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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD _______________ TO _________________
COMMISSION FILE NUMBER 333-29357
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PACKAGED ICE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0316492
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(713) 464-9384
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $0.01 per share
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is approximately $116.8 million as of March 15, 1999. The total
number of shares of common stock, par value $0.01 per share, outstanding as of
March 15, 1999 was 17,959,159.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13 of Part III have been omitted from this report,
since Packaged Ice, Inc. will file with the Securities and Exchange Commission,
not later than 120 days after the close of its fiscal year, a definitive proxy
statement, pursuant to Regulation 14A, which involves the election of directors.
The information required by Items 10, 11, 12 and 13 of Part III of this report,
which will appear in the definitive proxy statement, is incorporated by
reference into this Annual Report.
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<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
-----
PART I
Item 1. Business.............. 2
Item 2. Properties............ 9
Item 3. Legal Proceedings..... 10
Item 4. Submission of Matters
to a Vote of Security Holders... 10
PART II
Item 5. Market for
Registrant's Common Equity and
Related Stockholder Matters..... 11
Item 6. Selected Financial
Data............................ 14
Item 7. Management's
Discussion and Analysis of
Financial Condition and
Results of
Operations...................... 15
Item 8. Financial Statements
and Supplementary Data.......... 22
Item 9. Changes in and
Disagreements with Accountants
on Accounting and
Financial
Disclosure...................... 22
PART IV
Item 14. Exhibits, Financial
Statement Schedules and Reports
on Form 8-K..................... 22
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Packaged Ice, Inc. 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. The company has grown significantly
since its incorporation in 1990, primarily through the implementation of a
consolidation strategy within the highly fragmented packaged ice industry. Since
April 1997, the company has completed 53 acquisitions of traditional ice
companies, principally in the southern half of the United States. These
acquisitions 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 predominantly operates in two business segments, ice products
and non-ice operations. Ice products accounted for approximately 93.4% of
revenues in 1998 and consist of the following two activities:
o The manufacture and delivery of traditional ice from a central point
of production to the point of sale; and
o The installation of Ice Factories, the company's proprietary machines
that produce, package, store and merchandise ice at the point of sale
through an automated, self-contained system.
The company's other business segment, non-ice, consists of refrigerated
warehousing, bottled water and the manufacturing and leasing of ice equipment.
The majority of non-ice operations was acquired through acquisitions completed
in 1998.
At December 31, 1998, the company owned or operated 76 ice manufacturing
plants, four manufacturing facilities for other than ice production (such as
bottled water and manufacturing and leasing of ice equipment), 39 distribution
centers and nine refrigerated warehouses. Including an installed base of 1,835
Ice Factories, the company had a combined, rated ice manufacturing capacity of
approximately 13,600 tons of ice per day.
TRADITIONAL ICE MANUFACTURING
The packaged ice industry is highly fragmented and is led by the company
and several regional, multi-facility competitors. In addition, the industry
includes numerous local and regional companies of varying size and competitive
resources. Traditional ice manufacturers produce and package ice at centrally
located facilities and normally distribute to a limited radius of approximately
100 miles from the point of production. Due to high product transportation and
storage costs, the ice business has historically been a regional service
business. As a result of 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. Management believes that the
company's consolidation of traditional ice manufacturers within a geographic
region provides efficiencies in manufacturing and distribution largely due to
higher density of customer sites and the flexibility to shift production among
its manufacturing plants within a region. These efficiencies give the company an
advantage over its competitors.
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.
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<PAGE>
THE ICE FACTORY
The Ice Factory is an automated system that is capable of producing,
packaging and storing up to 40,000 bags of ice per year. It is most frequently
used in high volume supermarkets and other commercial locations, such as
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. Upon completion of this review, the company
makes a determination as to the viability of the location and whether single or
multiple machines are required at the time of initial installation. The company
maintains ownership of the machines and charges its customers for bags purchased
and delivered. The company generally pays for all installation and maintenance
costs, while the retailer provides and pays for the cost of utilities.
The Ice Factory, when combined with traditional delivery methods, provides
the company with numerous advantages compared to companies with only traditional
ice manufacturing and delivery. Some of these advantages include:
o 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;
o The ability to redistribute production from the company's traditional
ice facilities to new customers as well as satisfy seasonal peak
demand at stores with Ice Factories; and
o Higher operating margins, due to significantly reduced production,
storage and distribution costs.
An Ice Factory typically consists of one or more standard ice cubers, an
ice merchandiser built to the company's specifications and a bagging machine.
Lancer Corporation, a shareholder of the company, manufactures the bagging
machine, the heart of the Ice Factory, under an exclusive original equipment
manufacturing agreement. 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. Management believes that
these patents cover all patentable technology of a material nature currently
being used in the bagging device.
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. Management believes
that the company's 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 an expanded
geographic presence. As a result, management believes the company competes
effectively with smaller, local packaged ice companies. The key elements of the
company's business strategy are to:
o Acquire traditional ice manufacturing companies;
o Exploit national market presence;
o Expand market presence through the Ice Factory;
o Enhance operating margins of existing and acquired businesses; and
o Leverage management expertise.
3
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ACQUISITIONS
The company's acquisition strategy is focused on expanding its traditional
ice operations into new markets across the United States and increasing its
presence in markets it currently serves. In substantially 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. Acquired traditional ice companies
generally can be classified into one of two categories as follows:
o 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. These 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
is designed to give the company (a) the critical mass required to
provide a high level of service, (b) additional customer relationships
for the potential placement of Ice Factories and (c) a platform to
integrate tuck-in acquisitions.
o TUCK-INS. Tuck-in acquisitions are smaller acquisitions intended to
add incremental production and/or distribution capabilities in an
established market. Since existing operations can be leveraged,
substantial cost savings can be realized while generating incremental
revenues and enhancing the company's market presence and ability to
service customer accounts. If the tuck-in acquisition results in
redundant ice manufacturing capacity, the related production equipment
can be readily dismantled and redeployed to a region in need of
additional capacity.
Since April 1997, the company has completed 53 acquisitions. Significant
acquisitions in 1998 included the purchase on July 31, 1998 of Cassco Ice & Cold
Storage, Inc. for approximately $59 million in cash. Cassco is a leading
regional producer and distributor of packaged ice products and an owner/operator
of refrigerated warehouses in the Mid-Atlantic region. On April 30, 1998, the
company acquired Reddy Ice Corporation from Suiza Foods Corporation for $180.8
million. Prior to the acquisition, Reddy had been active in the consolidation of
the packaged ice industry, having made 28 acquisitions from January 1997 to
April 1998. The company's acquisitions have provided it:
o Increased cash flow;
o A national scope to better service large customers;
o Economies of scale and cost savings through the consolidation of
redundant manufacturing and distribution facilities, and the
consolidation of redundant administrative and selling functions; and
o Improved access to key markets and new customers.
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. The company believes that this
unique combination of distribution platforms enables it to redistribute ice
production efficiently from its traditional ice facilities to additional
customers and to supplement Ice Factory production during seasonal peak demand.
TRADITIONAL DISTRIBUTION. The company produces and bags ice at its
centrally located manufacturing facilities and subsequently stores the ice or
transports it directly to retail and commercial customers. To store ice
inventory, the company owns or rents appropriate freezer space.
4
<PAGE>
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 63,000 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 costs, 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
refrigerated warehouse facilities, the company has reduced its storage costs.
The company also sells to wholesale distributors, who resell the ice to retail
customers.
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 ice 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. In 1996, the company began the installation of remote communication
systems between the Ice Factories and the company's national service center.
This has enabled the company to monitor on-site inventories and usage, thereby
enhancing service quality and efficiency. Additionally, 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. Currently, approximately 400 Ice Factory
systems, or about 20% of the installed base, have remote communication
capability. The company has also implemented a routine route servicing system,
using trained service representatives to perform regularly scheduled service
procedures. In addition, the company maintains toll-free telephone support for
responding to customer calls regarding repairs and maintenance.
ICE PRODUCTS
The company markets its ice products to satisfy a broad range of customers,
primarily under the Reddy Ice brand name. 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 10 and 300 pound sizes, primarily to commercial,
agricultural and industrial customers.
NON-ICE OPERATIONS
The company also derives revenues from other goods and services including
refrigerated warehousing, the manufacturing and sale of bottled water and
manufacturing and leasing of ice equipment.
RAW MATERIALS
The company has not experienced any material supply problems in the past
with respect to its ice business. Except with respect to its water supply and
electricity, the company is not dependent upon any single supplier for materials
used in the manufacturing and packaging of its ice products. The company also
uses large quantities of plastic bags. Bag usage for 1999 is expected to
approximate 400 million bags. There are numerous plastic bag manufacturers
throughout the United States with the capability of providing the company's
plastic bag needs. Arrow Industries, Inc., a subsidiary of
5
<PAGE>
ConAgra Corporation, and Bemis Company, Inc. currently manufacture the majority
of plastic bags used by the company. Historically, market prices for plastic
bags have fluctuated in response to a number of factors, including changes in
polyethylene prices. The company historically has not attempted to pass through
changes in the price of plastic bags; therefore, a large, abrupt change in the
price of plastic bags could have a material adverse effect on the company's
operating margins, although such adverse effects historically have been
temporary. There can be no assurance that significant changes in plastic bag,
electricity, fuel or other commodity prices would not have a material adverse
effect on the company's business, results of operations and debt service
capabilities.
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. The
primary purchasers of the company's traditional ice products and users of its
Ice Factory are retailers with no internal ice production capacity. 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 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 and the District of Columbia.
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 the effects of
adverse weather in a particular region, such as reduced sales due to abnormally
cool or rainy conditions.
COMPETITION
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, financial resources, high regional
market share and associated route density and proprietary Ice Factory capability
provide it with numerous competitive advantages. Management also believes that
the company's geographic diversification and the advantages of the Ice Factory
to high volume retailers have helped develop relationships with certain high
volume, national supermarket chains and will continue to assist the company in
its penetration of this market.
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, in addition, numerous local and regional companies of varying sizes
and competitive resources.
INFORMATION SYSTEMS
Internal information systems are critical to the company's ability to
operate efficiently. The company 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, 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 Reddy Ice
Corporation developed. This satellite-based system, which has been installed in
all operating
6
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locations other than Cassco's, will facilitate centralized cash management,
timely financial reporting, a consistent reporting format and improved inventory
tracking. Cassco will be converted to the company's system in 1999.
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.
GOVERNMENT REGULATION
The packaged ice industry is subject to various federal, state and local
laws and regulations. These 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
food manufacturing practices 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 (a) quarterly testing of the ice for the presence of
microbes and certain substances regulated under the federal Safe Drinking Water
Act, (b) specific requirements for keeping ice packaging operations separate
from other activities and (c) 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.
The company is subject to certain health and safety regulations including
OSHA regulations. These regulations require the company to comply with certain
manufacturing, health and safety standards to protect its employees from
accidents.
ENVIRONMENTAL MATTERS
The company's ice manufacturing and ice storage operations are subject to
federal, state and local environmental laws and regulations. As a result, the
company has the potential to be involved from time to time in administrative or
legal proceedings relating to environmental matters. There can be no assurance
that the aggregate amount of any environmental liabilities that might be
asserted in any such proceeding will not be material. The company cannot predict
the types of environmental laws or regulations that may 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.
7
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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 has been 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 results of the company's operations.
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 these properties or current or
historical activities on adjacent properties have affected properties that are
currently or formerly owned by the company. As a result, additional
environmental issues may arise in the future as a result of these activities,
the precise nature of which the company cannot 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.
EMPLOYEES AND LABOR RELATIONS
At December 31, 1998, the company employed approximately 2,057 employees,
of which 13 were represented by a union or were subject to a collective
bargaining agreement. The company generally has not experienced difficulty in
meeting its seasonal employment needs. The company has never experienced a work
stoppage due to labor difficulties, and management believes its relationship
with its employees is good.
YEAR 2000
The company is exposed to the risk that the year 2000 issue could cause
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. During 1998, 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 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 and expects to complete the implementation of
this remediation by April 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 during the third quarter of 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.
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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. If an extended period of high inflation is encountered, the company
believes that it will be able to pass on its higher costs to its customers.
The ice business is highly seasonal. 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. 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 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 if the weather
is unusually cool or rainy. 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.
ITEM 2. PROPERTIES
The company maintains its principal executive offices in Houston, Texas,
where it leases approximately 13,050 square feet of space. The lease expires on
April 30, 2001. At December 31, 1998, the company owned or leased 76
manufacturing plants, four manufacturing facilities for other than ice
production (such as bottled water and manufacture and leasing of ice equipment),
39 distribution plants and nine refrigerated warehouses. Including an installed
base of 1,835 Ice Factories, the company had a combined, rated ice 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.
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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>
TRADITIONAL
MANUFACTURING
NO. OF MANUFACTURING NO. OF NO. OF COLD CAPACITY
MANUFACTURING OTHER THAN DISTRIBUTION STORAGE (RATED TONS
FACILITIES PRODUCTION(1) FACILITIES FACILITIES PER DAY)
------------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Alabama.............................. 4 1 2 -- 492
Arkansas............................. 2 -- 4 -- 240
Arizona.............................. 5 -- 1 1 1,136
California........................... 4 -- -- 1 487
Colorado............................. 1 -- -- 1 200
Florida.............................. 11 2 3 -- 1,797
Georgia.............................. 4 -- 5 -- 1,199
Louisiana............................ 4 -- 4 -- 794
Mississippi.......................... 1 -- 1 1 60
Maryland............................. 1 -- -- -- 9
New Mexico........................... 1 -- 1 -- 160
Nevada............................... 1 -- -- -- 140
North Carolina....................... -- -- -- 1 0
Oklahoma............................. 4 -- 1 -- 500
Tennessee............................ 5 1 -- -- 304
Texas................................ 19 -- 13 -- 3,290
Utah................................. 1 -- -- -- 120
Virginia............................. 6 -- 4 3 912
West Virginia........................ 1 -- 0 1 120
Washington, D.C...................... 1 -- -- -- 98
--- --- --- --- -------------
Total........................... 76 4 39 9 12,058
=== === === === =============
</TABLE>
- ------------
(1) Includes manufacturing facilities for other than production of ice, such as
bottled water and manufacture and leasing of ice equipment.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1998, no matters were submitted to a
vote of security holders.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of December 31, 1998, the company's common stock was not registered
pursuant to the Exchange Act and was not publicly traded. The company's common
stock began trading on the Nasdaq National Market System under the symbol
"ICED" upon the pricing of the company's initial public offering in January
1999. On March 15, 1999, the closing sales price of the common stock as reported
by Nasdaq was $7.50 per share. As of March 15, 1999, the company had
approximately 140 shareholders of record. Management estimates that there were
approximately 2,470 beneficial holders of the company's common stock as of March
15, 1999.
The company has never declared or paid any cash dividends on its common
stock. In addition, provisions of the company's revolving credit facility, the
10% exchangeable preferred stock and, in some instances, the 9 3/4% senior notes
prohibit the company from paying dividends. Further, the company intends to
retain any future earnings to fund growth. Accordingly, the company does not
anticipate paying any cash dividends in the foreseeable future.
The following information relates to sales and other issuances by the
company within the past three fiscal years of company securities, the sales and
issuances of which were not registered pursuant to the Securities Act. Unless
otherwise indicated, all of the following issuances were exempt from
registration under Section 4(2) of the Securities Act.
On January 17, 1997, the company issued 124,831 shares of Series B
convertible preferred stock to The Food Fund Limited Partnership, Norwest Equity
Fund V and an accredited investor for an aggregate cash consideration of
$757,761. All of the shares of Series B convertible preferred stock were
converted into common stock upon the close of the initial public offering at a
conversion price of $6.07 per share.
On February 18, 1997, the company issued 6,000 shares of common stock to an
employee for an aggregate cash consideration of $45,000.
On April 17, 1997, the company issued a total of 955,000 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. On the same day,
the company issued $50 million of 12% senior notes due 2004 with detachable
warrants to purchase 511,885 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 & Company, Inc., the
initial purchaser of 12% senior notes, as partial consideration for its
services.
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 a total of 2,500
shares of common stock valued at $10 per share to H.O. Pipkin and Joy E. Pipkin
as partial consideration for the acquisition. On the same day, the company
issued 18,271 shares of common stock to James M. Raines 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 to Mr. Raines was
exempt from registration under Section 3(a)(9) of the Securities Act.
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.
On June 2, 1997, the company issued 2,628 shares of common stock to Lancer
Corporation for an aggregate cash consideration of $26,280.
On July 17, 1997, the company issued 300,000 shares of common stock to
Silver Brands Partners, L.P. for an aggregate cash consideration of $3 million.
In connection with such issuance and
11
<PAGE>
without additional consideration, the company also issued a warrant to purchase
up to 100,000 shares of common stock for $14 per share.
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.
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.
On September 4, 1997, as partial consideration for its acquisition of
various assets of A-Alaska Ice, Inc., the company issued a total of 56,500
shares of common stock to A-Alaska, Inc.
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-Neutze, Inc.
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.
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.
On October 16, 1997, the company issued to Jefferies & Company, Inc., 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.
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.
On October 27, 1997, 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.
On December 2, 1997, the company issued to Culligan Water Technologies,
Inc. 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%
exchangeable 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. The 10% exchangeable preferred stock may be exchanged for
subordinated notes in an aggregate principal amount equal to the liquidation
preference of the shares exchanged.
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.
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)(9) of the Securities Act.
12
<PAGE>
On January 28, 1998, the company issued to Jefferies & Company, Inc., the
initial purchaser, $145 million of 9 3/4% Series A senior notes due 2005.
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.
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.
On March 5, 1998, the company issued a total of 38,460 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.
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.
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.
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.
On April 30, 1998, the company issued to Jefferies & Company, Inc., 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 million.
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.
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 tract of real property located in Laredo,
Texas.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and dates indicated,
selected consolidated data derived from the company's audited consolidated
financial statements. The following information should be read in conjunction
with the consolidated financial statements of the company, including the notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998(1) 1997(2) 1996 1995 1994
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating Data:
Revenues......................... $179,062 $ 28,981 $ 4,427 $ 2,830 $ 784
Cost of sale..................... 108,276 18,724 2,035 1,251 352
-------- -------- --------- --------- ---------
Gross profit..................... 70,786 10,257 2,392 1,579 432
Operating expenses............... 31,741 7,636 1,981 1,515 974
Depreciation and amortization
expense........................ 20,729 5,130 1,456 751 224
Other income (expense)........... 803 655 185 75 69
Interest expense................. (24,705) (6,585) (130) (76) (25)
Extraordinary loss on
refinancing.................... (17,387) -- -- -- --
-------- -------- --------- --------- ---------
Net loss......................... $(22,973) $ (8,439) $ (990) $ (688) $ (722)
======== ======== ========= ========= =========
Net loss to common
shareholders................... $(28,891) $ (8,637) $ (990) $ (688) $ (722)
======== ======== ========= ========= =========
Loss per Basic and Diluted Share of
Common Stock(3):
Net loss before extraordinary
item Attributable to common
shareholders................... $ (2.35) $ (2.40) $ (0.35) $ (0.26) $ (0.28)
Extraordinary item............... (3.56) -- -- -- --
-------- -------- --------- --------- ---------
Net loss attributable to common
shareholders................... $ (5.91) $ (2.40) $ (0.35) $ (0.26) $ (0.28)
======== ======== ========= ========= =========
Weighted Average Common Shares
Outstanding:
Basic and diluted................ 4,886 3,600 2,826 2,682 2,615
Other Financial Data:
Cash flows -- operating
activities..................... $ 16,320 $ (3,292) $ 1,094 $ 148 $ (647)
Cash flows -- investing
activities..................... (314,788) (61,541) (5,925) (2,961) (3,497)
Cash flows -- financing
activities..................... 287,070 79,488 3,968 3,034 4,897
EBITDA(4)........................ 39,848 3,276 596 139 (473)
Capital expenditures(5).......... 22,830 10,765 5,745 2,717 2,999
Balance Sheet Data:
Total assets..................... $440,257 $122,300 $ 11,523 $ 8,050 $ 5,513
Total long term obligations...... 338,150 67,501 3,582 211 566
Total exchangeable preferred
stock.......................... 66,546 25,198 -- -- --
Total preferred stock with put
redemption option.............. 3,223 3,223 2,497 2,497 --
Total common stock with put
redemption option.............. 1,972 1,972 1,972 1,972 --
Total shareholders' equity....... 1,300 15,819 1,597 2,582 4,427
</TABLE>
- ------------
(1) Reflects acquisitions made by the company during 1998, including Reddy Ice
Corporation and Cassco Ice & Cold Storage, Inc. Acquisitions made in 1998
previously reported annual revenues of approximately $149 million.
(2) Reflects acquisitions made by the company during 1997, including Mission
Party, Ice., Southwest Texas Packaged Ice, Inc. and Southwestern Ice, Inc.
Acquisitions made in 1997 previously reported annual revenues of
approximately $47 million.
(3) Shares of common stock issuable under stock options have not been included
in the computation of earnings per share as their effect is antidilutive.
(4) EBITDA represents earnings before interest, income taxes, depreciation,
amortization and extraordinary items. The company has included EBITDA data
(which are not measures of financial performance under generally accepted
accounting principles) because it understands such data are used by certain
investors to determine a company's historical ability to service its
indebtedness. EBITDA should not be considered by an investor as alternatives
to net income, as indicators of the company's operating performance or as
alternatives to cash flow as measures of liquidity. EBITDA may not be
comparable to similarly captioned items presented by other companies.
(5) Excludes expenditures used to acquire traditional ice businesses.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
HISTORICAL FINANCIAL DATA," AND THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO AND OTHER INFORMATION APPEARING
ELSEWHERE IN THIS REPORT.
GENERAL
The company views the manufacture and distribution of ice through
traditional ice manufacturing and through the Ice Factory as its predominant
business segment. The company's other business segment, non-ice, consists of
refrigerated warehousing, bottled water and the manufacturing and leasing of ice
equipment. The majority of non-ice operations were acquired through acquisitions
completed in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues increased $150.1 million, from $29.0 million for the
year ended December 31, 1997 to $179.1 million for the year ended December 31,
1998. Revenues increased $134.2 million as a result of revenue contributed by
traditional ice companies, $5.0 million due to the placement of additional Ice
Factories and $10.9 million due to non-ice operations. The increase in
traditional ice and non-ice operations primarily was due to acquisitions.
Additionally, unprecedented hot, dry weather during the 1998 summer period
throughout the southeastern portion of the United States and Texas resulted in
greater sales than during 1997 and more than offset the shortfall of sales
experienced during the first quarter of 1998.
