactions are conducted under
normal business conditions, with no preferential treatment given to related
parties.
(11) BUSINESS ACQUISITIONS
On March 10, 1998, the Company acquired substantially all of the assets of
Mt. Joy Ice Company (Mt. Joy) for $400,000 cash and $100,000 (15,534 shares) of
WLR Foods, Inc. common stock. The assets included primarily ice merchandisers.
This transaction has been accounted for as a purchase, and accordingly, the
financial statements include the assets acquired at fair value and the results
of operations of Mt. Joy from the acquisition date.
On March 30, 1998, the Company acquired substantially all of the assets of
Copes Ice Company (Copes) for $250,000 in cash. The assets included primarily
ice merchandisers. This transaction has been accounted for as a purchase, and
accordingly, the financial statements include the assets acquired at fair value
and the results of operations of Copes from the acquisition date.
In the fiscal 1997, the Company acquired substantially all of the assets of
Jennings Ice Company (Jennings) for $573,750 (45,000 shares) of WLR Foods, Inc.
common stock. The assets included primarily ice merchandisers and refrigeration
equipment. This transaction has been accounted for as a purchase, and
accordingly, the financial statements include the assets acquired at fair value
and the results of operations of Jennings from the acquisition date.
The Company also acquired substantially all of the assets of The Ice Plant,
Inc. for $195,000 in cash in fiscal 1997. The assets included primarily ice
merchandisers. This transaction has been accounted for as a purchase, and
accordingly, the financial statements include the assets acquired at fair value
and the results of operations of The Ice Plant, Inc. from the acquisition date.
(12) SUBSEQUENT EVENT
WLR Foods, Inc. has entered a letter of intent to sell its stock in Cassco
Ice and Cold Storage, Inc. to Packaged Ice, Inc. of Houston, Texas. Closing for
the transaction is subject to certain conditions, including the completion of
customary due diligence by the purchasers and regulatory approvals.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder of Mission Party Ice, Inc. and
Stockholders of Southwest Texas Packaged Ice, Inc.:
We have audited the accompanying combined balance sheet of Mission Party
Ice, Inc. (a S corporation) and Southwest Texas Packaged Ice, Inc. (an
affiliated S corporation) (collectively, the "Companies"), both of which are
under common ownership and common management, as of December 31, 1996, and the
related combined statements of operations and retained earnings and of cash
flows for the year then ended. These combined financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the combined financial position of the Companies at December 31, 1996,
and the combined results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 21, 1997
F-43
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED BALANCE SHEETS
MARCH 31, DECEMBER 31
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents............... $ 46,094 $ 46,468
Accounts receivable:
Trade, net...................... 521,095 556,925
Affiliates...................... 595,737 379,619
Inventories........................ 142.706 164,013
Prepaid expenses................... 24,673 47,180
----------- ------------
Total current assets.......... 1,330,305 1,194,205
PROPERTY, NET........................ 4,518,417 4,547,978
OTHER ASSETS, NET.................... 269,634 274,352
NET ASSETS FROM DISCONTINUED
OPERATIONS........................... -- 316,520
----------- ------------
TOTAL......................... $ 6,118,356 $6,333,055
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt............................ $ 1,906,633 $1,483,228
Accounts payable:
Trade........................... 496,571 621,562
Payable to affiliates........... 162,436 155,408
Accrued expenses................... 118,779 82,707
----------- ------------
Total current liabilities..... 2,684,419 2,342,905
----------- ------------
LONG-TERM DEBT, NET.................. 1,704,378 1,692,620
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note
9)
SHAREHOLDERS' EQUITY:
Common stock (Mission: 1,000,000
shares authorized, $.01
par value, 1,000 shares issued
and outstanding; STPI:
1,000,000 shares authorized, $1
par value; 1,250 shares
issued)......................... 1,260 1,260
Additional paid-in capital......... 1,538,026 1,538,026
Retained earnings.................. 200,273 768,244
Less 25 shares of STPI treasury
stock at cost................... (10,000) (10,000)
----------- ------------
Total shareholders' equity.... 1,729,559 2,297,530
----------- ------------
TOTAL......................... $ 6,118,356 $6,333,055
=========== ============
See notes to combined financial statements.
F-44
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 1997 DECEMBER 31, 1996
--------------------- -------------------
(UNAUDITED)
<S> <C> <C>
Revenues............................. $ 998,702 $ 7,704,514
Costs of sales....................... 813,665 4,683,307
--------------------- -------------------
Gross profit......................... 185,037 3,021,207
Selling, general and administrative
expenses........................... 418,728 1,498,622
Depreciation and amortization
expense............................ 254,138 973,712
--------------------- -------------------
Income (loss) from operations........ (487,829) 548,873
--------------------- -------------------
Other income, net.................... 9,592 64,432
Interest expense..................... (89,734) (271,535)
--------------------- -------------------
Income (loss) from continuing
operations before income taxes..... (567,971) 341,770
Income taxes......................... -- --
--------------------- -------------------
Income (loss) from continuing
operations......................... (567,971) 341,770
Income from discontinued
operations......................... -- 83,133
--------------------- -------------------
Net income (loss).................... (567,971) 424,903
Retained earnings, beginning of
period............................. 768,244 343,341
--------------------- -------------------
Retained earnings, end of period..... $ 200,273 $ 768,244
===================== ===================
</TABLE>
See notes to combined financial statements.
F-45
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 1997 DECEMBER 31, 1996
--------------------- -------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing
operations.................... $(567,971) $ 341,770
Adjustments to reconcile income
from continuing operations to
net cash provided by operating
activities:
Depreciation and
amortization............ 254,138 973,712
Gain from disposal of
assets.................. -- (29,529)
Changes in assets and
liabilities:
Accounts receivable........ 132,706 (406,564)
Inventories................ 21,307 (23,559)
Prepaid expenses........... 22,507 37,160
Accounts payable........... (114,437) 175,410
Accrued expenses........... 36,072 1,377
Net cash flows provided by
operating activities of
discontinued
operations.............. -- 447,319
--------------------- -------------------
Net cash provided by
operating
activities............ (215,678) 1,517,096
--------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions.............. (219,859) (1,731,607)
Proceeds from disposition of
property...................... -- 77,023
Net cash flows used in investing
activities of discontinued
operations.................... -- (413,390)
--------------------- -------------------
Net cash used in
investing
activities............ (219,859) (2,067,974)
--------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt issuance..... 600,000 1,647,500
Repayment of debt............... (164,837) (1,055,657)
Treasury stock purchases........ -- (10,000)
Net cash flows from financing
activities of discontinued
operations.................... -- 4,347
--------------------- -------------------
Net cash provided by
financing
activities............ 435,163 586,190
--------------------- -------------------
NET INCREASE IN CASH AND
EQUIVALENTS........................ (374) 35,312
CASH AND EQUIVALENTS, DECEMBER 31,
1996............................... 46,468 11,156
--------------------- -------------------
CASH AND EQUIVALENTS, MARCH 31,
1997............................... $ 46,094 $ 46,468
===================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -- Cash payments for
interest........................... $ 20,641 $ 272,849
===================== ===================
</TABLE>
See notes to combined financial statements.
F-46
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Mission Party Ice, Inc. ("Mission") and Southwest Texas Packaged Ice,
Inc. ("STPI") (collectively, the "Company" or "Companies") were
incorporated to do business in Texas in 1988 and 1991, respectively. Mission
owns and operates ice manufacturing facilities in San Antonio, Corpus Christi
and Gonzales, Texas. STPI owns and operates stand-alone automated merchandising
ice systems ("ice systems") installed primarily in retail grocery locations.
These ice systems produce and package bags of cubed ice at the customer's
location. The Company operates in the South Texas region.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION -- Both Mission and STPI are controlled through
ownership by the same stockholder and are under common management. As a result
the 1996 financial statements and related footnote disclosures are presented on
a combined basis. All significant intercompany accounts and transactions have
been eliminated upon combination.
PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION -- The combined
financial statements presented herein at March 31, 1997 and for the three-month
periods ended March 31, 1997 are unaudited; however, all adjustments which are,
in the opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the periods covered have been
made and are of a normal, recurring nature. Accounting measurements at interim
dates inherently involve greater reliance on estimates than at year end. The
results of the interim periods are not necessarily indicative of results to
expect for the full year.
INVENTORIES -- Inventories are valued at the lower of first-in first-out
cost or market basis and consisted of the following at December 31, 1996:
Manufactured ice..................... $ 33,547
Ice packaging bags................... 75,804
Parts and supplies................... 54,662
----------
Total inventory...................... $ 164,013
==========
PROPERTY -- Property is carried at cost and is being depreciated on a
straight-line basis over estimated lives of five to seven years. Maintenance and
repairs are charged to expense as incurred, while capital improvements which
extend the useful lives of the underlying assets are capitalized.
OTHER ASSETS -- Other assets, consisting primarily of costs associated with
the acquisition of competitors' ice manufacturing facilities and ice system
location contracts, are being amortized over three to five years (see Note 5).
Accumulated amortization was $210,398 at December 31, 1996.
IMPAIRMENT OF LONG-LIVED ASSETS -- In 1996 the Companies adopted Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires that long-lived assets be reviewed for impairment whenever events
or circumstances indicate that the carrying amount of an asset may not be
recoverable. The adoption of SFAS No. 121 did not result in a charge to earnings
in the accompanying combined financial statements.
INCOME TAXES -- Mission and STPI are not subject to income taxes as both
have elected, under applicable provisions of the Internal Revenue Code, to be
treated as a Subchapter S corporation. Accordingly, the proportionate share of
each Company's taxable income or loss is reported in the respective
stockholder's individual tax return. Therefore, no liability for federal income
taxes has been recorded in the accompanying combined financial statements.
F-47
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION -- Mission's revenues are recognized upon the delivery
and acceptance of ice products to customer locations. Revenue is recognized by
STPI in accordance with contracted terms based upon the number of ice packaging
bags delivered to and accepted by customers. Once accepted, there is no right of
return with respect to the bags delivered.
CASH FLOWS -- The Company considers all highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The Company's financial instruments
include certain current assets and liabilities where carrying value approximates
fair value. In addition, the carrying value of financial instruments related to
long-term debt approximate fair value based on management's opinion that stated
interest rates are representative of rates currently available to the Companies
for comparable borrowings. It is not practicable to estimate the fair value of
the related party balances due to the instruments' nature.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
3. DISCONTINUED OPERATIONS
In December 1996, Mission entered into formal negotiations to sell Mission
Ice Equipment Company ("MIECO"), a division of Mission, to Southwest Texas
Equipment Distributors ("STED"). STED is affiliated with Mission through
common ownership. MIECO's business involves the sale or lease of commercial food
service equipment to retail establishments. The net assets of MIECO were sold on
January 2, 1997 for a price of $316,520, which equaled their net book value at
this date. No gain or loss was recorded on the disposal. Costs and expenses
directly associated with the disposition were paid by STED.
4. PROPERTY AND EQUIPMENT
Property and equipment were as follows at December 31, 1996:
Ice systems machinery and
equipment............................ $ 6,250,893
Furniture and fixtures............... 122,068
Auto/truck........................... 1,480,184
Computer equipment................... 246,204
Leasehold improvements............... 12,967
Land................................. 35,095
------------
Total property and equipment......... 8,147,411
Less accumulated depreciation........ (3,599,433)
------------
Total................................ $ 4,547,978
============
Depreciation expense for the year ended December 31, 1996 was $893,485.
F-48
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. CURRENT ACQUISITIONS
MCGEHEE NEUTZE, INC. ("MNI") -- In May 1996 Mission acquired certain
assets of MNI including ice merchandising equipment and a vehicle for $77,500.
The acquisition was funded through Mission's bank credit facility. As part of
the acquisition, MNI agreed to perform sales and customer relations work within
the MNI market area, primarily Webb County, Texas in exchange for approximately
$170,000 to be paid over a three year term. Such purchase consideration was
recorded in other assets with an offsetting amount in accounts payable. Payment
of amounts under this service agreement are guaranteed by Mission's sole
stockholder. The assigned value of this agreement is being amortized over the
agreement term with accumulated amortization of approximately $23,000 at
December 31, 1996.
SOUTHCO, INC. ("SOUTHCO") CONTRACTS -- On November 21, 1994, STPI entered
into a purchase agreement (the "Purchase Agreement") with Southco to purchase
certain of its assets, primarily the right to operate ice systems at 33
locations and firm orders to operate ice systems in the future at seven
additional locations. The cost was approximately $188,000 and was partially
financed by a $105,620 note payable (see Note 6). The purchase price and related
note are subject to reduction (as defined) for a three year period for
cancellations/ terminations of any existing locations or in the event that any
of the identified firm order locations do not become customers.
The assigned value of the right to operate ice systems and associated costs
has been recorded within other assets and is being amortized over five years.
The accumulated amortization related to this asset was approximately $80,000 at
December 31, 1996.
6. LONG-TERM DEBT AND NOTES PAYABLE
At December 31, 1996, long-term debt of the Companies consisted of the
following:
Frost National Bank.................. $ 2,612,616
Jefferson State Bank................. 523,249
Southco Note......................... 33,958
Other................................ 6,025
------------
Total debt........................... 3,175,848
Less current maturities.............. 1,483,228
------------
Long-term debt, net.................. $ 1,692,620
============
FROST NATIONAL BANK -- The Company and Frost National Bank have entered
into a secured loan agreement (the "Bank Loan Agreement"), as last amended
January 1997, to finance capital expenditures and seasonal working capital
needs. Under the provisions of the Bank Loan Agreement, available financing
consists of a term loan (the "Term Loan"), a working capital line of credit
and an equipment purchase line of credit (collectively, the "Lines of
Credit"). Borrowings under the Bank Loan Agreement are secured by Mission's
machinery and equipment, accounts receivable, the pledge of Mission's common
stock and the personal guarantee of Mission's sole shareholder as well as the
guarantees of STPI and STED. The Bank Loan Agreement contains restrictive
covenants which, among other things, requires the Company to maintain a minimum
tangible net worth (as defined) and a specific ratio of cash flow to current
maturities of long-term debt. The terms of the Bank Loan Agreement also prohibit
the payment of dividends, limit annual capital expenditures and limit the
Companies' ability to incur additional debt. The maximum combined credit under
the Lines of Credit is $1,475,000, subject to borrowing base limitations which
are generally computed as a percentage of various classes of eligible accounts
receivable, qualifying inventory and fixed
F-49
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
assets (as defined) of Mission, STPI and STED. The Company pays no annual
facility fee related to the Lines of Credit.
The balance of the Term Loan was $904,155 at December 31, 1996. The Term
Loan bears interest at prime plus 1% (9.25% at December 31, 1996) and is payable
in monthly installments of $21,840 through July 2000. The balance of the Lines
of Credit was $425,000 at December 31, 1996. The Lines of Credit mature on May
31, 1997 and bear interest at prime plus 1% (9.25% at December 31, 1996).
In addition, the Companies enter into secured promissory note agreements
with Frost National Bank from time to time in order to finance the purchase of
equipment, which is in turn used as collateral for the notes. At December 31,
1996, borrowings under such notes were $1,283,461. These notes bear interest at
prime plus 1% (9.25% at December 31, 1996) and require principal and interest
payments in equal monthly installments ranging from three to five years.
JEFFERSON STATE BANK -- The Companies enter into secured promissory note
agreements ("Promissory Notes") with Jefferson State Bank at various dates in
order to finance the purchase of ice merchandisers and/or transportation
vehicles, which are in turn used as collateral for the Promissory Notes. The
notes outstanding at December 31, 1996 bear interest at a fixed rate ranging
from 6.5% to 9.0%. The Promissory Notes require principal and interest payments
in equal monthly installments ranging from two to four years.
SOUTHCO NOTE -- In November 1994 STPI issued a note (the "Southco Note")
to finance a portion of the Southco acquisition (see Note 5). The Southco Note
bears interest at an annual rate of prime plus 2% (10.25% at December 31, 1996)
and is secured by the contracts to operate ice systems. The Southco Note
required interest-only payments for the first six months and thereafter 36
monthly payments of $3,521 plus accrued interest.
The weighted average interest rate for the Companies was 9.27% for the year
ended December 31, 1996.
The Companies long-term debt maturities are as follows:
1997................................. $ 1,483,228
1998................................. 782,292
1999................................. 584,820
2000................................. 317,328
2001................................. 8,180
------------
$ 3,175,848
============
7. RELATED PARTIES
STPI entered into a distributor agreement (the "Distributor Agreement")
to purchase ice systems machinery and equipment from Packaged Ice, Inc.
