UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 333-29357
PACKAGED ICE, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0316492
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8572 KATY FREEWAY, SUITE 101
HOUSTON, TEXAS 77024
(Address of principal executive offices)
(713) 464-9384
(Issuer's telephone number, including area code)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The total number of shares of common stock, par value $0.01 per share,
outstanding as of August 2, 1999 was 18,242,989.
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 ............................ 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998
(unaudited) ................................................... 4
Condensed Consolidated Statement of Shareholders' Equity
as of June 30, 1999 (unaudited) ............................... 5
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 (unaudited) ........... 6
Notes to the Condensed Consolidated Financial Statements .......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 18
Item 2. Changes in Securities and Use of Proceeds ......................... 18
Item 3. Default Upon Senior Securities .................................... 19
Item 4. Submission of Matters to Vote of Security Holders ................. 19
Item 5. Other Information ................................................. 19
Item 6. Exhibits and Reports on Form 8-K .................................. 19
SIGNATURES ................................................................ 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................................................... $ 4,901 $ 3,427
Accounts receivable, net ........................................................................ 29,311 16,692
Inventories ..................................................................................... 9,105 7,695
Prepaid expenses ................................................................................ 2,521 1,688
--------- ------------
Total current assets ....................................................................... 45,838 29,502
PROPERTY, net ......................................................................................... 178,983 169,208
GOODWILL AND OTHER INTANGIBLES, net ................................................................... 240,703 240,750
OTHER ASSETS .......................................................................................... 941 797
--------- ------------
TOTAL ................................................................................................. $ 466,465 $ 440,257
========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term obligations ........................................................ $ 4,213 $ 231
Accounts payable ................................................................................ 10,989 5,714
Payable to affiliates ........................................................................... 800 615
Accrued expenses ................................................................................ 23,622 22,506
--------- ------------
Total current liabilities .................................................................. 39,624 29,066
LONG TERM OBLIGATIONS ................................................................................. 321,927 338,150
COMMITMENTS AND CONTINGENCIES ......................................................................... -- --
MANDATORILY REDEEMABLE PREFERRED STOCK:
10% Exchangeable - 286,422 shares issued and outstanding at June 30, 1999
and 272,890 at December 31, 1998, liquidation preference of $100 per share .................. 29,121 27,745
13% Exchangeable - 423,525 shares issued and outstanding at
December 31, 1998, liquidation preference of $100 per share ................................ -- 38,801
PREFERRED STOCK WITH PUT REDEMPTION OPTION:
Series A Convertible - 450,000 shares issued and outstanding at December 31, 1998 ............... -- 2,497
Series B Convertible - 124,831 shares issued and outstanding at December 31, 1998 ............... -- 726
COMMON STOCK WITH PUT REDEMPTION OPTION:
420,000 shares issued and outstanding at December 31, 1998 ...................................... -- 1,972
SHAREHOLDERS' EQUITY:
Preferred stock, Series C, $0.01 par value, 100 shares authorized and outstanding ............... -- --
Common stock, $0.01 par value, 50,000,000 shares authorized; 18,528,423 shares
issued at June 30, 1999, and 4,925,541 shares issued at December 31, 1998 .................. 185 49
Additional paid-in capital ...................................................................... 120,595 37,250
Less: 298,231 shares of treasury stock, at cost ................................................ (1,491) (1,491)
Accumulated deficit ............................................................................. (43,496) (34,508)
--------- ------------
Total shareholders' equity ................................................................. 75,793 1,300
--------- ------------
TOTAL ................................................................................................. $ 466,465 $ 440,257
========= ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues ........................................................... $ 67,246 $ 51,015 $ 98,667 $ 59,416
Cost of sales ...................................................... 38,309 29,079 60,405 35,473
-------- -------- -------- --------
Gross profit ....................................................... 28,937 21,936 38,262 23,943
Operating expenses ................................................. 9,528 7,909 17,796 11,763
Depreciation and amortization expense .............................. 7,431 4,751 14,246 6,822
-------- -------- -------- --------
Income from operations ............................................. 11,978 9,276 6,220 5,358
Other income (expense), net ........................................ -- 144 (3) 145
Interest expense ................................................... (7,588) (5,853) (15,205) (8,727)
-------- -------- -------- --------
Income (loss) before income taxes .................................. 4,390 3,567 (8,988) (3,224)
Income taxes ....................................................... -- -- -- --
-------- -------- -------- --------
Income (loss) before extraordinary item
and preferred dividends ......................................... 4,390 3,567 (8,988) (3,224)
Extraordinary loss on refinancing .................................. -- -- -- (17,387)
-------- -------- -------- --------
Net income (loss) before preferred dividends ....................... 4,390 3,567 (8,988) (20,611)
Preferred dividends ................................................ 703 1,392 1,611 2,008
-------- -------- -------- --------
Net income (loss) attributable to common shareholders .............. $ 3,687 $ 2,175 $(10,599) $(22,619)
======== ======== ======== ========
Net income (loss) per share of common stock:
Basic:
Net income (loss) before extraordinary item
attributable to common shareholders .......................... $ 0.20 $ 0.43 $ (0.66) $ (1.11)
Extraordinary item .............................................. -- -- -- (3.68)
-------- -------- -------- --------
Net income (loss) attributable to common shareholders ........... $ 0.20 $ 0.43 $ (0.66) $ (4.79)
======== ======== ======== ========
Diluted:
Net income (loss) before extraordinary item
attributable to common shareholder ........................... $ 0.20 $ 0.31 $ (0.66) $ (1.11)