COST OF SALES. Cost of sales increased $89.6 million, from $18.7 million
for the year ended December 31, 1997 to $108.3 million for the year ended
December 31, 1998. This increase was primarily due to acquisitions. To a lesser
extent, ice operations increased due to additional costs directly related to the
cumulative effect of the unprecedented heat experienced during the 1998 summer
period. Such additional costs included the cost of purchasing ice from third
parties and transporting both purchased and company-produced ice into regions
that were unable to meet demand with local capacity. The cost of sales as a
percentage of revenues decreased from 64.6% to 60.5%. This relative decrease
primarily was due to improvements in operating efficiencies that the company has
experienced during the integration of acquisitions.
GROSS PROFIT. Gross profit increased $60.5 million, from $10.3 million for
the year ended December 31, 1997, to $70.8 million for the year ended December
31, 1998. This increase primarily resulted from acquisitions completed during
1998. As a percentage of revenues, gross profit from ice operations increased
from 35.0% to 39.8%. Gross profit on non-ice operations was approximately 34.7%
during 1998.
OPERATING EXPENSES. Operating expenses increased $24.1 million, from $7.6
million for the year ended December 31, 1997, to $31.7 million for the year
ended December 31, 1998. This increase primarily was due to acquisitions
completed during 1998. As a percentage of revenues, operating expenses for ice
operations decreased from 25.9% to 17.7%. 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 that resulted from the company's
acquisitions. Operating expenses as a percentage of revenues for non-ice
operations was approximately 15.9% during 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$15.6 million, from $5.1 million for the year ended December 31, 1997, to $20.7
million for the year ended December 31, 1998. Although goodwill and other
intangibles increased from $55.2 million in 1997 to $247.9 million in 1998, the
increase in depreciation and amortization was primarily due to property
additions as a result of acquisitions of traditional ice companies. As a
percentage of revenues, depreciation and amortization decreased from 17.7% to
11.6%. This decrease was due primarily to the lower historical depreciation and
amortization percentages of traditional ice and non-ice businesses the company
has
15
<PAGE>
acquired, as compared to Ice Factories. These percentages also reflect the
longer estimated useful lives of traditional ice and non-ice plant and
equipment, as compared to Ice Factories.
INTEREST EXPENSE. Interest expense increased $18.1 million, from $6.6
million for the year ended December 31, 1997, to $24.7 million for the year
ended December 31, 1998. This increase was a result of higher levels of debt
outstanding during 1998, resulting from the debt financing used in connection
with the company's 1998 acquisition program.
EXTRAORDINARY LOSS ON REFINANCING. During the first quarter of 1998,
simultaneously with the issuance of the 9 3/4% senior notes and in conjunction
with the repurchase of $75 million of Series B notes and Series C notes, the
company recorded an extraordinary loss on refinancing of $17.4 million for such
debt extinguishment, which related to the write-off of the debt discount,
associated redemption premiums and issuance costs.
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
and $21.9 million as a result of revenues contributed by acquisitions 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 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 the company as its general
and administrative expenses were spread over the larger base of revenues
resulting from the acquisitions 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.
16
<PAGE>
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 (a) cost of sales, (b)
operating expenses, (c) debt service, (d) capital expenditures related to
manufacturing and installing additional Ice Factories and replacing and
modernizing the company's other capital equipment and (e) acquisitions.
Capital expenditures for 1999 are estimated to total an aggregate of
approximately $29.1 million, $18.9 million of which will be to maintain and
expand traditional ice facilities and, based on current installation plans,
approximately $10.2 million will be for the purchase and installation of Ice
Factories. There can be no assurance that capital expenditures will not exceed
this estimate.
During 1998, the company continued its acquisition strategy, acquiring
traditional ice companies at a cost of approximately $305 million. These
acquisitions were financed primarily with the proceeds of debt issuance and
amounts available under the company's revolving credit facility and to a lesser
extent with common stock.
The company believes that it will have adequate working capital to meet
debt service requirements and to satisfy working capital and general corporate
needs. At December 31, 1998, the company had a working capital of approximately
$0.4 million and had approximately $3.4 million of cash and cash equivalents and
$12.1 million available under the working capital loan of the revolving credit
facility.
At December 31, 1998, the company had approximately $338.2 million of long
term debt outstanding as follows:
o $270 million of 9 3/4% senior notes due 2005;
o $67.5 million outstanding under the company's revolving credit
facility; and
o $0.7 million of other debt, net of debt discount.
The company's revolving credit facility provides for a $80 million line of
credit consisting of a $15 million revolving working capital loan and a $65
million revolving acquisition loan. At December 31, 1998, the company had $2.9
million (including approximately $0.4 million supporting letters of credit)
outstanding under the working capital loan and $65 million outstanding under the
acquisition loan. The revolving credit facility bears interest per annum, at the
company's option, at LIBOR plus 2.75% or the "prime" rate plus 1.0% with
interest rates subject to a pricing grid. The amounts under the working capital
loan will be due March 31, 2003. The amounts under the acquisition loan will be
due beginning June 30, 2000 in 12 equal quarterly installments.
Covenants contained in the revolving credit facility and the indenture
governing the 9 3/4% senior notes require the company to meet certain financial
tests, and other restrictions limit the company's ability to pay dividends,
borrow additional funds or to acquire or dispose of assets. The revolving credit
facility is secured by all of the company's assets and the capital stock of all
of the company's significant subsidiaries. The 9 3/4% senior notes are generally
unsecured obligations of the company and are senior in right of payment to all
existing and future subordinated debt (as defined in the indenture) and PARI
PASSU to all senior indebtedness of the company. The 9 3/4% senior notes are
effectively subordinated to the revolving credit facility.
On February 3, 1999, the company completed its initial public offering of
10,750,000 shares of common stock at $8.50 per share. The net proceeds of the
sale of approximately $85 million were applied as follows: (i) $43.6 million to
repurchase the company's 13% exchangeable preferred stock (including repurchase
premium) plus accrued and unpaid dividends, (ii) $39.5 million to pay amounts
outstanding under the working capital loan and the acquisition loan of the
revolving credit facility and (iii) approximately $1.9 million of estimated
expenses related to the offering.
17
<PAGE>
In connection with this offering of common stock, the registration rights
underlying the put redemption feature on the 420,000 share of common stock with
put redemption option were satisfied. In addition, the holders of the Series A
and Series B preferred stock with put redemption option exercised their
respective conversion features to obtain 450,000 and 124,831 shares of common
stock, respectively.
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 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.
The company believes that its overall treasury management of cash on hand and
available borrowings under the revolving credit facility will be adequate to
meet debt service requirements, fund ongoing capital requirements and satisfy
working capital and general corporate needs.
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.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
Statements made in this Form 10-K, other than statements of historical
facts, statements made by us in periodic press releases or oral statements made
by our management to analysts and shareholders in the course of presentations
about our company, constitute "forward-looking statements". We believe the
expectations reflected in such forward-looking statements are accurate. However,
we cannot assure you that such expectations will occur. These forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause our company's actual results, performance or achievements to be
materially different from actual future results expressed or implied by the
forward-looking statements. Factors you should consider that could cause these
differences are:
o General economic trends and seasonality;
o Substantial leverage and ability to service debt;
o Availability of credit facilities and restrictive covenants;
o Risks associated with acquisition and failure to integrate acquired
businesses;
o Availability of capital sources; and
o Competition.
You should not unduly rely on these forward-looking statements as they
speak only as of the date of this report. Except as required by law, we are not
obligated to publicly release any revisions to these forward looking statements
to reflect events or circumstances occurring after the date of this report or to
reflect the occurrence of unanticipated events. Important factors that could
cause our actual results to differ materially from our expectations are
discussed elsewhere in this report.
RISK FACTORS
WE HAVE SIGNIFICANT DEBT AND MAY NOT BE ABLE TO MEET OUR DEBT
OBLIGATIONS. We have financed much of our acquisition activities through the
incurrence of debt, and consequently, we have
18
<PAGE>
substantial debt service requirements. At December 31, 1998, the company's total
indebtedness was approximately $338 million. Our high level of debt could have
important consequences to the company. Important factors to consider are:
o A substantial portion of our cash flow must be dedicated to paying
interest and principal. This reduces the level of cash flow available
to fund planned capital expenditures, acquisitions and working
capital. If we are unable to generate enough cash flow to make debt
service payments, we may be required to (a) seek additional debt or
equity financing, (b) refinance or restructure all or a portion of our
debt, (c) sell selected assets or (d) reduce or delay planned capital
expenditures. There can be no assurance that we could accomplish any
of these measures;
o The indentures that govern the 9 3/4% senior notes and the credit
agreement for our revolving credit facility require us to meet
financial tests. Additionally, there are other restrictions that limit
our ability to pay dividends, borrow additional funds or to dispose of
assets. These covenants and restrictions may affect our flexibility in
planning for and reacting to changes in our business, including
possible acquisition activities; and
o Our high level of debt increases our risk to unfavorable changes in
general economic, industry and competitive conditions.
ACQUISITIONS CAN ADVERSELY EFFECT OUR PERFORMANCE. Our growth strategy,
which includes acquiring other companies and product lines, exposes the company
to risks outside the ordinary course of business. After an acquisition, we must
devote significant management resources integrating the newly acquired company
or assets, which could adversely effect our existing business. We also could
have lower income and cash flow in the short term while the newly acquired
company or assets are being integrated into the company, particularly if the
acquisition occurs during the fall and winter seasons when sales activities are
low. In addition, if the integration of the new company or assets does not work
as expected, we could be adversely affected over the longer term. Further, if we
acquire an operating business, we may incorrectly value the business, or we may
be subject to liabilities that were not discovered in the investigation before
the acquisition.
THE ICE BUSINESS IS SEASONAL. We experience seasonal fluctuations in our
sales and profitability with a disproportionate amount of our sales and a
majority of our net income typically realized in the second and third calendar
quarters when the weather is generally warmer. As a result of these seasonal
revenue declines and the lack of a corresponding decrease in expense during the
first and fourth quarters, we will experience lower profit margins and possibly
experience losses during these periods. In addition, because our operating
results depend significantly on sales during the second and third calendar
quarters, our results of operations during these periods may fluctuate
significantly if the weather is unusually cool or rainy.
OUR FUTURE GROWTH IS LARGELY DEPENDENT ON OUR ABILITY TO CONTINUE TO
ACQUIRE OTHER COMPANIES. 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 our existing business. There can
be no assurance that we will be able to continue to identify additional suitable
acquisition opportunities or successfully complete acquisitions in the future.
THE MARKET VALUE OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED IF WE
CONTINUE TO REPORT SUBSTANTIAL NET OPERATING LOSSES. Since the company was
formed in 1990, we have reported substantial net operating losses. This has been
due primarily to the following:
o Increased interest expense associated primarily with our 9 3/4% senior
notes and debt under our revolving credit facility, which we have
incurred to finance our acquisition program; and
o Substantial depreciation and amortization associated with (a) the
amortization of goodwill and other intangible assets associated with
our acquisitions and (b) depreciation of capital expenditures.
19
<PAGE>
As of December 31, 1998, we had an accumulated deficit of $34.5 million. We
intend to continue an aggressive acquisition strategy. If we continue to use a
high proportion of cash or debt to finance acquisitions, it is likely that we
will continue to report substantial increases in interest expense and in
depreciation and amortization, and there can be no assurance we will be
profitable in the future.
The market price of our common stock may fluctuate widely, depending on
many factors, including:
o The perceived prospects of the company and the ice industry;
o Differences between our actual financial and operating results and
those expected by investors and analysts;
o Changes in analysts' recommendations or projections;
o General economic or market conditions; and
o Broad market fluctuations.
SHARE PRICE MAY DECLINE BECAUSE OF SHARES ELIGIBLE FOR FUTURE SALE. Share
price may decline because of shares eligible for future sale. The sales of a
substantial number of shares of our common stock in the open market could
adversely affect the price of our common stock and impede our ability to raise
capital by issuing more equity securities. As of March 15, 1999, holders of
restricted common stock owned 7,209,159 shares, representing approximately 40.1%
of the outstanding common stock. If these holders were to sell their shares, it
could adversely affect the trading price of our common stock. In addition, a
total of 2,979,423 shares of common stock have been reserved for issuance upon
the exercise of outstanding warrants at exercise prices of $0.01 per share to
$15.00 per share (and a weighted average exercise price of $9.71 per share).
THE ICE BUSINESS IS HIGHLY COMPETITIVE. The company's business is highly
competitive. We face many competitors in the areas in which we operate,
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 being the principal competitive factors. Two
competitive factors that could have a material adverse effect on the company's
operations are:
o A significant increase in on-site manufacturing and packaging of ice
by operators of large retail chains we serve; and
o The successful roll out by a competitor of a machine that duplicates
the function of our Ice Factory, a proprietary, self-contained system
that produces, bags and stores ice at the point of sale.
CHANGES IN THE PRICE OF CERTAIN RAW MATERIALS COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS. We use large quantities of water and energy when manufacturing
and storing company products. If the prices for these resources should increase,
we could experience sudden and significant increases in our costs that we may be
unable to pass along to our customers. We also use large quantities of plastic
bags. In the past, prices for plastic bags have fluctuated in response to a
number of factors, including changes in polyethylene prices. We have 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 our business, results of
operations and our ability to service debt.
WE DEPEND ON A SINGLE MANUFACTURER FOR THE PROPRIETARY BAGGING DEVICE USED
IN THE ICE FACTORY. Our proprietary bagging device used in the Ice Factory is
manufactured by Lancer Corporation under an exclusive original equipment
manufacturing agreement. This device is highly technical in nature, and there
can be no assurance that we would quickly locate, or ever locate, alternative
sources of supply for the bagging device if Lancer was unable to meet our
obligations.
20
<PAGE>
ACQUISITIONS CAN RESULT IN THE RECORDING OF GOODWILL AND OTHER INTANGIBLE
ASSETS AND MAY HAVE A NEGATIVE IMPACT ON OUR RESULTS OF
OPERATIONS. Acquisitions often result in the recording of goodwill and other
intangible assets. As of December 31, 1998, goodwill and other intangible assets
represented 54.7% of total assets and exceeded shareholders' equity by $239.5
million. Generally accepted accounting principles requires that goodwill and
other intangible assets be amortized over the period benefited. Management has
determined that for the majority of these assets this period is to be no less
than 40 years. If, however, we were required to amortize goodwill and other
intangibles over a shorter period of time, current earnings would be reduced.
DEPENDENCE ON KEY PERSONNEL. The future success of our business is
dependent in part on the efforts and skills of certain key members of
management, including (a) James F. Stuart, Chairman of the Board and Chief
Executive Officer, (b) A.J. Lewis III, President and (c) Jimmy C. Weaver,
Executive Vice President and Chief Operating Officer. The loss of any of our key
members of management could have an adverse effect on the company. The company
has entered into employment agreements with Messrs. Stuart, Lewis and Weaver.
WE MAY BE REQUIRED TO DEVOTE SUBSTANTIAL RESOURCES TO COMPLY WITH
ENVIRONMENTAL LAWS AND REGULATIONS. Our ice manufacturing and ice storage
operations are subject to federal, state and local environmental laws and
regulations. As a result, we have the potential to be involved in administrative
or legal proceedings relating to environmental matters. There can be no
assurance that the amount of any environmental liabilities that might be
asserted against us in a proceeding will not be material. We cannot predict (a)
the types of environmental laws or regulations that might be enacted in the
future, (b) how existing or future laws or regulations will be interpreted or
enforced or (c) what types of environmental conditions may be found to exist at
any of our facilities. If regulatory agencies enact more stringent laws or
regulations or interpret existing laws and regulations more strictly, it may
require us to make additional expenditures to comply, some of which could be
material.
WE MAY NOT HAVE THE ABILITY TO REPURCHASE THE 9 3/4% SENIOR NOTES IN THE
EVENT OF A CHANGE OF CONTROL. The majority of our debt consists of $270 million
of 9 3/4% senior notes. If there is a change of control of the company, the
holders of the 9 3/4% senior notes have the right to require us to purchase the
outstanding 9 3/4% senior notes at 101% of the principal amount plus any accrued
and unpaid interest. We may not have the ability to raise the funds necessary to
finance the repurchase of the 9 3/4% senior notes if the holders require the
repurchase. If we were required to repurchase the 9 3/4% senior notes, the
repurchase could also result in a default under other debt agreements, including
our revolving credit facility.
ACCIDENTS INVOLVING OUR PRODUCTS AND EQUIPMENT COULD EXPOSE US TO
LITIGATION. We are subject to the inherent business risk of product liability
claims and adverse publicity if a consumer is allegedly harmed by using our
products or equipment. If someone gets hurt using our products or equipment, we
could lose revenues, face higher costs or be sued. Litigation arising from such
an occurrence could result in the company being named as a defendant in lawsuits
asserting large claims.
We currently carry product liability insurance that we believe is adequate
to cover our losses in these situations. However, this insurance may be
insufficient to pay for all or a large part of these losses. If our insurance
did not pay for these losses, our income would fall. In addition, we may not be
able to maintain our insurance if insurance rates or insurance industry policies
change.
WE HAVE LIMITED PATENT PROTECTION. Other than patents that we own or
licenses we have on the bagging device in the Ice Factory, we currently do not
have patents on our products. We believe the patents on the bagging device are
important to the Ice Factory as a whole, but there can be no assurance that any
issued patent will provide us with a meaningful competitive advantage. It also
is our practice to protect certain of our 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.
21
<PAGE>
It is possible that other companies may obtain patents necessary for, or
useful to, the development of our company's products. In that event, we may be
required to obtain licenses for patents or proprietary technology to develop,
manufacture or market products from those companies. There can be no assurance
that we would be able to obtain these licenses on commercially reasonable terms,
if at all.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices.
The company is exposed to some market risk due to the floating interest
rate under its revolving credit facility. Under the revolving credit facility,
the principal balance under the working capital loan is due in March 2003. The
amounts under the acquisition loan will be due beginning in June 2000 in 12
equal quarterly installments. As of December 31, 1998, the revolving credit
facility had a principal balance of $67.5 million at an average floating
interest rate of 8.75% per annum. A 1.0% increase in interest rates could result
in a $0.7 million annual increase in interest expense on the existing principal
balance. Management has determined that it is not necessary to participate in
interest rate-related derivative financial instruments because it currently does
not expect significant short-term increases in interest rates charged under the
revolving credit facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required hereunder are
included in this report as set forth in Item 14(a) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report or are
incorporated by reference:
1. FINANCIAL STATEMENTS
As to financial statements and supplementary information, reference is
made to "Index to Financial Statements" on Page F-1 of this Annual
Report.
2. FINANCIAL STATEMENT SCHEDULES
None. All financial statement schedules are omitted because the
information is not required, is not material or is otherwise included
in the consolidated financial statements or notes thereto included
elsewhere in this Annual Report.
3. EXHIBITS
EXHIBIT NO. DESCRIPTION
- -------------------------------------------------------------
3.1 -- Restated Articles of Incorporation of
Packaged Ice filed with the Secretary
of State of the State of Texas on
February 5, 1992. (Exhibit 3.2)(1)
3.2 -- Articles of Amendment to the Restated
Articles of Incorporation of Packaged
Ice filed with the Secretary of State
of the State of Texas on August 11,
1998. (Exhibit 3.2) (6)
3.3 -- Amended and Restated Bylaws of
Packaged Ice, effective as of January
20, 1997. (Exhibit 3.5)(1)
22
<PAGE>
EXHIBIT NO. DESCRIPTION
- -------------------------------------------------------------
4.1 -- Certificate of Designation of Series
C Preferred Stock. (Exhibit 4.1)(4)
4.2 -- Amended and Restated Certificate of
Designation of 10% Exchangeable
Preferred Stock. (Exhibit 4.12)(5)
4.3 -- Indenture by and among Packaged Ice,
as Issuer, the Subsidiary Guarantors
and U.S. Trust Company of Texas, N.A.
as Trustee dated as of January 28,
1998, Amended and Restated as of
April 30, 1998. (Exhibit 4.1)(5)
4.4 -- Registration Rights Agreement dated
April 30, 1998 by and among Packaged
Ice, Ares and SV. (Exhibit 4.8)(5)
4.5 -- Common Stock Purchase Warrant, dated
July 17, 1997, executed by Packaged
Ice for the benefit of SV. (Exhibit
10.39)(2)
4.6+ -- Registration Rights Agreement by and
between Packaged Ice and Ares, dated
February 3, 1999.
4.7+ -- Registration Rights Agreement by and
between Packaged Ice and Silver
Brands Partners, L.P. (formerly SV),
dated February 3, 1999.
4.8 -- Registration Rights Agreement by and
among Packaged Ice, and Dale Johnson,
Alan Bernstein and Robert Miller,
dated as of April 17, 1997. (Exhibit
10.9)(1)
4.9 -- Warrant Agreement among Packaged Ice
and U.S. Trust Company of Texas,
N.A., a national banking association,
as Warrant Agent, dated as of April
17, 1997. (Exhibit 10.12)(1)
4.10 -- Registration Rights Agreement, dated
as of July 17, 1997, by and between
Packaged Ice and SV. (Exhibit
10.41)(2)
4.11 -- Warrant Agreement among Packaged Ice
and U.S. Trust Company of Texas,
N.A., a national banking association,
as Warrant Agent, dated as of October
16, 1997. (Exhibit 10.7)(3)
4.12 -- Common Stock Purchase Warrant
Agreement issued by Packaged Ice and
issued to Culligan Water
Technologies, Inc. issuing 1,807,692
fully paid and nonassessable shares
of Packaged Ice's common stock at an
exercise price of $13.00 per share
dated December 2, 1997. (Exhibit
10.3)(4)
4.13 -- Registration Rights Agreement by and
among Packaged Ice, Culligan Water
Technologies, Inc. and Erica
Jesselson. (Exhibit 10.5)(4)
10.1 -- Noncompetition Agreement by and among
Packaged Ice, Packaged Ice Mission,
Inc., Packaged Ice STPI, Inc. and A.
J. Lewis III, dated as of April 17,
1997. (Exhibit 10.4)(1)
10.2 -- Registration Rights Agreement by and
among Packaged Ice, A. J. Lewis III
and Liza B. Lewis, dated as of April
17, 1997. (Exhibit 10.5)(1)
10.3 -- Form of Noncompetition Agreement
among Packaged Ice, 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)
10.4 -- 1994 Stock Option Plan, dated July
26, 1994. (Exhibit 10.10)(1)
10.5 -- Form of Stock Option Plan Agreements
issued under Stock Option Plan.
(Exhibit 10.11)(1)
10.6 -- Form of Indemnification Agreement
entered into by Packaged Ice in favor
of members of the Board of Directors.
(Exhibit 10.31)(1)
10.7 -- Development and Manufacturing
Agreement by and between Lancer
Corporation and Packaged Ice, dated
April 13, 1993. (Exhibit 10.32)(1)
10.8 -- License Agreement by and among
Packaged Ice, Hoshizaki Electric Co.,
Ltd. and Hoshizaki America, Inc.,
dated May 28, 1993. (Exhibit
10.37)(1)
10.9 -- Securities Purchase Agreements with
Culligan Water Technologies, Inc.
dated December 2, 1997. (Exhibit
10.1)(4)
23
<PAGE>
EXHIBIT NO. DESCRIPTION
- -------------------------------------------------------------
10.10 -- Credit Agreement dated April 30, 1998
by and among Packaged Ice and Antares
Leveraged Capital Corp.,
individually, and as agent for The
Other Financial Institutions.