("Packaged Ice"), an entity affiliated through common ownership. Under
provisions of the Distributor Agreement, STPI has exclusive purchasing rights in
certain Texas counties for a period of ten years effective May 19, 1994. STPI
purchases each ice system at an agreed upon price and pays a royalty, as
defined. Packaged Ice has the right to repurchase all of the ice systems at a
price defined in the Distributor Agreement. STPI's purchases under the
Distributor Agreement were $147,613 for the year ended December 31, 1996. No
amounts were payable related to these transactions at December 31, 1996.
Certain affiliates of the Companies' shareholders sell ice merchandisers to
Mission. During 1996, Mission incurred approximately $100,000 of capital
expenditures related to these entities.
F-50
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Companies, from time to time, advance and receive funds from affiliates
in the normal course of operations for working capital purposes. Such
transactions are reflected in accounts receivable-affiliates and accounts
payable-affiliates on the combined balance sheet in the respective amounts of
$360,589 and $49,856 at December 31, 1996. In addition, Mission has $105,552 of
8.75% interest bearing demand notes due affiliates and $19,030 of employee
receivables at December 31, 1996.
The Companies lease certain property from individuals affiliated through
ownership. Total payments under these leases were $87,600 in 1996. See Note 9
for additional information regarding noncancellable lease commitments.
8. CAPITAL STOCK
COMMON STOCK -- Respective holders of Mission and STPI's common stock are
entitled to one vote per share on all matters to be voted on by shareholders and
are entitled to receive dividends, if any, as may be declared from time to time
by the respective Board of Directors of the Companies. Upon any liquidation or
dissolution of either Company, the holders of common stock are entitled to
receive a pro rata share of all of the assets remaining available for
distribution to shareholders after payment of all liabilities.
In 1993, STPI entered into a Stock Purchase and Restriction Agreement (the
"Agreement") with certain employees of STPI. The Agreement allowed these
employees to purchase up to a 20% interest in STPI's $1 par value common stock
for a purchase price of $50,000. The Agreement gave the new shareholders a put
option whereby STPI would repurchase the shares at a price equal to the greater
of the original purchase price or the then adjusted book value (as defined).
Upon termination of employment or death, STPI has the option to repurchase such
shares in accordance with the put option formula. The Agreement restricts such
shares from being sold, pledged, gifted or otherwise disposed of without
offering such shares to the majority stockholder. During 1996 STPI repurchased
and placed in treasury 25 shares of common stock from minority shareholders for
$10,000.
9. COMMITMENTS AND CONTINGENCIES
Relating to the Purchase Agreement with Southco, STPI leased certain ice
systems from Southco for a five year period. Rental payments are $110 per month
per ice system.
The Companies have entered into various noncancellable operating leases for
buildings and other property. The Company subleases some of the property
included under these leases. The annual future minimum lease payments under
these leases, and the related sublease amounts, are as follows:
PAYMENT SUBLEASE NET
-------- -------- ----------
1997................................. $330,000 $ 12,000 $ 318,000
1998................................. 74,000 2,000 72,000
1999................................. 16,000 -- 16,000
The Companies may be involved in various claims, lawsuits and proceedings
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate costs that may be incurred, management believes
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Companies's combined financial position or
results of operations.
F-51
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS
On January 1, 1994, the Company, in conjunction with affiliated companies
controlled through ownership by the same stockholder established a 401(k)
defined contribution savings plan ("Plan") covering substantially all of the
affiliates' employees. Employees may elect to contribute on a pre-tax basis up
to 15% of their eligible compensation to the Plan. For those participants who
have elected to make voluntary contributions to the Plan, the Company's matching
contributions consist of an amount of up to 2% of the eligible compensation of
the participants. An additional matching contribution may be made by the Company
at the discretion of the Board of Directors. Such contributions vest ratably
over a period of five years. The Company contributed approximately $30,000 to
the Plan for the year ended December 31, 1996.
11. SUBSEQUENT EVENTS (UNAUDITED)
On April 17, 1997, the Companies consummated an agreement with Packaged Ice
to merge into wholly owned subsidiaries of Packaged Ice. The total combined
consideration for those acquisitions was $10.4 million, consisting of $3.4
million in cash, $3.4 million in the assumption and repayment of seller debt and
$3.6 million in shares of Packaged Ice common stock payable to the Companies'
shareholders.
F-52
<PAGE>
INDEPENDENT AUDITORS' REPORT ON ADDITIONAL INFORMATION
To the Stockholder of Mission Party Ice, Inc. and
Stockholders of Southwest Texas Packaged Ice, Inc.:
Our audit was conducted for the purpose of forming an opinion on the basic
combined financial statements taken as a whole. The additional combined balance
sheet with combining information as of December 31, 1996 and the combined
statement of operations with combining information for the year ended December
31, 1996 are presented for the purpose of additional analysis of the basic
combined financial statements rather than to present the financial position and
results of operations of the individual companies and are not a required part of
the basic combined financial statements. This additional combining information
is the responsibility of the Companies' management. Such combining information
has been subjected to the auditing procedures applied in our audit of the basic
combined financial statements and, in our opinion, is fairly stated in all
material respects when considered in relation to the basic combined financial
statements taken as a whole.
DELOITTE & TOUCHE LLP
Houston, Texas
March 21, 1997
F-53
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED BALANCE SHEET WITH COMBINING INFORMATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
SOUTHWEST
MISSION TEXAS
PARTY ICE PACKAGED COMBINING COMBINED
INC. ICE, INC. ADJUSTMENTS BALANCE
------------ ------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents................. $ 36,149 $ 10,319 $ 46,468
Accounts receivable:
Trade........................... 477,480 79,445 556,925
Affiliates...................... 491,394 4,778 $ (116,553) 379,619
Inventories..................... 146,278 17,735 -- 164,013
Prepaid expenses................ 45,468 1,712 -- 47,180
------------ ------------ ----------- -----------
Total current assets....... 1,196,769 113,989 (116,553) 1,194,205
PROPERTY, NET........................ 3,591,511 956,467 -- 4,547,978
OTHER ASSETS, NET.................... 161,740 112,612 -- 274,352
NET ASSETS FROM DISCONTINUED
OPERATIONS......................... 374,282 -- (57,762) 316,520
------------ ------------ ----------- -----------
TOTAL...................... $ 5,324,302 $ 1,183,068 $ (174,315) $ 6,333,055
============ ============ =========== ===========
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.... $ 1,161,544 $ 321,684 $ 1,483,228
Accounts payable..................... 509,689 111,873 621,562
Payable to affiliates................ 105,522 224,201 $ (174,315) 155,408
Accrued expenses..................... 63,473 19,234 -- 82,707
------------ ------------ ----------- -----------
Total current
liabilities............. 1,840,228 676,992 (174,315) 2,342,905
------------ ------------ ----------- -----------
LONG-TERM DEBT, NET.................. 1,178,618 514,002 -- 1,692,620
------------ ------------ ----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, 2,000,000 shares
authorized; (1,000,000 shares, $.01
par value, authorized for Mission,
1,000 shares issued and
outstanding; 1,000,000 shares, $1
par value; authorized for STPI,
1,250 shares issued)............... 10 1,250 -- 1,260
Additional paid-in capital........... 1,514,513 23,513 -- 1,538,026
Retained earnings.................... 790,933 (22,689) -- 768,244
Less 25 shares of STPI treasury stock
at cost............................ -- (10,000) -- (10,000)
------------ ------------ ----------- -----------
Total shareholders'
equity.................. 2,305,456 (7,926) -- 2,297,530
------------ ------------ ----------- -----------
TOTAL...................... $ 5,324,302 $ 1,183,068 $ (174,315) $ 6,333,055
============ ============ =========== ===========
</TABLE>
See notes to combined financial statements at pages F-47 through F-52.
F-54
<PAGE>
MISSION PARTY ICE, INC. (A S CORPORATION) AND
SOUTHWEST TEXAS PACKAGED ICE, INC. (A S CORPORATION)
COMBINED STATEMENT OF OPERATIONS WITH COMBINING INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
SOUTHWEST
MISSION TEXAS
PARTY ICE PACKAGED COMBINING COMBINED
INC. ICE, INC. ADJUSTMENTS BALANCE
---------- --------- ----------- ----------
<S> <C> <C> <C>
Revenues............................. $6,853,645 $ 850,869 $7,704,514
Costs of sales....................... 4,327,267 356,040 4,683,307
---------- --------- ----------- ----------
Gross profit......................... 2,526,378 494,829 3,021,207
Selling, general and administrative
expenses............................. 1,387,837 110,785 1,498,622
Depreciation and amortization
expense.............................. 698,136 275,576 973,712
---------- --------- ----------- ----------
Income from operations............... 440,405 108,468 548,873
Other income, net.................... 68,448 560 $(4,576) 64,432
Interest expense..................... (182,179) (93,932) 4,576 (271,535)
---------- --------- ----------- ----------
Income from continuing operations
before income
taxes........................... 326,674 15,096 -- 341,770
---------- --------- ----------- ----------
Income taxes Income from continuing
operations...................... 326,674 15,096 -- 341,770
Income from discontinued
operations........................... 83,133 -- -- 83,133
---------- --------- ----------- ----------
Net income........................... $ 409,807 $ 15,096 $-- $ 424,903
========== ========= =========== ==========
</TABLE>
See notes to combined financial statements at pages F-47 through F-53.
F-55
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southwestern Ice, Inc.:
We have audited the accompanying balance sheets of SOUTHWESTERN ICE, Inc.
(an Arizona corporation) as of December 31, 1996 and 1995, and the related
statements of operations and changes in retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwestern Ice, Inc. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Phoenix, Arizona,
January 27, 1997.
F-56
<PAGE>
SOUTHWESTERN ICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
MARCH 31, 1997 1996 1995
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................ $ 32,595 $ 39,821 $ 135,289
Short-term investments.......... 50,000 95,000 --
Accounts receivable, less
allowance for doubtful
accounts of $27,000 at both
December 31, 1996 and 1995
(Note 1)...................... 1,379,319 1,204,745 1,352,607
Inventories..................... 427,362 371,433 370,300
Prepaid expenses and other
current assets................ 55,664 89,599 103,216
-------------- -------------- --------------
Total current assets....... 1,944,940 1,800,598 1,961,412
PROPERTY, PLANT AND EQUIPMENT, net
(Notes 2 and 3).................... 9,782,141 10,168,279 10,591,579
ASSETS HELD FOR SALE (Note 1)........ 265,655 265,655 --
OTHER ASSETS, net.................... 170,202 173,292 199,689
-------------- -------------- --------------
$ 12,162,938 $ 12,407,824 $ 12,752,680
============== ============== ==============
LIABILITIES AND
STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current portion of debt and
obligations under capital
leases (Note 3)............... $ 1,043,137 $ 1,068,181 $ 1,868,159
Operating line of credit (Note
3)............................ 600,000 600,000 --
Accounts payable................ 1,168,779 733,799 1,096,257
Accrued liabilities............. 521,669 475,513 565,430
Other liabilities (Note 4)...... -- -- 500,000
-------------- -------------- --------------
Total current
liabilities............. 3,333,585 2,877,493 4,029,846
-------------- -------------- --------------
DEBT AND OBLIGATIONS UNDER CAPITAL
LEASES, less current portion (Note
3)................................. 7,757,550 7,856,134 8,112,280
-------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES (Notes
4 and 5)
STOCKHOLDERS' INVESTMENT:
Capital stock; no par value,
1,000,000 shares authorized,
1,110 shares issued and
outstanding at both December
31, 1996 and 1995 and March
31, 1997...................... 1,110 1,110 1,110
Retained earnings............... 1,070,693 1,673,087 609,444
-------------- -------------- --------------
Total stockholders'
investment.............. 1,071,803 1,674,197 610,554
-------------- -------------- --------------
$ 12,162,938 $ 12,407,824 $ 12,752,680
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-57
<PAGE>
SOUTHWESTERN ICE, INC.
STATEMENTS OF OPERATIONS AND CHANGES IN RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ------------------------------
1997 1996 1996 1995
------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES................................ $ 2,206,840 $ 2,350,481 $ 14,050,305 $ 13,933,266
COST OF SALES........................ 2,066,527 2,053,176 10,270,979 10,414,557
------------ ------------ -------------- --------------
Gross profit.................... 140,313 297,305 3,779,326 3,518,709
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 688,063 579,291 2,640,271 2,464,654
------------ ------------ -------------- --------------
Income (loss) from operations... (547,750) (281,986) 1,139,055 1,054,055
------------ ------------ -------------- --------------
OTHER (INCOME) EXPENSE:
Interest expense................ 226,730 194,952 920,136 798,316
Other (income) expense.......... (172,086) 9,034 (14,682) (238,406)
------------ ------------ -------------- --------------
Total other expense, net... 54,644 203,986 905,454 559,910
------------ ------------ -------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM..... (602,394) (485,972) 233,601 494,145
EXTRAORDINARY ITEM:
Gain from extinguishment of
debt.......................... -- -- 830,042 --
------------ ------------ -------------- --------------
NET (LOSS) INCOME.................... (602,394) (485,972) 1,063,643 494,145
RETAINED EARNINGS, beginning
balance............................ 1,673,087 609,444 609,444 115,299
------------ ------------ -------------- --------------
RETAINED EARNINGS, ending balance.... $ 1,070,693 $ 123,472 $ 1,673,087 $ 609,444
============ ============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
SOUTHWESTERN ICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------------- ------------------------------
1997 1996 1996 1995
------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................. $ (602,394) $ (485,972) $ 1,063,643 $ 494,145
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities --
Depreciation and amortization...... 298,852 269,313 1,124,380 1,020,393
Debt discount amortization......... 2,343 3,446 12,127 51,311
Gain on sale of property, plant and
equipment....................... (172,085) -- (198,601) (207,986)
Gain on extinguishment of debt..... -- -- (830,042) --
(Increase) decrease in assets:
Accounts receivable............. (174,574) 71,206 147,862 (65,800)
Inventories..................... (55,929) 35,687 (1,133) 80,332
Prepaid expenses and other
current assets................ 33,935 21,598 13,617 (26,188)
Other assets.................... (1,231) (8,188) (9,470) (19,607)
Increase (decrease) in liabilities:
Accounts payable................ 434,980 (156,480) (362,458) 184,151
Accrued liabilities............. 46,156 115,838 88,309 (348,244)
------------ ------------ -------------- --------------
Net cash (used in) provided by
operating activities....... (189,947) (133,552) 1,048,234 1,162,507
------------ ------------ -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property,
plant and equipment and assets
held for sale................... 328,495 -- 525,000 1,611,285
Purchase of property, plant and
equipment....................... (64,803) (125,609) (631,526) (417,292)
Proceeds from (purchase of)
short-term investments.......... 45,000 -- (95,000) --
Disposition costs of assets held
for sale........................ -- -- -- (553,374)
------------ ------------ -------------- --------------
Net cash (used in) provided by
investing activities....... 308,692 (125,609) (201,526) 640,619
------------ ------------ -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....... -- 19,441 8,041,542 --
Principal payments on long-term
debt............................ (125,971) (372,731) (9,583,718) (1,842,841)
Proceeds from line of credit....... -- 500,000 1,311,950 200,000
Payments on line of credit......... -- -- (711,950) (200,000)
------------ ------------ -------------- --------------
Net cash (used in) provided by
financing activities....... (125,971) 146,710 (942,176) (1,842,841)
NET DECREASE IN CASH................. (7,226) (112,451) (95,468) (39,715)
CASH, beginning balance.............. 39,821 135,289 135,289 175,004
------------ ------------ -------------- --------------
CASH, ending balance................. $ 32,595 $ 22,838 $ 39,821 $ 135,289
============ ============ ============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest............. $ 229,140 $ 179,348 $ 951,991 $ 713,853
============ ============ ============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES:
Capital lease obligations of
$803,307 and $116,312 were
incurred during 1996 and 1995,
respectively.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(1) OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
OPERATIONS
Southwestern Ice, Inc. (the Company) was incorporated in the State of
Arizona on February 25, 1992. The Company's primary business activity is the
production, marketing, and distribution of ice products in Arizona, southern
Texas, Memphis, Tennessee, Albuquerque, New Mexico and El Centro, California.
The Company has elected to be organized as an S corporation and therefore, is
not subject to income taxes. Accordingly, there is no provision for income taxes
reflected in the accompanying financial statements.
In 1994, the Company's program for market penetration culminated with the
acquisition of the national ice operations of Southeastern Public Service
Company (SEPSCO). During the following two years the Company disposed of
unprofitable segments of the SEPSCO operations; additionally it made three
strategic acquisitions of small operations in order to strengthen the Company's
primary markets. See specific discussion on acquisition/disposal activity below.