Extraordinary item .............................................. -- -- -- (3.68)
-------- -------- -------- --------
Net income (loss) attributable to common shareholders ........... $ 0.20 $ 0.31 $ (0.66) $ (4.79)
======== ======== ======== ========
Weighted average common shares outstanding:
Basic ........................................................... 18,145 5,044 15,990 4,722
======== ======== ======== ========
Diluted ......................................................... 18,896 6,996 15,990 4,722
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------
NUMBER
OF PAR PAID-IN TREASURY ACCUMULATED
SHARES VALUE CAPITAL STOCK DEFICIT TOTAL
--------- --------- --------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 ......................... 4,926 $ 49 $ 37,250 $ (1,491) $ (34,508) $ 1,300
Issuance of common stock ............................. 10,750 108 91,267 -- -- 91,375
Conversion of preferred and
common stock with put
redemption option .............................. 994 10 5,185 -- -- 5,195
Conversion of warrants ............................... 1,118 11 (10) -- -- 1
Common stock issued for
redemption premium on 13%
exchangeable preferred stock ................... 482 5 (5) -- -- --
Common stock issued in
consideration for acquisitions ................. 258 2 1,573 -- -- 1,575
Issuance cost of common stock ........................ -- -- (8,483) -- -- (8,483)
Dividends accumulated on
10% exchangeable
preferred stock ................................ -- -- (1,376) -- -- (1,376)
Dividends accumulated on 13%
exchangeable preferred stock ................... -- -- (235) -- -- (235)
Net fair value of warrants issued
in connection with 13%
exchangeable preferred stock ................... -- -- (4,571) -- -- (4,571)
Net loss ............................................. -- -- -- -- (8,988) (8,988)
--------- --------- --------- --------- ----------- ---------
Balance at June 30, 1999 ............................. 18,528 $ 185 $ 120,595 $ (1,491) $ (43,496) $ 75,793
========= ========= ========= ========= =========== =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................... $ (8,988) $ (20,611)
Adjustments to reconcile net loss to net cash used in
operating activities (excluding working capital from acquisitions):
Depreciation and amoritzation ..................................................... 14,246 6,822
Amortization of debt discount, net ................................................ 20 100
Loss from disposal of assets ...................................................... 3 --
Extraordinary loss on refinancing ................................................. -- 17,387
Change in assets and liabilities:
Accounts receivable, inventory and prepaid expenses .......................... (15,591) (15,225)
Accounts payable and accrued expenses ........................................ 6,333 8,995
--------- ---------
Net cash used in operating activities .................................................. (3,977) (2,532)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ..................................................................... (18,687) (10,810)
Cost of acquisitions ................................................................... (6,739) (233,861)
Purchase of short term cash investments ................................................ -- 4,544
Decrease (increase) in other noncurrent assets ......................................... (353) (219)
Proceeds from disposition of assets .................................................... 4,337 --
--------- ---------
Net cash used in investing activities .................................................. (21,442) (240,346)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock ................................... 82,891 39,237
Proceeds from conversion of warrants ................................................... 1 --
Repurchase of common and preferred stock ............................................... (43,607) --
Proceeds from debt issuance, net ....................................................... -- 260,071
Borrowings from lines of credit ........................................................ 32,686 25,000
Repayment of lines of credit ........................................................... (45,000) (10,000)
Repayment of debt ...................................................................... (78) (75,006)
Cost of refinancing .................................................................... -- (3,938)
--------- ---------
Net cash provided by financing activities .............................................. 26,893 235,364
--------- ---------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS .............................................. 1,474 (7,514)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................................... 3,427 14,825
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..................................................... $ 4,901 $ 7,311
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments for interest ............................................................. $ 15,582 $ 2,621
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued in consideration for business acquisitions ......................... $ 1,575 $ 10,535
========= =========
Accretion of warrants in connection with 13% exchangeable preferred stock .............. $ 43 $ --
========= =========
Fair value of warrants issued in connection with debt .................................. $ -- $ 4,763
========= =========
Conversion of common and preferred stock with put redemption
options into common stock ......................................................... $ 5,195 $ --
========= =========
Conversion of warrants in exchange for common stock .................................... $ 10 $ --
========= =========
Common stock issued for redemption premium on
13% exchangeable preferred stock .................................................. $ 5 $ --
========= =========
Long term debt incurred to purchase assets ............................................. $ 109 $ --
========= =========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
1. GENERAL
The condensed consolidated financial statements of Packaged Ice, Inc. and
its wholly owned subsidiaries (the "Company") included herein are unaudited,
except for the balance sheet as of December 31, 1998 that has been prepared from
the audited financial statements for that date. These financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission, and as applicable under such regulations,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. All significant intercompany balances and
transactions have been eliminated upon consolidation, and all adjustments which,
in the opinion of management, are necessary for a fair presentation of the
financial position, results of operations and cash flow for the periods covered
have been made and are of a normal and recurring nature. Accounting measurements
at interim dates inherently involve greater reliance on estimates than at year
end and are not necessarily indicative of results for the full year. The
financial statements included herein should be read in conjunction with the
consolidated financial statements and the related notes thereto included in the
Company's annual report on Form 10-K/A for the year ended December 31, 1998.
Certain amounts from the prior year have been reclassified to conform to the
current presentation.