(Exhibit 10.1)(5)
10.11 -- Security Agreement dated April 30,
1998, by and among Packaged Ice and
Antares Leveraged Capital Corp.
(Exhibit 10.2)(5)
10.12 -- 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 Packaged
Ice, Southwestern Ice, Inc., Southern
Bottled Water Company, Inc., Mission
Party Ice, Inc. and Antares Leveraged
Capital Corp. (Exhibit 10.3)(5)
10.13 -- Guaranty dated April 30, 1998 by and
among Reddy Ice Corporation, Mission
Party Ice, Inc., Southwest Texas
Packaged Ice, 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)(5)
10.14 -- Stock Purchase Agreement between
Packaged Ice and Suiza Foods
Corporation dated March 27, 1998.
(Exhibit 2.1)(5)
10.15 -- Employment Agreement of James F.
Stuart dated effective August 1,
1998. (Exhibit 10.29)(6)
10.16 -- Employment Agreement of A. J. Lewis
III dated effective August 1, 1998.
(Exhibit 10.30)(6)
10.17 -- Employment Agreement of Jimmy C.
Weaver dated effective May 1, 1998.
(Exhibit 10.31)(6)
10.18 -- Employment Agreement of James C.
Hazlewood dated effective November 1,
1997. (Exhibit 10.32)(6)
10.19 -- 1998 Stock Option Plan, dated June
19, 1998. (Exhibit 10.34)(7)
11.1+ -- Statement of earnings per share.
21.1+ -- List of subsidiaries.
27.1+ -- Financial Data Schedule.
- ------------
+ Filed herewith.
(1) Filed as an Exhibit to Packaged Ice's Registration Statement on Form S-4
(File No. 333-29357), filed with the Commission on June 16, 1997.
(2) Filed as an Exhibit to the Amendment No. 1 to Packaged Ice's Registration
Statement on Form S-4 (No. 333-29357), filed with the Commission on July 29,
1997.
(3) Filed as an Exhibit to Packaged Ice's Third Quarter Disclosure on Form 10-Q
with the Commission on November 14, 1997.
(4) Filed as an Exhibit to Form 8-K filed on behalf of Packaged Ice with the
Commission on December 15, 1997.
(5) Filed as an Exhibit to Form 8-K/A filed on behalf of Packaged Ice with the
Commission on May 12, 1998.
(6) Filed as an Exhibit to Amendment No. 1 to Packaged Ice's Registration
Statement on Form S-1 (File No. 333-60627), filed with the Commission on
October 2, 1998.
(7) Filed as an Exhibit to Amendment No. 2 to Packaged Ice's Registration
Statement on Form S-1 (File No. 333-60627), filed with the Commission on
January 4, 1999.
(b) Reports on Form 8-K. None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
PACKAGED ICE, INC.
March 26, 1999 /s/ JAMES C. HAZLEWOOD
JAMES C. HAZLEWOOD
CHIEF FINANCIAL AND ACCOUNTING OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ ------------------------------------- ---------------
<C> <S> <C>
/s/JAMES F. STUART Chairman of the Board and Chief March 26, 1999
JAMES F. STUART Executive Officer
/s/A. J. LEWIS III President, Secretary and Director March 26, 1999
A. J. LEWIS III
/s/STEVEN P. ROSENBERG Director March 26, 1999
STEVEN P. ROSENBERG
/s/RICHARD A. COONROD Director March 26, 1999
RICHARD A. COONROD
/s/ROBERT G. MILLER Director March 26, 1999
ROBERT G. MILLER
/s/ROD J. SANDS Director March 26, 1999
ROD J. SANDS
/s/ARTHUR E. BIGGS Director March 26, 1999
ARTHUR E. BIGGS
</TABLE>
25
<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, 1998 and
1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. 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,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 19, 1999
F-1
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 3,427 $ 14,825
Short term cash investments..... -- 4,543
Accounts receivable, net........ 16,692 4,103
Inventories..................... 7,695 1,348
Prepaid expenses................ 1,688 322
---------- ----------
Total current assets....... 29,502 25,141
PROPERTY, net........................ 169,208 43,297
GOODWILL AND OTHER INTANGIBLES,
net................................ 240,750 53,541
OTHER ASSETS......................... 797 321
---------- ----------
TOTAL................................ $ 440,257 $ 122,300
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term
obligations.................... $ 231 $ --
Accounts payable................ 5,714 1,965
Payable to affiliates........... 615 1,309
Accrued expenses................ 22,506 3,337
Note payable.................... -- 1,976
---------- ----------
Total current
liabilities............. 29,066 8,587
LONG TERM OBLIGATIONS................ 338,150 67,501
COMMITMENTS AND CONTINGENCIES (Note
16) -- --
MANDATORILY REDEEMABLE PREFERRED
STOCK:
10% Exchangeable -- 272,890
shares issued and outstanding
at December 31, 1998 and
250,000 shares issued and
outstanding at December 31,
1997, liquidation preference of
$100 per share................. 27,745 25,198
13% Exchangeable -- 423,525
shares issued and outstanding
at December 31, 1998,
liquidation preference of $100
per share...................... 38,801 --
PREFERRED STOCK WITH PUT REDEMPTION
OPTION:
Series A Convertible -- 450,000
shares issued and outstanding
at December 31, 1998 and
1997........................... 2,497 2,497
Series B Convertible -- 124,831
shares issued and outstanding
at December 31, 1998 and
1997........................... 726 726
COMMON STOCK WITH PUT REDEMPTION
OPTION:
420,000 shares issued and
outstanding at December 31,
1998 and 1997.................. 1,972 1,972
SHAREHOLDERS' EQUITY:
Preferred stock, Series C, $0.01
par value, 100 shares
authorized and outstanding..... -- --
Common stock, $0.01 par value,
50,000,000 shares authorized;
4,925,541 shares issued at
December 31, 1998, and
4,015,981 shares issued at
December 31, 1997.............. 49 40
Additional paid-in capital...... 37,250 28,805
Less: 298,231 shares of treasury
stock, at cost................. (1,491) (1,491)
Accumulated deficit............. (34,508) (11,535)
---------- ----------
Total shareholders'
equity.................. 1,300 15,819
---------- ----------
TOTAL................................ $ 440,257 $ 122,300
========== ==========
See notes to consolidated financial statements.
F-2
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Revenues............................. $ 179,062 $ 28,981 $ 4,427
Cost of sales........................ 108,276 18,724 2,035
---------- --------- ---------
Gross profit......................... 70,786 10,257 2,392
Operating expenses................... 31,741 7,636 1,981
Depreciation and amortization
expense............................ 20,729 5,130 1,456
---------- --------- ---------
Income (loss) from operations........ 18,316 (2,509) (1,045)
Other income, net.................... 803 655 185
Interest expense..................... (24,705) (6,585) (130)
---------- --------- ---------
Loss before income taxes............. (5,586) (8,439) (990)
Income taxes......................... -- -- --
---------- --------- ---------
Loss before extraordinary item and
preferred dividends................ (5,586) (8,439) (990)
Extraordinary loss on refinancing.... (17,387) -- --
---------- --------- ---------
Net loss before preferred
dividends.......................... (22,973) (8,439) (990)
Preferred dividends.................. (5,918) (198) --
---------- --------- ---------
Net loss attributable to common
shareholders....................... $ (28,891) $ (8,637) $ (990)
========== ========= =========
Net loss per share of common stock:
Basic and diluted:
Net loss before extraordinary
item attributable to common
shareholders............... $ (2.35) $ (2.40) $ (0.35)
Extraordinary item............ (3.56) -- --
---------- --------- ---------
Net loss attributable to
common shareholders........ $ (5.91) $ (2.40) $ (0.35)
========== ========= =========
Basic and diluted weighted average
common shares outstanding.......... 4,886 3,600 2,826
========== ========= =========
See notes to consolidated financial statements.
F-3
<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 TOTAL
--------- ----- ------- ------------ -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at December 31, 1995......... 2,406 $ 24 $ 4,669 $ (5) $ -- $ (2,106) $ 2,582
Issuance of common stock............. -- -- -- 5 -- -- 5
Net loss............................. -- -- -- -- -- (990) (990)
--------- ----- ------- ------------ -------- ----------- ----------
Balance at December 31, 1996......... 2,406 24 4,669 -- -- (3,096) 1,597
Issuance of common stock............. 1,610 16 15,768 -- -- -- 15,784
Issuance of detachable warrants to
purchase common stock.............. -- -- 9,422 -- -- -- 9,422
Accretion of 10% exchangeable
preferred stock.................... -- -- (856) -- -- -- (856)
Dividends accumulated on 10%
exchangeable preferred stock....... -- -- (198) -- -- -- (198)
Purchase of treasury stock........... -- -- -- -- (1,491) -- (1,491)
Net loss............................. -- -- -- -- -- (8,439) (8,439)
--------- ----- ------- ------------ -------- ----------- ----------
Balance at December 31, 1997......... 4,016 $ 40 28,805 -- (1,491) (11,535) 15,819
Issuance of common stock............. 910 9 10,596 -- -- -- 10,605
Dividends accumulated on 10%
exchangeable preferred stock....... -- -- (2,546) -- -- -- (2,546)
Dividends accumulated on 13%
exchangeable preferred stock....... -- -- (3,372) -- -- -- (3,372)
Issuance costs on 13% exchangeable
preferred stock.................... -- -- (804) -- -- -- (804)
Warrants issued in connection with
13% exchangeable preferred stock... -- -- 4,878 -- -- -- 4,878
Amortization of warrants............. -- -- (307) -- -- -- (307)
Net loss............................. -- -- -- -- -- (22,973) (22,973)
--------- ----- ------- ------------ -------- ----------- ----------
Balance at December 31, 1998......... 4,926 $ 49 $37,250 $ -- $ (1,491) $ (34,508) $ 1,300
========= ===== ======= ============ ======== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (22,973) $ (8,439) $ (990)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating activities
(excluding working capital from
acquisitions):
Depreciation and
amortization................. 20,729 5,130 1,456
Amortization of debt discount,
net.......................... 120 577 --
Gain from disposal of
assets....................... -- (4) (3)
Extraordinary loss from
refinancing.................. 17,387 -- --
Change in assets and
liabilities:
Accounts receivable,
inventory and prepaid
expenses................. 407 (997) (26)
Accounts payable and
accrued expenses......... 650 441 657
---------- ---------- ---------
Net cash provided by (used in)
operating activities........... 16,320 (3,292) 1,094
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions.............. (22,830) (10,765) (5,745)
Cost of acquisitions............ (294,814) (44,569) --
Proceeds from (purchase of)
short-term cash investments.... 4,544 (4,499) --
Increase in other noncurrent
assets......................... (1,688) (1,856) (334)
Proceeds from disposition of
property....................... -- 148 154
---------- ---------- ---------
Net cash used in investing
activities..................... (314,788) (61,541) (5,925)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common
and preferred stock............ 39,237 27,101 --
Repurchase of common stock...... -- (1,491) --
Proceeds from debt issuance,
net............................ 259,765 69,562 3,604
Proceeds from issuance and
conversion of convertible
demand notes................... -- (24) 750
Borrowings from lines of
credit......................... 90,550 9,900 --
Repayment of lines of credit.... (23,050) (13,385) --
Repayment of debt............... (75,494) (12,175) (386)
Cost of refinancing............. (3,938) -- --
---------- ---------- ---------
Net cash provided by financing
activities..................... 287,070 79,488 3,968
---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS........................ (11,398) 14,655 (863)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 14,825 170 1,033
---------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 3,427 $ 14,825 170
========== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments for interest...... $ 14,712 $ 4,748 114
========== ========== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in
consideration for business
acquisitions................... $ 10,565 $ 12,814 $ --
========== ========== =========
Fair value of warrants issued in
connection with debt........... $ -- $ 9,442 $ --
========== ========== =========
Fair value of warrants issued in
connection with 13%
exchangeable preferred stock... $ 4,878 $ -- $ --
========== ========== =========
Amortization of warrants in
connection with 13%
exchangeable
preferred stock............... $ (307) $ -- $ --
========== ========== =========
Demand notes converted to
preferred stock................ $ -- $ 750 $ --
========== ========== =========
Note payable incurred to
purchase assets................ $ -- $ 189 $ --
========== ========== =========
See notes to consolidated financial statements.
F-5
<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 products and bottled water, owns and
operates refrigerated warehouses and manufactures and leases ice production
equipment. Packaged ice products are distributed by traditional delivery methods
and stand-alone automated merchandising ice systems (the "Ice Factory") that
produce, package, store and merchandise ice at the point of sale. At December
31, 1998, the Company served over 70,000 customer locations in 26 states and the
District of Columbia.
2. RECENT EVENTS
On February 3, 1999, the Company completed an initial public offering of
10,750,000 shares of common stock, par value $0.01 per share. The net proceeds
from the sale were approximately $85 million before deducting estimated expenses
related to the offering of approximately $1.9 million. The use of proceeds was
approximately $43.6 million to repurchase the Company's 13% exchangeable
preferred stock, which included approximately $1.3 million of accrued but unpaid
dividends, and approximately $39.5 million to pay amounts outstanding under the
Company's revolving credit facility. The redemption premium on the 13%
exchangeable preferred stock of approximately $3.8 million was paid with 481,887
shares of common stock at $7.91 per share.
In connection with this offering of common stock, the registration rights
underlying the put redemption feature on the 420,000 shares of common stock with
put redemption option were satisfied. In addition, the holders of the Series A
and Series B preferred stock with put redemption option exercised their
respective conversion features to obtain 450,000 and 124,831 shares of common
stock, respectively.
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 accounts and transactions have been eliminated upon
consolidation.
ACCOUNTS RECEIVABLE. Accounts receivable are net of allowances for
doubtful accounts of $0.2 million at December 31, 1998.
INVENTORIES. Inventories contain raw materials, supplies and finished
goods. Raw materials and supplies consist of ice packaging polyethylene bags,
spare parts, bottled water supplies and merchandiser parts. Finished goods
consist of packaged ice, bottled water and merchandisers awaiting sale.
Inventories are valued at the lower of cost or market basis. Cost is determined
using the first-in, first-out and average cost methods.
PROPERTY. Property is carried at cost and is being depreciated on a
straight-line basis over an estimated life of 2.5 to 40 years. Maintenance and
repairs are charged to expense as incurred, while capital improvements that
extend the useful lives of the underlying assets are capitalized.
F-6
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL AND OTHER INTANGIBLES. Goodwill and other intangibles include the
following that are amortized over their useful lives:
INTANGIBLE ASSETS USEFUL LIFE
- ------------------------------------- -------------------------------------
Goodwill and other acquisition
costs.............................. Straight line method over 40 years
Trade names.......................... Straight line method over 40 years
Ice system patents................... Straight line method over 17 years
Debt issue costs..................... Straight line method over 7 years
Trade mark license agreement,
location contracts Straight line method over the terms
and other intangibles.............. of the agreements
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 is recognized when product (packaged ice, ice
packaging bags, bottled water and ice equipment) is delivered to and accepted by
customers. There is no right of return with respect to the packaged ice, bags
delivered and bottled water. Revenue resulting from cold storage and leased ice
equipment is recognized as earned under contract terms.
EARNINGS PER SHARE. The computation of earnings per share is based on net
loss, after deducting the dividend requirement of preferred stock ($5.9 million
in 1998 and $0.2 million 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
anti-dilutive. For the years ended December 31, 1998, 1997 and 1996, all
potentially dilutive securities are anti-dilutive and, therefore, are not
included in the earnings per share calculation.
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Basic and Diluted Earnings Per Share:
Weighted average common shares
outstanding................... 4,886 3,600 2,826
========== ========= =========
Basic and diluted loss before
extraordinary item available
to common shareholders........ $ (2.35) $ (2.40) $ (0.35)
========== ========= =========
Basic and diluted loss to common
shareholders.................. $ (5.91) $ (2.40) $ (0.35)
========== ========= =========
Earnings for Basic and Diluted
Computation:
Net loss before extraordinary
item and preferred
dividends..................... $ (5,586) $ (8,439) $ (990)
Extraordinary item.............. (17,387) -- --
Preferred share dividends....... (5,918) (198) --
---------- --------- ---------
Net loss to common
shareholders............ $ (28,891) $ (8,637) $ (990)
========== ========= =========
F-7
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, cash equivalents, accounts receivable, accounts
payable and debt obligations. The carrying amount of cash, cash equivalents,
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 9) are representative of their carrying values based upon the variable
rate terms for the 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 9 3/4% 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.
NEW ACCOUNTING PRONOUNCEMENTS. 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. SFAS Nos. 130 and
131 were adopted effective January 1, 1997. The adoption of SFAS No. 130 did not
impact the Company's financial statement presentation or disclosures as the
Company had no items of other comprehensive income. The disclosure information
required by SFAS No. 131 has been presented in Note 15.
RECLASSIFICATION. Certain amounts from previous years have been
reclassified to conform to the current presentation.
4. ACQUISITIONS
Since April 1997, the Company has completed 53 acquisitions for an
aggregate cost of $362.8 million. Significant acquisitions in 1998 included the
purchase of all of the outstanding stock of Cassco Ice & Cold Storage, Inc. from
WLR Foods, Inc. for approximately $59 million in cash on July 31, 1998 and the
purchase of all of the outstanding stock of Reddy Ice Corporation from Suiza
Foods Corporation for $180.8 million in cash on April 30, 1998. The Company's
acquisition program has been financed almost exclusively through the incurrence
of debt and the issuance of capital stock.
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. The acquisitions included at fair value current assets of $25.3
million, property plant and equipment of $143.9 million, other assets of $0.7
million, current liabilities of $24.5 million and long term debt, primarily paid
at closings, of $15.8 million. The excess of the aggregate purchase price over
the fair market value of the net assets acquired, including acquisition costs,
of approximately $233.2 million was recorded as goodwill and other intangibles
and is being amortized over 40 years. Total amortization expense for goodwill
and other intangible assets resulting from the Company's acquisitions was $4.2
million, $0.4 million and $0.0 million for the three years ended December 31,
1998, 1997 and 1996, respectively.
F-8
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (i) a summary
of the consolidated results of operations for the years ended December 31, 1998
and 1997 as if the 1998 acquisitions had occurred as of January 1, 1997 and (ii)
a summary of the consolidated results of operations for the years ended December
31, 1997 and 1996 as if the 1997 acquisitions had occurred as of January 1,
1996.
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
1998 Acquisitions:
Revenues........................ $ 218,531 $ 156,514
Net income (loss) attributable
to common shareholders........ (34,415) 464
Basic earnings per share........ (6.82) 0.10
Diluted earnings per share...... (6.82) 0.09
1997 1996
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
1997 Acquisitions:
Revenues........................ $ 53,902 $ 53,716
Net income (loss) attributable
to common shareholders........ (11,565) 1,807
Basic earnings per share........ (2.81) 0.44
Diluted earnings per share...... (2.81) 0.43
5. INVENTORIES
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Raw materials and supplies...... $ 6,560 $ 1,179
Finished goods.................. 1,135 169
---------- ----------
Total...................... $ 7,695 $ 1,348
========== ==========
6. PROPERTY AND EQUIPMENT
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Land............................ $ 15,458 $ 1,881
Buildings....................... 46,290 5,159
Ice Factory equipment........... 33,812 19,519
Plant, equipment and
machinery..................... 50,485 12,064
Furniture and fixtures.......... 2,261 615
Vehicles........................ 14,788 4,510
Merchandisers................... 21,368 4,970
Construction in progress........ 4,510 254
---------- ----------
Total property and equipment.... 188,972 48,972
Less: Accumulated
depreciation.................. 19,764 5,675
---------- ----------
Total...................... $ 169,208 $ 43,297
========== ==========
F-9
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Depreciation expense for the three years ended December 31, 1998 was $14.1
million, $3.8 million and $1.1 million, respectively.
7. GOODWILL AND OTHER INTANGIBLES
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Goodwill and other acquisition
costs.............................. $ 205,710 $ 45,116
Trade names.......................... 27,500 --
Debt issue costs..................... 10,227 6,785
Location contracts................... 2,141 1,002
Trademark and license agreement...... 1,750 1,750
Other intangibles.................... 580 520
---------- ----------
247,908 55,173
Less: Accumulated amortization....... 7,158 1,632
---------- ----------
Total........................... $ 240,750 $ 53,541
========== ==========
8. ACCRUED LIABILITIES
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
Accrued interest..................... $ 11,749 $ 1,876
Accrued compensation................. 4,258 545
Accrued acquisition costs............ 1,620 --
Accrued taxes........................ 1,594 478
Other accruals....................... 3,285 438
---------- ----------
Total........................... $ 22,506 $ 3,337
========== ==========
9. LONG TERM OBLIGATIONS
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 639,857 shares of the Company's common stock were issued to Series A
note holders and the investment banking firm that marketed the Series A Notes at
an exercise price of $0.01 per share. The Company sold the Series A Notes at a
price of 96% of the par value, or $48 million. On October 6, 1997, the Company
issued 12% Series B senior notes registered under the Securities Act of 1933
("Series B Notes") in exchange for all outstanding Series A Notes.
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, the Company issued to the holders of the Series C Notes detachable
warrants to purchase 255,943 shares of the Company's common stock at an exercise
price of $0.01 per share.
On January 28, 1998, the Company completed a private offering of $145
million aggregate principal amount of its 9 3/4% Senior Notes. The 9 3/4% Senior
Notes were issued pursuant to the indenture dated January 28, 1998, as amended,
(the "Indenture"). The 9 3/4% Senior Notes are general unsecured obligations
of the Company and are senior in right of payment to all existing and future
F-10
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subordinated Indebtedness of the Company and PARI PASSU to all senior
indebtedness of the Company. The 9 3/4% Senior Notes are effectively
subordinated to the Company's bank credit facility established in April 1998.
The 9 3/4% 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 9 3/4%
Senior Notes were used for (i) repurchase of Series B Notes and Series C Notes;
(ii) repayment of all outstanding obligations under the revolving credit
facility; (iii) funding of acquisitions of traditional ice companies; and (iv)
working capital and general corporate purposes.
Simultaneous with the issuance of the 9 3/4% Senior Notes and in
conjunction with the purchase and retirement of $75.0 million of Series B Notes
and Series C Notes, the Company recorded an extraordinary charge of $17.4
million for such debt extinguishment relating to the write-off of the debt
discount, associated redemption premiums and issuance costs.