During the summer of 1996, new technology was introduced into the Company's
primary market. Specifically, this technology produces and bags ice within the
ice merchandiser located at the customer site. Realizing the opportunities for
increased sales volume and market penetration while allowing the Company to
reduce its production and shipping costs, the Company entered into a Master
Equipment Lease Agreement with the owner of the technology. The Company also
believes the addition of this new technology will compliment its traditional ice
operations by increasing its production capacity during periods of the year in
which demand has typically exceeded the Company's production capacity. Pursuant
to the lease agreement, the Company granted the technology owner an option to
purchase the Company, exercisable within five years from the date of the Master
Equipment Lease Agreement at a price based on an agreed-upon formula (see Note
4).
During 1996, the Company sold certain assets related to its Corpus Christi,
Texas ice production and distribution facility and certain mobile refrigerated
vacuum equipment. The Company recognized a gain of approximately $145,000 on
proceeds of approximately $525,000. The Company has classified the assets still
located in Corpus Christi as assets held for sale and is actively marketing
these assets. No depreciation expense has been recorded since the date the
assets were taken out of production and made available for sale. The assets held
for sale at December 31, 1996, consist of the following:
Land................................. $ 155,506
Buildings............................ 110,149
----------
$ 265,655
==========
The following unaudited pro forma information has been prepared assuming
the disposal of the Corpus Christi assets and discontinuance of those operations
occurred at the beginning of 1996.
1996
--------------
Revenues............................. $ 13,839,730
Gross profit......................... 3,793,418
Income from operations............... 1,204,780
The unaudited pro forma combined financial data is provided for
illustrative purposes only and is not necessarily indicative of the results of
operations that would have been reported had the disposition of these operations
occurred on January 1, 1996, nor does it represent a forecast of the results of
operations for any future period.
During 1995, the Company sold for aggregate proceeds of approximately
$1,408,000 certain assets located in Florida and certain assets related to its
Albuquerque water operations, all of which were
F-60
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
originally acquired in the SEPSCO acquisition discussed below. No gain or loss
resulted from these sales as the assets were recorded at their net realizable
value. Also, during 1995, the Company sold certain assets related to its Phoenix
dry ice operations. The sale of these assets resulted in a gain of approximately
$208,000 on proceeds of approximately $250,000.
During 1995, the Company acquired certain assets of three ice distributors
for a total purchase price of approximately $246,000. The excess cost over the
net assets acquired of approximately $38,000 is included in other assets in the
accompanying financial statements and is being amortized over 15 years. In
accordance with APB No. 16, Accounting for Business Combinations, the
acquisitions were accounted for as purchases and, accordingly the purchase price
was allocated to the assets acquired based on their respective estimated fair
values at the date of acquisition.
Effective April 8, 1994, the Company, pursuant to a Purchase Agreement with
Southeastern Public Service Company (SEPSCO), acquired substantially all of the
assets, subject to certain liabilities (see Note 4) of an ice manufacturing and
distribution company for approximately $9,295,000. Funding was provided by the
issuance of a note payable to SEPSCO in the amount of $4,295,000 and $5,000,000
obtained on the issuance of a note payable to a bank (see Note 3).
The acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to the assets and liabilities acquired based on
their respective estimated fair values at the date of acquisition. The
allocation is summarized as follows:
Accounts receivable.................. $ 1,044,868
Inventories.......................... 468,478
Property, plant and equipment........ 9,362,494
Assets held for sale................. 506,226
Accounts payable..................... (546,014)
Accrued liabilities.................. (541,052)
Other liabilities.................... (1,000,000)
--------------
$ 9,295,000
==============
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
SHORT-TERM INVESTMENTS
Short-term investments consist of certificates of deposits with a financial
institution which have original maturities in excess of three months and are
carried at cost, which approximate market.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. The Company's inventory consists of wet ice and bags for the
transportation and storage of ice.
OTHER ASSETS
The cost of customer lists, trade name and other identifiable intangible
assets acquired in connection with business acquisitions are amortized on a
straight-line basis over 15 years. Amortization expense totaled
F-61
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to $18,000 and $17,000 for the years ended December 31, 1996 and 1995.
Accumulated amortization was $47,700 and $34,200 as of December 31, 1996 and
1995, respectively.
OTHER LIABILITIES
At December 31, 1995, other liabilities consisted of the remediation costs
associated with SEPSCO acquisition (see Note 4). These remediation costs were
fully paid in conjunction with the debt refinancing discussed in Note 3.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The Company earns approximately 76% of
its revenues from Arizona with the remaining portion earned from Texas,
Tennessee, New Mexico and California. Also, approximately 44% of the Company's
sales are to major supermarket chains.
RECENTLY ISSUED PRONOUNCEMENTS
During 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. This statement requires companies to
review long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable and provides guidance to be considered in
performing such reviews. The adoption of SFAS No. 121 did not have an impact on
the Company's financial position or results of operations.
(2) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is recorded at cost. Property and equipment
held under capital leases is stated at the present value of minimum lease
payments, net of accumulated amortization. These assets are amortized over the
lesser of the lease term or the estimated useful life of the underlying assets
using the straight-line method. Additions, improvements and major renewals are
capitalized. Maintenance, repairs and minor renewals, which do not improve or
significantly extend the life of assets, are expensed as incurred. Depreciation
is computed on a straight-line basis over the following estimated useful lives:
ESTIMATED
ASSET DESCRIPTION LIFE
- ------------------------------------- ------------
Buildings and improvements........... 31 years
Machinery and equipment.............. 7-12 years
Furniture and fixtures............... 7-12 years
Vehicles............................. 5 years
Property, plant and equipment at December 31 consists of the following:
1996 1995
-------------- --------------
Land................................. $ 749,361 $ 994,031
Buildings and improvements........... 3,010,772 3,183,380
Machinery and equipment.............. 7,213,527 6,625,892
Furniture and fixtures............... 691,394 656,437
Vehicles............................. 1,431,552 1,059,695
-------------- --------------
13,096,606 12,519,435
Less -- Accumulated depreciation..... (2,928,327) (1,927,856)
-------------- --------------
$ 10,168,279 $ 10,591,579
============== ==============
F-62
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) DEBT AND OBLIGATIONS UNDER CAPITAL LEASES:
In July 1996, the Company used $8,600,000 in proceeds from borrowings with
a bank to retire approximately $9,083,000 in debt and $500,000 in accrued
remediation liabilities (see Note 4). The new debt consists of a senior term
note, a secondary term note and a revolving line of credit. The retired debt
consisted of three loan agreements and a revolving line of credit with a bank
and a subordinated note payable to SEPSCO. The refinancing resulted in an
extraordinary gain on extinguishment of debt of $830,042.
Debt and obligations under capital leases at December 31 consists of the
following:
1996 1995
-------------- --------------
Senior note payable to bank
collateralized by personal
property, real estate, capital
stock and a shareholder certificate
of deposit, payable in monthly
installments of $65,775 including
interest at prime (8.25% at
December 31, 1996), plus 1.5%
through June 2006.................. $ 4,606,854 $ --
Secondary note payable to bank
collateralized by personal
property, real estate, capital
stock and a shareholder certificate
of deposit, payable in monthly
installments of interest only at
prime plus 1.5% through June
2006............................... 3,000,000 --
Note payable to bank collateralized
by accounts receivable and
equipment, payable in monthly
installments of $106,060 including
interest at 8.25% per annum, paid
in full in July 1996............... -- 4,188,471
Subordinated note payable to SEPSCO,
payable in annual installments of
$120,000 plus interest at 5% per
annum, beginning April 1996 and
1995, paid in full in July 1996.... -- 3,880,767
Installment note payable to bank
collateralized by accounts
receivable and equipment and
personally guaranteed by a
shareholder, payable in monthly
installments of $13,911 plus
interest at prime plus 2%, paid in
full in July 1996.................. -- 430,636
Obligations under capital leases, net
of amounts representing interest.
Interest ranging from 9% to 13%,
maturing through October 2001...... 879,035 407,099
Note payable to bank, collateralized
by shareholder certificate of
deposit, interest payable in
monthly installments at time
deposit rate plus 2% per annum,
paid in full in July 1996.......... -- 495,000
Note payable to shareholder, due in
monthly installments of $6,458 plus
interest at 10% through April
1999............................... 284,167 322,917
Other................................ 165,804 279,221
-------------- --------------
8,935,860 10,004,111
Less -- Current portion.............. (1,068,181) (1,868,159)
Unamortized discount................. (11,545) (23,672)
-------------- --------------
$ 7,856,134 $ 8,112,280
============== ==============
Pursuant to the refinancing, the Company entered in a revolving line of
credit with a bank which is secured by personal property, real estate, capital
stock and a shareholder certificate of deposit. Interest is payable monthly at
prime plus 1.5% until maturity of the line of credit in May 1997. The maximum
borrowing base is determined by the Company's accounts receivable balance, as
defined, not to exceed $600,000. The line of credit was fully drawn at the time
of refinancing to pay in full the outstanding balance
F-63
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of an existing line of credit with a bank. Interest on the retired line of
credit was payable monthly at the institution's reference rate plus 2%.
Maturities on long-term debt and obligations under capital leases are as
follows:
1997................................. $ 1,146,639
1998................................. 979,496
1999................................. 886,543
2000................................. 819,752
2001................................. 832,196
Thereafter........................... 4,428,239
------------
9,092,865
Less -- Interest on capital leases... (168,550)
------------
$ 8,924,315
============
(4) COMMITMENTS AND CONTINGENCIES:
Pursuant to the Purchase Agreement with SEPSCO, the Company set forth a
remediation plan for all environmental contamination at all real properties
acquired. As a result of the Company refinancing its debt and accrued
liabilities to SEPSCO, the Company was relieved of its remaining remediation
liability by SEPSCO in July 1996. The Company's maximum liability was
$1,500,000. Costs paid by the Company in excess of $500,000 reduced
dollar-for-dollar the principal balance of the note payable to SEPSCO up to a
maximum reduction of $500,000. As of the refinancing date, the Company had paid
approximately $795,000 in remediation costs which resulted in a forgiveness of
$500,000 in accrued remediation liability which is included in the calculation
of the gain from the debt extinguishment.
In September 1996, the Company entered into an option agreement (the
Agreement) with another corporation (the Buyer) whereby the Company granted the
Buyer a five-year option to purchase its assets. The purchase price set forth in
the Agreement is calculated from the Company's earnings before interest, taxes,
depreciation and amortization (EBITDA) with a valuation premium, as defined in
the Agreement. This option may be exercised by the Buyer on or before September
2001 by giving written notice to the Company. Payment of the agreed-upon price
must be in the form of a combination of cash and common stock of the Buyer
issued in conjunction with an initial public offering. Certain personal and real
property are excluded from the option. No consideration was received from the
Buyer in exchange for the option.
The Company also entered into a Master Equipment Lease Agreement in
September 1996 with the Buyer to lease various ice manufacturing and
merchandising systems for retail and commercial use. The lease agreement is for
an initial term of five years with an option to renew for an additional
five-year term. The annual per unit lease rate is equal to 25% of the Buyer's
cost to manufacture and install the ice merchandising systems. The Company has
agreed to lease 157 systems as of September 1997 and an additional 100 systems
per year thereafter.
Future minimum lease payments under the Master Equipment Lease are as
follows:
YEAR ENDED
DECEMBER 31,
-------------
1997............................... $ 385,314
1998............................... 385,314
1999............................... 385,314
2000............................... 385,314
2001............................... 266,509
------------
Total minimum lease payments....... $1,807,765
============
F-64
<PAGE>
SOUTHWESTERN ICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the lease agreement, the Company entered into a service
agreement with the Buyer whereby the Company will pay a monthly management fee
of $10,000 for the Buyer to have primary responsibility for marketing the ice
merchandising systems and oversight responsibility for installing, operating,
managing and servicing the systems. In addition, the Company is required to
reimburse the Buyer for all costs relating to activities under the agreement
including all costs associated with the operation, repair and maintenance of the
systems. The Company also must pay directly or through reimbursement to the
Buyer, all salaries, wages and other compensation and benefits of all personnel
employed by the Buyer and involved with the operation of the Company's leased
systems. The term of the agreement is for ten years or the termination of the
Master Equipment Lease Agreement.
Effective September 1994, the Company adopted a 401(k) profit sharing plan
(the "Plan") for all employees who are 21 years of age or older and have
completed one year of service. The Plan provides for a mandatory matching
contribution equal to 25% of the amount of the employee's salary deduction not
to exceed 5% of an employee's annual compensation. The Company's matching
contribution was $10,580 and $15,000 for Plan years ending December 31, 1996 and
1995, respectively.
(5) RELATED PARTY TRANSACTIONS:
The Company makes monthly payments of $3,000 to a company owned by a
shareholder to rent an ice manufacturing and storage facility. The Company is
also responsible for the related property taxes on the facility. The shareholder
has an obligation to extend the current lease (which expires February 1997) for
an additional five years. Total lease and tax obligations paid or accrued to or
on behalf of the shareholder were $63,600 and $36,000 for 1996 and 1995,
respectively.
The Company has entered into a management consulting agreement with a
shareholder. The management contract is renewable annually. Under the management
contract, the shareholder is entitled to receive monthly payments of $10,000.
Fees paid or accrued to the shareholder were $128,550 and $120,000 during 1996
and 1995, respectively.
(6) EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITORS' REPORT:
On March 26, 1997, the Company sold its Albuquerque, New Mexico facility to
a non-related third party and entered into a ten-month lease-back agreement for
this facility.
On April 16, 1997, the Company distributed certain property and buildings
with an approximate net book value of $369,000 to SWI, Inc., a related entity.
On April 17, 1997, the Company consummated an agreement with Packaged Ice,
Inc. to merge into a wholly-owned subsidiary of Packaged Ice, Inc. (SWI
Acquisition). The total consideration for the SWI Acquisition was $18.8 million,
consisting of $3.5 million in cash, $9.3 million in repayment of the Company's
debt and $6.0 million in shares of the Company's common stock (valued at $10.00
per share) payable to the Company's shareholders.
(7) PRESENTATION OF UNAUDITED INTERIM FINANCIAL INFORMATION
The financial statements presented herein at March 31, 1997 and for the
three-month periods ended March 31, 1997 and 1996 are unaudited; however, all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods covered have been made and are of a normal, recurring nature.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year-end. The results of the interim periods are not
necessarily indicative of results to expect for the full year.
F-65
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------------------------
TABLE OF CONTENTS
------------------------------------------
PAGE
----
PROSPECTUS SUMMARY...................... 1
RISK FACTORS............................ 7
DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS............................ 13
THE COMPANY............................. 14
USE OF PROCEEDS......................... 16
DIVIDEND POLICY......................... 16
DILUTION................................ 17
CAPITALIZATION.......................... 18
UNAUDITED PRO FORMA COMBINED CONDENSED
FINANCIAL STATEMENTS.................. 19
SELECTED HISTORICAL FINANCIAL DATA...... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................ 26
BUSINESS................................ 32
MANAGEMENT.............................. 40
PRINCIPAL SHAREHOLDERS.................. 46
CERTAIN TRANSACTIONS.................... 48
DESCRIPTION OF CAPITAL STOCK............ 49
SHARES ELIGIBLE FOR FUTURE SALE......... 53
UNDERWRITING............................ 54
LEGAL MATTERS........................... 56
EXPERTS................................. 56
ADDITIONAL INFORMATION.................. 56
FINANCIAL STATEMENTS.................... F-1
9,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
NationsBanc Montgomery
Securities LLC
Jefferies & Company, Inc.
Bear, Stearns & Co. Inc.
Stephens Inc.
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered, other than underwriting discounts and
commissions, are set forth in the following table. The Company shall pay the
estimated expenses of issuance and distribution in proportion to the respective
number of shares sold by it in the Offering. Each amount, except for the
Commission and National Association of Securities Dealers, Inc. ("NASD") fees,
is estimated.