2. ACQUISITIONS
During the six months ended June 30, 1999, the Company acquired certain
traditional ice businesses and certain assets. The purchase prices of the
acquisitions totaled approximately $7.8 million of which $6.2 million was in
cash and $1.6 million was in the Company's common stock (258,236 shares) valued
between $5.87 and $6.31 per share. Further, the Company paid an additional $0.5
million cash related to acquisitions closed during the current and prior
reporting periods.
The acquisitions have been accounted for using the purchase method of
accounting, and, accordingly, the purchase price preliminarily has been
allocated to the assets and liabilities acquired based on fair value at the date
of the acquisitions. The acquisitions included, at fair value, current assets of
$0.2 million, property plant and equipment of $4.2 million and current
liabilities of $0.2 million. The excess of the aggregate purchase price over the
fair market value of the net assets acquired of approximately $3.6 million was
recorded as goodwill and other intangibles and is being amortized over 40 years.
Total amortization expense of goodwill and other intangible assets resulting
from the Company's acquisitions was $1.4 million and $1.0 million for the three
months ended June 30, 1999 and 1998, respectively, and $2.9 million and $1.3
million for the six months ended June 30, 1999 and 1998, respectively.
The operating results of the acquisitions have been included in the
Company's condensed consolidated financial statements from the date of their
respective purchases. The following unaudited pro forma information presents (i)
a summary of the consolidated results of operations for the three and six months
ended June 30, 1999 and 1998 as if the acquisitions during 1999 and 1998 had
occurred as of January 1 of the immediately preceding year and (ii) a summary of
the consolidated results of operations for the three and six
7
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (CONTINUED)
months ended June 30, 1998 as if the acquisitions during the first six months of
1998 had occurred as of January 1 of the immediately preceding year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Acquisitions during 1999 and 1998:
Revenues..................................................... $ 67,617 $ 69,088 $ 99,672 $ 97,342
Net loss attributable to common shareholders................. 3,682 3,363 (10,757) (28,516)
Basic earnings per share..................................... 0.20 0.63 (0.67) (5.38)
Diluted earnings per share................................... 0.19 0.56 (0.67) (5.38)
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1998
---------------- ----------------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Acquisitions for the first six months of 1998:
Revenues............................................................................... $ 58,977 $ 82,242
Net loss attributable to common shareholders........................................... 1,520 (30,051)
Basic earnings per share............................................................... 0.30 (5.95)
Diluted earnings per share............................................................. 0.26 (5.95)
</TABLE>
3. INVENTORY
Inventories contain raw materials, supplies and finished goods. Raw
materials and supplies consist of ice packaging polyethylene bags, spare parts,
bottled water supplies and merchandiser parts. Finished goods consist of
packaged ice and bottled water. Inventories are valued at the lower of cost or
market basis. Cost is determined using the first-in, first-out and average cost
methods.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and supplies........................................................................ $ 7,233 $ 6,560
Finished goods.................................................................................... 1,872 1,135
------------- -------------
Total....................................................................................... $ 9,105 $ 7,695
============= =============
</TABLE>
4. EARNINGS PER SHARE
The computation of earnings per share is based on net income (loss), after
deducting the dividend requirement of preferred stock, divided by the weighted
average number of shares outstanding. Options and warrants to purchase 3,137,198
and 2,738,691 shares of common stock issuable under stock options or warrants
that are outstanding but exercisable at prices above the Company's average
common stock price for
8
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (CONTINUED)
the three months ended June 30, 1999 and 1998 have not been included in the
computation of earnings per share. For the six months ended June 30, 1999 and
1998, all potentially diluted securities are antidilutive.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Earnings (Loss) for Basic and Diluted Computation:
Net income (loss) before extraordinary item
and preferred dividends ...................................... $ 4,390 $ 3,567 $ (8,988) $ (3,224)
Extraordinary loss on refinancing ............................... -- -- -- (17,387)
Preferred dividends ............................................. (703) (1,392) (1,611) (2,008)
-------- -------- -------- --------
Net income (loss) attributable to common shareholders ........... $ 3,687 $ 2,175 $(10,599) $(22,619)
======== ======== ======== ========
Basic Earnings (Loss) Per Share:
Weighted average common shares outstanding ...................... 18,145 5,044 15,990 4,722
======== ======== ======== ========
Net income (loss) before extraordinary item
attributable to common shareholders .......................... $ 0.20 $ 0.43 $ (0.66) $ (1.11)
Extraordinary loss on refinancing ............................... -- -- -- (3.68)
-------- -------- -------- --------
Net income (loss) attributable to common shareholders ........... $ 0.20 $ 0.43 $ (0.66) $ (4.79)
======== ======== ======== ========
Diluted Earnings (Loss) per Share:
Weighted average common shares outstanding ...................... 18,145 5,044 15,990 4,722
Shares issuable from assumed conversion of stock
options and warrants ......................................... 751 1,952 -- --
-------- -------- -------- --------
Weighted average common shares outstanding,
as adjusted .................................................. 18,896 6,996 15,990 4,722
======== ======== ======== ========
Net income (loss) before extraordinary item
attributable to common shareholders .......................... $ 0.20 $ 0.31 $ (0.66) $ (1.11)
Extraordinary loss on refinancing ............................... -- -- -- (3.68)
-------- -------- -------- --------
Net income (loss) attributable to common shareholders ........... $ 0.20 $ 0.31 $ (0.66) $ (4.79)
======== ======== ======== ========
</TABLE>
5. LONG TERM OBLIGATIONS
On April 30, 1998, the Company entered into an $80 million, five year
senior credit facility with Antares Capital Corporation, as amended, (the
"Credit Facility") consisting of a revolving working capital facility of $25
million (the "Working Capital Loan") and a revolving acquisition loan facility
of $55 million (the "Acquisition Loan").