On April 30, 1998, the Company issued an additional $125 million of
Tack-on-Notes. The Tack-on-Notes were issued pursuant to the Indenture and are
identical in terms to the $145 million of 9 3/4% Senior Notes issued January 28,
1998. In connection with issuing the Tack-on-Notes, the Company obtained the
consent of a majority of the holders of the original 9 3/4% Senior Notes to
certain amendments to the Indenture. The Company paid consent fees aggregating
$1.4 million to the 9 3/4% Senior Note Holders. The principal amendments to the
Indenture allowed the issuance of the Tack-on-Notes and allowed the Company to
enter into the Credit Facility. The Company's 9 3/4%, including the
Tack-on-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. The net proceeds of the Tack-on-Notes were
used to fund a portion of the cash consideration for the acquisition of Reddy
Ice Corporation.
On April 30, 1998, the Company replaced its previous $20 million line of
credit facility with an $80 million, five year senior credit facility with
Antares Leveraged Capital Corporation (the "Credit Facility") consisting of a
revolving working capital facility of $15 million (the "Working Capital Loan")
and a revolving acquisition loan facility of $65 million (the "Acquisition
Loan"). The Credit Facility replaced the Company's previous credit facility.
The outstanding principal balance under the Credit Facility bears interest per
annum, at the Company's option, at LIBOR plus 2.75% or the "prime" rate plus
1.0% with interest rates subject to a pricing grid. Additionally, the Company
pays a 0.5% commitment fee quarterly on the average availability under the
Credit Facility. Amounts outstanding under the Working Capital Loan of the
Credit Facility are due March 31, 2003. Amounts outstanding under the
Acquisition Loan of the Credit Facility will amortize in 12 equal quarterly
installments commencing June 30, 2000. The Credit Facility, as amended, contains
financial covenants which include limitations on capital expenditures and the
maintenance of minimum ratio levels of earnings before interest, taxes and
depreciation and amortization ("EBITDA") to fixed charges, interest coverage
and leverage, as defined in the agreement, and is secured by substantially all
of the Company's assets and the capital stock of all of the Company's
significant subsidiaries. At December 31, 1998, the Company had exceeded its
annual limitation on capital expenditures under the Credit Facility. The Company
subsequently received a waiver of this covenant for 1998.
In July 1998, the Company completed an offer to exchange the 9 3/4% Senior
Notes, including the Tack-on-Notes with new debt registered under the Securities
Act of 1933. The forms and terms of the new 9 3/4% Senior Notes are identical in
all material respects to the forms and terms of the original 9 3/4% Senior Notes
and the Tack-on-Notes, except for certain transfer restrictions and
registration.
F-11
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998 and 1997, long term obligations consisted of the
following:
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
12% Series B and Series C Notes...... $ -- $ 75,000
9 3/4% Senior Notes.................. 270,000 --
Unamortized debt discount on
detachable warrants issued......... -- (7,499)
Unamortized debt discount on 9 3/4%
Senior Notes....................... (243) --
Revolving credit facility............ 67,500 --
Other................................ 1,124 --
---------- ----------
Total................................ 338,381 67,501
Less: Current maturities............. (231) --
---------- ----------
Long term obligations, net...... $ 338,150 $ 67,501
========== ==========
As of December 31, 1998, principal maturities of long term obligations for
the next five years are as follows:
(IN THOUSANDS)
1999................................. $ 231
2000................................. 16,505
2001................................. 21,905
2002................................. 21,868
2003................................. 7,985
And thereafter....................... 270,130
---------------
Total........................... $ 338,624
===============
See Note 14 for information regarding subsidiary guarantors of long term
obligations.
10. INCOME TAXES
The Company incurred losses for each of the three years ended December 31,
1998, 1997 and 1996 for both financial reporting and tax return purposes. Due to
the uncertainty of being able to utilize such losses to reduce future taxes, a
valuation allowance has been provided to reduce to zero the net deferred tax
assets resulting primarily from the loss carryforwards available.
The total provision for income taxes varied from the U.S. federal statutory
rate due to the following:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS)
Federal income tax benefit at
statutory rate..................... $ (7,811) $ (2,869) $ (336)
State income taxes, net of federal
income tax benefits................ (659) (269) (28)
Acquired tax liability............... -- 2,837 --
Increase in valuation allowance...... 7,591 201 289
Non-deductible expenses.............. 879 100 5
Other................................ -- -- 70
---------- --------- ---------
Total provision for income
taxes......................... $ -- $ -- $ --
========== ========= =========
F-12
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities computed at the statutory rate related
to temporary differences were as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS)
Deferred Tax Liability:
Property and equipment.......... $ (11,027) $ (4,169) $ (781)
========== ========= =========
Deferred Tax Asset:
Other assets.................... $ 272 $ 21 $ 92
Net operating loss
carryforwards................. 19,552 5,355 1,694
---------- --------- ---------
Total deferred tax
assets.................. $ 19,824 $ 5,376 $ 1,786
========== ========= =========
Net deferred tax assets.............. $ 8,797 $ 1,207 $ 1,006
Valuation allowance.................. (8,797) (1,207) (1,006)
---------- --------- ---------
Total deferred taxes............ $ -- $ -- $ --
========== ========= =========
At December 31, 1998, the Company had approximately $52 million of net
operating loss carryforwards that expire between 2005 and 2018. There will be an
annual limitation on the utilization of the outstanding NOLs due to an ownership
change, as defined by Internal Revenue Code Section 382.
11. CAPITAL STOCK
PREFERRED STOCK. The Company's Board of Directors has authorized 450,000
shares of $0.01 par value Series A convertible preferred stock ("Series A").
The Company issued 450,000 shares of $0.01 par value Series A convertible
preferred stock in a private placement offering during 1995. 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.
In conjunction with the private placement of the Series A convertible
preferred stock, the Company also issued 700,000 shares of common stock of which
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 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 sheets
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 $0.01 par value
Series B convertible preferred stock ("Series B"). The Company issued 124,831
Series B shares in full satisfaction of a 10% convertible demand. 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
F-13
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
The Series A and Series B 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 sheets under the heading "Preferred Stock With Put Redemption Option".
As discussed in Note 2, the holders of Series A and Series B exercised
their convertibility rights and received 450,000 and 124,831 common shares,
respectively, at the time of the Company's initial public offering, and the put
redemption feature on the 420,000 common shares referred to above was satisfied.
On December 2, 1997, the Company's Board of Directors authorized the
designation of 500,000 shares of $0.01 par value 10% exchangeable preferred
stock, and 100 shares of $0.01 par value Series C preferred stock. Holders of
the 10% exchangeable 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% exchangeable preferred stock. If
dividends are paid in kind, the Company shall also issue to holders of the 10%
exchangeable preferred stock, additional warrants to purchase common stock at an
exercise price of $13.00 per share. 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. The Company may redeem the 10%
exchangeable preferred stock at any time subject to contractual and other
restrictions. The Company is obligated to redeem the 10% exchangeable preferred
stock for cash on April 15, 2005.
On December 2, 1997, the Company entered into a securities purchase
agreement with Culligan Water Technologies, Inc. and an existing shareholder
pursuant to which the Company issued 250,000 shares of the 10% exchangeable
preferred stock, 100 shares of Series C preferred stock and warrants, with an
exercise price of $13 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 or (b) the first anniversary of the last day of the first period of 20
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.
On April 30, 1998, the Company entered into a securities purchase with Ares
Leveraged Investment Fund, L.P. ("Ares") and SV Capital Partners, L.P.
("SV") to acquire 400,000 shares of the Company's 13% exchangeable preferred
stock at $100 per share for an aggregate amount of $40 million. Holders of the
13% exchangeable preferred stock 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% exchangeable preferred stock. The Company is
obligated to redeem the 13% exchangeable preferred stock for cash
F-14
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
975,752 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% exchangeable preferred stock
bears a dividend rate of 13% per annum; however, during the first 12 months
following issuance, the dividend rate will be 11.5%, and during the second 12
months, the dividend rate will be 12.25%. 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%
exchangeable 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% exchangeable preferred 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% exchangeable preferred stock for subordinated notes
at the Company's discretion. As discussed in Note 2, the Company repurchased the
13% exchangeable preferred stock for $43.6 million that included accrued but
unpaid dividends and a redemption premium. The holders of the 13% exchangeable
preferred stock also exercised warrants to purchase 974,603 shares of common
stock in a cashless transaction.
In July 1998, the Company completed an offer to exchange the 13%
exchangeable preferred stock (the "Series 1 Preferred Stock") with new 13%
exchangeable preferred stock (the "Series 2 Preferred Stock") registered under
the Securities Act of 1933. The form and terms of the Series 2 Preferred Stock
are identical in all material respects to the form and term of the Series 1
Preferred Stock, except for certain transfer restrictions and registration
rights.
During 1998, the Company paid no cash dividends on the 10% exchangeable
preferred stock or the 13% exchangeable preferred stock. The Company elected to
pay in kind dividends on the respective dividend dates, which totaled 23,525
shares of 13% exchangeable preferred stock and 22,890 shares of 10% exchangeable
preferred stock and 176,074 warrants to purchase common stock at $13 per share.
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.
12. RELATED PARTIES
In connection with certain acquisitions, some former owners have become
shareholders of the Company. Some of these shareholders have leased real estate
or facilities to the Company as part of the acquisition transaction. Expenses
related to these leases were $0.4 million in 1998, $0.1 million in 1997 and $0.0
million in 1996. (See Note 16)
Certain affiliates of the Company's shareholders sell equipment and
inventory to the company. Total expenditures incurred related to these entities
were $4.7 million in 1998, $4.8 million in 1997 and $4.1 million in 1996. At
December 31, 1998 and 1997, accrued liabilities to these entities totaled $0.6
million and $0.2 million, respectively.
Law firms associated with certain company shareholders provided services
totaling $1.7 million in 1998, $0.9 million in 1997 and $0.1 million in 1996.
F-15
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A shareholder is the owner of the insurance agency that acts on behalf of
the Company in connection with the Company's group health and life insurance,
benefit plans and key-man life insurance.
A shareholder provided investment banking services to the Company in
connection with the Company's acquisition of Reddy Ice Corporation in 1998. This
shareholder received an investment banking fee from the investment banking firm
for such services.
13. EMPLOYEE BENEFIT PLANS
401(K) 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 $290,592 in 1998, $49,012 in 1997
and $19,022 in 1996.
1994 STOCK OPTION PLAN. The shareholders have approved the Packaged Ice,
Inc. 1994 Stock Option Plan and have reserved for issuance 400,000 shares of
common stock. This plan provides for the granting of incentive awards in the
form of stock options to employees, outside directors and consultants and
advisors to the Company or any of its subsidiaries. The plan provides for the
underlying shares that are no longer subject to purchase pursuant to an option
previously granted to be reoptioned. Stock options have an exercise price equal
to the fair market value of the shares of common stock at the date of grant,
vest in equal annual installments over five years and expire 10 years from the
date of grant. All outstanding options become fully vested at the date of the
Company's initial public offering (See Note 2).
<TABLE>
<CAPTION>
1998 1997 1996
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year..... 256,000 $ 9.16 63,500 $ 6.53 57,500 $6.43
Granted.............................. 154,700 13.67 194,500 10.00 6,000 7.50
Exercised............................ (6,300) 6.37 -- -- -- --
Forfeited............................ (13,200) 8.48 (2,000) 6.75 -- --
--------- --------- --------- --------- --------- ---------
Outstanding at end of year........... 391,200 $ 11.01 256,000 $ 9.16 63,500 $6.53
========= ========= ========= ========= ========= =========
Weighted average fair value of
options granted during the year at
market price....................... $ 3.92 $ 3.99 $2.60
========= ========= =========
</TABLE>
F-16
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 STOCK OPTION PLAN. The shareholders have approved the Packaged Ice,
Inc. 1998 Stock Option Plan and have reserved for issuance 1,000,000 shares of
common stock. This plan provides for the granting of incentive awards in the
form of stock options, stock appreciation rights, restricted stock and stock
bonuses to officers, employees, outside directors and consultants and advisors
to the Company or any of its subsidiaries at the discretion of the Compensation
Committee of the Board of Directors. Stock options have an exercise price equal
to the fair market value of the shares of common stock at the date of grant,
become exercisable in annual increments for up to five years commencing one year
after the date of grant and expire not more than ten years from the date of
grant.
1998
---------------------
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
Outstanding at beginning of year..... -- $ --
Granted.............................. 244,220 15.00
Exercised............................ -- --
Forfeited............................ (1,150) 15.00
--------- ---------
Outstanding at end of year........... 243,070 $ 15.00
========= =========
Weighted average fair value of
options granted during the year at
market price....................... $ 6.23
=========
The Company's reported net income and earnings per share would have been
reduced had compensation cost for the company's stock-based compensation plans
been determined using the fair value method of accounting as set forth in SFAS
No. 123 "Accounting for Stock-Based Compensation". For purposes of estimating
the fair value disclosure below, the fair value of each stock option has been
estimated on the grant date using the "minimum value" method for option-
pricing using the following weighted average assumptions: dividend yield of
0.0%, expected volatility of 0.0%; risk free interest rate of 5.51% to 6.4%; and
expected lives of eight to 10 years for stock options granted. The effects of
using the fair value method of accounting on net income and earnings per share
are indicated in the pro forma amounts below:
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net Loss Attributable to Common
Shareholders:
As reported..................... $ (28,891) $ (8,637) $ (990)
Pro forma....................... (30,282) (8,828) (1,018)
Basic and Diluted Earnings Per Share:
As reported..................... $ (5.91) $ (2.40) $ (0.35)
Pro forma....................... (6.20) (2.45) (0.36)
F-17
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSIDIARY GUARANTORS
The Company's 9 3/4% Senior Notes are guaranteed, fully, jointly and
severally, and unconditionally, on a senior subordinated basis by all of the
Company's current and future, direct and indirect subsidiaries (the "Subsidiary
Guarantors"), all wholly owned. The following table sets forth the "summarized
financial information" of the Subsidiary Guarantors. Full financial statements
of the Subsidiary Guarantors are not presented because management believes they
are not material to the investors. There are currently no restrictions on the
ability of the subsidiary guarantors to transfer funds to the Company in the
form of cash dividends, loans or advances.
YEAR ENDED DECEMBER
31,
---------------------
1998 1997
---------- ---------
(IN THOUSANDS)
Balance Sheet Data:
Current assets.................. $ 29,373 $ 6,592
Property and equipment.......... 169,208 32,622
Total assets.................... 429,508 71,381
Current liabilities............. 14,864 3,904
Long term debt.................. 893 --
Total shareholders' equity...... 257,722 16,708
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
(IN THOUSANDS)
Operating Data:
Net revenues.................... $ 177,491 $ 24,811 $ 2,404
Gross profit.................... 74,193 9,756 1,308
Net loss........................ (2,493) (8,878) (236)
F-18
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENT INFORMATION
The Company has two reportable segments: (1) ice products and (2) non-ice
products and services. Ice products include the manufacture and distribution of
packaged ice products through traditional ice manufacturing and delivery and the
Ice Factory. Non-ice products and services include refrigerated warehouses,
bottled water and manufacture and leasing of ice production equipment. The
accounting policies of the segments are the same as those described in Note 3.
The Company evaluates performance of each segment based on earnings before
interest, taxes, depreciation and amortization ("EBITDA") and does not
allocate assets by segments. Inter-segment sales are accounted for at current
market prices.
<TABLE>
<CAPTION>
ICE NON-ICE ELIMINATION TOTAL
---------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $ 167,288 $ 13,102 $ (1,328) $ 179,062
Cost of sales........................ 100,765 8,561 (1,050) 108,276
---------- -------- ------------ ----------
Gross profit......................... 66,523 4,541 (278) 70,786
Operating expenses................... 29,662 2,079 -- 31,741
Other income......................... 790 13 -- 803
---------- -------- ------------ ----------
EBITDA.......................... $ 37,651 $ 2,475 $ (278) $ 39,848
========== ======== ============ ==========
</TABLE>
For the Year Ended December 31, 1997:
<TABLE>
<CAPTION>
ICE NON-ICE ELIMINATION TOTAL
---------- -------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues............................. $ 28,139 $ 842 $ -- $ 28,981
Cost of sales........................ 18,304 420 -- 18,724
---------- -------- ------------ ----------
Gross profit......................... 9,835 422 -- 10,257
Operating expenses................... 7,298 338 -- 7,636
Other income......................... 655 -- -- 655
---------- -------- ------------ ----------
EBITDA.......................... $ 3,192 $ 84 $ -- $ 3,276
========== ======== ============ ==========
</TABLE>
; and (iv) working capital and general corporate purposes.
For the year ended December 31, 1996, the Company's activities primarily
consisted of Ice Factory operations.
Reconciliation of EBITDA to net loss before extraordinary item and
preferred dividends:
YEAR ENDED DECEMBER
31,
---------------------
1998 1997
---------- ---------
(IN THOUSANDS)
EBITDA............................... $ 39,848 $ 3,276
Depreciation and amortization........ (20,729) (5,130)
Interest expense..................... (24,705) (6,585)
Income taxes......................... -- --
---------- ---------
Net loss before extraordinary
item and preferred
dividends..................... $ (5,586) $ (8,439)
========== =========
16. COMMITMENTS AND CONTINGENCIES
In April 1993, the Company entered into an agreement to purchase all Ice
Factory packaging components from a shareholder for a period of three years or
until a minimum of 3,600 components is purchased. Since inception of this
agreement, the Company has purchased 1,697 components.
F-19
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1,809
merchandisers.
The Company entered into employment contracts with certain executive
officers and key employees of the Company with terms of one to two years. The
aggregate annual commitment for base salary under these agreements is
approximately $1.0 million.
As a result of the acquisitions, the Company entered into certain
employment contracts with former employees of the acquired companies with terms
of one to five years. The aggregate annual commitment under these agreements is
approximately $1.7 million.
The Company has leased certain facilities and equipment. Under these and
other operating leases, payments in 1998 were approximately $3.3 million, and
minimum annual rentals at December 31, 1998 were approximately $4.2 million in
1999, $2.8 million in 2000, $2.6 million in 2001, $2.3 million in 2002, $1.6
million in 2003 and $3.8 million thereafter.
The Company is involved in various claims, lawsuits and proceedings arising
in the ordinary course of business. While there are uncertainties inherent in
the ultimate outcome of such matters and it is impossible to presently determine
the ultimate costs that may be incurred, management believes the resolution of
such uncertainties and the incurrence of such costs should not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
On October 31, 1997, the Company entered into a Trademark License
Agreement, as amended, with Culligan International Company (the "TLA"). The
TLA includes automatic renewals for successive one-year terms through July 31,
2002, subject to early termination. The Company paid an initial license fee and
is required to make the greater of (i) minimum royalty payments of $28,600 in
1998, $0.1 million in 1999, $0.6 million in 2000 and $1.1 million in 2001 and
$1.0 million in 2002 or (ii) 2.5% of all revenues, as defined.
F-20
EXHIBIT 4.6
ANNEX A - FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
DATED AS OF FEBRUARY 3, 1999
AMONG
PACKAGED ICE, INC.,
AND
ARES LEVERAGED INVESTMENT FUND, L.P.
<PAGE>
TABLE OF CONTENTS
Section Page
Section 1. Definitions......................................................1
Section 2. Registration Rights..............................................4
2.1 (a) Demand Registration............................................4
(b) Effective Registration.........................................4
(c) Restrictions on Sale by Holders................................5
(d) Underwritten Registrations.....................................5
(e) Expenses.......................................................5
(f) Priority in Demand Registration................................6
2.2 (a) Piggy-Back Registration........................................6
(b) Priority in Piggyback Registration.............................7
2.3 Limitations, Conditions and Qualifications to Obligations
Under Registration Covenants.....................................8
2.4 Restrictions on Sale by the Company and Others.....................9
2.5 Rule 144 and Rule 144A.............................................9
Section 3. Registration Procedures...........................................9
Section 4. Indemnification and Contribution.................................15
Section 5. Miscellaneous....................................................18
(a) No Inconsistent Agreements.....................................18
(b) Adjustments Affecting Registrable Securities...................18
(c) Amendments and Waivers.........................................18
(d) Notices........................................................18
(e) Successors and Assigns.........................................19
(f) Counterparts...................................................19
(g) Headings.......................................................19
(h) GOVERNING LAW..................................................19
(i) Severability...................................................19
(j) Third Party Beneficiary........................................19
(k) Entire Agreement...............................................19
(l) Securities Held by the Company or Its Affiliates...............20
i
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is made and entered
into as of February 3, 1999 __________, ____, among PACKAGED ICE, INC., a Texas
corporation (the "COMPANY"), ARES LEVERAGED INVESTMENT FUND, L.P. (the
"Investor").
This Agreement is entered into in connection with the issuance of 90,354
shares of Common Stock (the "Converted Shares") of the Company pursuant to the
letter agreement entered into between the Company and the Investor on January
28, 1999 (the "Letter Agreement").
In consideration of the foregoing, the parties hereto agree as follows:
Section 1. Definitions. As used in this Agreement, the following defined
terms shall have the following meanings:
"ADVICE" has the meaning ascribed to such term in the last paragraph
of Section 3 hereof.
"BUSINESS DAY" shall mean a day that is not a Legal Holiday.
"COMMON STOCK" shall mean the shares of common stock, par value $.01
per share, of the Company.
"CONVERTED SHARES" has the meaning ascribed to such term in the
preamble of this Agree-
ment.
"DEMAND REGISTRATION" has the meaning ascribed to such term in
Section 2.1(a) hereof.
"DEMAND RIGHT HOLDERS" means persons with "demand" registration
rights pursuant to a contractual commitment of the Company.
"DTC" has the meaning ascribed to such term in Section 3(i)
hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time and the rules and regulations of the SEC promulgated
thereunder.
"HOLDER" means Investor, for so long as it owns any of the
Registrable Securities, and each of its successors, assigns and direct and
indirect transferees who become registered owners of such Registrable
Securities.
"INCLUDED SECURITIES" has the meaning ascribed to such term in
Section 2.1(a) hereof.
"INDEMNIFIED PARTY" has the meaning ascribed to such term in
Section 4(c) hereof.
"INSPECTORS" has the meaning ascribed to such term in Section
3(n) hereof.
1
<PAGE>
"INVESTOR" has the meaning ascribed to that term in the preamble
of this Agreement.
"LEGAL HOLIDAY" shall mean a Saturday, a Sunday or a day on which
banking institutions in New York, New York are required by law, regulation
or executive order to remain closed.
"PERSON" shall mean an individual, partnership, corporation, trust
or unincorporated organization, or a government or agency or political
subdivision thereof.
"PIGGY-BACK REGISTRATION" has the meaning ascribed to such term
in Section 2.2 hereof.
"PROSPECTUS" means the prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to
completion and a prospectus that includes any information previously
omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities
Act), as amended or supplemented by any prospectus supplement, and all
other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference or
deemed to be incorporated by reference in such Prospectus.