Commission registration fees............ $ 42,406
NASD filing fees........................ $ 14,875
Nasdaq National Market application and
listing fees.......................... $ 91,000
Transfer agent's and registrar's fees
and expenses.......................... $ 10,000
Printing and engraving expenses......... $ 275,000
Legal fees and expenses................. $ 325,000
Accounting fees and expenses............ $ 240,000
Blue sky fees and expenses.............. $ 500
Standby commitment fee to existing
noteholder............................ $ 680,000
------------
Total.............................. $ 1,673,781
============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is empowered by Art. 2.02-1 of the Texas Business Corporation
subject to the procedures and limitations stated therein, to indemnify any
person who was, is or is threatened to be made a named defendant or respondent
in a proceeding because the person is or was a director or officer against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses (including court costs and attorneys' fees) actually
incurred by the person in connection with the proceeding. The Company is
required by Art. 2.02-1 to indemnify a director or officer against reasonable
expenses (including court costs and attorneys' fees) incurred by him in
connection with a proceeding in which he is a named defendant or respondent
because he is or was a director or officer if he has been wholly successful, on
the merits or otherwise, in the defense of the proceeding. The statute provides
that indemnification pursuant to its provisions is not exclusive of other rights
of indemnification to which a person may be entitled under any bylaw, agreement,
vote of shareholders or disinterested directors, or otherwise. The Articles and
bylaws of the Company provide for indemnification by the Company of its
directors and officers to the fullest extent permitted by the Texas Business
Corporation Act. In addition, the Company has, pursuant to Article 1302-7.06 of
the Texas Miscellaneous Corporation Laws Act, provided in its articles of
incorporation that, to the fullest extent permitted by applicable law, a
director of the Company shall not be liable to the Company or its shareholders
for monetary damages for an act or omission in a director's capacity as director
of the Company.
The Company has entered into indemnification agreements with each of its
directors and certain of its executive officers. The indemnification agreements
provide that the Company shall indemnify these individuals against certain
liabilities (including settlements) and expenses actually and reasonably
incurred by them in connection with any threatened or pending legal action,
proceeding or investigation (other than actions brought by or in the right of
the Company) to which any of them is, or is threatened to be, made a party by
reason of their status as a director, officer or agent of the Company; PROVIDED
that, with respect to a civil, administrative or investigative (other than
criminal) action, such individual acted in good faith and in a manner he or she
reasonably believed to be in, or not opposed to, the best interests of the
Company, and with respect to any criminal proceedings, he or she had no
reasonable cause to believe his or her conduct was unlawful. With respect to any
action brought by or in the right of the Company, such individuals may be
indemnified, to the extent not prohibited by applicable laws or as determined by
a court of competent
II-1
<PAGE>
jurisdiction, against expenses actually and reasonably incurred by them in
connection with such action if they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
Company. The agreements also require indemnification of such individuals for all
reasonable expenses incurred in connection with the successful defense of any
action or claim and provide for partial indemnification in the case of any
partially successful defense.
The Company has obtained an insurance policy providing for indemnification
of officers and directors of the Company and certain other persons against
liabilities and expenses incurred by any of them in certain stated proceedings
and under certain stated conditions. The Company has entered into separate
indemnification agreements with each of its directors which may require the
Company, among other things, to indemnify such directors against certain
liabilities that may arise by reason of their status or service as directors to
the maximum extent permitted under Texas law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1996, the Company issued and sold the following unregistered
securities:
(1) On January 17, 1997, the Company issued 124,831 shares of Series
B Convertible Preferred Stock to Food Fund, Norwest and an accredited
investor for an aggregate cash consideration of $757,761. This issuance was
exempt from registration under Section 4(2) of the Securities Act.
(2) On February 18, 1997, the Company issued 6,000 shares of Common
Stock to an employee for an aggregate cash consideration of $45,000. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(3) On April 17, 1997, the Company issued a total of 995,020 shares
of Common Stock valued at $10 per share to the former shareholders of
Southwest Texas Packaged Ice, Inc., Mission Party Ice, Inc. and
Southwestern Ice, Inc. as partial consideration for the Company's
acquisition of Southwest Texas Packaged Ice, Inc., Mission Party Ice, Inc.
and Southwestern Ice, Inc. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(4) On April 17, 1997, the Company issued $50 million of 12% Senior
Notes due 2004 with detachable warrants to purchase 511,855 shares of
Common Stock for $0.01 per share. In connection with such issuance, the
Company issued warrants to purchase $127,972 shares of Common Stock for
$0.01 per share to Jefferies, the initial purchaser of 12% Senior Notes as
partial consideration for its services. These issuances were exempt from
registration under Section 4(2) of the Securities Act.
(5) On May 22, 1997, in connection with its acquisition of various
assets of The Pipkin Company (d/b/a The Ice Company), the Company issued to
H.O. Pipkin and Joy E. Pipkin a total of 2,500 shares of Common Stock
valued at $10 per share as partial consideration for the acquisition. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(6) On May 22, 1997, the Company issued to James M. Raines 18,271
shares of Common Stock in exchange for the return of warrants entitling
James M. Raines to purchase 43,296 shares of Common Stock at an exercise
price of $5.78 per share. This issuance was exempt from registration under
Section 3(a)(9) of the Securities Act.
(7) On May 30, 1997, as partial consideration for its acquisition of
various assets of Apache Ice Company, the Company issued 4,500 shares of
Common Stock valued at $10 per share to an accredited investor. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(8) On June 2, 1997, the Company issued 2,628 shares of Common Stock
to Lancer Corporation for an aggregate cash consideration of $26,280. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(9) On July 17, 1997, the Company issued 300,000 shares of Common
Stock to SV for an aggregate cash consideration of $3,000,000. In
connection with such issuance and without additional
II-2
<PAGE>
consideration, the Company also issued a warrant to purchase up to 100,000
shares of Common Stock for $14 per share. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(10) On August 21, 1997, as partial consideration for its acquisition
of various assets of Whitted Ice Service, the Company issued a total of
15,411 shares of Common Stock valued at $10 per share to the former
shareholders of Whitted Ice Service. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(11) On September 3, 1997, the Company issued a total of 15,000
shares of Common Stock valued at $10 per share to the former shareholders
of First Ice Company and Codorus Leasing Company as partial consideration
for the Company's acquisition of both First Ice Company and Codorus Leasing
Company. This issuance was exempt from registration under Section 4(2) of
the Securities Act.
(12) On September 4, 1997, as partial consideration for its
acquisition of various assets of A-Alaska Ice, Inc., the Company issued to
A-Alaska, Inc. a total of 56,500 shares of Common Stock. This issuance was
exempt from registration under Section 4(2) of the Securities Act.
(13) On September 10, 1997, the Company issued a total of 15,000
shares of Common Stock valued at $10 per share to the former shareholders
of McGehee-Neutze, Inc. as partial consideration for the Company's
acquisition of McGehee-Neutize, Inc. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(14) On September 12, 1997, the Company issued a total of 51,000
shares of Common Stock valued at $10 per share to the former shareholders
of Century Ice of Tulsa, Inc. and Ice Cold Enterprises, Inc. as partial
consideration for the Company's acquisition of both Century Ice of Tulsa,
Inc. and Ice Cold Enterprises, Inc. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(15) On September 27, 1997, as partial consideration for its
acquisition of various assets of
A-Arctic Inc, the Company issued to Donald S. Olsen and Christopher S.
Olsen a total of 30,000 shares of Common Stock valued at $10 per share.
This issuance was exempt from registration under Section 4(2) of the
Securities Act.
(16) On October 19, 1997, as partial consideration for its acquisition
of various assets of Ed's Refrigeration, Inc., the Company issued to Edmond
Paques and True Dee Paques a total of 10,000 shares of Common Stock valued
at $10 per share. This issuance was exempt from registration under Section
4(2) of the Securities Act.
(17) On October 16, 1997, the Company issued to Jefferies, the
initial purchaser, $25 million of 12% Senior Notes due 2004 with detachable
warrants to purchase 255,943 shares of Common Stock for $0.01 per share,
for an aggregate of $25 million in cash. This issuance was exempt from
registration under Rule 144A of the rules promulgated under the Securities
Act.
(18) On October 27, 1977, the Company issued a total of 127,800
shares of Common Stock valued at $10 per share to the former shareholders
of Central Arkansas Cold Storage, Inc. and Golden Eagle Ice Company as
partial consideration for the Company's acquisition of both Central
Arkansas Cold Storage, Inc. and Golden Eagle Ice Company. This issuance was
exempt from registration under Section 4(2) of the Securities Act.
(19) On December 2, 1997, the Company issued to Culligan 100,000
shares of 10% Exchangeable Preferred Stock, 40 shares of Series C Preferred
Stock, and warrants, having an exercise price of $13 per share, to purchase
1,807,692 shares of Common Stock, for an aggregate of $10 million. On the
same date, the Company issued to an accredited investor 15,000 shares of
10% Mandatorily Redeemable Preferred Stock, 6 shares of Series C Preferred
Stock and warrants to purchase an aggregate of 115,385 shares of Common
Stock, for an aggregate of $1.5 million. These issuances were exempt from
registration under Section 4(2) of the Securities Act.
II-3
<PAGE>
(20) On December 15, 1997 the Company issued to Culligan 135,000
shares of 10% Exchangeable Preferred Stock and 54 shares of Series C
Preferred Stock for an aggregate purchase price of $13.5 million. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(21) On January 15, 1998, the Company issued 4,500 shares of Common
Stock for an aggregate cash consideration of $27,990 and issued 1,800
shares of Common Stock for an aggregate cash consideration of $12,150 upon
exercise of options by a former employee. These issuances were exempt from
registration under Section 3(a)(1) of the Securities Act.
(22) On Januay 28, 1998, the Company issued to Jefferies, the initial
purchaser, $145 million of 9 3/4% Series A Senior Notes due 2005. This
issuance was exempt from registration under Section 4(2) of the Securities
Act.
(23) On February 6, 1998, the Company issued 10,000 shares of Common
Stock valued at $10 per share to the former shareholders of Fiesta Fun Ice
Co. as partial consideration for the Company's acquisition of Fiesta Fun
Ice Co. This issuance was exempt from registration under Section 4(2) of
the Securities Act.
(24) On February 13, 1998, the Company issued a total of 188,308
shares of Common Stock valued at $13 per share to the former shareholders
of Scianna's Party Ice, Inc. as partial consideration for the Company's
acquisition of Scianna's Party Ice, Inc. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(25) On March 5, 1998, the Company issued a total of 38,400 shares of
Common Stock valued at $13 per share to the former shareholders of Party
Time Ice, Co. as partial consideration for the Company's acquisition of
Party Time Ice, Co. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(26) On March 6, 1998, the Company issued a total of 91,565 shares of
Common Stock valued at $13 per share to the former shareholders of J.P.
Albert Ice, Co., as partial consideration for the Company's acquisition of
J.P. Albert Ice, Co. This issuance was exempt from registration under
Section 4(2) of the Securities Act.
(27) On March 11, 1998, the Company issued to Arthur Biggs, Charlotte
Biggs and other accredited investors a total of 379,619 shares of Common
Stock valued at $10 per share as partial consideration for the Company's
acquisition of Artic Ice Corporation. This issuance was exempt from
registration under Section 4(2) of the Securities Act.
(28) On March 24, 1998, the Company issued a total of 192,308 shares
of Common Stock valued at $13 per share to the former shareholders of
Anniston Ice & Coal Company, Inc. as partial consideration for the
Company's acquisition of Anniston Ice & Coal Company, Inc. This issuance
was exempt from registration under Section 4(2) of the Securities Act.
(29) On April 30, 1998, the Company issued to Jefferies, the initial
purchaser, $125 million of 9 3/4% Series A Senior Notes due 2005. On the
same date, the Company issued to Ares and SV 400,000 shares of Series A 13%
Preferred Stock and warrants to purchase 975,752 shares of Common Stock for
an aggregate cash consideration of $40,000,000. These issuances were exempt
from registration under Section 4(2) of the Securities Act.
(30) On June 30, 1998, the Company issued to Tim D. Davis a warrant
to purchase 15,000 shares of Common Stock at an exercise price of $15 per
share as partial consideration for the Company's acquisition of Clinton Ice
Company, Inc. This issuance was exempt from registration under Section 4(2)
of the Securities Act.
(31) On July 29, 1998, the Company issued 3,000 shares of Common
Stock valued at $10 per share to Carroll E. Summers, Jr. as partial
consideration for the Company's acquisition of a certain track of real
property located at 4301 Loop 20, Laredo, Webb County, Texas. This issuance
was exempt from registration under Section 4(2) of the Securities Act.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
The following is a list of exhibits filed as part of this Registration
Statement. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference.
EXHIBIT NO. DESCRIPTION
- ----------------------------------------------------------------
1.1 -- Form of Underwriting Agreement.
3.1 -- Restated Articles of Incorporation of
the Company filed with the Secretary of
State of the State of Texas on February
5, 1992. (Exhibit 3.2)(1)
3.2 -- Articles of Amendment to the Restated
Articles of Incorporation of the Company
filed with the Secretary of State of the
State of Texas on August 11, 1998.(12)
3.3 -- Amended and Restated Bylaws of the
Company, effective as of January 20,
1997. (Exhibit 3.5)(1)
4.1 -- Securityholder's and Registration Rights
Agreement, dated as of October 16, 1997,
among the Company and the Initial
Purchaser. (Exhibit 4.6)(1)
4.2 -- Certificate of Designation of Series C
Preferred Stock. (Exhibit 4.1)(5)
4.3 -- Certificate of Designation of 10%
Exchangeable Preferred Stock. (Exhibit
4.2)(5)
4.4 -- Certificate of Designation of 13%
Exchangeable Preferred Stock Series A.
(Exhibit 4.10)(9)
4.5 -- Amended and Restated Certificate of
Designation of 10% Exchangeable
Preferred Stock. (Exhibit 4.12)(9)
4.6 -- Purchase Agreement dated January 22,
1998 by and among Packaged Ice and
Jefferies. (Exhibit 4.2)(6)
4.7 -- Registration Rights Agreement dated
January 28, 1998 by and among Packaged
Ice, the Subsidiary Guarantors and
Jefferies. (Exhibit 4.3)(6)
4.8 -- Indenture by and among Packaged Ice, as
Issuer, the Subsidiary Guarantors and
U.S. Trust Company of Texas, N.A. as
Trustee dated as of January 28, 1998,
Amended and Restated as of April 30,
1998. (Exhibit 4.1)(9)
4.9 -- Purchase Agreement among the Company,
its subsidiaries and Jefferies as
Initial Purchaser ($125,000,000 Senior
Notes Offering) dated April 23, 1998.
(Exhibit 4.2)(9)
4.10 -- Registration Rights Agreement by and
among Packaged Ice, the Subsidiary
Guarantors and Jefferies dated January
28, 1998 and Amended and Restated as of
April 30, 1998. (Exhibit 4.3)(9)
4.11 -- Securities Purchase Agreement dated
April 30, 1998 by and among Packaged
Ice, Ares Leveraged Investment Fund,
L.P., and SV. (Exhibit 4.4)(9)
4.12 -- Warrant Agreement by and among Packaged
Ice and Ares Leveraged Investment Fund,
L.P. dated April 30, 1998. (Exhibit
4.5)(9)
4.13 -- Warrant Agreement by and among Packaged
Ice and SV dated April 30, 1998.
(Exhibit 4.6)(9)
4.14 -- Exchange Offer Registration Rights
Agreement dated April 30, 1998 by and
among Packaged Ice, Ares Leveraged
Investment Fund, L.P. and SV. (Exhibit
4.7)(9)
4.15 -- Registration Rights Agreement dated
April 30, 1998 by and among Packaged Ice
and Ares Leveraged Investment Fund, L.P.
and SV. (Exhibit 4.8)(9)
4.16 -- Registration Rights Agreement Dated
April 30, 1998 by and among Packaged Ice
and SV (Exhibit 4.9)(9)
4.17 -- Common Stock Purchase Warrant, dated
July 17, 1997, executed by the Company
for the benefit of SV Capital Partners,
L.P. (Exhibit 10.39)(2)
5.1 -- Opinion of Akin, Gump, Strauss, Hauer &
Feld, L.L.P.
10.1 -- Agreement and Plan of Merger by and
among the Company, Packaged Ice Mission,
Inc., Mission and A. J. Lewis III, made
as of March 25, 1997. (Exhibit 10.1)(1)
II-5
<PAGE>
10.2 -- Agreement and Plan of Merger by and
among the Company, Packaged Ice STPI,
Inc., STPI and the Shareholders of STPI,
made as of March 25, 1997. (Exhibit
10.2)(1)
10.3 -- Noncompetition Agreement by and among
the Company, Packaged Ice Mission, Inc.,
Packaged Ice STPI, Inc. and A. J. Lewis
III, dated as of April 17, 1997.
(Exhibit 10.4)(1)
10.4 -- Registration Rights Agreement by and
among the Company, A. J. Lewis III and
Liza B. Lewis, dated as of April 17,
1997. (Exhibit 10.5)(1)
10.5 -- Agreement and Plan of Merger by and
among the Company, Packaged Ice South-
western, Inc., SWI and the shareholders
of SWI, made as of March 25, 1997.