The outstanding principal balance under the Credit Facility bears interest
per annum, at the Company's option, at LIBOR plus 2.75% per annum or at the
"prime" rate plus 1.0% with interest rates subject to a pricing grid.
Additionally, the Company pays a 0.5% commitment fee quarterly on the average
availability under the Credit Facility. Amounts outstanding under the Working
Capital Loan of the Credit Facility are due March 31, 2003. Amounts outstanding
under the Acquisition Loan of the Credit Facility will amortize in 12 equal
quarterly installments commencing June 30, 2000. The Credit Facility contains
financial covenants which include limitations on capital expenditures and the
maintenance of minimum ratio levels of earnings before interest, taxes and
depreciation and amortization ("EBITDA") to fixed charges, interest coverage and
leverage, as defined in the Credit Facility, and is secured by substantially all
of the Company's assets and the capital stock of all of the Company's
significant subsidiaries.
9
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (CONTINUED)
At June 30, 1999 and December 31, 1998, long term obligations consisted of
the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
9 3/4% senior notes ................................................................ $ 270,000 $ 270,000
Less: Unamortized debt discount on 9 3/4% senior notes ............................ (223) (243)
Credit Facility .................................................................... 55,185 67,500
Other .............................................................................. 1,178 1,124
--------- ---------
Total .............................................................................. 326,140 338,381
Less: Current maturities .......................................................... (4,213) (231)
--------- ---------
Long term obligations, net ................................................... $ 321,927 $ 338,150
========= =========
</TABLE>
6. CAPITAL STOCK
The Company currently is authorized to issue up to 50,000,000 shares of
common stock, par value $0.01 per share, of which 18,230,192 shares were
outstanding at June 30, 1999 and up to 5,000,000 shares of preferred stock, par
value $0.01 per share, of which the board of directors has authorized the
designation of 500,100 shares. As of June 30, 1999, the two classes of preferred
stock were as follows: (i) 500,000 shares as 10% exchangeable preferred stock,
of which 286,422 shares are outstanding; and (ii) 100 shares as Series C
preferred stock, of which 100 shares are outstanding. As of June 30, 1999,
393,700 shares and 1,000,000 shares of common stock have been reserved for
issuance upon the exercise of stock options under the 1994 and 1998 Stock Option
Plans, respectively, of which 391,200 and 427,752 are outstanding. In addition,
3,070,721 shares have been reserved for issuance upon the exercise of
outstanding warrants.
On February 3, 1999, the Company completed an initial public offering of
10,750,000 shares of common stock, par value $0.01 per share. The net proceeds
from the sale were approximately $85 million before deducting estimated expenses
related to the offering of approximately $1.9 million. The use of proceeds was
approximately $43.6 million to repurchase the Company's 13% exchangeable
preferred stock, which included approximately $1.3 million of accrued but unpaid
dividends and approximately $39.5 million to pay amounts outstanding under the
Credit Facility. The redemption premium on the 13% exchangeable preferred stock
of approximately $3.8 million was paid with 481,887 shares of common stock at
$7.91 per share.
In connection with this offering of common stock, the put redemption
feature on the 420,000 shares of common stock with put redemption option was
satisfied. In addition, the holders of the Series A and Series B preferred stock
with put redemption option exercised their respective conversion features to
obtain 450,000 and 124,831 shares of common stock, respectively.
7. SUBSIDIARY GUARANTORS
The Company's 9 3/4% senior notes are guaranteed, fully, jointly and
severally, and unconditionally, on a senior subordinated basis, by all of the
Company's current and future, direct and indirect, wholly owned subsidiaries
(the "Subsidiary Guarantors"). The following table sets forth the "summarized
financial information" of the Subsidiary Guarantors. Full financial statements
of the Subsidiary Guarantors are not presented because management believes they
are not material to the investors. There are currently no
10
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (CONTINUED)
restrictions on the ability of the subsidiary guarantors to transfer funds to
the Company in the form of cash dividends, loans or advances.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data:
Current assets.............................................................................. $ 44,659 $ 29,373
Property and equipment...................................................................... 178,983 169,208
Total assets................................................................................ 454,956 429,508
Current liabilities......................................................................... 23,951 14,864
Long term debt.............................................................................. 915 893
Total shareholders' equity.................................................................. 251,277 257,722
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Data:
Net revenues................................................. $ 67,246 $ 45,927 $ 98,667 $ 52,848
Gross profit................................................. 28,937 19,355 38,262 21,164
Net income................................................... 5,561 6,662 (6,445) 2,037
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims, lawsuits and proceedings
arising in the ordinary course of business. While there are uncertainties
inherent in the ultimate outcome of such matters and it is impossible to
presently determine the ultimate costs that may be incurred, management believes
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133" ("SFAS 137"). SFAS 137 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. FASB Statement No. 133, as amended by SFAS 137,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The Company is currently evaluating what impact adoption of
this statement will have on the Company's consolidated financial statements.