"PUBLIC EQUITY OFFERING" means an underwritten offer and sale of
capital stock of the Company pursuant to a registration statement that has
been declared effective by the Commission pursuant to the Securities Act
(other than a registration statement on Form S-8 or otherwise relating to
equity securities issuable under any employee benefit plan of the
Company).
"REGISTRABLE SECURITIES" means any of the Converted Shares and any
other securities issued or issuable with respect to any Converted Shares
by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. As to any particular Registrable Securities,
such securities shall cease to be Registrable Securities when (i) a
Registration Statement with respect to the offering of such securities by
the Holder thereof shall have been declared effective under the Securities
Act and such securities shall have been disposed of by such Holder
pursuant to such Registration Statement, (ii) such securities are eligible
for sale to the public pursuant to Rule 144(k) (or any similar provision
then in force, but not Rule 144A) promulgated under the Securities Act,
(iii) such securities shall have been otherwise transferred by such Holder
and new certificates for such securities not bearing a legend restricting
further transfer shall have been delivered by the Company or its transfer
agent and subsequent disposition of such securities shall not require
registration or qualification under the Securities Act or any similar
state law then in force or (iv) such securities shall have ceased to be
outstanding.
2
<PAGE>
"REGISTRATION EXPENSES" shall mean all expenses incident to the
Company's performance of or compliance with its obligations, under this
Agreement, including, without limitation, all SEC and stock exchange or
National Association of Securities Dealers, Inc. registration and filing
fees and expenses, fees and expenses of compliance with securities or blue
sky laws (including, without limitation, reasonable fees and disbursements
of counsel for the underwriters in connection with blue sky qualifications
of the Registrable Securities), preparing, printing, filing, duplicating
and distributing the Registration Statement and the related Prospectus,
the cost of printing stock certificates, the cost and charges of any
transfer agent, rating agency fees, printing expenses, messenger,
telephone and delivery expenses, fees and disbursements of counsel for the
Company and all independent certified public accountants, the fees and
disbursements of underwriters customarily paid by issuers or sellers of
securities (but not including any underwriting discounts or commissions or
transfer taxes, if any, attributable to the sale of Registrable Securities
by Selling Holders), fees and expenses of one counsel for the Holders and
other reasonable out-of-pocket expenses of the Holders.
"REGISTRATION STATEMENT" shall mean any appropriate registration
statement of the Company filed with the SEC pursuant to the Securities Act
which covers any of the Registrable Securities pursuant to the provisions
of this Agreement and all amendments and supplements to any such
Registration Statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"REQUISITE SECURITIES" shall mean a number of Registrable Securities
equal to not less than 25% of the Registrable Securities held in the
aggregate by all Holders.
"RULE 144" shall mean Rule 144 promulgated under the Securities Act,
as such Rule may be amended from time to time, or any similar rule (other
than Rule 144A) or regulation hereafter adopted by the SEC providing for
offers and sales of securities made in compliance therewith resulting in
offers and sales by subsequent holders that are not affiliates of an
issuer of such securities being free of the registration and prospectus
delivery requirements of the Securities Act.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended
from time to time and the rules and regulations of the SEC promulgated
thereunder.
"SELLING HOLDER" shall mean a Holder who is selling Registrable
Securities in accordance with the provisions of Section 2.1 or 2.2 hereof.
3
<PAGE>
"WITHDRAWAL ELECTION" has the meaning ascribed to such term in
Section 2.2(b) hereof.
Section 2. REGISTRATION RIGHTS
2.1 (a) DEMAND REGISTRATION. From time to time, after 180 days
following the completion by the Company of a Public Equity Offering, Holders
owning, individually or in the aggregate, not less than the Requisite Securities
may make a written request for registration under the Securities Act of their
Registrable Securities (a "DEMAND REGISTRATION"). Within 120 days of the receipt
of such written request for a Demand Registration, the Company shall file with
the SEC and use its best efforts to cause to become effective under the
Securities Act a Registration Statement with respect to such Registrable
Securities. Any such request will specify the number of Registrable Securities
proposed to be sold and will also specify the intended method of disposition
thereof. The Company shall give written notice of such registration request to
all other Holders of Registrable Securities within 15 days after the receipt
thereof. Within 20 days after notice of such registration request by the
Company, any Holder may request in writing that such Holder's Registrable
Securities be included in such Registration Statement and the Company shall
include in such Registration Statement the Registrable Securities of any such
Holder requested to be so included (the "INCLUDED SECURITIES"). Each such
request by such other Holders shall specify the number of Included Securities
proposed to be sold and the intended method of disposition thereof. Subject to
Section 2.1(b) hereof, the Company shall be required to register Registrable
Securities pursuant to this Section 2.1(a) on a maximum of two separate
occasions.
Subject to Section 2.1(f) hereof, no other securities of the Company
except securities held by any Holder, any Demand Right Holder, and any Person
entitled to exercise "piggy back" registration rights pursuant to contractual
commitments of the Company shall be included in a Demand Registration.
(b) EFFECTIVE REGISTRATION. A Registration Statement will not be
deemed to have been effected as a Demand Registration unless it has been
declared effective by the SEC and the Company has complied in a timely manner
and in all material respects with all of its obligations under this Agreement
with respect thereto; PROVIDED, HOWEVER, that if, after such Registration
Statement has become effective, the offering of Registrable Securities pursuant
to such Registration Statement is or becomes the subject of any stop order,
injunction or other order or requirement of the SEC or any other governmental or
administrative agency or court that prevents, restrains or otherwise limits the
sale of Registrable Securities pursuant to such Registration Statement for any
reason not attributable to any Holder participating in such registration and
such Registration Statement has not become effective within a reasonable time
period thereafter (not to exceed 60 days), such Registration Statement will be
deemed not to have been effected. If (i) a registration requested pursuant to
this Section 2.1 is deemed not to have been effected or (ii) a Demand
Registration does not remain effective under the Securities Act until at least
the earlier of (A) an aggregate of 90 days after the effective date thereof or
(B) the consummation of the distribution by the Holders of all of the
Registrable Securities covered thereby, then the Company shall continue to be
obligated to effect an additional Demand Registration pursuant to this Section
2.1 provided, that a Demand Registration shall not be counted as such unless the
Selling Holders have sold at least 80% of the Registrable Securities covered
thereby. For purposes of calculating the 90-day period referred to in the
preceding sentence, any period of time during which such Registration Statement
was not in effect shall be excluded. The Holders of Registrable Securities shall
be permitted to withdraw all or any part of the Registrable Securities from a
Demand Registration at any time prior to the effective date of such Demand
Registration.
(c) RESTRICTIONS ON SALE BY HOLDERS. Each Holder of Registrable
Securities whose Registrable Securities are covered by a Registration Statement
filed pursuant to this Section 2.1 and are to be sold thereunder agrees, if and
to the extent reasonably requested by the managing underwriter or underwriters
in an underwritten offering, not to effect any public sale or distribution of
Registrable Securities or of securities of the Company of the same class as any
securities included in such Registration Statement, including a sale pursuant to
Rule 144 (except as part of such underwritten offering), during the 30-day
period prior to, and during the 120-day period beginning on, the closing date of
each underwritten offering made pursuant to such Registration Statement, to the
extent timely notified in writing by the Company or such managing underwriter or
underwriters.
The foregoing provisions of Section 2.1(c) shall not apply to any
Holder of Registrable Securities if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; PROVIDED, HOWEVER,
that any such Holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any such public sale or distribution of
Registrable Securities or of securities of the Company of the same class as any
securities included in such Registration Statement, including a sale pursuant to
Rule 144 (except as part of such underwritten offering) during such period,
unless it has provided 45 days' prior written notice of such sale or
distribution to the underwriter or underwriters.
(d) UNDERWRITTEN REGISTRATIONS. If any of the Registrable Securities
covered by a Demand Registration are to be sold in an underwritten offering, the
investment banker or investment bankers and manager or managers that will manage
the offering will be selected by the Holders of not less than a majority of the
Registrable Securities then outstanding to be sold thereunder and will be
reasonably acceptable to the Company.
No Holder of Registrable Securities may participate in any
underwritten registration pursuant to a Registration Statement filed under this
Agreement unless such Holder (a) agrees to (i) sell such Holder's Registrable
Securities on the basis provided in and in compliance with any underwriting
arrangements approved by the Holders of not less than a majority of the
Registrable Securities to be sold thereunder and (ii) comply with Rules 10b-6
and 10b-7 under the Exchange Act and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements.
(e) EXPENSES. The Company will pay all Registration Expenses in
connection with the registrations requested pursuant to Section 2.1(a) hereof.
Each Holder of Registrable Securities shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating
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to the sale or disposition of such Holder's Registrable Securities pursuant to a
Registration Statement requested pursuant to this Section 2.1.
(f) PRIORITY IN DEMAND REGISTRATION. In a registration pursuant to
Section 2.1 hereof involving an underwritten offering, if the managing
underwriter or underwriters of such underwritten offering have informed, in
writing, the Company and the Selling Holders who have requested such Demand
Registration or who have sought inclusion therein that in such underwriter's or
underwriters' opinion the total number of securities which the Selling Holders
and any other Person desiring to participate in such registration intend to
include in such offering is such as to adversely affect the success of such
offering, including the price at which such securities can be sold, then the
Company will be required to include in such registration only the amount of
securities which it is so advised should be included in such registration. In
such event securities shall be registered in such registration in the following
order of priority: (i) FIRST, the securities which have been requested to be
included in such registration by the Holders of Registrable Securities pursuant
to this Agreement and the Demand Right Holders (pro rata based on the amount of
securities sought to be registered by such Persons), (ii) SECOND, provided that
no securities sought to be included by the Holders and the Demand Right Holders
have been excluded from such registration, the securities of other Persons
entitled to exercise "piggy-back" registration rights pursuant to contractual
commitments of the Company (pro rata based on the amount of securities sought to
be registered by such Persons) and (iii) THIRD, securities the Company proposes
to register.
2.2 (a) PIGGY-BACK REGISTRATION. If at any time after the Company
has completed a Public Equity Offering, the Company proposes to file a
Registration Statement under the Securities Act with respect to an offering by
the Company for its own account or for the account of any of its securityholders
of any class of its Common Stock in a firmly underwritten Public Equity Offering
(other than (i) a Registration Statement on Form S-4 or S-8 (or any substitute
form that may be adopted by the SEC) or (ii) a Registration Statement filed in
connection with an exchange offer or offering of securities solely to the
Company's existing securityholders), then the Company shall give written notice
of such proposed filing to the Holders of Registrable Securities as soon as
practicable (but in no event fewer than 20 days before the anticipated filing
date), and such notice shall offer such Holders the opportunity to register such
number of shares of Registrable Securities as each such Holder may request in
writing within 30 days after receipt of such written notice from the Company
(which request shall specify the Registrable Securities intended to be disposed
of by such Selling Holder (a "PIGGY-BACK REGISTRATION"). The Company shall use
its best efforts to keep such Piggy-Back Registration continuously effective
under the Securities Act until at least the earlier of (A) an aggregate of 90
days after the effective date thereof or (B) the consummation of the
distribution by the Holders of all of the Registrable Securities covered
thereby. The Company shall use its best efforts to cause the managing
Underwriter or underwriters, if any, of such proposed offering to permit the
Registrable Securities requested to be included in a Piggy-Back Registration to
be included on the same terms and conditions as any similar securities of the
Company or any other securityholder included therein and to permit the sale or
other disposition of such Registrable Securities in accordance with the intended
method of distribution thereof. Any Selling Holder shall have the right to
withdraw its request for inclusion of its Registrable Securities in any
Registration Statement pursuant to this Section 2.2 by giving written notice to
the Company of its request to
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withdraw. The Company may withdraw a Piggy-Back Registration at any time prior
to the time it becomes effective or the Company may elect to delay the
registration; PROVIDED, HOWEVER, that the Company shall give prompt written
notice thereof to participating Selling Holders. The Company will pay all
Registration Expenses in connection with each registration of Registrable
Securities requested pursuant to this Section 2.2, and each Holder of
Registrable Securities shall pay all underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of such Holder's
Registrable Securities pursuant to a Registration Statement effected pursuant to
this Section 2.2.
No registration effected under this Section 2.2, and no failure to
effect a registration under this Section 2.2, shall relieve the Company of its
obligation to effect a registration upon the request of Holders of Registrable
Securities pursuant to Section 2.1 hereof, and no failure to effect a
registration under this Section 2.2 and to complete the sale of securities
registered thereunder in connection therewith shall relieve the Company of any
other obligation under this Agreement. (b) PRIORITY IN PIGGYBACK REGISTRATION.
In a registration pursuant to Section 2.2 hereof involving an underwritten
offering, if the managing underwriter or underwriters of such underwritten
offering have informed, in writing, the Company and the Selling Holders
requesting inclusion in such offering that in such underwriter's or
underwriters' opinion the total number of securities which the Company, the
Selling Holders and any other Persons desiring to participate in such
registration intend to include in such offering is such as to adversely affect
the success of such offering, including the price at which such securities can
be sold, then the Company will be required to include in such registration only
the amount of securities which it is so advised should be included in such
registration. In such event: (x) in cases initially involving the registration
for sale of securities for the Company's own account, securities shall be
registered in such offering in the following order of priority: (i) FIRST, the
securities which the Company proposes to register, and (ii) SECOND, the
securities which have been requested to be included in such registration by
Persons entitled to exercise "piggy-back" registration rights pursuant to
contractual commitments of the Company (pro rata on the amount of securities
sought to be registered by such Persons); and (y) in cases not initially
involving the registration for sale of securities for the Company's own account,
securities shall be registered in such offering in the following order of
priority: (i) FIRST, the securities of any Person whose exercise of a "demand"
registration right pursuant to a contractual commitment of the Company is the
basis for the registration (provided that if such Person is a Holder of
Registrable Securities, as among Holders of Registrable Securities there shall
be no priority and Registrable Securities sought to be included by Holders of
Registrable Securities shall be included pro rata based on the amount of
securities sought to be registered by such Persons), (ii) SECOND, securities of
other persons entitled to exercise "piggy-back" registration rights pursuant to
contractual commitments (PRO RATA based on the amount of securities sought to be
registered by such persons) and (iii) THIRD, the securities which the Company
proposes to register.
If, as a result of the provisions of this Section 2.2(b), any
Selling Holder shall not be entitled to include all Registrable Securities in a
Piggy-Back Registration that such Selling Holder has requested to be included,
such Selling Holder may elect to withdraw his request to include Registrable
Securities in such registration (a "WITHDRAWAL ELECTION"); PROVIDED, HOWEVER,
that a Withdrawal Election shall be irrevocable and, after making a Withdrawal
Election, a Selling Holder
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shall no longer have any right to include Registrable Securities in the
registration as to which such Withdrawal Election was made.
2.3 LIMITATIONS, CONDITIONS AND QUALIFICATIONS TO OBLIGATIONS UNDER
REGISTRATION COVENANTS. The obligations of the Company set forth in Sections 2.1
and 2.2 hereof are subject to each of the following limitations, conditions and
qualifications:
(i) Subject to the next sentence of this paragraph, the Company
shall be entitled to postpone, for a reasonable period of time, the filing or
effectiveness of, or suspend the rights of any Holders to make sales pursuant
to, any Registration Statement otherwise required to be prepared, filed and made
and kept effective by it hereunder; PROVIDED, HOWEVER, that the duration of such
postponement or suspension may not exceed the earlier to occur of (A) 15 days
after the cessation of the circumstances described in the next sentence of this
paragraph on which such postponement or suspension is based or (B) 120 days
after the date of the determination of the Board of Directors referred to in the
next sentence, and the duration of any such postponement or suspension shall be
excluded from the calculation of the 90-day period described in Section 2.1(b)
hereof. Such postponement or suspension may only be effected if the Board of
Directors of the Company determines in good faith that the filing or
effectiveness of, or sales pursuant to, such Registration Statement would
materially impede, delay or interfere with any financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction involving the Company or any of its affiliates (whether or not
planned, proposed or authorized prior to an exercise of demand registration
rights hereunder or any other registration rights agreement) or require
disclosure of material information which the Company has a bona fide business
purpose for preserving as confidential. If the Company shall so postpone the
filing or effectiveness of a Registration Statement or so suspend the rights of
Holders to make sales it shall, as promptly as possible, notify any Selling
Holders of such determination, and the Selling Holders shall (y) have the right,
in the case of a postponement of the filing or effectiveness of a Registration
Statement, upon the affirmative vote of the Holders of not less than a majority
of the Registrable Securities to be included in such Registration Statement, to
withdraw the request for registration by giving written notice to the Company
within 10 days after receipt of such notice or (z) in the case of a suspension
of the right to make sales, receive an extension of the registration period
equal to the number of days of the suspension. Any Demand Registration as to
which the withdrawal election referred to in the preceding sentence has been
effected shall not be counted for purposes of the two Demand Registrations the
Company is required to effect pursuant to Section 2.1 hereof.
(ii) The Company shall not be required by this Agreement to include
securities in a Registration Statement pursuant to Section 2.2 hereof if (i) in
the written opinion of counsel to the Company, addressed to the Holders and
delivered to them, the Holders of such securities seeking registration would be
free to sell all such securities within the current calendar quarter, without
registration, under Rule 144, which opinion may be based in part upon the
representation by such Holders, which representation shall not be unreasonably
withheld, that each such Holder is not an affiliate of the Company within the
meaning of the Securities Act and (ii) all requirements under the Securities Act
for effecting such sales are satisfied at such time.
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(iii) The Company's obligations shall be subject to the obligations
of the Selling Holders, which the Selling Holders acknowledge, to furnish all
information and materials and to take any and all actions as may be required
under applicable federal and state securities laws and regulations to permit the
Company to comply with all applicable requirements of the SEC and to obtain any
acceleration of the effective date of such Registration Statement.
(iv) The Company shall not be obligated to cause any special audit
to be undertaken in connection with any registration pursuant to this Agreement
unless such audit is requested by the underwriters with respect to such
registration.
2.4 RESTRICTIONS ON SALE BY THE COMPANY AND OTHERS. The Company
covenants and agrees that it shall not, and that it shall not cause or permit
any of its subsidiaries to, effect any public sale or distribution of any
securities of the same class as any of the Registrable Securities or any
securities convertible into or exchangeable or exercisable for such securities
(or any option or other right for such securities) during the 30-day period
prior to, and during the 90-day period beginning on, the commencement of any
underwritten offering of Registrable Securities pursuant to a Demand
Registration which has been requested pursuant to this Agreement, or a
Piggy-Back Registration.
2.5 RULE 144. The Company covenants that it will file the reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the SEC thereunder in a timely manner and, if
at any time the Company is not required to file such reports, it will, upon the
request of any Holder of Registrable Securities, make publicly available other
information so long as necessary to permit sales pursuant to Rule 144. Upon the
request of any Holder of Registrable Securities, the Company will in a timely
manner deliver to such Holder a written statement as to whether it has complied
with such information requirements.
Section 3. REGISTRATION PROCEDURES. In connection with the
obligations of the Company with respect to any Registration Statement pursuant
to Sections 2.1 and 2.2 hereof, the Company shall:
(a) Prepare and file with the SEC as soon as practicable each such
Registration Statement (but in any event on or prior to the date of filing
thereof required under this Agreement) and cause each such Registration
Statement to become effective and remain effective as provided herein;
PROVIDED, HOWEVER, that before filing any such Registration Statement or
any Prospectus or any amendments or supplements thereto (including
documents that would be incorporated or deemed to be incorporated therein
by reference, including such documents filed under the Exchange Act that
would be incorporated therein by reference), the Company shall afford
promptly to the Holders of the Registrable Securities covered by such
Registration Statement,
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their counsel and the managing underwriter or underwriters, if any, an
opportunity to review copies of all such documents proposed to be filed a
reasonable time prior to the proposed filing thereof. The Company shall
not file any Registration Statement or Prospectus or any amendments or
supplements thereto if the Holders of a majority of the Registrable
Securities covered by such Registration Statement, their counsel, or the
managing underwriter or underwriters, if any, shall reasonably object in
writing unless failure to file any such amendment or supplement would
involve a violation of the Securities Act or other applicable law.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to such Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the time periods
prescribed hereby; cause the related Prospectus to be supplemented by any
required prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 (or any similar provisions then in force) promulgated
under the Securities Act; and comply with the provisions of the Securities
Act, the Exchange Act and the rules and regulations of the SEC promulgated
thereunder applicable to it with respect to the disposition of all
securities covered by such Registration Statement as so amended or such
Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities, their counsel and
the managing underwriter or underwriters, if any, promptly (but in any
event within two (2) Business Days), and confirm such notice in writing,
(i) when a Prospectus or any prospectus supplement or post-effective
amendment has been filed, and, with respect to a Registration Statement or
any post-effective amendment, when the same has become effective
(including in such notice a written statement that any Holder may, upon
request, obtain, without charge, one conformed copy of such Registration
Statement or post-effective amendment including financial statements and
schedules and exhibits), (ii) of the issuance by the SEC of any stop order
suspending the effectiveness of such Registration Statement or of any
order preventing or suspending the use of any Prospectus or the initiation
or threatening of any proceedings for that purpose, (iii) if at any time
when a prospectus is required by the Securities Act to be delivered in
connection with sales of the Registrable Securities the representations
and warranties of the Company contained in any agreement (including any
underwriting agreement) contemplated by Section 3(m) below cease to be
true and correct in any material respect, (iv) of the receipt by the
Company of any notification with respect to (A) the suspension of the
qualification or exemption from qualification of the Registration
Statement or any of the Registrable Securities covered thereby for offer
or sale in any jurisdiction, or (B) the initiation of any proceeding for
such purpose, (v) of the happening of any event, the existence of any
condition or information becoming known that requires the making of any
change in any Registration Statement or Prospectus so that, in the case of
such Registration Statement, it will conform in all material respects with
the requirements of the Securities Act and it will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, and that in the case of any Prospectus, it will conform in all
material respects with the requirements of the Securities Act and it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and (vi) of the Company's reasonable determination
that a post-effective amendment to such Registration Statement would be
appropriate.
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(d) Use every reasonable effort to prevent the issuance of any order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of a Prospectus or suspending the
qualification (or exemption from qualification) of any of the Registrable
Securities covered thereby for sale in any jurisdiction, and, if any such
order is issued, to obtain the withdrawal of any such order at the
earliest possible moment.
(e) If requested by the managing underwriter or underwriters, if
any, or the Holders of a majority of the Registrable Securities being sold
in connection with an underwriting offering, (i) promptly incorporate in a
prospectus supplement or post-effective amendment such information as the
managing underwriter or underwriters, if any, or such Holders reasonably
request to be included therein to comply with applicable law, (ii) make
all required filings of such prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such prospectus
supplement or post-effective amendment, and (iii) supplement or make
amendments to such Registration Statement.