(Exhibit 10.6)(1)
10.6 -- Form of Noncompetition Agreement among
the Company, Packaged Ice Southwestern,
Inc., and each of Dale Johnson, Alan
Bernstein and Robert Miller
individually, dated as of April 17,
1997. (Exhibit 10.8)(1)
10.7 -- Registration Rights Agreement by and
among the Company, and Dale Johnson,
Alan Bernstein and Robert Miller, dated
as of April 17, 1997. (Exhibit 10.9)(1)
10.8 -- 1994 Stock Option Plan, dated July 26,
1994 (Exhibit 10.10)(1)
10.9 -- Form of Stock Option Plan Agreements
issued under Stock Option Plan. (Exhib-
it 10.11)(1)
10.10 -- Warrant Agreement among the Company and
U.S. Trust Company of Texas, N.A., a
national banking association, as Warrant
Agent, dated as of April 17, 1997.
(Exhibit 10.12)(1)
10.11 -- Form of Indemnification Agreement
entered into by the Company in favor of
members of the Board of Directors.
(Exhibit 10.31)(1)
10.12 -- Development and Manufacturing Agreement
by and between Lancer Corporation and
the Company, dated April 13, 1993.
(Exhibit 10.32)(1)
10.13 -- License Agreement by and among the
Company, Hoshizaki Electric Co., Ltd.
and Hoshizaki America, Inc., dated May
28, 1993. (Exhibit 10.37)(1)
10.14 -- Registration Rights Agreement, dated as
of July 17, 1997, by and between the
Company and SV Capital Partners, L.P.
(Exhibit 10.41)(2)
10.15 -- Warrant Agreement among the Company and
U.S. Trust Company of Texas, N.A., a
national banking association, as Warrant
Agent, dated as of October 16, 1997.
(Exhibit 10.7)(4)
10.16 -- Trademark License Agreement between
Culligan International Company and the
Company dated as of October 31, 1997.
(Exhibit 10.40)(4)
10.17 -- Securities Purchase Agreements with
Culligan Water Technologies, Inc. dated
December 2, 1997. (Exhibit 10.1)(5)
10.18 -- Common Stock Purchase Warrant Agreement
issued by the Company and issued to
Culligan Water Technologies, Inc.
issuing 1,807,692 fully paid and
nonassessable shares of the Company's
common stock at an exercise price of
$13.00 per share dated December 2, 1997.
(Exhibit 10.3)(5)
10.19 -- Registration Rights Agreement by and
among the Company, Culligan Water Tech-
nologies, Inc. and Erica Jesselson.
(Exhibit 10.5)(5)
10.20 -- Culligan Voting Agreement by and among
the Company and Culligan Water
Technologies, Inc. dated December 2,
1997. (Exhibit 10.6)(5)
10.21 -- Letter Agreement dated December 2, 1997.
(Exhibit 10.7)(5)
10.22 -- Option Agreement. (Exhibit 10.12)(5)
10.23 -- Credit Agreement dated April 30, 1998 by
and among the Company and Antares
Leveraged Capital Corp., individually,
and as agent for The Other Financial
Institutions. (Exhibit 10.1)(9)
10.24 -- Security Agreement dated April 30, 1998,
by and among the Company and Antares
Leveraged Capital Corp. (Exhibit
10.2)(9)
II-6
<PAGE>
10.25 -- Security Agreement dated April 30, 1998,
by and among Reddy Ice Corporation,
Golden Eagle Ice-Texas, Inc., Packaged
Ice, Southeast, Inc., Packaged Ice
Leasing, Inc., Southco Ice, Inc.,
Southwest Texas the Company,
Southwestern Ice, Inc., Southern Bottled
Water Company, Inc., Mission Party Ice,
Inc. and Antares Leveraged Capital Corp.
(Exhibit 10.3)(9)
10.26 -- Guaranty dated April 30, 1998 by and
among Reddy Ice Corporation, Mission
Party Ice, Inc., Southwest Texas the
Company, Southwestern Ice, Inc., Golden
Eagle Ice-Texas. Inc., Packaged Ice
Southeast, Inc., Packaged Ice Leasing,
Inc., Southern Bottled Water Company,
Inc., and Southco Ice, Inc. (Exhibit
10.4)(9)
10.27 -- Stock Purchase Agreement between the
Company and Suiza Foods Corporation
dated March 27, 1998. (Exhibit 2.1)(9)
10.28 -- Recapitalization Agreement dated August
4, 1998 between SV and the Company.(12)
10.29 -- Employment Agreement of James F. Stuart
dated effective August 1, 1998.(12)
10.30 -- Employment Agreement of A.J. Lewis III
dated effective August 1, 1998.(12)
10.31 -- Employment Agreement of Jimmy C. Weaver
dated effective May 1, 1998.(12)
10.32 -- Employment Agreement of James C.
Hazlewood dated effective November 1,
1997.(12)
10.33 -- [Intentionally omitted]
10.34 -- 1998 Stock Option Plan, dated June 19,
1998.
11.1 -- Statement of earnings per share.`
12.1 -- Historical statement of ratios of
earnings to fixed charges.`
12.2 -- Pro forma statement of ratios of
earnings to fixed charges.`
21.1 -- List of subsidiaries.(12)
23.1 -- Consent of Akin, Gump, Strauss, Hauer &
Feld, L.L.P. (included in the opinion
filed as Exhibit 5.1).
23.2 -- Consent of Deloitte & Touche LLP.`
23.3 -- Consent of KPMG LLP.`
23.4 -- Consent of Arthur Andersen LLP.`
24.1 -- Power of Attorney(12)
27.1 -- Financial Information Schedule (included
in Commission-filed copy only).
- ------------
` Filed herewith.
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(File No. 333-29357), filed with the Commission on June 16, 1997.
(2) Filed as an Exhibit to the Amendment No. 1 to the Company's Registration
Statement No. 333-29357 on Form S-4 with the Commission on July 29, 1997.
(3) Filed as an Exhibit to the Amendment No. 2 to the Company's Registration
Statement No. 333-29357 on Form S-4 with the Commission on August 22,
1997.
(4) Filed as an Exhibit to the Company's Third Quarter Disclosure on Form 10-Q
with the Commission on November 14, 1997.
(5) Filed as an Exhibit to Form 8-K filed on behalf of the Company with the
Commission on December 15, 1997.
(6) Filed as an Exhibit to Form 8-K filed on behalf of the Company with the
Commission on February 9, 1997.
(7) Filed as an Exhibit to the Company's Fourth Quarter Disclosure on Form
10-K filed with the Commission on March 30, 1998.
(8) Filed as an Exhibit to Form 8-K filed on behalf of the Company with the
Commission on April 2, 1998.
II-7
<PAGE>
(9) Filed as an Exhibit to Form 8-K/A filed on behalf of the Company with the
Commission on May 12, 1998.
(10) Filed as an Exhibit to the Company's First Quarter Disclosure on Form 10-Q
filed with the Commission on May 15, 1998.
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-4
(File No. 333-581111), filed with the Commission on June 30, 1998.
(12) Previously filed.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to Item 14 herein, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on January 22, 1999.
PACKAGED ICE, INC.
By: /s/JAMES F. STUART
JAMES F. STUART,
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act this Registration
Statement has been signed by the following persons in the capacities indicated
on January 22, 1999:
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ ------------------------------------ -----------------
<C> <S> <C>
/s/JAMES F. STUART Chief Executive Officer and Director January 22, 1999
JAMES F. STUART (principal executive officer)
* President and Director January 22, 1999
A.J. LEWIS III
* Chief Financial Officer January 22, 1999
JAMES C. HAZLEWOOD (principal accounting officer)
* Director January 22, 1999
RICHARD A. COONROD
* Director January 22, 1999
ROBERT G. MILLER
* Director January 22, 1999
ROD J. SANDS
* Director January 22, 1999
STEVEN P. ROSENBERG
* Director January 22, 1999
ARTHUR E. BIGGS, SR.
/s/JAMES F. STUART January 22, 1999
*ATTORNEY-IN-FACT
</TABLE>
II-9
EXHIBIT 1.1
9,000,000 SHARES
PACKAGED ICE, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED JANUARY ___, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
Section 1. Representations and Warranties of the Company....................2
Compliance with Registration Requirements..............................2
Offering Materials Furnished to Underwriters...........................2
Distribution of Offering Material By the Company.......................3
The Underwriting Agreement.............................................3
Authorization of the Common Shares.....................................3
No Applicable Registration or Other Similar Rights.....................3
No Material Adverse Change.............................................3
Independent Accountants................................................4
Preparation of the Financial Statements................................4
Incorporation and Good Standing of the Company and its Subsidiaries....5
Capitalization and Other Capital Stock Matters.........................5
Stock Exchange Listing.................................................5
NonContravention of Existing Instruments; No Further
Authorizations or Approvals Required.............................5
No Material Actions or Proceedings.....................................6
Intellectual Property Rights...........................................6
All Necessary Permits, etc.............................................7
Title to Properties....................................................7
Tax Law Compliance.....................................................7
Company Not an "Investment Company"....................................7
Insurance..............................................................8
No Price Stabilization or Manipulation.................................8
Related Party Transactions.............................................8
Compliance with Environmental Laws.....................................8
Periodic Review of Costs of Environmental Compliance...................9
ERISA Compliance.......................................................9
No Unlawful Contributions or Other Payments...........................10
Company's Accounting System...........................................10
Year 2000.............................................................10
Section 2. Purchase, Sale and Delivery of the Common Shares................10
The Firm Common Shares................................................10
The First Closing Date................................................10
The Optional Common Shares; the Second Closing Date...................11
Public Offering of the Common Shares..................................11
Payment for the Common Shares.........................................11
Delivery of the Common Shares.........................................12
Delivery of Prospectus to the Underwriters............................12
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<PAGE>
Section 3. Additional Covenants of the Company.............................12
Representatives' Review of Proposed Amendments and Supplements........12
Securities Act Compliance.............................................12
Amendments and Supplements to the Prospectus and Other
Securities Act Matters..........................................13
Copies of any Amendments and Supplements to the Prospectus............13
Blue Sky Compliance...................................................13
Use of Proceeds.......................................................14
Transfer Agent........................................................14
Earnings Statement....................................................14
Periodic Reporting Obligations........................................14
Agreement Not To Offer or Sell Additional Securities..................14
Future Reports to the Representatives.................................14
Section 4. Payment of Expenses.............................................15
Section 5. Conditions of the Obligations of the Underwriters...............15
Accountants' Comfort Letters..........................................15
Compliance with Registration Requirements; No Stop Order;
No Objection from NASD..........................................16
No Material Adverse Change or Ratings Agency Change...................16
Opinion of Counsel for the Company....................................16
Opinion of Counsel for the Underwriters...............................17
Officers' Certificate.................................................17
Bringdown Comfort Letters.............................................17
LockUp Agreement from Certain Securityholders of the Company..........17
Additional Documents..................................................18
Section 6. Reimbursement of Underwriters' Expenses.........................18
Section 7. Effectiveness of this Agreement.................................18
Section 8. Indemnification.................................................18
Indemnification of the Underwriters...................................18
Indemnification of the Company, its Directors and Officers............19
Notifications and Other Indemnification Procedures....................20
Settlements...........................................................21
Section 9. Contribution. ..................................................21
Section 10. Default of One or More of the Several Underwriters..............23
Section 11. Termination of this Agreement...................................23
Section 12. Representations and Indemnities to Survive Delivery.............24
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<PAGE>
Section 13. Notices. .....................................................24
Section 14. Successors.....................................................25
Section 15. Partial Unenforceability.......................................25
Section 16..................................................................25
Governing Law Provisions..............................................25
Consent to Jurisdiction...............................................25
Waiver of Immunity....................................................25
Section 17. General Provisions.............................................26
SCHEDULE A.................................................................S-1
EXHIBIT A..................................................................A-1
EXHIBIT B..................................................................B-1
EXHIBIT B1...............................................................B-1-1
-iii-
<PAGE>
UNDERWRITING AGREEMENT
January ___, 1999
NATIONSBANC MONTGOMERY SECURITIES LLC
JEFFERIES & COMPANY, INC.
BEAR, STEARNS & CO. INC.
STEPHENS INC.
As Representatives of the several Underwriters
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Packaged Ice, Inc., a Texas corporation (the "Company"),
proposes to issue and sell to the several underwriters named in SCHEDULE A (the
"Underwriters") an aggregate of 9,000,000 shares (the "Firm Common Shares") of
its Common Stock, par value $.01 per share (the "Common Stock"). In addition,
the Company has granted to the Underwriters an option to purchase up to an
additional 1,350,000 shares (the "Optional Common Shares") of Common Stock, as
provided in Section 2. The Firm Common Shares and, if and to the extent such
option is exercised, the Optional Common Shares are collectively called the
"Common Shares". NationsBanc Montgomery Securities LLC ("NMS"), Jefferies &
Company, Inc., Bear, Stearns & Co. Inc. and Stephens Inc. have agreed to act as
representatives of the several Underwriters (in such capacity, the
"Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-60627), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement", and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; PROVIDED,
HOWEVER, if the Company has, with the consent of NMS, elected to rely upon Rule
434 under the Securities Act, the term "Prospectus" shall mean the Company's
prospectus subject to completion (each, a "preliminary prospectus") dated
January 4, 1999 (such preliminary prospectus is called the "Rule 434 preliminary
prospectus"), together with the applicable term sheet (the "Term Sheet")
prepared and filed by the Company with the Commission under Rules 434 and 424(b)
under the Securities Act and all references in this Agreement to the date of the
Prospectus shall mean the date of the Term Sheet. All references in this
<PAGE>
Agreement to the Registration Statement, the Rule 462(b) Registration Statement,
a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or
supplements to any of the foregoing, shall include any copy thereof filed with
the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company hereby confirms its agreements with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents, warrants and covenants to each Underwriter
as follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed complied
in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy
thereof delivered to the Underwriters for use in connection with the offer
and sale of the Common Shares. Each of the Registration Statement, any
Rule 462(b) Registration Statement and any post-effective amendment
thereto, at the time it became effective and at the closing, complied and
will comply in all material respects with the Securities Act and did not
and will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at the closing, did not and will not
contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements
thereto, made in reliance upon and in conformity with information relating
to any Underwriter furnished to the Company in writing by the
Representatives expressly for use therein. There are no contracts or other
documents required to be described in the Prospectus or to be filed as
exhibits to the Registration Statement which have not been described or
filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS. The Company has
delivered to the Representatives four complete copies of the Registration
Statement, and conformed copies of the Registration Statement (without
exhibits) and preliminary prospectuses and the
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<PAGE>
Prospectus, as amended or supplemented, in such quantities and at such
places as the Representatives have reasonably requested for each of the
Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. The Company
has not distributed and will not distribute, prior to the later of the
Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material in
connection with the offering and sale of the Common Shares other than a
preliminary prospectus, the Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable
law and except as the enforcement hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting the rights and remedies of creditors or by general equitable
principles.
(e) AUTHORIZATION OF THE COMMON SHARES. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. There are no
persons with registration or other similar rights to have any equity or
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, except for such
rights as have been duly waived.
(g) NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed in the
Prospectus, subsequent to the respective dates as of which information is
given in the Prospectus: (i) there has been no material adverse change, or
any development that could reasonably be expected to result in a material
adverse change, in the condition, financial or otherwise, or in the
earnings, business, operations or prospects, whether or not arising from
transactions in the ordinary course of business, of the Company and its
subsidiaries, considered as one entity (any such change is called a
"Material Adverse Change"); (ii) the Company and its subsidiaries,
considered as one entity, have not incurred any material liability or
obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the
ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company (except for
dividends on preferred stock described in the Prospectus) or, except for
dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by
the Company or any of its subsidiaries of any class of capital stock.
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<PAGE>
(h) INDEPENDENT ACCOUNTANTS. Deloitte & Touche LLP, KPMG LLP and
Arthur Andersen LLP, who have expressed their opinions with respect to the
financial statements (which term as used in this Agreement includes the
related notes thereto) and supporting schedules filed with the Commission
as a part of the Registration Statement and included in the Prospectus,
are independent public or certified public accountants as required by the
Securities Act.
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the consolidated
financial position of the Company, Reddy Ice Corporation ("Reddy"), Cassco
Ice & Cold Storage, Inc. ("Cassco"), Southwestern Ice, Inc.