10. SEGMENT INFORMATION
The Company has two reportable segments: (1) ice products and (2) non-ice
products and services. Ice products include the manufacture and distribution of
packaged ice products through traditional ice manufacturing and delivery and the
Ice Factory. Non-ice products and services include refrigerated warehouses,
bottled water and leasing of ice production equipment. The Company evaluates
performance of each segment based on earnings before interest, taxes,
depreciation and amortization ("EBITDA") and does
11
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (CONTINUED)
not allocate assets by segments. Inter-segment sales are accounted for at
current market prices. Segment information for the three months ended June 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999 THREE MONTHS ENDED JUNE 30, 1998
------------------------------------------ ------------------------------------------
ICE NON-ICE ELIMINATION TOTAL ICE NON-ICE ELIMINATION TOTAL
------- ------- ----------- ------- ------- ------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ................................. $61,828 $ 6,181 $ (763) $67,246 $48,861 $ 2,564 $ (410) $51,015
Cost of sales ............................ 35,153 3,829 (673) 38,309 27,745 1,653 (319) 29,079
------- ------- ----------- ------- ------- ------- ----------- -------
Gross profit ............................. 26,675 2,352 (90) 28,937 21,116 911 (91) 21,936
Operating expenses ....................... 8,807 721 -- 9,528 7,493 416 -- 7,909
Other income (expense) ................... -- -- -- -- 144 -- -- 144
------- ------- ----------- ------- ------- ------- ----------- -------
EBITDA ............................. $17,868 $ 1,631 $ (90) $19,409 $13,767 $ 495 $ (91) $14,171
======= ======= =========== ======= ======= ======= =========== =======
</TABLE>
Segment information for the six months ended June 30, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------- ---------------------------------------------
ICE NON-ICE ELIMINATION TOTAL ICE NON-ICE ELIMINATION TOTAL
-------- -------- ----------- -------- -------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ......................... $ 88,519 $ 11,418 $ (1,270) $ 98,667 $ 56,861 $ 2,965 $ (410) $ 59,416
Cost of sales .................... 54,610 6,867 (1,072) 60,405 33,948 1,844 (319) 35,473
-------- -------- ----------- -------- -------- -------- ----------- --------
Gross profit ..................... 33,909 4,551 (198) 38,262 22,913 1,121 (91) 23,943
Operating expenses ............... 16,362 1,434 -- 17,796 11,147 616 -- 11,763
Other income (expense) ........... (3) -- -- (3) 145 -- -- 145
-------- -------- ----------- -------- -------- -------- ----------- --------
EBITDA ..................... $ 17,544 $ 3,117 $ (198) $ 20,463 $ 11,911 $ 505 $ (91) $ 12,325
======== ======== =========== ======== ======== ======== =========== ========
</TABLE>
Reconciliation of EBITDA to loss before extraordinary item and preferred
dividends for the three and six month periods ended June 30, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA................................................................ 19,409 14,171 $ 20,463 $ 12,325
Depreciation and amortization......................................... (7,431) (4,751) (14,246) (6,822)
Interest expense...................................................... (7,588) (5,853) (15,205) (8,727)
Income taxes.......................................................... - - - -
------------- ------------ ------------- -------------
Income (loss) before extraordinary item and
preferred dividends........................................ $ 4,390 $ 3,567 $ (8,988) $ (3,224)
============= ============ ============= =============
</TABLE>
11. SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company has acquired certain traditional
ice businesses and certain assets. The purchase prices of the acquisitions
totaled approximately $2.2 million in cash and $5.3 million in the Company's
common stock. The acquisitions will be accounted for using the purchase method
of accounting, and, accordingly, the purchase prices preliminarily will be
allocated to the assets and liabilities acquired based on fair market value at
the date of the acquisitions. The excess of the aggregate purchase price over
the fair market value of the net assets acquired will be recognized as goodwill
and will be amortized over 40 years. The number of shares of common stock to be
issued in connection with these acquisitions will be determined based on the
average per share price of the Company's common stock during a prescribed period
of time immediately prior to and after the closings.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the company's financial condition
and results of operations should be read in conjunction with the company's
consolidated financial statements and the notes thereto and other information
included elsewhere in this Form 10-Q and the company's Form 10-K/A, previously
filed with the Securities and Exchange Commission.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
Other than statements of historical facts, statements made in this Form
10-Q, statements made by us in periodic press releases or oral statements made
by our management to analysts and shareholders in the course of presentations
about our company constitute "forward-looking statements". The words and phrases
"should be", "will be", "believe", "expect", "anticipate" and similar
expressions identify forward-looking statements. We believe the expectations
reflected in such forward-looking statements are accurate. However, we cannot
assure you that such expectations will occur. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
actual future results expressed or implied by the forward-looking statements.
You should not unduly rely on these forward-looking statements as they speak
only as of the date of this report. Except as required by law, we are not
obligated to publicly release any revisions to these forward looking statements
to reflect events or circumstances occurring after the date of this report or to
reflect the occurrence of unanticipated events.
GENERAL
Packaged Ice, Inc. is the largest manufacturer and distributor of packaged
ice in the United States and currently serves over 74,000 customer locations in
27 states and the District of Columbia. The company has grown significantly
since its incorporation in 1990, primarily through the implementation of a
consolidation strategy within the highly fragmented packaged ice industry,
principally in the southern half of the United States. These acquisitions have
enabled us to enter new geographic regions, increase our presence in established
markets, gain additional production capacity, realize cost savings from
economies of scale and leverage the acquired companies' relationships with
grocery and convenience store customers.