(f) Furnish to each Holder of Registrable Securities who so requests
and to counsel for the Holders of Registrable Securities and each managing
underwriter, if any, without charge, upon request, one conformed copy of
the Registration Statement and each post-effective amendment thereto,
including financial statements and schedules, and of all documents
incorporated or deemed to be incorporated therein by reference and all
exhibits (including exhibits incorporated by reference).
(g) Deliver to each Holder of Registrable Securities, their counsel
and each underwriter, if any, without charge, as many copies of each
Prospectus and each amendment or supplement thereto as such Persons may
reasonably request; and, subject to the last paragraph of this Section 3,
the Company hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the Holders of Registrable
Securities and the underwriter or underwriters or agents, if any, in
connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any offering of Registrable Securities, to register or
qualify, and cooperate with the Holders of such Registrable Securities,
the managing underwriter or underwriters, if any, and their respective
counsel in connection with the registration or qualification (or exemption
from such registration or qualification) of, such Registrable Securities
for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as the managing underwriter or
underwriters reasonably request in writing, or, in the event of a
non-underwritten offering, as the Holders of a majority of such
Registrable Securities may request; PROVIDED, HOWEVER, that where
Registrable Securities are offered other than through an underwritten
offering, the Company agrees to cause its counsel to perform Blue Sky
investigations and file registrations and qualifications required to be
filed pursuant to this Section 3(h); keep each such registration or
qualification (or exemption therefrom) effective during the period the
Registration Statement relating to such Registrable Securities is required
to be kept effective pursuant to this Agreement and do any and all other
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acts or things necessary or advisable to enable the disposition in such
jurisdictions of the securities covered thereby; PROVIDED, HOWEVER, that
the Company will not be required to (A) qualify generally to do business
in any jurisdiction where it is not then so qualified, (B) take any action
that would subject it to general service of process in any such
jurisdiction where it is not then so subject or (C) become subject to
taxation in any jurisdiction where it is not then so subject.
(i) Cooperate with the Holders of Registrable Securities and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable
Securities to be sold, which certificates shall not bear any restrictive
legends whatsoever and shall be in a form eligible for deposit with The
Depository Trust Company ("DTC"); and enable such Registrable Securities
to be in such denominations and registered in such names as the managing
underwriter or underwriters, if any, or Holders may reasonably request at
least two business days prior to any sale of Registrable Securities in a
firm commitment underwritten public offering.
(j) Use its best efforts to cause the Registrable Securities covered
by a Registration Statement to be registered with or approved by such
other governmental agencies or authorities within the United States as may
be necessary to enable the seller or sellers thereof or the underwriter or
underwriters, if any, to consummate the disposition of such Registrable
Securities, except as may be required solely as a consequence of the
nature of such selling Holder's business, in which case the Company will
cooperate in all reasonable respects with the filing of the Registration
Statement and the granting of such approvals.
(k) Upon the occurrence of any event contemplated by Section 3(c)(v)
or 3(c)(vi) above, as promptly as practicable prepare a supplement or
post-effective amendment to the Registration Statement or a supplement to
the related Prospectus or any document incorporated or deemed to be
'incorporated therein by reference, and, subject to Section 3(a) hereof,
file such with the SEC so that, as thereafter delivered to the purchasers
of Registrable Securities being sold thereunder, such Prospectus will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and will otherwise comply with law.
(1) Prior to the effective date of a Registration Statement, (i)
provide the registrar for the Registrable Securities with certificates for
such securities in a form eligible for deposit with DTC and (ii) provide a
CUSIP number for such securities.
(m) Enter into an underwriting agreement in form, scope and
substance as is customary in underwritten offerings and take all such
other actions as are reasonably requested by the managing underwriter or
underwriters in order to expedite or facilitate the registration or
disposition of such Registrable Securities in any underwritten offering to
be made of the Registrable Securities in accordance with this Agreement,
and in such connection, (i) make such representations and warranties to,
and covenants with,
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the underwriter or underwriters, with respect to the business of the
Company and the subsidiaries of the Company, and the Registration
Statement, Prospectus and documents, if any, incorporated or deemed to be
incorporated by reference therein, in each case, in form, substance and
scope as are customarily made by issuers to underwriters in underwritten
offerings, and confirm the same if and when requested: (ii) use reasonable
efforts to obtain opinions of counsel to the Company and updates thereof,
addressed to the underwriter or underwriters covering the matters
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by underwriters; (iii)
use reasonable efforts to obtain "cold comfort letters and updates thereof
from the independent certified public accountants of the Company (and, if
applicable, the subsidiaries of the Company) and, if necessary, any other
independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements
and financial data are, or are required to be, included in the
Registration Statement, addressed to each of the underwriters, such
letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with
underwritten offerings and such other matters as reasonably requested by
the managing underwriter or underwriters and as permitted by the Statement
of Auditing Standards No. 72; and (iv) if an underwriting agreement is
entered into, the same shall contain customary indemnification provisions
and procedures no less favorable than those set forth in Section 5 (or
such other provisions and procedures acceptable to Holders of a majority
of Registrable Securities covered by such Registration Statement and the
managing underwriter or underwriters or agents) with respect to all
parties to be indemnified pursuant to said Section. The above shall be
done at each closing under such underwriting agreement, or as and to the
extent required thereunder.
(n) Make available for inspection by a representative of the Holders
of Registrable Securities being sold, any underwriter participating in any
such disposition of Registrable Securities, if any, and any attorney or
accountant retained by such representative of the Holders or underwriter
(collectively, the "INSPECTORS"), at the offices where normally kept,
during reasonable business hours, all financial and other records and
pertinent corporate documents of the Company and the subsidiaries of the
Company, and cause the officers, directors and employees of the Company
and the subsidiaries of the Company to supply all information in each case
reasonably requested by any such Inspector in connection with such
Registration Statement; PROVIDED, HOWEVER, that all information shall be
kept confidential by such Inspector, except to the extent that (i) the
disclosure of such information is necessary to avoid or correct a
misstatement or omission in the Registration Statement, (ii) the release
of such information is ordered pursuant to a subpoena or other order from
a court of competent jurisdiction, (iii) disclosure of such information
is, in the opinion of counsel for any Inspector, necessary or advisable in
connection with any action, claim, suit or proceeding, directly or
indirectly, involving or potentially involving such Inspector and arising
out of, based upon, relating to or involving this Agreement or any of the
transactions contemplated hereby or arising hereunder, or (iv) such
information has been made generally available to the public. Each Selling
Holder of such Registrable Securities agrees that information obtained by
it as a result of such inspections shall be deemed confidential and
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shall not be used by it as the basis for any market transactions in the
securities of the Company or of any of its affiliates unless and until
such is generally available to the public. Each Selling Holder of such
Registrable Securities further agrees that it will, upon learning that
disclosure of such information is sought in a court of competent
jurisdiction, give prompt notice to the Company and allow the Company to
undertake appropriate action to prevent disclosure of the information
deemed confidential at the Company's sole expense.
(o) Comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earnings statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder (or any similar rule promulgated under the Securities Act)
no later than forty-five (45) days after the end of any 12-month period
(or ninety (90) days after the end of any 12-month period if such period
is a fiscal year) (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold to an underwriter or to underwriters in a
firm commitment or best efforts underwritten offering and (ii) if not sold
to an underwriter or to underwriters in such an offering, commencing on
the first day of the first fiscal quarter of the Company after the
effective date of the relevant Registration Statement, which statements
shall cover said 12-month periods.
(p) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on each securities
exchange, if any, on which similar securities issued by the Company are then
listed.
(q) Cooperate with the Selling Holders of Registrable Securities to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any restrictive legends and
registered in such names as the Selling Holders may reasonably request at least
two business days prior to the closing of any sale of Registrable Securities.
Each seller of Registrable Securities as to which any registration
is being effected agrees, as a condition to the registration obligations with
respect to such Holder provided herein, to furnish to the Company such
information regarding such seller and the distribution of such Registrable
Securities as the Company may, from time to time, reasonably request in writing
to comply with the Securities Act and other applicable law. The Company may
exclude from such registration the Registrable Securities of any seller who
fails to furnish such information within a reasonable time after receiving such
request. If the identity of a seller of Registrable Securities is to be
disclosed in the Registration Statement, such seller shall be permitted to
include all information regarding such seller as it shall reasonably request.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(c)(ii), 3(c)(iv),
3(c)(v), or 3(c)(vi) hereof, such Holder will forthwith discontinue disposition
of such Registrable Securities covered by the Registration Statement or
Prospectus until such Holder's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 3(k) hereof), or until it is advised
in writing (the "ADVICE") by the Company
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that the use of the applicable Prospectus may be resumed, and has received
copies of any amendments or supplements thereto, and, if so directed by the
Company, such Holder will deliver to the Company all copies, other than
permanent file copies, then in such Holder's possession, of the Prospectus
covering such Registrable Securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the period of time
for which a Registration Statement is required hereunder to be effective shall
be extended by the number of days during such periods from and including the
date of the giving of such notice to and including the date when each seller of
Registrable Securities covered by such Registration Statement shall have
received (x) the copies of the supplemented or amended Prospectus contemplated
by Section 3(k) hereof or (y) the Advice.
Section 4. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Holder and each Person, if any, who controls
such Holder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, or is under common control with, or is
controlled by, such Holder, from and against any and all losses, claims, damages
and liabilities (including, without limitation, the reasonable legal fees and
other reasonable out-of-pocket expenses actually incurred in connection with any
suit, action or proceeding or any claim asserted), caused by, arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or caused by
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or caused by any omission
or alleged omission to state in any such Prospectus a material fact required to
be stated or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Holder furnished to the Company in
writing by such Holder expressly for use therein; PROVIDED, HOWEVER, that the
Company will not be liable if such untrue statement or omission or alleged
untrue statement or omission was contained or made in any preliminary prospectus
and corrected in the Prospectus or any amendment or supplement thereto and the
Prospectus does not contain any other untrue statement or omission or alleged
untrue statement or omission of a material fact that was the subject matter of
the related proceeding and any such loss, liability, claim, damage or expense
suffered or incurred by the Holders resulted from any action, claim or suit by
any Person who purchased Registrable Securities which are the subject thereof
from such Holder and it is established in the related proceeding that such
Holder failed to deliver or provide a copy of the Prospectus (as mended or
supplemented) to such Person with or prior to the confirmation of the sale of
such Registrable Securities sold to such Person if required by applicable law,
unless such failure to deliver or provide a copy of the Prospectus (as amended
or supplemented was a result of noncompliance by the Company with Section 5 of
this Agreement.
(b) Each Holder agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign any Registration
Statement, and each Person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section
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20 of the Exchange Act to the same extent as the foregoing indemnity from the
Company to such Holder, but only with reference to information relating to such
Holder furnished to the Company in writing by such Holder expressly for use in
any Registration Statement or any Prospectus (or any amendment or supplement
thereto) or any preliminary prospectus. The liability of any Holder under this
paragraph shall in no event exceed the proceeds received by such Holder from
sales of Registrable Securities giving rise to such obligations.
(c) In case any suit, action, proceeding (including any governmental
or regulatory investigation), claim or demand shall be instituted involving any
Person in respect of which indemnity may be sought pursuant to either paragraph
(a) or (b) above, such Person (the "INDEMNIFIED PARTY") shall promptly notify
the Person against which such indemnity may be sought (the "INDEMNIFYING PARTY")
in writing and the Indemnifying Party, upon request of the Indemnified Party,
shall retain counsel reasonably satisfactory to the Indemnified Party to
represent the Indemnified Party and any others the Indemnifying Party may
reasonably designate in such proceeding and shall pay the reasonable fees and
expenses actually incurred of such counsel relating to such proceeding;
PROVIDED, HOWEVER, that the failure to so notify the Indemnifying Party shall
not relieve it of any obligation or liability which it may have hereunder or
otherwise (unless and only to the extent that such failure directly results in
the loss or compromise of any material rights or defenses by such Indemnifying
Party and such Indemnifying Party was not otherwise aware of such action or
claim). In any such proceeding, any Indemnified Party shall have the right to
retain its own counsel, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Party unless (i) the Indemnifying Party and the
Indemnified Party shall have mutually agreed in writing to the contrary, (ii)
the Indemnifying Party shall have failed to retain within a reasonable period of
time counsel reasonably satisfactory to such Indemnified Party or parties or
(iii) the named parties to any such proceeding (including any impleaded parties)
include both such Indemnified Party or parties and the indemnifying parties or
an affiliate of the indemnifying parties or such indemnified parties and
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. It is understood that,
unless there exists a conflict among indemnified parties, the indemnifying
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all such indemnified
parties and that all such fees and expenses shall be reimbursed promptly after
receipt of the invoice therefore as they are incurred. Any such separate firm
for the Holders and such control Persons of the Holders shall be designated in
writing by Holders who sold a majority in interest of Registrable Securities
sold by all such Holders and any such separate firm for the Company, its
directors, its officers and such control Persons of the Company shall be
designated in writing by the Company. The Indemnifying Party shall not be liable
for any settlement of any proceeding
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effected without its prior written consent, but if settled with such consent or
if there is a final non-appealable judgment for the plaintiff for which the
Indemnified Party is entitled to indemnification pursuant to this Agreement, the
Indemnifying Party agrees to indemnify any Indemnified Party from and against
any loss or liability 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 reasonable fees and
expenses actually incurred by counsel as contemplated by the third sentence of
this paragraph, the Indemnifying Party agrees that it shall be liable for any
settlement of any proceeding effected without its prior 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; PROVIDED, HOWEVER, that the Indemnifying
Party shall not be liable for any settlement effected without its consent
pursuant to this sentence if the Indemnifying Party is contesting, in good
faith, the request for reimbursement. No Indemnifying Party shall, without the
prior written consent of the Indemnified Party, effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Party is or
could have been a party and indemnity could have been sought hereunder by such
Indemnified Party, unless such settlement (1) includes an unconditional release
of such Indemnified Party in form and substance satisfactory to such Indemnified
Party from all liability on Claims that are the subject matter of such
proceeding and (2) does not include any statement as to an admission of fault,
culpability or failure to act by or on behalf of any Indemnified Party.
(d) If the indemnification provided for in paragraph (a) or (b) of
this Section 4 is unavailable (other than by reason of the exceptions
specifically provided therein) to, or insufficient to hold harmless, an
Indemnified Party in respect of any losses, claims, damages or liabilities
referred to therein, then each Indemnifying Party under such paragraphs, in lieu
of indemnifying such Indemnified Party thereunder and in order to provide for
just and equitable contribution, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect (i) the relative
benefits received by the Company on the one hand and the Holders on the other
hand from the offering of such Registrable Securities or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, not only such
relative benefits but also the relative fault of the Company on the one hand and
the Holders on the other in connection with the statements or omissions (or
alleged statements or omissions) that resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of the Company on the one hand and
the Holders on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Holders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in the
circumstances.
(e) The parties agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by PRO RATA allocation
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Party as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses actually incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 4, in no event shall a Holder be
required to contribute any amount in excess of the amount by which proceeds
received by such Holder from sales of Registrable Securities exceeds the amount
of any damages that such Holder has otherwise
17
<PAGE>
been required to pay or has paid by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
(f) The indemnity and contribution agreements contained in this
Section 4 will be in addition to any which the indemnifying parties may
otherwise have to the indemnified parties referred to above.
Section 5. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company has not entered into nor
will the Company on or after the date of this Agreement enter into, or cause or
permit any of its subsidiaries to enter into, any agreement which is
inconsistent with the rights granted to the Holders of Registrable Securities in
this Agreement or otherwise conflicts with the provisions hereof.
(b) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company shall
not, directly or indirectly, take any action with respect to the Registrable
Securities as a class that would adversely affect the ability of the Holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not
be amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given unless the Company has obtained the prior
written consent of Holders of not less than a majority of the outstanding
Registrable Securities; PROVIDED, HOWEVER, that Section 4 hereof and this
Section 5(c) may not be amended, modified or supplemented without the prior
written consent of each Holder (including any Person who was a Holder of
Registrable Securities disposed of pursuant to any Registration Statement).
Notwithstanding the foregoing, a waiver or consent to departure from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders of Registrable Securities whose securities are being sold
pursuant to a Registration Statement and that does not directly or indirectly
affect, impair, limit or compromise the rights of other Holders of Registrable
Securities may be given by the Holders of not less than a majority of the
Registrable Securities proposed to be sold by such Holders pursuant to such
Registration Statement. In addition, each such amendment, modification,
supplement and waiver must be agreed to in writing by the Company.
(d) NOTICES. All notices, requests, demands and other communications
hereunder, and each other agreement required to be entered into pursuant to the
terms and conditions of this Agreement, shall be in writing and shall be
delivered by hand, overnight courier, facsimile transmission, or by United
States Mail, and shall be deemed to have been duly given when actually received,
or when mailed, first class postage prepaid, certified mail, return receipt
requested, to the addresses set forth below, or to such other address as may be
designated hereafter by prior written notice from the recipient to the sender:
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If to the Company: Packaged Ice, Inc.
Attention: Chief Executive Officer
8572 Katy Freeway, Suite 101
Houston, Texas 77024
With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Attention: Alan Schoenbaum
300 Convent, Suite 1500
San Antonio, Texas 78205
Facsimile: (210) 224-2035
If to the Investor: Ares Leveraged investment Fund, L.P.
Attention: David Sachs, Vice President
1999 Avenue of the Stars
Los Angeles, CA 90067
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto and the Holders; PROVIDED, HOWEVER, that this Agreement shall not inure
to the benefit of or be binding upon a successor or assign of a Holder unless
such successor or assign holds Registrable Securities.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AS APPLIED TO CONTRACTS MADE
AND PERFORMED WITHIN THE STATE OF TEXAS WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF THE STATE OF TEXAS IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT.
(i) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
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<PAGE>
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(j) THIRD PARTY BENEFICIARY. The Holders are intended third party
beneficiaries of this Agreement and this Agreement may be enforced by such
Persons.
(k) ENTIRE AGREEMENT. The Recapitalization Agreement and this
Agreement, collectively are intended by the parties as a final expression of
their agreement, and is intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and therein. This Agreement and the Recapitalization
Agreement supersede all prior agreements and understandings between the parties
with respect to such subject matter.
(l) SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
by any of its affiliates (as such term is defined in Rule 405 under the
Securities Act) shall not be counted in determining whether such consent or
approval was given by the holders of such required percentage.
[REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE FOLLOWS]
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REGISTRATION RIGHTS AGREEMENT
SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PACKAGED ICE, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
ARES LEVERAGED INVESTMENT FUND, L.P.
By: Ares Management, L.P.,
Its General Partner
By:__________________________________
Name:________________________________
Title:_______________________________
EXHIBI 4.7
ANNEX A - FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
DATED AS OF FEBRUARY 3, 1999
AMONG
PACKAGED ICE, INC.,
AND
SILVER BRANDS PARTNERS, L.P.
<PAGE>
TABLE OF CONTENTS
Section Page
Section 1. Definitions......................................................1
Section 2. Registration Rights..............................................4
2.1 (a)Demand Registration.............................................4
(b)Effective Registration..........................................4
(c)Restrictions on Sale by Holders.................................5
(d)Underwritten Registrations......................................5
(e)Expenses........................................................5
(f)Priority in Demand Registration.................................6
2.2 (a)Piggy-Back Registration.........................................6
(b)Priority in Piggyback Registration..............................7
2.3 Limitations, Conditions and Qualifications to Obligations
Under Registration Covenants......................................8
2.4 Restrictions on Sale by the Company and Others.....................9
2.5 Rule 144 and Rule 144A.............................................9
Section 3. Registration Procedures...........................................9
Section 4. Indemnification and Contribution.................................15
Section 5. Miscellaneous....................................................18
(a) No Inconsistent Agreements....................................18
(b) Adjustments Affecting Registrable Securities..................18
(c) Amendments and Waivers........................................18
(d) Notices.......................................................18
(e) Successors and Assigns........................................19
(f) Counterparts..................................................19
(g) Headings......................................................19
(h) GOVERNING LAW.................................................19
(i) Severability..................................................19
(j) Third Party Beneficiary.......................................19
(k) Entire Agreement..............................................19
(l) Securities Held by the Company or Its Affiliates..............20
i
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REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is made and entered
into as of February 3, 1999 __________, ____, among PACKAGED ICE, INC., a Texas
corporation (the "COMPANY"), SILVER BRANDS PARTNERS, L.P. (the "Investor").
This Agreement is entered into in connection with the issuance of 90,354
shares of Common Stock (the "Converted Shares") of the Company pursuant to the
letter agreement entered into between the Company and the Investor on January
28, 1999 (the "Letter Agreement").
In consideration of the foregoing, the parties hereto agree as follows:
Section 1. DEFINITIONS. As used in this Agreement, the following defined
terms shall have the following meanings:
"ADVICE" has the meaning ascribed to such term in the last paragraph of
Section 3 hereof.
"BUSINESS DAY" shall mean a day that is not a Legal Holiday.
"COMMON STOCK" shall mean the shares of common stock, par value $.01
per share, of the Company.
"CONVERTED SHARES" has the meaning ascribed to such term in the
preamble of this Agreement.
"DEMAND REGISTRATION" has the meaning ascribed to such term in Section
2.1(a) hereof.
"DEMAND RIGHT HOLDERS" means persons with "demand" registration rights
pursuant to a contractual commitment of the Company.
"DTC" has the meaning ascribed to such term in Section 3(i) hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended
from time to time and the rules and regulations of the SEC promulgated
thereunder.
"HOLDER" means Investor, for so long as it owns any of the Registrable
Securities, and each of its successors, assigns and direct and indirect
transferees who become registered owners of such Registrable Securities.
"INCLUDED SECURITIES" has the meaning ascribed to such term in Section
2.1(a) hereof.
"INDEMNIFIED PARTY" has the meaning ascribed to such term in Section
4(c) hereof.
"INSPECTORS" has the meaning ascribed to such term in Section 3(n)
hereof.
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"INVESTOR" has the meaning ascribed to that term in the preamble of
this Agreement.
"LEGAL HOLIDAY" shall mean a Saturday, a Sunday or a day on which
banking institutions in New York, New York are required by law, regulation
or executive order to remain closed.
"PERSON" shall mean an individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political
subdivision thereof.
"PIGGY-BACK REGISTRATION" has the meaning ascribed to such term in
Section 2.2 hereof.
"PROSPECTUS" means the prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to
completion and a prospectus that includes any information previously
omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities
Act), as amended or supplemented by any prospectus supplement, and all
other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference or
deemed to be incorporated by reference in such Prospectus.
"PUBLIC EQUITY OFFERING" means an underwritten offer and sale of
capital stock of the Company pursuant to a registration statement that has
been declared effective by the Commission pursuant to the Securities Act
(other than a registration statement on Form S-8 or otherwise relating to
equity securities issuable under any employee benefit plan of the
Company).