("Southwestern"), and their respective consolidated subsidiaries, and the
combined financial position of Mission Party Ice, Inc. and Southwest Texas
Packaged Ice, Inc. ("Mission/SW") as of and at the dates indicated and the
results of their operations and cash flows for the periods specified. The
supporting schedules included in the Registration Statement present fairly
the information required to be stated therein. Such financial statements
and supporting schedules have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout
the periods involved, except as may be expressly stated in the related
notes thereto. No other financial statements or supporting schedules are
required to be included in the Registration Statement. The financial data
set forth in the Prospectus under the captions "Prospectus
Summary--Summary Historical and Unaudited Pro Forma Financial
Information", "Selected Historical Financial Data" and "Capitalization"
fairly present the information set forth therein on a basis consistent
with that of the audited financial statements contained in the
Registration Statement.
The pro forma combined condensed financial statements of the Company
and its subsidiaries and the related notes thereto included under the
captions "Prospectus Summary--Summary Historical and Unaudited Pro Forma
Financial Information", "Unaudited Pro Forma Combined Condensed Financial
Statements" and elsewhere in the Prospectus and in the Registration
Statement present fairly the information contained therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly presented
on the bases described therein, and the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances referred
to therein.
The Company's ratios of earnings to fixed charges and preferred
stock dividends set forth in the Prospectus under the captions "Prospectus
Summary--Summary Historical and Unaudited Pro Forma Financial
Information", "Selected Historical Financial Data" and "Unaudited Pro
Forma Combined Condensed Financial Statements" and in Exhibits 12.1 and
12.2 to the Registration Statement have been calculated in compliance with
Item 503(d) of Regulation S-K under the Securities Act.
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<PAGE>
(j) INCORPORATION AND GOOD STANDING OF THE COMPANY AND ITS
SUBSIDIARIES. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and, in the case of
the Company, to enter into and perform its obligations under this
Agreement. Each of the Company and each subsidiary is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except for such jurisdictions where the failure to so qualify or to be in
good standing would not, individually or in the aggregate, result in a
Material Adverse Change. All of the issued and outstanding capital stock
of each subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance or claim, except for the Company's pledge of all of such
stock to secure the Company's indebtedness under the Credit Facility (as
defined in the Prospectus). The Company does not own or control, directly
or indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 21.1 to the Registration Statement.
(k) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. The authorized,
issued and outstanding capital stock of the Company is as set forth in the
Prospectus in the column entitled "Actual" under the caption
"Capitalization" (other than for subsequent issuances, if any, pursuant to
employee benefit plans described in the Prospectus or upon exercise of
outstanding options or warrants described in the Prospectus). The Common
Stock (including the Common Shares) conforms in all material respects to
the description thereof contained in the Prospectus. All of the issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable and have been issued in
compliance with federal and state securities laws. None of the outstanding
shares of Common Stock were issued in violation of any preemptive rights,
rights of first refusal or other similar rights to subscribe for or
purchase securities of the Company. There are no authorized or outstanding
options, warrants, preemptive rights, rights of first refusal or other
rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or any
of its subsidiaries other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus and
other stock plans or arrangements, and the options or other rights granted
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to such plans, arrangements,
options and rights.
(l) STOCK EXCHANGE LISTING. The Common Shares have been approved for
inclusion on the Nasdaq National Market, subject only to official notice
of issuance.
(m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER
AUTHORIZATIONS OR APPROVALS REQUIRED. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract,
-5-
<PAGE>
franchise, lease or other instrument to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any of its
subsidiaries is subject (each, an "Existing Instrument"), except for such
Defaults or violations as would not, individually or in the aggregate,
result in a Material Adverse Change. The Company's execution, delivery and
performance of this Agreement and consummation of the transactions
contemplated hereby and by the Prospectus (i) have been duly authorized by
all necessary corporate action and will not result in any violation of the
provisions of the charter or by-laws of the Company or any subsidiary,
(ii) will not conflict with or constitute a breach of, or Default or a
Debt Repayment Triggering Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to,
or require the consent of any other party to, any Existing Instrument,
except for such conflicts, breaches, Defaults, liens, charges or
encumbrances as would not, individually or in the aggregate, result in a
Material Adverse Change and (iii) will not result in any violation of any
law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary. No consent, approval,
authorization or other order of, or registration or filing with, any court
or other governmental or regulatory authority or agency, is required for
the Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the
Prospectus, except such as have been obtained or made by the Company and
are in full force and effect under the Securities Act, applicable state
securities or blue sky laws and from the National Association of
Securities Dealers, Inc. (the "NASD"). As used herein, a "Debt Repayment
Triggering Event" means any event or condition which gives, or with the
giving of notice or lapse of time would give, the holder of any note,
debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
of its subsidiaries.
(n) NO MATERIAL ACTIONS OR PROCEEDINGS. There are no legal or
governmental actions, suits or proceedings pending or, to the Company's
knowledge, threatened (i) against or affecting the Company or any of its
subsidiaries, (ii) which has as the subject thereof any officer or
director of, or property owned or leased by, the Company or any of its
subsidiaries or (iii) relating to environmental or discrimination matters,
where in any such case (A) there is a reasonable possibility that such
action, suit or proceeding might be determined adversely to the Company or
such subsidiary and (B) any such action, suit or proceeding, if so
determined adversely, would reasonably be expected to result in a Material
Adverse Change or adversely affect the consummation of the transactions
contemplated by this Agreement. No material labor dispute with the
employees of the Company or any of its subsidiaries, or with the employees
of any principal supplier of the Company, exists or, to the best of the
Company's knowledge, is threatened or imminent.
(o) INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries
own or possess sufficient trademarks, trade names, patent rights,
copyrights, licenses, approvals, trade secrets and other similar rights
(collectively, "Intellectual Property Rights") reasonably necessary to
conduct their businesses as now conducted; and the expected expiration of
any of such Intellectual Property Rights would not result in a Material
Adverse Change. Neither
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the Company nor any of its subsidiaries has received any notice of
infringement or conflict with asserted Intellectual Property Rights of
others, which infringement or conflict, if the subject of an unfavorable
decision, would result in a Material Adverse Change.
(p) ALL NECESSARY PERMITS, ETC. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits
(collectively, "Permits") issued by the appropriate state, federal or
foreign regulatory agencies or bodies necessary to conduct their
respective businesses except where the failure to possess such Permits
would not result in a Material Adverse Change, and neither the Company nor
any subsidiary has received any notice of proceedings relating to the
revocation or modification of, or non-compliance with, any such Permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, could result in a Material Adverse Change.
(q) TITLE TO PROPERTIES. The Company and each of its subsidiaries
have good and marketable title to all real property and good title to all
other properties reflected as owned in the financial statements referred
to in Section 1(i) above (or elsewhere in the Prospectus), in each case
free and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, except as described in the Prospectus
and except such as do not materially and adversely affect the value of
such property and do not materially interfere with the use made or
proposed to be made of such property by the Company or such subsidiary.
The material real property, improvements, equipment and personal property
held under lease by the Company or any subsidiary are held under valid and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company or
such subsidiary.
(r) TAX LAW COMPLIANCE. The Company and its subsidiaries have filed
all necessary federal, state and foreign income and franchise tax returns
or have properly requested extensions thereof and have paid all taxes
required to be paid by any of them and, if due and payable, any related or
similar assessment, fine or penalty levied against any of them except as
may be being contested in good faith and by appropriate proceedings. The
Company has made adequate charges, accruals and reserves in the applicable
financial statements referred to in Section 1(i) above in respect of all
federal, state and foreign income and franchise taxes for all periods as
to which the tax liability of the Company or any of its subsidiaries has
not been finally determined.
(s) COMPANY NOT AN "INVESTMENT COMPANY". The Company has been
advised of the rules and requirements under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Company is not, and
after receipt of payment for the Common Shares will not be, an "investment
company" within the meaning of Investment Company Act.
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(t) INSURANCE. Each of the Company and its subsidiaries are insured
by recognized, financially sound and reputable institutions with policies
in such amounts and with such deductibles and covering such risks as are
generally deemed adequate and customary for their businesses including,
but not limited to, policies covering real and personal property owned or
leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and earthquakes. The Company has no reason
to believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary
or appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. Neither the Company nor any
subsidiary has been denied any insurance coverage which it has sought or
for which it has applied.
(u) NO PRICE STABILIZATION OR MANIPULATION. The Company has not
taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Common Shares.
(v) RELATED PARTY TRANSACTIONS. There are no business relationships
or related-party transactions involving the Company or any subsidiary or
any other person required to be described in the Prospectus which have not
been described as required.
(w) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as would not,
individually or in the aggregate, result in a Material Adverse Change (i)
neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign law or regulation relating to pollution
or protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products (collectively,
"Materials of Environmental Concern"), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environment Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its
subsidiaries under applicable Environmental Laws, or noncompliance with
the terms and conditions thereof, nor has the Company or any of its
subsidiaries received any written communication, whether from a
governmental authority, citizens group, employee or otherwise, that
alleges that the Company or any of its subsidiaries is in violation of any
Environmental Law; (ii) there is no claim, action or cause of action filed
with a court or governmental authority, no investigation with respect to
which the Company has received written notice, and no written notice by
any person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising
out of, based on or resulting from the presence, or release into the
environment, of any Material of Environmental Concern at any location
owned, leased or
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operated by the Company or any of its subsidiaries, now or in the past
(collectively, "Environmental Claims"), pending or, to the best of the
Company's knowledge, threatened against the Company or any of its
subsidiaries or any person or entity whose liability for any Environmental
Claim the Company or any of its subsidiaries has retained or assumed
either contractually or by operation of law; and (iii) to the best of the
Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that reasonably could result in a
violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or
against any person or entity whose liability for any Environmental Claim
the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law.
(x) PERIODIC REVIEW OF COSTS OF ENVIRONMENTAL COMPLIANCE. In the
ordinary course of its business, the Company conducts a periodic review of
the effect of Environmental Laws on the business, operations and
properties of the Company and its subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including,
without limitation, any capital or operating expenditures required for
clean-up, closure of properties or compliance with Environmental Laws or
any permit, license or approval, any related constraints on operating
activities and any potential liabilities to third parties). On the basis
of such review and the amount of its established reserves, the Company has
reasonably concluded that such associated costs and liabilities would not,
individually or in the aggregate, result in a Material Adverse Change.
(y) ERISA COMPLIANCE. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its subsidiaries or their "ERISA Affiliates"
(as defined below) are in compliance in all material respects with ERISA.
"ERISA Affiliate" means, with respect to the Company or a subsidiary, any
member of any group of organizations described in Sections 414(b),(c),(m)
or (o) of the Internal Revenue Code of 1986, as amended, and the
regulations and published interpretations thereunder (the "Code") of which
the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee
benefit plan" established or maintained by the Company, its subsidiaries
or any of their ERISA Affiliates, if such "employee benefit plan" were
terminated, would have any "amount of unfunded benefit liabilities" (as
defined under ERISA). Neither the Company, its subsidiaries nor any of
their ERISA Affiliates has incurred or reasonably expects to incur any
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971,
4975 or 4980B of the Code. Each "employee benefit plan" established or
maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the
Code is so qualified and nothing has occurred, whether by action or
failure to act, which would cause the loss of such qualification.
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(z) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS. Neither the Company
nor any of its subsidiaries nor, to the best of the Company's knowledge,
any employee or agent of the Company or any subsidiary, has made any
contribution or other payment to any official of, or candidate for, any
federal, state or foreign office in violation of any law or of the
character required to be disclosed in the Prospectus.
(aa) COMPANY'S ACCOUNTING SYSTEM. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability
for assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(bb) YEAR 2000. All disclosure regarding year 2000 compliance that
is required to be described under the 1933 Act and 1933 Regulations
(including disclosures required by Staff Legal Bulletin No. 5) has been
included in the Prospectus. The Company will not incur significant
operating expenses or costs to ensure that its information systems will be
year 2000 complaint, other than as disclosed in the Prospectus.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
THE FIRM COMMON SHARES. The Company agrees to issue and sell to the
several Underwriters the Firm Common Shares upon the terms herein set forth. On
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the
Underwriters agree, severally and not jointly, to purchase from the Company the
respective number of Firm Common Shares set forth opposite their names on
SCHEDULE A. The purchase price per Firm Common Share to be paid by the several
Underwriters to the Company shall be $[___] per share.
THE FIRST CLOSING DATE. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of NMS, 600 Montgomery Street, San Francisco, California (or such
other place as may be agreed to by the Company and the Representatives) at 6:00
a.m. San Francisco time, on ________, 1999, or such other time and date not
later than 10:30 a.m. San Francisco time, on ______, 1999 as the Representatives
shall designate by notice to the Company (the time and date of such closing are
called the "First Closing Date"). The Company hereby acknowledges that
circumstances under which the Representatives may provide notice to postpone the
First Closing Date as originally scheduled include, but are in no way limited
to, any determination by the Company or the
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Representatives to recirculate to the public copies of an amended or
supplemented Prospectus or a delay as contemplated by the provisions of Section
10.
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In addition, on the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 1,350,000 Optional Common Shares from the
Company at the purchase price per share to be paid by the Underwriters for the
Firm Common Shares. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, each Underwriter agrees, severally and not jointly,
to purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Representatives may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased as
the number of Firm Common Shares set forth on SCHEDULE A opposite the name of
such Underwriter bears to the total number of Firm Common Shares. The
Representatives may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
PUBLIC OFFERING OF THE COMMON SHARES. The Representatives hereby advise
the Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Common Shares as
soon after this Agreement has been executed and the Registration Statement has
been declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
PAYMENT FOR THE COMMON SHARES. Payment for the Common Shares shall be made
at the First Closing Date (and, if applicable, at the Second Closing Date) by
wire transfer of immediately available funds to the order of the Company.
It is understood that the Representatives have been authorized, for their
own accounts and the accounts of the several Underwriters, to accept delivery of
and receipt for, and make payment of the purchase price for, the Firm Common
Shares and any Optional Common Shares the Underwriters have agreed to purchase.
The Representatives, individually and not as the Representatives of the
Underwriters, may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by
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the Representatives by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall not
relieve such Underwriter from any of its obligations under this Agreement.
DELIVERY OF THE COMMON SHARES. The Company shall deliver, or cause to be
delivered, to the Representatives for the accounts of the several Underwriters
certificates for the Firm Common Shares at the First Closing Date, against the
irrevocable release of a wire transfer of immediately available funds for the
amount of the purchase price therefor. The Company shall also deliver, or cause
to be delivered, to the Representatives for the accounts of the several
Underwriters, certificates for the Optional Common Shares the Underwriters have
agreed to purchase at the First Closing Date or the Second Closing Date, as the
case may be, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The certificates
for the Common Shares shall be in definitive form and registered in such names
and denominations as the Representatives shall have requested at least two full
business days prior to the First Closing Date (or the Second Closing Date, as
the case may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the case may
be) at a location in New York City as the Representatives may designate. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than 12:00 p.m. on
the second business day following the date the Common Shares are first released
by the Underwriters for sale to the public, the Company shall deliver or cause
to be delivered, copies of the Prospectus in such quantities and at such places
as the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS OF THE COMPANY.
The Company further covenants and agrees with each Underwriter as follows:
(a) REPRESENTATIVES' REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS.
During such period beginning on the date hereof and ending on the later of
the First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be delivered
in connection with sales by an Underwriter or dealer (the "Prospectus
Delivery Period"), prior to amending or supplementing the Registration
Statement (including any registration statement filed under Rule 462(b)
under the Securities Act) or the Prospectus, the Company shall furnish to
the Representatives for review copies of each such proposed amendment or
supplement, and the Company shall not file any such proposed amendment or
supplement to which the Representatives reasonably object.