The company predominantly operates in two business segments, ice products
and non-ice operations. Ice products accounted for approximately 93.4% of
revenues in 1998 and approximately 91.9% for the six months ended June 30, 1999.
Ice products consist of the following two activities:
o The manufacture and delivery of traditional ice from a central point
of production to the point of sale; and
o The installation of Ice Factories, our proprietary machines that
produce, package, store and merchandise ice at the point of sale
through an automated, self-contained system.
Our other business segment, non-ice, consists of refrigerated warehousing,
bottled water and the leasing of ice production equipment. The majority of
non-ice operations was acquired through acquisitions completed in 1998.
Our cost of sales includes costs associated with plant occupancy, raw
materials, delivery, labor and utility related expenses. With the Ice Factory,
plant occupancy, delivery and utility costs are eliminated, but costs associated
with customer service representatives and machine technicians are added to the
cost of sales.
Our operating expenses are costs associated with selling, general and
administrative functions. These costs include executive officers' compensation,
office and administrative salaries and costs associated with leasing office
space.
13
<PAGE>
At June 30, 1999, the company owned or operated 82 ice manufacturing
plants, two facilities for other than ice production, 40 distribution centers,
nine refrigerated warehouses and had an installed base of 2,030 Ice Factories.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES: Revenues increased $16.2 million, from $51.0 million for the
three months ended June 30, 1998 to $67.2 million for the three months ended
June 30, 1999. Revenues increased $11.4 million as a result of revenues
contributed by traditional ice companies, $1.1 million due to the placement of
Ice Factories and $3.7 million due to non-ice operations, principally acquired
cold storage operations. The increases in traditional ice and non-ice operations
primarily were due to acquisitions of traditional ice companies.
COST OF SALES: Cost of sales increased $9.2 million, from $29.1 million
for the three months ended June 30, 1998 to $38.3 million for the three months
ended June 30, 1999. This increase primarily resulted from acquisitions of
traditional ice companies. As a percentage of revenues, cost of sales was 57.0%
for the three months ended June 30, 1998 and 1999.
GROSS PROFIT: Gross profit increased $7.0 million, from $21.9 million for
the three months ended June 30, 1998 to $28.9 million for the three months ended
June 30, 1999. This increase primarily resulted from acquisitions of traditional
ice companies. As a percentage of revenues, gross profit was 43.0% for the three
months ended June 30, 1998 and 1999. Gross profit from ice operations decreased
slightly from 43.2% to 43.1%, and gross profit on non-ice operations increased
from 35.5% to 38.1%.
OPERATING EXPENSES: Operating expenses increased $1.6 million, from $7.9
million for the three months ended June 30, 1998 to $9.5 million for the three
months ended June 30, 1999. This increase primarily resulted from acquisitions
of traditional ice companies. As a percentage of revenues, operating expenses
decreased from 15.5% for the three months ended June 30, 1998 to 14.2% for the
three months ended June 30, 1999. This decrease was due to greater efficiencies
as our current period general and administrative expenses were spread over the
larger base of revenues resulting primarily from the acquisitions. Operating
expenses from ice operations decreased from 15.3% to 14.2%, and operating
expenses on non-ice operations decreased from 16.2% to 11.7%.
DEPRECIATION AND AMORTIZATION EXPENSES: Depreciation and amoritzation
increased $2.6 million, from $4.8 million for the three months ended June 30,
1998 to $7.4 million for the three months ended June 30, 1999. This increase was
primarily due to property additions as a result of acquisitions, installations
of Ice Factories and new plant additions. As a percentage of revenues,
depreciation and amortization increased from 9.3% for the three months ended
June 30, 1998 to 11.1% for the three months ended June 30, 1999. This increase
was primarily due to the acquisitions of Reddy Ice in May 1998 and Cassco Ice &
Cold Storage in August 1998 that resulted in a greater percentage of fixed
assets to goodwill than our previous acquisitions. As a result, the depreciation
and amortization from these acquisitions is relatively higher as a percentage of
revenues than the company's historic percentages.
INTEREST EXPENSE: Interest expense increased $1.7 million, from $5.9
million for the three months ended June 30, 1998 to $7.6 million for the three
months ended June 30, 1999. As a percentage of revenues, interest expense
decreased slightly from 11.5% for the three months ended June 30, 1998 to 11.3%
for the three months ended June 30, 1999. The dollar increase in interest
expense was a result of higher levels of debt associated with the 1998
acquisitions.
14
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES: Revenues increased $39.3 million, from $59.4 million for the six
months ended June 30, 1998 to $98.7 million for the six months ended June 30,
1999. Revenues increased $29.2 million as a result of revenues contributed by
traditional ice companies, $2.3 million due to the placement of Ice Factories
and $7.8 million due to non-ice operations, principally acquired cold storage
operations. The increases in traditional ice and non-ice operations primarily
were due to acquisitions of traditional ice companies.
COST OF SALES: Cost of sales increased $24.9 million, from $35.5 million
for the six months ended June 30, 1998 to $60.4 million for the six months ended
June 30, 1999. This increase primarily resulted from acquisitions of traditional
ice companies. As a percentage of revenues, cost of sales increased from 59.7%
for the six months ended June 30, 1998 to 61.2% for the six months ended June
30, 1999. This increase primarily was due to the higher cost of sales margins
during the six months ended June 30, 1999 attributable to the acquisitions of
Reddy Ice in May 1998 and Cassco Ice & Cold Storage in August 1998. Prior to
these acquisitions, a greater proportion of our business was attributable to the
Ice Factory that has a lower cost of sales margins than that of traditional ice
companies.