"REGISTRABLE SECURITIES" means any of the Converted Shares and any
other securities issued or issuable with respect to any Converted Shares
by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. As to any particular Registrable Securities,
such securities shall cease to be Registrable Securities when (i) a
Registration Statement with respect to the offering of such securities by
the Holder thereof shall have been declared effective under the Securities
Act and such securities shall have been disposed of by such Holder
pursuant to such Registration Statement, (ii) such securities are eligible
for sale to the public pursuant to Rule 144(k) (or any similar provision
then in force, but not Rule 144A) promulgated under the Securities Act,
(iii) such securities shall have been otherwise transferred by such Holder
and new certificates for such securities not bearing a legend restricting
further transfer shall have been delivered by the Company or its transfer
agent and subsequent disposition of such securities shall not require
registration or qualification under the Securities Act or any similar
state law then in force or (iv) such securities shall have ceased to be
outstanding.
"REGISTRATION EXPENSES" shall mean all expenses incident to the
Company's performance of or compliance with its obligations, under this
Agreement, including, without limitation, all SEC and stock exchange or
National Association of Securities Dealers, Inc. registration and filing
fees and expenses, fees and expenses of compliance with securities or blue
sky laws (including, without limitation, reasonable fees and disbursements
of counsel for the
2
<PAGE>
underwriters in connection with blue sky qualifications of the Registrable
Securities), preparing, printing, filing, duplicating and distributing the
Registration Statement and the related Prospectus, the cost of printing
stock certificates, the cost and charges of any transfer agent, rating
agency fees, printing expenses, messenger, telephone and delivery
expenses, fees and disbursements of counsel for the Company and all
independent certified public accountants, the fees and disbursements of
underwriters customarily paid by issuers or sellers of securities (but not
including any underwriting discounts or commissions or transfer taxes, if
any, attributable to the sale of Registrable Securities by Selling
Holders), fees and expenses of one counsel for the Holders and other
reasonable out-of-pocket expenses of the Holders.
"REGISTRATION STATEMENT" shall mean any appropriate registration
statement of the Company filed with the SEC pursuant to the Securities Act
which covers any of the Registrable Securities pursuant to the provisions
of this Agreement and all amendments and supplements to any such
Registration Statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"REQUISITE SECURITIES" shall mean a number of Registrable Securities
equal to not less than 25% of the Registrable Securities held in the
aggregate by all Holders.
"RULE 144" shall mean Rule 144 promulgated under the Securities Act, as
such Rule may be amended from time to time, or any similar rule (other
than Rule 144A) or regulation hereafter adopted by the SEC providing for
offers and sales of securities made in compliance therewith resulting in
offers and sales by subsequent holders that are not affiliates of an
issuer of such securities being free of the registration and prospectus
delivery requirements of the Securities Act.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended from
time to time and the rules and regulations of the SEC promulgated
thereunder.
"SELLING HOLDER" shall mean a Holder who is selling Registrable
Securities in accordance with the provisions of Section 2.1 or 2.2 hereof.
"WITHDRAWAL ELECTION" has the meaning ascribed to such term in Section
2.2(b) hereof.
Section 2. REGISTRATION RIGHTS.
2.1 (a) DEMAND REGISTRATION. From time to time, after 180 days
following the completion by the Company of a Public Equity Offering, Holders
owning, individually or in the aggregate, not less than the Requisite Securities
may make a written request for registration under the Securities Act of their
Registrable Securities (a "DEMAND REGISTRATION"). Within 120 days of the receipt
of such written request for a Demand Registration, the Company shall file with
the SEC and use its best efforts to cause to become effective under the
Securities Act a Registration Statement
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with respect to such Registrable Securities. Any such request will specify the
number of Registrable Securities proposed to be sold and will also specify the
intended method of disposition thereof. The Company shall give written notice of
such registration request to all other Holders of Registrable Securities within
15 days after the receipt thereof. Within 20 days after notice of such
registration request by the Company, any Holder may request in writing that such
Holder's Registrable Securities be included in such Registration Statement and
the Company shall include in such Registration Statement the Registrable
Securities of any such Holder requested to be so included (the "INCLUDED
SECURITIES"). Each such request by such other Holders shall specify the number
of Included Securities proposed to be sold and the intended method of
disposition thereof. Subject to Section 2.1(b) hereof, the Company shall be
required to register Registrable Securities pursuant to this Section 2.1(a) on a
maximum of two separate occasions.
Subject to Section 2.1(f) hereof, no other securities of the Company
except securities held by any Holder, any Demand Right Holder, and any Person
entitled to exercise "piggy back" registration rights pursuant to contractual
commitments of the Company shall be included in a Demand Registration.
(b) EFFECTIVE REGISTRATION. A Registration Statement will not be deemed
to have been effected as a Demand Registration unless it has been declared
effective by the SEC and the Company has complied in a timely manner and in all
material respects with all of its obligations under this Agreement with respect
thereto; PROVIDED, HOWEVER, that if, after such Registration Statement has
become effective, the offering of Registrable Securities pursuant to such
Registration Statement is or becomes the subject of any stop order, injunction
or other order or requirement of the SEC or any other governmental or
administrative agency or court that prevents, restrains or otherwise limits the
sale of Registrable Securities pursuant to such Registration Statement for any
reason not attributable to any Holder participating in such registration and
such Registration Statement has not become effective within a reasonable time
period thereafter (not to exceed 60 days), such Registration Statement will be
deemed not to have been effected. If (i) a registration requested pursuant to
this Section 2.1 is deemed not to have been effected or (ii) a Demand
Registration does not remain effective under the Securities Act until at least
the earlier of (A) an aggregate of 90 days after the effective date thereof or
(B) the consummation of the distribution by the Holders of all of the
Registrable Securities covered thereby, then the Company shall continue to be
obligated to effect an additional Demand Registration pursuant to this Section
2.1 provided, that a Demand Registration shall not be counted as such unless the
Selling Holders have sold at least 80% of the Registrable Securities covered
thereby. For purposes of calculating the 90-day period referred to in the
preceding sentence, any period of time during which such Registration Statement
was not in effect shall be excluded. The Holders of Registrable Securities shall
be permitted to withdraw all or any part of the Registrable Securities from a
Demand Registration at any time prior to the effective date of such Demand
Registration.
(c) RESTRICTIONS ON SALE BY HOLDERS. Each Holder of Registrable
Securities whose Registrable Securities are covered by a Registration Statement
filed pursuant to this Section 2.1 and are to be sold thereunder agrees, if and
to the extent reasonably requested by the managing underwriter or underwriters
in an underwritten offering, not to effect any public sale or distribution of
Registrable Securities or of securities of the Company of the same class as any
securities included
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in such Registration Statement, including a sale pursuant to Rule 144 (except as
part of such underwritten offering), during the 30-day period prior to, and
during the 120-day period beginning on, the closing date of each underwritten
offering made pursuant to such Registration Statement, to the extent timely
notified in writing by the Company or such managing underwriter or underwriters.
The foregoing provisions of Section 2.1(c) shall not apply to any
Holder of Registrable Securities if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; PROVIDED, HOWEVER,
that any such Holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any such public sale or distribution of
Registrable Securities or of securities of the Company of the same class as any
securities included in such Registration Statement, including a sale pursuant to
Rule 144 (except as part of such underwritten offering) during such period,
unless it has provided 45 days' prior written notice of such sale or
distribution to the underwriter or underwriters.
(d) UNDERWRITTEN REGISTRATIONS. If any of the Registrable Securities
covered by a Demand Registration are to be sold in an underwritten offering, the
investment banker or investment bankers and manager or managers that will manage
the offering will be selected by the Holders of not less than a majority of the
Registrable Securities then outstanding to be sold thereunder and will be
reasonably acceptable to the Company.
No Holder of Registrable Securities may participate in any underwritten
registration pursuant to a Registration Statement filed under this Agreement
unless such Holder (a) agrees to (i) sell such Holder's Registrable Securities
on the basis provided in and in compliance with any underwriting arrangements
approved by the Holders of not less than a majority of the Registrable
Securities to be sold thereunder and (ii) comply with Rules 10b-6 and 10b-7
under the Exchange Act and (b) completes and executes all questionnaires, powers
of attorney, indemnities, underwriting agreements and other documents reasonably
required under the terms of such underwriting arrangements.
(e) EXPENSES. The Company will pay all Registration Expenses in
connection with the registrations requested pursuant to Section 2.1(a) hereof.
Each Holder of Registrable Securities shall pay all underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or disposition of
such Holder's Registrable Securities pursuant to a Registration Statement
requested pursuant to this Section 2.1.
(f) PRIORITY IN DEMAND REGISTRATION. In a registration pursuant to
Section 2.1 hereof involving an underwritten offering, if the managing
underwriter or underwriters of such underwritten offering have informed, in
writing, the Company and the Selling Holders who have requested such Demand
Registration or who have sought inclusion therein that in such underwriter's or
underwriters' opinion the total number of securities which the Selling Holders
and any other Person desiring to participate in such registration intend to
include in such offering is such as to adversely affect the success of such
offering, including the price at which such securities can be sold, then the
Company will be required to include in such registration only the amount of
securities which it is so advised should be included in such registration. In
such event securities shall be registered in such registration in the following
order of priority: (i) FIRST, the securities which have been requested to
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be included in such registration by the Holders of Registrable Securities
pursuant to this Agreement and the Demand Right Holders (pro rata based on the
amount of securities sought to be registered by such Persons), (ii) SECOND,
provided that no securities sought to be included by the Holders and the Demand
Right Holders have been excluded from such registration, the securities of other
Persons entitled to exercise "piggy-back" registration rights pursuant to
contractual commitments of the Company (pro rata based on the amount of
securities sought to be registered by such Persons) and (iii) THIRD, securities
the Company proposes to register.
2.2(a) PIGGY-BACK REGISTRATION. If at any time after the Company has
completed a Public Equity Offering, the Company proposes to file a Registration
Statement under the Securities Act with respect to an offering by the Company
for its own account or for the account of any of its securityholders of any
class of its Common Stock in a firmly underwritten Public Equity Offering (other
than (i) a Registration Statement on Form S-4 or S-8 (or any substitute form
that may be adopted by the SEC) or (ii) a Registration Statement filed in
connection with an exchange offer or offering of securities solely to the
Company's existing securityholders), then the Company shall give written notice
of such proposed filing to the Holders of Registrable Securities as soon as
practicable (but in no event fewer than 20 days before the anticipated filing
date), and such notice shall offer such Holders the opportunity to register such
number of shares of Registrable Securities as each such Holder may request in
writing within 30 days after receipt of such written notice from the Company
(which request shall specify the Registrable Securities intended to be disposed
of by such Selling Holder (a "PIGGY-BACK REGISTRATION"). The Company shall use
its best efforts to keep such Piggy-Back Registration continuously effective
under the Securities Act until at least the earlier of (A) an aggregate of 90
days after the effective date thereof or (B) the consummation of the
distribution by the Holders of all of the Registrable Securities covered
thereby. The Company shall use its best efforts to cause the managing
Underwriter or underwriters, if any, of such proposed offering to permit the
Registrable Securities requested to be included in a Piggy-Back Registration to
be included on the same terms and conditions as any similar securities of the
Company or any other securityholder included therein and to permit the sale or
other disposition of such Registrable Securities in accordance with the intended
method of distribution thereof. Any Selling Holder shall have the right to
withdraw its request for inclusion of its Registrable Securities in any
Registration Statement pursuant to this Section 2.2 by giving written notice to
the Company of its request to withdraw. The Company may withdraw a Piggy-Back
Registration at any time prior to the time it becomes effective or the Company
may elect to delay the registration; PROVIDED, HOWEVER, that the Company shall
give prompt written notice thereof to participating Selling Holders. The Company
will pay all Registration Expenses in connection with each registration of
Registrable Securities requested pursuant to this Section 2.2, and each Holder
of Registrable Securities shall pay all underwriting discounts and commissions
and transfer taxes, if any, relating to the sale or disposition of such Holder's
Registrable Securities pursuant to a Registration Statement effected pursuant to
this Section 2.2.
No registration effected under this Section 2.2, and no failure to
effect a registration under this Section 2.2, shall relieve the Company of its
obligation to effect a registration upon the request of Holders of Registrable
Securities pursuant to Section 2.1 hereof, and no failure to effect a
registration under this Section 2.2 and to complete the sale of securities
registered thereunder in connection therewith shall relieve the Company of any
other obligation under this Agreement.
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(b) PRIORITY IN PIGGYBACK REGISTRATION. In a registration pursuant to
Section 2.2 hereof involving an underwritten offering, if the managing
underwriter or underwriters of such underwritten offering have informed, in
writing, the Company and the Selling Holders requesting inclusion in such
offering that in such underwriter's or underwriters' opinion the total number of
securities which the Company, the Selling Holders and any other Persons desiring
to participate in such registration intend to include in such offering is such
as to adversely affect the success of such offering, including the price at
which such securities can be sold, then the Company will be required to include
in such registration only the amount of securities which it is so advised should
be included in such registration. In such event: (x) in cases initially
involving the registration for sale of securities for the Company's own account,
securities shall be registered in such offering in the following order of
priority: (i) FIRST, the securities which the Company proposes to register, and
(ii) SECOND, the securities which have been requested to be included in such
registration by Persons entitled to exercise "piggy-back" registration rights
pursuant to contractual commitments of the Company (pro rata on the amount of
securities sought to be registered by such Persons); and (y) in cases not
initially involving the registration for sale of securities for the Company's
own account, securities shall be registered in such offering in the following
order of priority: (i) FIRST, the securities of any Person whose exercise of a
"demand" registration right pursuant to a contractual commitment of the Company
is the basis for the registration (provided that if such Person is a Holder of
Registrable Securities, as among Holders of Registrable Securities there shall
be no priority and Registrable Securities sought to be included by Holders of
Registrable Securities shall be included pro rata based on the amount of
securities sought to be registered by such Persons), (ii) SECOND, securities of
other persons entitled to exercise "piggy-back" registration rights pursuant to
contractual commitments (PRO RATA based on the amount of securities sought to be
registered by such persons) and (iii) THIRD, the securities which the Company
proposes to register.
If, as a result of the provisions of this Section 2.2(b), any Selling
Holder shall not be entitled to include all Registrable Securities in a
Piggy-Back Registration that such Selling Holder has requested to be included,
such Selling Holder may elect to withdraw his request to include Registrable
Securities in such registration (a "WITHDRAWAL ELECTION"); PROVIDED, HOWEVER,
that a Withdrawal Election shall be irrevocable and, after making a Withdrawal
Election, a Selling Holder shall no longer have any right to include Registrable
Securities in the registration as to which such Withdrawal Election was made.
2.3 LIMITATIONS, CONDITIONS AND QUALIFICATIONS TO OBLIGATIONS UNDER
REGISTRATION COVENANTS. The obligations of the Company set forth in Sections 2.1
and 2.2 hereof are subject to each of the following limitations, conditions and
qualifications:
(i) Subject to the next sentence of this paragraph, the Company shall
be entitled to postpone, for a reasonable period of time, the filing or
effectiveness of, or suspend the rights of any Holders to make sales pursuant
to, any Registration Statement otherwise required to be prepared, filed and made
and kept effective by it hereunder; PROVIDED, HOWEVER, that the duration of such
postponement or suspension may not exceed the earlier to occur of (A) 15 days
after the cessation of the circumstances described in the next sentence of this
paragraph on which such postponement or suspension is based or (B) 120 days
after the date of the determination of the Board of Directors referred to in the
next sentence, and the duration of any such postponement or suspension shall be
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excluded from the calculation of the 90-day period described in Section 2.1(b)
hereof. Such postponement or suspension may only be effected if the Board of
Directors of the Company determines in good faith that the filing or
effectiveness of, or sales pursuant to, such Registration Statement would
materially impede, delay or interfere with any financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction involving the Company or any of its affiliates (whether or not
planned, proposed or authorized prior to an exercise of demand registration
rights hereunder or any other registration rights agreement) or require
disclosure of material information which the Company has a bona fide business
purpose for preserving as confidential. If the Company shall so postpone the
filing or effectiveness of a Registration Statement or so suspend the rights of
Holders to make sales it shall, as promptly as possible, notify any Selling
Holders of such determination, and the Selling Holders shall (y) have the right,
in the case of a postponement of the filing or effectiveness of a Registration
Statement, upon the affirmative vote of the Holders of not less than a majority
of the Registrable Securities to be included in such Registration Statement, to
withdraw the request for registration by giving written notice to the Company
within 10 days after receipt of such notice or (z) in the case of a suspension
of the right to make sales, receive an extension of the registration period
equal to the number of days of the suspension. Any Demand Registration as to
which the withdrawal election referred to in the preceding sentence has been
effected shall not be counted for purposes of the two Demand Registrations the
Company is required to effect pursuant to Section 2.1 hereof.
(ii) The Company shall not be required by this Agreement to include
securities in a Registration Statement pursuant to Section 2.2 hereof if (i) in
the written opinion of counsel to the Company, addressed to the Holders and
delivered to them, the Holders of such securities seeking registration would be
free to sell all such securities within the current calendar quarter, without
registration, under Rule 144, which opinion may be based in part upon the
representation by such Holders, which representation shall not be unreasonably
withheld, that each such Holder is not an affiliate of the Company within the
meaning of the Securities Act and (ii) all requirements under the Securities Act
for effecting such sales are satisfied at such time.
(iii) The Company's obligations shall be subject to the obligations of
the Selling Holders, which the Selling Holders acknowledge, to furnish all
information and materials and to take any and all actions as may be required
under applicable federal and state securities laws and regulations to permit the
Company to comply with all applicable requirements of the SEC and to obtain any
acceleration of the effective date of such Registration Statement.
(iv) The Company shall not be obligated to cause any special audit to
be undertaken in connection with any registration pursuant to this Agreement
unless such audit is requested by the underwriters with respect to such
registration.
2.4 RESTRICTIONS ON SALE BY THE COMPANY AND OTHERS. The Company
covenants and agrees that it shall not, and that it shall not cause or permit
any of its subsidiaries to, effect any public sale or distribution of any
securities of the same class as any of the Registrable Securities or any
securities convertible into or exchangeable or exercisable for such securities
(or any option or other right for such securities) during the 30-day period
prior to, and during the 90-day period beginning
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on, the commencement of any underwritten offering of Registrable Securities
pursuant to a Demand Registration which has been requested pursuant to this
Agreement, or a Piggy-Back Registration.
2.5 RULE 144. The Company covenants that it will file the reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations adopted by the SEC thereunder in a timely manner and, if
at any time the Company is not required to file such reports, it will, upon the
request of any Holder of Registrable Securities, make publicly available other
information so long as necessary to permit sales pursuant to Rule 144. Upon the
request of any Holder of Registrable Securities, the Company will in a timely
manner deliver to such Holder a written statement as to whether it has complied
with such information requirements.
Section 3. REGISTRATION PROCEDURES. In connection with the obligations of
the Company with respect to any Registration Statement pursuant to Sections 2.1
and 2.2 hereof, the Company shall:
(a) Prepare and file with the SEC as soon as practicable each such
Registration Statement (but in any event on or prior to the date of filing
thereof required under this Agreement) and cause each such Registration
Statement to become effective and remain effective as provided herein;
PROVIDED, HOWEVER, that before filing any such Registration Statement or
any Prospectus or any amendments or supplements thereto (including
documents that would be incorporated or deemed to be incorporated therein
by reference, including such documents filed under the Exchange Act that
would be incorporated therein by reference), the Company shall afford
promptly to the Holders of the Registrable Securities covered by such
Registration Statement, their counsel and the managing underwriter or
underwriters, if any, an opportunity to review copies of all such
documents proposed to be filed a reasonable time prior to the proposed
filing thereof. The Company shall not file any Registration Statement or
Prospectus or any amendments or supplements thereto if the Holders of a
majority of the Registrable Securities covered by such Registration
Statement, their counsel, or the managing underwriter or underwriters, if
any, shall reasonably object in writing unless failure to file any such
amendment or supplement would involve a violation of the Securities Act or
other applicable law.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to such Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the time periods
prescribed hereby; cause the related Prospectus to be supplemented by any
required prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 (or any similar provisions then in force) promulgated
under the Securities Act; and comply with the provisions of the Securities
Act, the Exchange Act and the rules and regulations of the SEC promulgated
thereunder applicable to it with respect to the disposition of all
securities covered by such Registration Statement as so amended or such
Prospectus as so supplemented.
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(c) Notify the Holders of Registrable Securities, their counsel and the
managing underwriter or underwriters, if any, promptly (but in any event
within two (2) Business Days), and confirm such notice in writing, (i)
when a Prospectus or any prospectus supplement or post-effective amendment
has been filed, and, with respect to a Registration Statement or any
post-effective amendment, when the same has become effective (including in
such notice a written statement that any Holder may, upon request, obtain,
without charge, one conformed copy of such Registration Statement or
post-effective amendment including financial statements and schedules and
exhibits), (ii) of the issuance by the SEC of any stop order suspending
the effectiveness of such Registration Statement or of any order
preventing or suspending the use of any Prospectus or the initiation or
threatening of any proceedings for that purpose, (iii) if at any time when
a prospectus is required by the Securities Act to be delivered in
connection with sales of the Registrable Securities the representations
and warranties of the Company contained in any agreement (including any
underwriting agreement) contemplated by Section 3(m) below cease to be
true and correct in any material respect, (iv) of the receipt by the
Company of any notification with respect to (A) the suspension of the
qualification or exemption from qualification of the Registration
Statement or any of the Registrable Securities covered thereby for offer
or sale in any jurisdiction, or (B) the initiation of any proceeding for
such purpose, (v) of the happening of any event, the existence of any
condition or information becoming known that requires the making of any
change in any Registration Statement or Prospectus so that, in the case of
such Registration Statement, it will conform in all material respects with
the requirements of the Securities Act and it will not contain any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, and that in the case of any Prospectus, it will conform in all
material respects with the requirements of the Securities Act and it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, and (vi) of the Company's reasonable determination
that a post-effective amendment to such Registration Statement would be
appropriate.
(d) Use every reasonable effort to prevent the issuance of any order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of a Prospectus or suspending the
qualification (or exemption from qualification) of any of the Registrable
Securities covered thereby for sale in any jurisdiction, and, if any such
order is issued, to obtain the withdrawal of any such order at the
earliest possible moment.
(e) If requested by the managing underwriter or underwriters, if any,
or the Holders of a majority of the Registrable Securities being sold in
connection with an underwriting offering, (i) promptly incorporate in a
prospectus supplement or post-effective amendment such information as the
managing underwriter or underwriters, if any, or such Holders reasonably
request to be included therein to comply with applicable law, (ii) make
all required filings of such prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received
notification of the matters to be incorporated in such prospectus
supplement or post-effective amendment, and (iii) supplement or make
amendments to such Registration Statement.
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(f) Furnish to each Holder of Registrable Securities who so requests
and to counsel for the Holders of Registrable Securities and each managing
underwriter, if any, without charge, upon request, one conformed copy of
the Registration Statement and each post-effective amendment thereto,
including financial statements and schedules, and of all documents
incorporated or deemed to be incorporated therein by reference and all
exhibits (including exhibits incorporated by reference).