(b) SECURITIES ACT COMPLIANCE. After the date of this Agreement, the
Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing
of any post-effective amendment to the Registration Statement or any
amendment or supplement to any preliminary prospectus or the Prospectus,
(iii) of the time and date that any post-effective amendment to the
Registration Statement becomes effective
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and (iv) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or any post-effective
amendment thereto or of any order preventing or suspending the use of any
preliminary prospectus or the Prospectus, or of any proceedings to remove,
suspend or terminate from listing or quotation the Common Stock from any
securities exchange upon which it is listed for trading or included or
designated for quotation, or of the threatening or initiation of any
proceedings for any of such purposes. If the Commission shall enter any
such stop order at any time, the Company will use its best efforts to
obtain the lifting of such order as soon as practicable. Additionally, the
Company agrees that it shall comply with the provisions of Rules 424(b),
430A and 434, as applicable, under the Securities Act and will use its
reasonable efforts to confirm that any filings made by the Company under
such Rule 424(b) were received in a timely manner by the Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER
SECURITIES ACT MATTERS. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if in the opinion of the
Representatives or counsel for the Underwriters it is otherwise necessary
to amend or supplement the Prospectus to comply with law, the Company
agrees to promptly prepare (subject to Section 3(a) hereof), file with the
Commission and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. The
Company agrees to furnish the Representatives, without charge, during the
Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) BLUE SKY COMPLIANCE. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register
the Common Shares for sale under (or obtain exemptions from the
application of) the state securities or blue sky laws or Canadian
provincial securities laws of those jurisdictions designated by the
Representatives, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required
for the distribution of the Common Shares. The Company shall not be
required to qualify as a foreign corporation or to take any action that
would subject it to general service of process in any such jurisdiction
where it is not presently qualified or where it would be subject to
taxation as a foreign corporation. The Company will advise the
Representatives promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Common Shares for
offering, sale or trading in any jurisdiction or any initiation or threat
of any proceeding for any such purpose, and in the event of the issuance
of any order suspending such qualification, registration or exemption, the
Company shall use its best efforts to obtain the withdrawal thereof as
soon as practicable.
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(f) USE OF PROCEEDS. The Company shall apply the net proceeds from
the sale of the Common Shares sold by it in the manner described under the
caption "Use of Proceeds" in the Prospectus.
(g) TRANSFER AGENT. The Company shall engage and maintain, at its
expense, a registrar and transfer agent for the Common Stock.
(h) EARNINGS STATEMENT. As soon as practicable, the Company will
make generally available to its security holders and to the
Representatives an earnings statement (which need not be audited) covering
the twelve-month period ending [______, 2000] that satisfies the
provisions of Section 11(a) of the Securities Act.
(i) PERIODIC REPORTING OBLIGATIONS. During the Prospectus Delivery
Period the Company shall file, on a timely basis, with the Commission and
the Nasdaq National Market all reports and documents required to be filed
under the Securities Exchange Act of 1934 (the "Exchange Act").
Additionally, the Company shall report the use of proceeds from the
issuance of the Common Shares as may be required under Rule 463 under the
Securities Act.
(j) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. During the
period of 180 days following the date of the Prospectus, the Company will
not, without the prior written consent of NMS (which consent may be
withheld at the sole discretion of NMS), directly or indirectly, sell,
offer, contract or grant any option to sell, pledge, transfer or establish
an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Exchange Act, or otherwise dispose of or transfer, or announce
the offering of, or file any registration statement under the Securities
Act in respect of, any shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Common Shares);
PROVIDED, HOWEVER, that the Company may issue (i) shares of its Common
Stock or options to purchase its Common Stock, or Common Stock upon
exercise of warrants, convertible securities, options, pursuant to any
stock option, stock bonus or other stock plan or arrangement described in
the Prospectus, and (ii) shares of its Common Stock in connection with
acquisitions by the Company of other businesses, provided that (except
with respect to shares issued in transactions in which the issuance or
resale of such shares will not be registered under the Securities Act),
the holders of such shares, options, or shares issued upon exercise of
such options or in connection with such acquisitions, agree in writing not
to sell, offer, dispose of or otherwise transfer any such shares or
options during such 180 day period without the prior written consent of
NMS (which consent may be withheld at the sole discretion of the NMS).
(k) FUTURE REPORTS TO THE REPRESENTATIVES. During the period of five
years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, CA 94111, Attention: [ _________]: (i)
as soon as practicable after the end of each fiscal year, copies of the
Annual Report of the Company containing the balance sheet of the Company
as of the close of such fiscal year and statements of income,
Shareholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's
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independent public or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report
on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of
any report or communication of the Company mailed generally to holders of
its capital stock.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel, independent public or certified public accountants and
other advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to the NASD's review and approval of the
Underwriters' participation in the offering and distribution of the Common
Shares, (viii) the fees and expenses associated with including the Common Stock
on the Nasdaq National Market, and (ix) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company set
forth in Section 1 hereof as of the date hereof and as of the First Closing Date
as though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company of its covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) ACCOUNTANTS' COMFORT LETTERS. On the date hereof, the
Representatives shall have received from Deloitte & Touche LLP,
independent public or certified public accountants for the Company, a
letter dated the date hereof addressed to the Underwriters, in form and
substance satisfactory to the Representatives, containing statements and
information of the type ordinarily included in accountant's "comfort
letters" to underwriters, delivered according to Statement of Auditing
Standards No. 72 (or any
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successor bulletin), with respect to the audited and unaudited financial
statements and certain financial information contained in the Registration
Statement and the Prospectus.
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO
OBJECTION FROM NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under
the Securities Act) in the manner and within the time period
required by Rule 424(b) under the Securities Act; or the Company
shall have filed a post-effective amendment to the Registration
Statement containing the information required by such Rule 430A, and
such post-effective amendment shall have become effective; or, if
the Company elected to rely upon Rule 434 under the Securities Act
and obtained the Representatives' consent thereto, the Company shall
have filed a Term Sheet with the Commission in the manner and within
the time period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or
any post-effective amendment to the Registration Statement, shall be
in effect and no proceedings for such purpose shall have been
instituted or threatened by the Commission; and
(iii) the NASD shall have raised no objection to the fairness
and reasonableness of the underwriting terms and arrangements.
(c) NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE. For the
period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second
Closing Date:
(i) in the judgment of the Representatives there shall
not have occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading, nor shall
any notice have been given of any intended or potential downgrading
or of any review for a possible change that does not indicate the
direction of the possible change, in the rating accorded any
securities of the Company or any of its subsidiaries by any
"nationally recognized statistical rating organization" as such term
is defined for purposes of Rule 436(g)(2) under the Securities Act.
(d) OPINION OF COUNSEL FOR THE COMPANY. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received
the favorable opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
counsel for the Company, dated as of such Closing Date, the form of which
is attached as EXHIBIT A.
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(e) OPINION OF COUNSEL FOR THE UNDERWRITERS. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Vinson & Elkins L.L.P., counsel for the
Underwriters, dated as of such Closing Date, with respect to the matters
set forth in paragraphs (i), (vii) (with respect to subparagraph (i)
thereof only), (viii), (ix), (x), (xi), (xii) and (xiii) (with respect to
the captions "Description of Capital Stock" and "Underwriting" under
subparagraph (i) thereof only) and the next-to-last paragraph of EXHIBIT
A.
(f) OFFICERS' CERTIFICATE. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer
or President of the Company and the Chief Financial Officer or Chief
Accounting Officer of the Company, dated as of such Closing Date, to the
effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5, and
further to the effect that:
(i) for the period from and after the date of this Agreement
and prior to such Closing Date, there has not occurred any Material
Adverse Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1 of this Agreement are true and
correct with the same force and effect as though expressly made on
and as of such Closing Date; and
(iii) the Company has complied with all the agreements
hereunder and satisfied all the conditions on its part to be
performed or satisfied hereunder at or prior to such Closing Date.
(g) BRING-DOWN COMFORT LETTERS. On each of the First Closing Date
and the Second Closing Date the Representatives shall have received from
Deloitte & Touche LLP, independent public or certified public accountants
for the Company, a letter dated such date, in form and substance
satisfactory to the Representatives, to the effect that they reaffirm the
statements made in the letter furnished by them pursuant to subsection (a)
of this Section 5, except that the specified date referred to therein for
the carrying out of procedures shall be no more than three business days
prior to the First Closing Date or Second Closing Date, as the case may
be.
(h) LOCK-UP AGREEMENT FROM CERTAIN SECURITYHOLDERS OF THE COMPANY.
On the date hereof, the Company shall have furnished to the
Representatives an agreement in the form of EXHIBIT B hereto from the
persons listed on Exhibit B-1 hereto, and such agreement shall be in full
force and effect on each of the First Closing Date and the Second Closing
Date.
(i) ADDITIONAL DOCUMENTS. On or before each of the First Closing
Date and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions
as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as
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contemplated herein, or in order to evidence the accuracy of any of the
representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and as
required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Optional Common Shares, at any time prior
to the Second Closing Date, which termination shall be without liability on the
part of any party to any other party, except that Section 4, Section 6, Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 5 or Section 11 or by the
Company pursuant to Section 7, or if the sale to the Underwriters of the Common
Shares on the First Closing Date is not consummated because of any refusal,
inability or failure on the part of the Company to perform any agreement herein
or to comply with any provision hereof, the Company agrees to reimburse the
Representatives and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Common Shares, including but not limited to
fees and disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representatives of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any party
by notice to each of the other parties hereto, and any such termination shall be
without liability on the part of (a) the Company to any Underwriter, except that
the Company shall be obligated to reimburse the expenses of the Representatives
and the Underwriters pursuant to Section 4 and, if the Company is the
terminating party, Section 6 hereof, (b) of any Underwriter to the Company, or
(c) of any party hereto to any other party except that the provisions of Section
8 and Section 9 shall at all times be effective and shall survive such
termination.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees,
and each person, if any, who controls any Underwriter within the meaning
of the Securities Act and the Exchange Act against any loss, claim,
damage, liability or expense, as incurred, to which such Underwriter or
such controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written
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consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out
of or is based (i) upon any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement, or any
amendment thereto, including any information deemed to be a part thereof
pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading;
or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; or (iii) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Common Stock or the offering contemplated
hereby, and which is included as part of or referred to in any loss,
claim, damage, liability or action arising out of or based upon any matter
covered by clause (i) or (ii) above, PROVIDED that the Company shall not
be liable under this clause (v) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter
through its bad faith or willful misconduct; and to reimburse each
Underwriter and each such controlling person for any and all expenses
(including the fees and disbursements of counsel chosen by NMS) as such
expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising
or paying any such loss, claim, damage, liability, expense or action;
PROVIDED, HOWEVER, that the foregoing indemnity agreement shall not apply
to any loss, claim, damage, liability or expense to the extent, but only
to the extent, arising out of or based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in reliance
upon and in conformity with written information furnished to the Company
by the Representatives expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); and provided, further, that with respect to any
preliminary prospectus, the foregoing indemnity agreement shall not inure
to the benefit of any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Common Shares, or any person
controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to Section 2 and a copy of the
Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to
have been delivered, at or prior to the written confirmation of the sale
of the Common Shares to such person, and if the Prospectus (as so amended
or supplemented) would have cured the defect giving rise to such loss,
claim, damage, liability or expense. The indemnity agreement set forth in
this Section 8(a) shall be in addition to any liabilities that the Company
may otherwise have.
(b) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS. Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement and each person, if any, who controls
the Company within the meaning of the Securities Act or the
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Exchange Act, against any loss, claim, damage, liability or expense, as
incurred, to which the Company, or any such director, officer or
controlling person may become subject, under the Securities Act, the
Exchange Act, or other federal or state statutory law or regulation, or at
common law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written consent of such Underwriter),
insofar as such loss, claim, damage, liability or expense (or actions in
respect thereof as contemplated below) arises out of or is based upon any
untrue or alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto), or arises out of or is based upon
the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use therein; and to reimburse
the Company, or any such director, officer or controlling person for any
legal and other expense reasonably incurred by the Company, or any such
director, officer or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. The Company hereby acknowledges that the
only information that the Underwriters have furnished to the Company
expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are
the statements set forth (A) as the paragraph on the inside front cover
page of the Prospectus concerning stabilization by the Underwriters and
(B) in the table in the first paragraph and as the second, sixth, seventh,
ninth and tenth paragraphs under the caption "Underwriting" in the
Prospectus; and the Underwriters confirm that such statements are correct.
The indemnity agreement set forth in this Section 8(b) shall be in
addition to any liabilities that each Underwriter may otherwise have.
(c) NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. Promptly
after receipt by an indemnified party under this Section 8 of notice of
the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a result of
such failure. In case any such action is brought against any indemnified
party and such indemnified party seeks or intends to seek indemnity from
an indemnifying party, the indemnifying party will be entitled to
participate in, and, to the extent that it shall elect, jointly with all
other indemnifying parties similarly notified, by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; PROVIDED, HOWEVER, if
the defendants in any such action include both the indemnified party and
the indemnifying party and the counsel for the indemnified party shall
have stated in writing to the indemnifying party that a conflict may arise
between the positions of the indemnifying party and the indemnified party
in
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conducting the defense of any such action or that there may be legal
defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party,
the indemnified party or parties shall have the right to select separate
counsel to assume such legal defenses and to otherwise participate in the
defense of such action on behalf of such indemnified party or parties.
Upon receipt of notice from the indemnifying party to such indemnified
party of such indemnifying party's election so to assume the defense of
such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with
the proviso to the next preceding sentence (it being understood, however,
that the indemnifying party shall not be liable for the expenses of more
than one separate counsel (together with local counsel), approved by the
indemnifying party (NMS in the case of Section 8(b) and Section 9),
representing the indemnified parties who are parties to such action) or
(ii) the indemnifying party shall not have employed counsel satisfactory
to the indemnified party to represent the indemnified party within a
reasonable time after notice of commencement of the action, in each of
which cases the fees and expenses of counsel shall be at the expense of
the indemnifying party.
(d) SETTLEMENTS. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and
expenses of counsel as contemplated by Section 8(c) hereof, the
indemnifying party agrees that it shall be liable for any settlement of
any proceeding effected without its written consent if (i) such settlement
is entered into more than 30 days after receipt by such indemnifying party
of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to
the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement,
compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified
party is or could have been a party and indemnity was or could have been
sought hereunder by such indemnified party, unless such settlement,
compromise or consent includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any reason held to
be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is
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appropriate to reflect the relative benefits received by the Company, on the one
hand, and the Underwriters, on the other hand, from the offering of the Common
Shares pursuant to this Agreement or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company, on the one hand, and the
Underwriters, on the other hand, in connection with the statements or omissions
or inaccuracies in the representations and warranties herein which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, on the one hand, and the Underwriters, on the other hand, in connection
with the offering of the Common Shares pursuant to this Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Common Shares pursuant to this Agreement (before deducting
expenses) received by the Company, and the total underwriting discount received
by the Underwriters, in each case as set forth on the front cover page of the
Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding
location on the Term Sheet) bear to the aggregate initial public offering price
of the Common Shares as set forth on such cover. The relative fault of the
Company, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company, on
the one hand, or the Underwriters, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; PROVIDED, HOWEVER, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
SCHEDULE A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director
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of the Company, each officer of the Company who signed the Registration
Statement, and each person, if any, who controls the Company with the meaning of
the Securities Act and the Exchange Act shall have the same rights to
contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Common Shares
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on SCHEDULE A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 8 and Section 9
shall at all times be effective and shall survive such termination. In any such
case either the Representatives or the Company shall have the right to postpone
the First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date
this Agreement may be terminated by the Representatives by notice given to the
Company if at any time (i) trading or quotation in any of the Company's
securities shall have been suspended or limited by the Commission or by the
Nasdaq National Market, or trading in securities generally on either the Nasdaq
Stock Market or the New York Stock Exchange shall have been suspended or
limited, or minimum or maximum prices shall have been generally established on
any of such stock exchanges by the Commission or the NASD; (ii) a general
banking moratorium shall have been declared by any of federal, New York or
California authorities; (iii) there shall have occurred any outbreak or
escalation of national or international hostilities or any crisis or calamity,
or any change in the United States or international financial markets, or any
substantial change or development involving a prospective substantial change in
United States' or international political, financial or economic conditions, as
in the judgment of the Representatives is material and adverse and makes it
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impracticable to market the Common Shares in the manner and on the terms
described in the Prospectus or to enforce contracts for the sale of securities;
(iv) in the judgment of the Representatives there shall have occurred any
Material Adverse Change; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the judgment of the Representatives may interfere materially with the conduct
of the business and operations of the Company regardless of whether or not such
loss shall have been insured. Any termination pursuant to this Section 11 shall
be without liability on the part of (a) the Company to any Underwriter, except
that the Company shall be obligated to reimburse the expenses of the
Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b)
any Underwriter to the Company, or (c) of any party hereto to any other party
except that the provisions of Section 8 and Section 9 shall at all times be
effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: Ted Johann, Esq.
If to the Company:
Packaged Ice, Inc.