GROSS PROFIT: Gross profit increased $14.4 million, from $23.9 million for
the six months ended June 30, 1998 to $38.3 million for the six months ended
June 30, 1999. This increase primarily resulted from acquisitions of traditional
ice companies. As a percentage of revenues, gross profit decreased from 40.3%
for the six months ended June 30, 1998 to 38.8% for the six months ended June
30, 1999. This increase primarily was due to the relatively higher cost of sales
during the six months ended June 30, 1999 resulting from the two major
traditional ice company acquisitions, as discussed above. Gross profit from ice
operations decreased from 40.3% to 38.3%, and gross profit on non-ice operations
increased from 37.8% to 39.9%.
OPERATING EXPENSES: Operating expenses increased $6.0 million, from $11.8
million for the six months ended June 30, 1998 to $17.8 million for the six
months ended June 30, 1999. This increase primarily resulted from acquisitions
of traditional ice companies. As a percentage of revenues, operating expenses
decreased from 19.8% for the six months ended June 30, 1998 to 18.0% for the six
months ended June 30, 1999. This decrease was due to greater efficiencies
realized as our current period general and administrative expenses were spread
over the larger base of revenues resulting primarily from the acquisitions.
Operating expenses from ice operations decreased from 19.6% to 18.5%, and
operating expenses on non-ice operations decreased from 20.8% to 12.6%.
DEPRECIATION AND AMORTIZATION EXPENSES: Depreciation and amoritzation
increased $7.4 million, from $6.8 million for the six months ended June 30, 1998
to $14.2 million for the six months ended June 30, 1999. This increase was
primarily due to property additions as a result of acquisitions, installations
of Ice Factories and new plant additions. As a percentage of revenues,
depreciation and amortization increased from 11.5% for the six months ended June
30, 1998 to 14.4% for the six months ended June 30, 1999. This increase was
primarily due to the acquisitions of Reddy Ice and Cassco Ice & Cold Storage
that resulted in a greater percentage of fixed assets to goodwill than our
previous acquisitions. As a result, the depreciation and amortization from these
acquisitions is relatively higher as a percentage of revenues than the historic
percentages.
INTEREST EXPENSE: Interest expense increased $6.5 million, from $8.7
million for the six months ended June 30, 1998 to $15.2 million for the six
months ended June 30, 1999. As a percentage of revenues, interest expense
increased from 14.7% for the six months ended June 30, 1998 to 15.4% for the six
months ended June 30, 1999. The dollar increase and percentage increase in
interest expense was a result of higher levels of debt associated with our
borrowing of $270 million through the issuance of the 9 3/4% senior notes and
borrowings associated with the 1998 acquisitions.
15
<PAGE>
EXTRAORDINARY LOSS ON REFINANCING: During the first quarter of 1998,
simultaneously with the issuance of the 9 3/4% senior notes and in conjunction
with the repurchase of $75 million of Series B notes and Series C notes, we
recorded an extraordinary loss on refinancing of $17.4 million for such debt
extinguishment that related to the write-off of the debt discount, associated
redemption premiums and issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The company generates cash primarily from the sale of packaged ice through
traditional delivery methods and through Ice Factories and, to a lesser extent,
through the non-ice operations. Our primary uses of cash are (a) cost of sales,
(b) operating expenses, (c) debt service, (d) capital expenditures related to
replacing and modernizing other capital equipment and related to the
manufacturing and installation of additional Ice Factories and (e) acquisitions.
We have budgeted approximately $18.9 million of capital expenditures
during 1999 for traditional ice and non-ice operations. These expenditures
primarily include amounts that we will spend to maintain and expand traditional
ice facilities. In addition, based on current installation plans, we expect to
spend approximately $9.7 million for the purchase and installation of Ice
Factories. During the six months ended June 30, 1999, capital expenditures have
been funded with operating cash flow, with proceeds of borrowings under the
acquisition loan of the credit facility and, in part, with the proceeds from the
disposition of various assets that totaled $4.3 million during the six-month
period.
During the six months ended June 30, 1999, we acquired 11 traditional ice
companies and certain assets. The purchase price of these acquisitions was
approximately $7.8 million of which $6.2 million was in cash and $1.6 million
was common stock (258,236 shares) valued between $5.87 and $6.31 per share.
We believe that we will have adequate working capital to meet debt service
requirements and to satisfy working capital and general corporate needs. At June
30, 1999, we had working capital of approximately $6.2 million including
approximately $4.9 million of cash and cash equivalents. In addition, we had
$15.9 million available under the working capital loan of the credit facility
and $7.6 million available under the acquisition loan of the credit facility.
At June 30, 1999, we had approximately $321.9 million of long term debt,
net of current maturities, outstanding as follows:
o $ 270 million of 9 3/4% senior notes due 2005;
o $ 51.2 million outstanding under the company's credit facility; and
o $ 0.7 million of other debt, net of debt discount.