(g) Deliver to each Holder of Registrable Securities, their counsel and
each underwriter, if any, without charge, as many copies of each
Prospectus and each amendment or supplement thereto as such Persons may
reasonably request; and, subject to the last paragraph of this Section 3,
the Company hereby consents to the use of such Prospectus and each
amendment or supplement thereto by each of the Holders of Registrable
Securities and the underwriter or underwriters or agents, if any, in
connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto.
(h) Prior to any offering of Registrable Securities, to register or
qualify, and cooperate with the Holders of such Registrable Securities,
the managing underwriter or underwriters, if any, and their respective
counsel in connection with the registration or qualification (or exemption
from such registration or qualification) of, such Registrable Securities
for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as the managing underwriter or
underwriters reasonably request in writing, or, in the event of a
non-underwritten offering, as the Holders of a majority of such
Registrable Securities may request; PROVIDED, HOWEVER, that where
Registrable Securities are offered other than through an underwritten
offering, the Company agrees to cause its counsel to perform Blue Sky
investigations and file registrations and qualifications required to be
filed pursuant to this Section 3(h); keep each such registration or
qualification (or exemption therefrom) effective during the period the
Registration Statement relating to such Registrable Securities is required
to be kept effective pursuant to this Agreement and do any and all other
acts or things necessary or advisable to enable the disposition in such
jurisdictions of the securities covered thereby; PROVIDED, HOWEVER, that
the Company will not be required to (A) qualify generally to do business
in any jurisdiction where it is not then so qualified, (B) take any action
that would subject it to general service of process in any such
jurisdiction where it is not then so subject or (C) become subject to
taxation in any jurisdiction where it is not then so subject.
(i) Cooperate with the Holders of Registrable Securities and the
managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable
Securities to be sold, which certificates shall not bear any restrictive
legends whatsoever and shall be in a form eligible for deposit with The
Depository Trust Company ("DTC"); and enable such Registrable Securities
to be in such denominations and registered in such names as the managing
underwriter or underwriters, if any, or Holders may reasonably request at
least two business days prior to any sale of Registrable Securities in a
firm commitment underwritten public offering.
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(j) Use its best efforts to cause the Registrable Securities covered by
a Registration Statement to be registered with or approved by such other
governmental agencies or authorities within the United States as may be
necessary to enable the seller or sellers thereof or the underwriter or
underwriters, if any, to consummate the disposition of such Registrable
Securities, except as may be required solely as a consequence of the
nature of such selling Holder's business, in which case the Company will
cooperate in all reasonable respects with the filing of the Registration
Statement and the granting of such approvals.
(k) Upon the occurrence of any event contemplated by Section 3(c)(v) or
3(c)(vi) above, as promptly as practicable prepare a supplement or
post-effective amendment to the Registration Statement or a supplement to
the related Prospectus or any document incorporated or deemed to be
'incorporated therein by reference, and, subject to Section 3(a) hereof,
file such with the SEC so that, as thereafter delivered to the purchasers
of Registrable Securities being sold thereunder, such Prospectus will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and will otherwise comply with law.
(1) Prior to the effective date of a Registration Statement, (i)
provide the registrar for the Registrable Securities with certificates for
such securities in a form eligible for deposit with DTC and (ii) provide a
CUSIP number for such securities.
(m) Enter into an underwriting agreement in form, scope and substance
as is customary in underwritten offerings and take all such other actions
as are reasonably requested by the managing underwriter or underwriters in
order to expedite or facilitate the registration or disposition of such
Registrable Securities in any underwritten offering to be made of the
Registrable Securities in accordance with this Agreement, and in such
connection, (i) make such representations and warranties to, and covenants
with, the underwriter or underwriters, with respect to the business of the
Company and the subsidiaries of the Company, and the Registration
Statement, Prospectus and documents, if any, incorporated or deemed to be
incorporated by reference therein, in each case, in form, substance and
scope as are customarily made by issuers to underwriters in underwritten
offerings, and confirm the same if and when requested: (ii) use reasonable
efforts to obtain opinions of counsel to the Company and updates thereof,
addressed to the underwriter or underwriters covering the matters
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by underwriters; (iii)
use reasonable efforts to obtain "cold comfort letters and updates thereof
from the independent certified public accountants of the Company (and, if
applicable, the subsidiaries of the Company) and, if necessary, any other
independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements
and financial data are, or are required to be, included in the
Registration Statement, addressed to each of the underwriters, such
letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with
underwritten offerings and such other matters as reasonably requested by
the managing underwriter or underwriters and as permitted by the Statement
of Auditing Standards No. 72;
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and (iv) if an underwriting agreement is entered into, the same shall
contain customary indemnification provisions and procedures no less
favorable than those set forth in Section 5 (or such other provisions and
procedures acceptable to Holders of a majority of Registrable Securities
covered by such Registration Statement and the managing underwriter or
underwriters or agents) with respect to all parties to be indemnified
pursuant to said Section. The above shall be done at each closing under
such underwriting agreement, or as and to the extent required thereunder.
(n) Make available for inspection by a representative of the Holders of
Registrable Securities being sold, any underwriter participating in any
such disposition of Registrable Securities, if any, and any attorney or
accountant retained by such representative of the Holders or underwriter
(collectively, the "INSPECTORS"), at the offices where normally kept,
during reasonable business hours, all financial and other records and
pertinent corporate documents of the Company and the subsidiaries of the
Company, and cause the officers, directors and employees of the Company
and the subsidiaries of the Company to supply all information in each case
reasonably requested by any such Inspector in connection with such
Registration Statement; PROVIDED, HOWEVER, that all information shall be
kept confidential by such Inspector, except to the extent that (i) the
disclosure of such information is necessary to avoid or correct a
misstatement or omission in the Registration Statement, (ii) the release
of such information is ordered pursuant to a subpoena or other order from
a court of competent jurisdiction, (iii) disclosure of such information
is, in the opinion of counsel for any Inspector, necessary or advisable in
connection with any action, claim, suit or proceeding, directly or
indirectly, involving or potentially involving such Inspector and arising
out of, based upon, relating to or involving this Agreement or any of the
transactions contemplated hereby or arising hereunder, or (iv) such
information has been made generally available to the public. Each Selling
Holder of such Registrable Securities agrees that information obtained by
it as a result of such inspections shall be deemed confidential and shall
not be used by it as the basis for any market transactions in the
securities of the Company or of any of its affiliates unless and until
such is generally available to the public. Each Selling Holder of such
Registrable Securities further agrees that it will, upon learning that
disclosure of such information is sought in a court of competent
jurisdiction, give prompt notice to the Company and allow the Company to
undertake appropriate action to prevent disclosure of the information
deemed confidential at the Company's sole expense.
(o) Comply with all applicable rules and regulations of the SEC and
make generally available to its securityholders earnings statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder (or any similar rule promulgated under the Securities Act)
no later than forty-five (45) days after the end of any 12-month period
(or ninety (90) days after the end of any 12-month period if such period
is a fiscal year) (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold to an underwriter or to underwriters in a
firm commitment or best efforts underwritten offering and (ii) if not sold
to an underwriter or to underwriters in such an offering, commencing on
the first day of the first fiscal quarter of the Company after the
effective date of the relevant Registration Statement, which statements
shall cover said 12-month periods.
13
<PAGE>
(p) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on each securities exchange,
if any, on which similar securities issued by the Company are then listed.
(q) Cooperate with the Selling Holders of Registrable Securities to
facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold and not bearing any
restrictive legends and registered in such names as the Selling Holders
may reasonably request at least two business days prior to the closing of
any sale of Registrable Securities.
Each seller of Registrable Securities as to which any registration is
being effected agrees, as a condition to the registration obligations with
respect to such Holder provided herein, to furnish to the Company such
information regarding such seller and the distribution of such Registrable
Securities as the Company may, from time to time, reasonably request in writing
to comply with the Securities Act and other applicable law. The Company may
exclude from such registration the Registrable Securities of any seller who
fails to furnish such information within a reasonable time after receiving such
request. If the identity of a seller of Registrable Securities is to be
disclosed in the Registration Statement, such seller shall be permitted to
include all information regarding such seller as it shall reasonably request.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(c)(ii), 3(c)(iv),
3(c)(v), or 3(c)(vi) hereof, such Holder will forthwith discontinue disposition
of such Registrable Securities covered by the Registration Statement or
Prospectus until such Holder's receipt of the copies of the supplemented or
amended Prospectus contemplated by Section 3(k) hereof), or until it is advised
in writing (the "ADVICE") by the Company that the use of the applicable
Prospectus may be resumed, and has received copies of any amendments or
supplements thereto, and, if so directed by the Company, such Holder will
deliver to the Company all copies, other than permanent file copies, then in
such Holder's possession, of the Prospectus covering such Registrable Securities
current at the time of receipt of such notice. In the event the Company shall
give any such notice, the period of time for which a Registration Statement is
required hereunder to be effective shall be extended by the number of days
during such periods from and including the date of the giving of such notice to
and including the date when each seller of Registrable Securities covered by
such Registration Statement shall have received (x) the copies of the
supplemented or amended Prospectus contemplated by Section 3(k) hereof or (y)
the Advice.
Section 4. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Holder and each Person, if any, who controls
such Holder within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, or is under common control with, or is
controlled by, such Holder, from and against any and all losses, claims, damages
and liabilities (including, without limitation, the reasonable legal fees and
other reasonable out-of-pocket expenses actually incurred in connection with any
suit, action or proceeding or any claim asserted), caused by, arising out of or
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained in any Registration Statement (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) or caused by
any
14
<PAGE>
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in any Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) or caused by any omission
or alleged omission to state in any such Prospectus a material fact required to
be stated or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Holder furnished to the Company in
writing by such Holder expressly for use therein; PROVIDED, HOWEVER, that the
Company will not be liable if such untrue statement or omission or alleged
untrue statement or omission was contained or made in any preliminary prospectus
and corrected in the Prospectus or any amendment or supplement thereto and the
Prospectus does not contain any other untrue statement or omission or alleged
untrue statement or omission of a material fact that was the subject matter of
the related proceeding and any such loss, liability, claim, damage or expense
suffered or incurred by the Holders resulted from any action, claim or suit by
any Person who purchased Registrable Securities which are the subject thereof
from such Holder and it is established in the related proceeding that such
Holder failed to deliver or provide a copy of the Prospectus (as mended or
supplemented) to such Person with or prior to the confirmation of the sale of
such Registrable Securities sold to such Person if required by applicable law,
unless such failure to deliver or provide a copy of the Prospectus (as amended
or supplemented was a result of noncompliance by the Company with Section 5 of
this Agreement.
(b) Each Holder agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign any Registration
Statement, and each Person, if any, who controls the Company within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Company to such Holder, but
only with reference to information relating to such Holder furnished to the
Company in writing by such Holder expressly for use in any Registration
Statement or any Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus. The liability of any Holder under this paragraph shall
in no event exceed the proceeds received by such Holder from sales of
Registrable Securities giving rise to such obligations.
(c) In case any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be instituted involving any
Person in respect of which indemnity may be sought pursuant to either paragraph
(a) or (b) above, such Person (the "INDEMNIFIED PARTY") shall promptly notify
the Person against which such indemnity may be sought (the "INDEMNIFYING PARTY")
in writing and the Indemnifying Party, upon request of the Indemnified Party,
shall retain counsel reasonably satisfactory to the Indemnified Party to
represent the Indemnified Party and any others the Indemnifying Party may
reasonably designate in such proceeding and shall pay the reasonable fees and
expenses actually incurred of such counsel relating to such proceeding;
PROVIDED, HOWEVER, that the failure to so notify the Indemnifying Party shall
not relieve it of any obligation or liability which it may have hereunder or
otherwise (unless and only to the extent that such failure directly results in
the loss or compromise of any material rights or defenses by such Indemnifying
Party and such Indemnifying Party was not otherwise aware of such action or
claim). In any such proceeding, any Indemnified Party shall have the right to
retain its own
15
<PAGE>
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed in writing to the contrary, (ii) the
Indemnifying Party shall have failed to retain within a reasonable period of
time counsel reasonably satisfactory to such Indemnified Party or parties or
(iii) the named parties to any such proceeding (including any impleaded parties)
include both such Indemnified Party or parties and the indemnifying parties or
an affiliate of the indemnifying parties or such indemnified parties and
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. It is understood that,
unless there exists a conflict among indemnified parties, the indemnifying
parties shall not, in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all such indemnified
parties and that all such fees and expenses shall be reimbursed promptly after
receipt of the invoice therefore as they are incurred. Any such separate firm
for the Holders and such control Persons of the Holders shall be designated in
writing by Holders who sold a majority in interest of Registrable Securities
sold by all such Holders and any such separate firm for the Company, its
directors, its officers and such control Persons of the Company shall be
designated in writing by the Company. The Indemnifying Party shall not be liable
for any settlement of any proceeding effected without its prior written consent,
but if settled with such consent or if there is a final non-appealable judgment
for the plaintiff for which the Indemnified Party is entitled to indemnification
pursuant to this Agreement, the Indemnifying Party agrees to indemnify any
Indemnified Party from and against any loss or liability 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 reasonable fees and expenses actually incurred by counsel
as contemplated by the third sentence of this paragraph, the Indemnifying Party
agrees that it shall be liable for any settlement of any proceeding effected
without its prior 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; PROVIDED,
HOWEVER, that the Indemnifying Party shall not be liable for any settlement
effected without its consent pursuant to this sentence if the Indemnifying Party
is contesting, in good faith, the request for reimbursement. No Indemnifying
Party shall, without the prior written consent of the Indemnified Party, effect
any settlement of any pending or threatened proceeding in respect of which any
Indemnified Party is or could have been a party and indemnity could have been
sought hereunder by such Indemnified Party, unless such settlement (1) includes
an unconditional release of such Indemnified Party in form and substance
satisfactory to such Indemnified Party from all liability on Claims that are the
subject matter of such proceeding and (2) does not include any statement as to
an admission of fault, culpability or failure to act by or on behalf of any
Indemnified Party.
(d) If the indemnification provided for in paragraph (a) or (b) of this
Section 4 is unavailable (other than by reason of the exceptions specifically
provided therein) to, or insufficient to hold harmless, an Indemnified Party in
respect of any losses, claims, damages or liabilities referred to therein, then
each Indemnifying Party under such paragraphs, in lieu of indemnifying such
Indemnified Party thereunder and in order to provide for just and equitable
contribution, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such losses, claims, damages or liabilities in such
proportion as is appropriate to reflect (i) the relative benefits received
16
<PAGE>
by the Company on the one hand and the Holders on the other hand from the
offering of such Registrable Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, not only such relative
benefits but also the relative fault of the Company on the one hand and the
Holders on the other in connection with the statements or omissions (or alleged
statements or omissions) that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof), as well as any other relevant
equitable considerations. The relative fault of the Company on the one hand and
the Holders on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Holders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in the
circumstances.
(e) The parties agree that it would not be just and equitable if
contribution pursuant to this Section 4 were determined by PRO RATA allocation
or by any other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Party as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses actually incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 4, in no event shall a Holder be
required to contribute any amount in excess of the amount by which proceeds
received by such Holder from sales of Registrable Securities exceeds the amount
of any damages that such Holder has otherwise been required to pay or has paid
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation.
(f) The indemnity and contribution agreements contained in this Section
4 will be in addition to any which the indemnifying parties may otherwise have
to the indemnified parties referred to above.
Section 5. MISCELLANEOUS.
(a) NO INCONSISTENT AGREEMENTS. The Company has not entered into nor
will the Company on or after the date of this Agreement enter into, or cause or
permit any of its subsidiaries to enter into, any agreement which is
inconsistent with the rights granted to the Holders of Registrable Securities in
this Agreement or otherwise conflicts with the provisions hereof.
(b) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company shall
not, directly or indirectly, take any action with respect to the Registrable
Securities as a class that would adversely affect the ability of the Holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement.
17
<PAGE>
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given unless the Company has obtained the prior
written consent of Holders of not less than a majority of the outstanding
Registrable Securities; PROVIDED, HOWEVER, that Section 4 hereof and this
Section 5(c) may not be amended, modified or supplemented without the prior
written consent of each Holder (including any Person who was a Holder of
Registrable Securities disposed of pursuant to any Registration Statement).
Notwithstanding the foregoing, a waiver or consent to departure from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders of Registrable Securities whose securities are being sold
pursuant to a Registration Statement and that does not directly or indirectly
affect, impair, limit or compromise the rights of other Holders of Registrable
Securities may be given by the Holders of not less than a majority of the
Registrable Securities proposed to be sold by such Holders pursuant to such
Registration Statement. In addition, each such amendment, modification,
supplement and waiver must be agreed to in writing by the Company.
(d) NOTICES. All notices, requests, demands and other communications
hereunder, and each other agreement required to be entered into pursuant to the
terms and conditions of this Agree ment, shall be in writing and shall be
delivered by hand, overnight courier, facsimile transmission, or by United
States Mail, and shall be deemed to have been duly given when actually received,
or when mailed, first class postage prepaid, certified mail, return receipt
requested, to the addresses set forth below, or to such other address as may be
designated hereafter by prior written notice from the recipient to the sender:
If to the Company: Packaged Ice, Inc.
Attention: Chief Executive Officer
8572 Katy Freeway, Suite 101
Houston, Texas 77024
With a copy to: Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Attention: Alan Schoenbaum
300 Convent, Suite 1500
San Antonio, Texas 78205
Facsimile: (210) 224-2035
If to the Investor: Silver Brands Partners, L.P.
Attention: Rod Sands
5121 Broadway
San Antonio, Texas 78209
with a copy to: Fulbright & Jaworski, L.L.P.
Attention: Daryl Lansdale
300 Convent, Suite 2200
San Antonio, Texas 78205
Facsimile No.: (210) 270-7205
18
<PAGE>
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and be binding upon the successors and assigns of each of the parties hereto
and the Holders; PROVIDED, HOWEVER, that this Agreement shall not inure to the
benefit of or be binding upon a successor or assign of a Holder unless such
successor or assign holds Registrable Securities.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AS APPLIED TO CONTRACTS MADE AND
PERFORMED WITHIN THE STATE OF TEXAS WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE JURISDICTION OF THE
COURTS OF THE STATE OF TEXAS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT.
(i) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(j) THIRD PARTY BENEFICIARY. The Holders are intended third party
beneficiaries of this Agreement and this Agreement may be enforced by such
Persons.
(k) ENTIRE AGREEMENT. The Recapitalization Agreement and this
Agreement, collectively are intended by the parties as a final expression of
their agreement, and is intended to be a complete and exclusive statement of the
agreement and understanding of the parties hereto in respect of the subject
matter contained herein and therein. This Agreement and the Recapitalization
Agreement supersede all prior agreements and understandings between the parties
with respect to such subject matter.
(l) SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
by any of its affiliates (as such term is defined in Rule 405 under the
Securities Act) shall not be counted in determining whether such consent or
approval was given by the holders of such required percentage.
19
<PAGE>
[REGISTRATION RIGHTS AGREEMENT SIGNATURE PAGE FOLLOWS]
20
<PAGE>
REGISTRATION RIGHTS AGREEMENT
SIGNATURE PAGE
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PACKAGED ICE, INC.
By:__________________________
Name:________________________
Title:_______________________
SILVER BRANDS PARTNERS, L.P.
By: Silver Brands, Inc.,
Its General Partner
By:__________________________
Name:________________________
Title:_______________________
21
EXHIBIT 11.1
PACKAGED ICE, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31,
--------------------------------
1998(1) 1997(1) 1996(1)
---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
BASIC EARNINGS PER SHARE:
Weighted average common shares
outstanding........................ 4,886 3,600 2,826
---------- --------- ---------
Net loss before extraordinary
item
available to common
shareholders.................. $ (2.35) $ (2.40) $ (0.35)
========== ========= =========
Net loss to common
shareholders.................. $ (5.91) $ (2.40) $ (0.35)
========== ========= =========
DILUTED EARNINGS PER SHARE:
Weighted average common shares
outstanding........................ 4,886 3,600 2,826
Shares issuable from assumed
conversion of
common share options and
warrants........................... 1,754 775 273
Convertible demand notes............. -- 6 9
---------- --------- ---------
Weighted average common shares
outstanding, as adjusted........... 6,640 4,381 3,108
========== ========= =========
Net loss before extraordinary
item
available to common
shareholders.................. $ (1.73) $ (1.97) $ (0.32)
========== ========= =========
Net loss to common
shareholders.................. $ (4.35) $ (1.97) $ (0.32)
========== ========= =========
EARNINGS FOR BASIC AND DILUTED
COMPUTATION:
Net loss before extraordinary item
and preferred dividends............ $ (5,586) $ (8,439) $ (990)
Extraordinary item................... (17,387) -- --
Preferred share dividends............ (5,918) (198) --
---------- --------- ---------
Net loss to common shareholders
(basic
earnings per share computation..... (28,891) (8,637) (990)
Interest expense on convertible
demand notes....................... -- 1 6
---------- --------- ---------
Net loss to common shareholders,
as
adjusted (diluted earnings per
share computation)............ $ (28,891) $ (8,636) $ (984)
========== ========= =========
- ------------
(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 21.1
LIST OF SUBSIDIARIES
Southco Ice, Inc., Texas
Packaged Ice Leasing, Inc., Nevada
Southwest Texas Packaged Ice, Inc., Nevada, dba Packaged Ice, Inc.
Southern Bottled Water, Inc., Nevada
Reddy Ice Corporation, Nevada
Cassco Ice & Cold Storage, Inc., Virginia
Packaged Ice IP, Inc., Nevada
Packaged Ice Manufacturing, Inc., Nevada, dba Thatcher Manufacturing
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICAL INFORMATION DERIVED FROM THE COMPANY'S
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN THE COMPANY'S FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,427
<SECURITIES> 0
<RECEIVABLES> 16,901
<ALLOWANCES> 209
<INVENTORY> 7,695
<CURRENT-ASSETS> 29,502
<PP&E> 188,972
<DEPRECIATION> 19,764
<TOTAL-ASSETS> 440,257
<CURRENT-LIABILITIES> 29,066
<BONDS> 338,150
66,546
3,223
<COMMON> 49
<OTHER-SE> 3,223
<TOTAL-LIABILITY-AND-EQUITY> 440,257
<SALES> 179,062
<TOTAL-REVENUES> 179,062
<CGS> 108,276
<TOTAL-COSTS> 160,746
<OTHER-EXPENSES> (803)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,705
<INCOME-PRETAX> (5,586)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,806)
<DISCONTINUED> 0
<EXTRAORDINARY> (17,387)
<CHANGES> 0
<NET-INCOME> (22,973)
<EPS-PRIMARY> (5.91)
<EPS-DILUTED> (5.91)
</TABLE>