8572 Katy Freeway, Suite 101
Houston, Texas 77024
Facsimile: (713) 464-4681
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Attention: James F. Stuart
Any party hereto may change the address for receipt of communications by
giving written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and no other person will have any right
or obligation hereunder. The term "successors" shall not include any purchaser
of the Common Shares as such from any of the Underwriters merely by reason of
such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. (a) GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) CONSENT TO JURISDICTION. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in New York City, New York or the courts of the State
of New York in each case located in New York City, New York (collectively, the
"Specified Courts"), and each party irrevocably submits to the exclusive
jurisdiction (except for proceedings instituted in regard to the enforcement of
a judgment of any such court (a "Related Judgment"), as to which such
jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. Service of any process, summons, notice or document by mail to such
party's address set forth above shall be effective service of process for any
suit, action or other proceeding brought in any such court. The parties
irrevocably and unconditionally waive any objection to the laying of venue of
any suit, action or other proceeding in the Specified Courts and irrevocably and
unconditionally waive and agree not to plead or claim in any such court that any
such suit, action or other proceeding brought in any such court has been brought
in an inconvenient forum.
(c) WAIVER OF IMMUNITY. With respect to any Related Proceeding, each party
irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without
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limitation, any immunity pursuant to the United States Foreign Sovereign
Immunities Act of 1976, as amended.
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
-26-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
PACKAGED ICE, INC.
By: __________________________________
Title: _______________________________
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
NATIONSBANC MONTGOMERY SECURITIES LLC
JEFFERIES & COMPANY, INC.
BEAR, STEARNS & CO. INC.
STEPHENS INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By NATIONSBANC MONTGOMERY SECURITIES LLC
By: ____________________________
Title: _________________________
-27-
<PAGE>
SCHEDULE A
NUMBER OF FIRM COMMON
UNDERWRITERS SHARES TO BE PURCHASED
- ------------------------------------------- ----------------------
NationsBanc Montgomery Securities LLC...... [_____]
Jefferies & Company, Inc................... [_____]
Bear, Stearns & Co. Inc.................... [_____]
Stephens Inc............................... [_____]
Total................................ [_____]
S-1
<PAGE>
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to Section
5(d) of the Underwriting Agreement.
References to the Prospectus in this EXHIBIT A include any supplements
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Texas.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change.
(iv) Each significant subsidiary (a "Significant Subsidiary") of the
Company (as defined in Rule 405 under the Securities Act) has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and, to the best
knowledge of such counsel, is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions where the failure to so qualify or to be in good standing
would not, individually or in the aggregate, result in a Material Adverse
Change.
(v) The authorized, issued and outstanding capital stock of the
Company (including the Common Stock) conform to the descriptions thereof
set forth in the Prospectus. All of the outstanding shares of Common Stock
have been duly authorized and validly issued, are fully paid and
nonassessable and, to such counsel's knowledge, have been issued in
compliance with the registration and qualification requirements of federal
and state securities laws. The form of certificate used to evidence the
Common Stock is in due and proper form and complies with all applicable
requirements of the charter and by-laws of the Company and the Business
Corporation Act of the State of Texas. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
A-1
<PAGE>
(vi) No stockholder of the Company or any other person has any
preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (i) by
operation of the charter or by-laws of the Company or the Business
Corporation Act of the State of Texas or (ii) to the knowledge of such
counsel, otherwise.
(vii) The Underwriting Agreement has been duly authorized, executed
and delivered by the Company.
(viii) The Common Shares to be purchased by the Underwriters from
the Company have been duly authorized for issuance and sale pursuant to
the Underwriting Agreement and, when issued and delivered by the Company
pursuant to the Underwriting Agreement against payment of the
consideration set forth therein, will be validly issued, fully paid and
nonassessable.
(ix) The Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To the knowledge of such counsel, no stop order suspending
the effectiveness of either of the Registration Statement or the Rule
462(b) Registration Statement, if any, has been issued under the
Securities Act and no proceedings for such purpose have been instituted or
are pending or are contemplated or threatened by the Commission. Any
required filing of the Prospectus and any supplement thereto pursuant to
Rule 424(b) under the Securities Act has been made in the manner and
within the time period required by such Rule 424(b).
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus and each amendment or supplement to
the Registration Statement and the Prospectus, as of their respective
effective dates (other than the financial statements and supporting
schedules included therein or in exhibits to or excluded from the
Registration Statement, as to which no opinion need be rendered) comply as
to form in all material respects with the applicable requirements of the
Securities Act.
(xi) The Common Shares have been approved for listing on the Nasdaq
National Market.
(xii) The statements (i) in the Prospectus under the captions
"Management -- Stock Option Plans," "-- Employment and Termination,"
"Description of Capital Stock", "Certain Transactions", "Shares Eligible
for Future Sale", and "Underwriting" and (ii) in Item 14 of the
Registration Statement, insofar as such statements constitute matters of
law, summaries of legal matters, the Company's charter or by-law
provisions, documents or legal proceedings, or legal conclusions, has been
reviewed by such counsel and fairly present and summarize, in all material
respects, the matters referred to therein.
(xiii) To the knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
A-2
<PAGE>
(xiv) To the knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits
thereto; and the descriptions thereof and references thereto are correct
in all material respects.
(xv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance
of the Underwriting Agreement and consummation of the transactions
contemplated thereby and by the Prospectus, except as required under the
Securities Act, applicable state securities or blue sky laws and from the
NASD.
(xvi) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations under
the indemnification section of the Underwriting Agreement, as to which no
opinion need be rendered) (i) have been duly authorized by all necessary
corporate action on the part of the Company; (ii) will not result in any
violation of the provisions of the charter or by-laws of the Company or
any subsidiary; (iii) will not constitute a breach of, or Default or a
Debt Repayment Triggering Event under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any of its subsidiaries pursuant to, to the knowledge of
such counsel, any material Existing Instrument; or (iv) to the knowledge
of such counsel, will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to
the Company or any subsidiary.
(xvii) The Company is not, and after receipt of payment for the
Common Shares will not be, an "investment company" within the meaning of
Investment Company Act.
(xviii) Except as disclosed in the Prospectus under the caption
"Shares Eligible for Future Sale", to the knowledge of such counsel, there
are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by the Underwriting
Agreement, except for such rights as have been duly waived.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants
for the Company and with representatives of the Underwriters at which the
contents of the Registration Statement and the Prospectus, and any
supplements or amendments thereto, and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus
(other than as specified above), and any supplements or amendments
thereto, on the basis of the foregoing, nothing has come to their
attention which would lead them to believe that either the Registration
Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue
statement of a material fact or
A-3
<PAGE>
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading (it being understood that such counsel need
express no belief as to the financial statements or schedules or other
financial or statistical data derived therefrom, included in the
Registration Statement or the Prospectus or any amendments or supplements
thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State of
Texas or the State of New York or the General Corporation Law of the State of
Delaware, or the federal law of the United States, to the extent they deem
proper and specified in such opinion, upon the opinion (which shall be dated the
First Closing Date or the Second Closing Date, as the case may be, shall be
satisfactory in form and substance to the Underwriters, shall expressly state
that the Underwriters may rely on such opinion as if it were addressed to them
and shall be furnished to the Representatives) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters; PROVIDED, HOWEVER, that such counsel shall further state that they
believe that they and the Underwriters are justified in relying upon such
opinion of other counsel, and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and public
officials.
A-4
<PAGE>
EXHIBIT B
__________, 1999
NationsBanc Montgomery Securities LLC
Jefferies & Company, Inc.
Bear, Stearns & Co. Inc.
Stephens Inc.
As Representatives of the Several Underwriters
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: Packaged Ice, Inc. (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NMS (which consent
may be withheld in its sole discretion), directly or indirectly, sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the date hereof
and continuing through the close of trading on the date 180 days after the date
of the Prospectus. The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
B-1
<PAGE>
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any rights
to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
_________________________________________________
Printed Name of Holder
By: _____________________________________________
Signature
_________________________________________________
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON SIGNING IF
SIGNING AS CUSTODIAN, TRUSTEE, OR ON BEHALF
OF AN ENTITY)
B-2
<PAGE>
EXHIBIT B-1
PERSONS SUBJECT TO LOCK-UP
James F. Stuart
A. J. Lewis III
Jimmy C. Weaver
James C. Hazlewood
H. D. Wiginton
Graham D. Davis
Dale M. Johnson
Steven P. Rosenberg
Richard A. Coonrod
Robert G. Miller
Rod J. Sands
Arthur E. Biggs, Sr.
Norwest Equity Partners V
Culligan Water Technologies, Inc.
SV Capital Partners, L.P.
Ares Leveraged Investment Fund, L.P.
B-1-1
EXHIBIT 5.1
[Akin, Gump, Strauss, Hauer & Feld, L.L.P. Letterhead]
January 22, 1999
Packaged Ice, Inc.
8572 Katy Freeway, Suite 101
Houston, TX 77024
Re: Registration Statement on Form S-1
File Number 333-60627
Ladies and Gentlemen:
We have acted as counsel for Packaged Ice, Inc., a Texas corporation (the
"Company"), in connection with the preparation and filing by the Company with
the Securities and Exchange Commission of a Registration Statement on Form S-1,
file number 333-60627, as amended (the "Registration Statement"), under the
Securities Act of 1933, as amended. The Registration Statement relates to an
underwritten public offering of up to 10,350,000 shares of the Company's common
stock, $.01 par value per share ("Common Stock") including 1,350,000 shares of
Common Sock that may be sold pursuant to the exercise of an over-allotment
option.
In so acting, we have examined and relied upon (i) the Registration
Statement and related Prospectus, the Company's Articles of Incorporation and
Bylaws, (ii) originals or copies, certified or otherwise identified to our
satisfaction, of such corporate records, agreements, documents, and instruments,
and such certificates or comparable documents of public officials and of
officers and representatives of the Company, and have made such inquiries of
such officers and representatives, as we have deemed relevant and necessary as a
basis for the opinions hereinafter set forth.
In such examination, we have assumed the genuiness of all signatures, the
legal capacity of natural persons, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies and the authenticity of the
originals of such latter documents. As to all questions of fact material to this
opinion that have not been independently established, we have relied upon
certificates of officers and representatives of the Company.
Based on the foregoing, and subject to the qualifications stated herein,
we are of the opinion that the Common Stock, when sold and issued in accordance
with the Registration Statement and related Prospectus, will be validly issued,
fully paid and nonassessable.
The opinions expressed herein are limited to the corporate laws of the
State of Texas and we express no opinion as to the effect on the matters covered
by this letter of any other laws.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the Prospectus that is a part of the Registration Statement.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD L.L.P.
EXHIBIT 11.1
PACKAGED ICE, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------------
1998 1997(1) 1997(1) 1996(1) 1995(1)
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Weighted Average Common Shares
Outstanding........................ 4,828,254 3,458,605 3,600,109 2,826,371 2,682,281
------------- ------------ ------------ ----------- -----------
Net income (loss) before
extraordinary item available to
common shareholders............ $ 0.39 $ (0.57) $ (2.40) $ (0.35) $ (0.26)
============= ============ ============ =========== ===========
Net loss to common
shareholders................... $ (3.21) $ (0.57) $ (2.40) $ (0.35) $ (0.26)
============= ============ ============ =========== ===========
DILUTED EARNINGS PER SHARE:
Weighted Average Common Shares
Outstanding........................ 4,828,254 3,458,605 3,600,109 2,826,371 2,682,261
Shares Issuable from Assumed
Conversion of Common Share Options
and Warrants....................... 1,838,018 744,165 774,787 272,822 174,293
Convertible Demand Notes............. -- -- 5,814 8,550 --
------------- ------------ ------------ ----------- -----------
Weighted Average Common Shares
Outstanding, as Adjusted........... 6,666,272 4,202,770 4,380,710 3,107,743 2,856,554
============= ============ ============ =========== ===========
Net income (loss) before
extraordinary item available to
common shareholders............ $ 0.28 $ (0.47) $ (1.93) $ (0.32) $ (0.24)
============= ============ ============ =========== ===========
Net loss to common
shareholders................... $ (2.33) $ (0.47) $ (1.93) $ (0.32) $ (0.24)
============= ============ ============ =========== ===========
EARNINGS FOR BASIC AND DILUTED
COMPUTATION:
Net income (loss) before
extraordinary item and preferred
dividends.......................... $ 5,813,455 $ (1,981,784) $ (8,438,636) $ (990,432) $ (688,482)
Extraordinary item................... (17,386,893) -- -- -- --
Preferred Shares Dividend............ (3,949,975) -- (198,630)
------------- ------------ ------------ ----------- -----------
Net Loss to Common Shareholders
(Basic Earnings Per Share
Computation)................... (15,523,413) (1,981,784) (8,637,266) (990,432) (688,482)
Interest Expense of Convertible
Demand Notes....................... -- -- 505 6,236 --
------------- ------------ ------------ ----------- -----------
Net Loss to Common Shareholders, as
adjusted (Diluted Earnings Per
Share Computation)................. $ (15,523,413) $ (1,981,784) $ (8,438,131) $ (984,196) $ (688,482)
============= ============ ============ =========== ===========
</TABLE>
- ------------
(1) This calculation is submitted in accordance with Regulation S-K; although
it is contrary to paragraphs 13 and 27 of the Financial Accounting
Standards Board's Statement of Financial Standard No. 128, because it
produces an antidilutive result.
EXHIBIT 12.1
PACKAGED ICE, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
HISTORICAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1998 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES AS DEFINED:
(1) Interest on long-term
debt.......................... $ 11 $ 25 $ 76 $ 130 $ 6,585 $ 16,457 $ 3,177
(2) Total Fixed Charges......... $ 11 $ 25 $ 76 $ 130 $ 6,585 $ 16,457 $ 3,177
EARNINGS AS DEFINED:
(3) Income (Loss) from
continuing operations....... $ (391) $ (722) $ (688) $ (990) $ (8,439) $ 5,813 $ (1,982)
(4) Income taxes for continuing
operations..................
(5) Total Fixed Charges......... 11 25 76 130 6,585 16,457 3,177
--------- --------- --------- --------- --------- --------- ---------
(6) Income (Loss) From
Continuing Operations Before
Income Taxes and Fixed
Charges..................... $ (380) $ (697) $ (612) $ (860) $ (1,854) $ 22,270 $ 1,195
========= ========= ========= ========= ========= ========= =========
RATIO OF EARNINGS TO FIXED CHARGES
(line 6 divided by line 2)......... N/A N/A N/A N/A N/A .35 N/A
COVERAGE DEFICIENCY(a):.............. $ (391) $ (722) $ (688) $ (990) $ (8,439) N/A $ (4,982)
========= ========= ========= ========= ========= ========= =========
</TABLE>
- ------------
(a) Earnings are adequate to cover fixed charges.
EXHIBIT 12.2
PACKAGED ICE, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
UNAUDITED PROFORMA AS ADJUSTED
---------------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C> <C>
FIXED CHARGES AS DEFINED:
(1) Interest on long-term debt..... $ 29,295 $ 21,971
----------------- ------------------
(2) Total Fixed Charges............ $ 29,295 $ 21,971
================= ==================
EARNINGS AS DEFINED:
(3) Income (loss) from continuing
operations....................... $ (9,813) $ (1,822)
(4) Income taxes for continuing
operations.......................
(5) Total Fixed Charges............ 29,295 21,971
----------------- ------------------
(6) Income From Continuing
Operations Before Income Taxes
and Fixed Charges.............. $ 19,482 $ 20,149
================= ==================
RATIO OF EARNINGS TO FIXED CHARGES
(line 6 divided by line 2)............ N/A N/A
COVERAGE DEFICIENCY(a):................. $ (9,813) $ (1,822)
================= ==================
</TABLE>
- ------------
(a) Earnings are inadequate to cover fixed charges.
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-60627 of Packaged Ice, Inc. (the "Company") of our report on the Company
dated March 27, 1998, our report on Reddy Ice Corporation dated April 14, 1998,
and our reports on the combined Mission Party Ice, Inc. and Southwest Texas
Packaged Ice, Inc. each dated March 21, 1997, all appearing in the Prospectus,
which is part of such Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
January 22, 1999
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Cassco Ice and Cold Storage, Inc.:
We consent to the inclusion of our report dated July 24, 1998, with respect
to the balance sheets of Cassco Ice and Cold Storage, Inc. as of June 27, 1998
and June 28, 1997 and the related statements of earnings, shareholder's equity,
and cash flows for the years then ended, which report appears in Amendment No. 3
to Registration Statement No. 333-60627 on Form S-1 of Packaged Ice, Inc. and to
the reference to our firm under the heading "Experts" in the prospectus.
/s/_ KPMG LLP
KPMG LLP
Richmond, Virginia
January 22, 1999
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement (File No. 333-60627) of our report dated January 27,
1997, covering the financial statements of Southwestern Ice, Inc. as of and for
the years ended December 31, 1996 and 1995, included herein and to all
references to our firm included in this registration statement.
/s/_ ARTHUR ANDERSEN
LLP
ARTHUR ANDERSEN LLP
Phoenix, Arizona
January 22, 1999