Our credit facility provides for an $80 million line of credit consisting
of a $25 million revolving working capital loan and a $55 million revolving
acquisition loan. At June 30, 1999, we had approximately $7.8 million
outstanding under the working capital loan (excluding $1.3 million of
availability supporting letters of credit) and approximately $47.4 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 credit facility and the indenture governing the
9 3/4% senior notes require the company to meet certain financial tests, anD
other restrictions limit the company's ability to pay dividends, borrow
additional funds or to acquire or dispose of assets. The credit facility is
secured by all of the company's assets and the capital stock of all of the
company's significant subsidiaries. The 9 3/4% senior notes are generally
unsecured obligations of the company and are senior in right of payment to all
existing and future subordinated debt (as defined in the indenture) and PARI
PASSU to all senior indebtedness of the company. The 9 3/4% senior notes are
effectively subordinated to the credit facility.
16
<PAGE>
On February 3, 1999, we completed its initial public offering of
10,750,000 shares of common stock at $8.50 per share. The net proceeds of the
sale of approximately $85 million were applied as follows: (i) $43.6 million to
repurchase the company's 13% exchangeable preferred stock (including repurchase
premium) plus accrued and unpaid dividends, (ii) $39.5 million to pay amounts
outstanding under the working capital loan and the acquisition loan of the
credit facility and (iii) approximately $1.9 million of estimated expenses
related to the offering.
In connection with this offering of common stock, the put redemption
feature on the 420,000 shares of common stock with put redemption option was
satisfied. In addition, the holders of the Series A and Series B preferred stock
with put redemption option exercised their respective conversion features to
obtain 450,000 and 124,831 shares of common stock, respectively.
We expect to continue acquiring traditional ice companies using a
combination of cash and common stock. There can be no assurance that
acquisitions based upon our criteria can be obtained or funds will be available
in sufficient amounts to finance such acquisitions. On April 14, 1999, the
company filed an "acquisition shelf" registration statement to register the sale
of up to 5,000,000 shares of common stock that can be used in connection with
future acquisitions.
Although the company has periodically reported negative cash flows from
operations on a historical basis, we believe that its overall treasury
management of cash on hand and available borrowings under the credit facility
will be adequate to meet debt service requirements, fund ongoing capital
requirements and satisfy working capital and general corporate needs.
We may need to raise additional funds through public or private debt or
equity financing to take advantage of opportunities that may become available,
including acquisitions and more rapid expansion. The availability of such
capital will depend upon prevailing market conditions and other factors over
which we have no control, as well as our financial condition and results of
operations. There can be no assurance that sufficient funds will be available to
finance intended acquisitions or capital expenditures to sustain our recent rate
of growth.
YEAR 2000
The company is exposed to the risk that the year 2000 issue could cause
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. During 1998, we
undertook a corporate-wide initiative designed to assess the impact of the year
2000 issue on software and hardware utilized in our operations, including
information technology infrastructure ("IT") and embedded manufacturing control
technology ("Non-IT").
Our initiative has been conducted in three phases: assessment,
implementation and testing. During the assessment phase, we completed a
comprehensive inventory of IT and Non-IT systems and equipment. Many of our IT
systems include hardware and packaged software purchased from large vendors who
have represented that these systems are already year 2000 compliant. However, we
determined that it would be necessary to modify portions of our financial and
accounting software. We believe that our Non-IT systems, which include the Ice
Factory, are not at risk to the year 2000 issue.
We believe that with modifications to its existing software, the year 2000
issue can be mitigated. The installation of software modifications has been
completed. However, if such modifications are not adequate or do not operate
properly, the year 2000 issue could have a material impact on our operations. We
plan to complete the testing of the year 2000 modifications during the third
quarter of 1999. We have not established a contingency plan but intends to
formulate one to address unavoidable risks. We expect to have the contingency
plan formulated by the end of the third quarter.
17
<PAGE>
We do not currently rely on the IT systems of other companies; however,
failure of our suppliers or their customers to become year 2000 compliant might
have a material impact on our operations. Key suppliers and our largest
customers have been contacted and indicate compliance by the end of the third
quarter of 1999. Further, we intend 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 us.
Our efforts with respect to the year 2000 issue have been handled
internally by management and other company employees. Costs of developing and
carrying out this initiative are being funded from operations and have not
represented a material expense. We have completed our cost assessment and
believe that the costs of addressing the year 2000 issue should not be
significant and should not have a material adverse impact on our financial
condition.
GENERAL ECONOMIC TRENDS AND SEASONALITY
The company's results of operations are generally affected by the economic
trends in its market area but results to date have not been impacted by
inflation. If an extended period of high inflation were to be encountered, we
believe that we will be able to pass on the higher costs to our customers.
The ice business is highly seasonal. We experience seasonal fluctuations
in our net sales and profitability with a disproportionate amount of our net
sales and a majority of our net income typically realized in the second and
third calendar quarters. We believe that over 60% of our revenues will occur
during the second and third calendar quarters when the weather conditions are
generally warmer and demand is greater, while less than 40% of our revenues will
occur during the first and fourth calendar quarters when the weather is
generally cooler. As a result of seasonal revenue declines and the lack of
proportional corresponding expense decreases, we will most likely experience
lower profit margins and possibly experience losses during the first and fourth
calendar quarters. In addition, because our operating results depend
significantly on sales during our peak season, our quarterly results of
operations during this period may fluctuate significantly if the weather is
unusually cool or rainy.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The company is from time to time party to legal proceedings that arise in
the ordinary course of business. Management does not believe that the resolution
of any threatened or pending legal proceedings will have a material adverse
affect on the company's financial position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 1, 1999, the company elected to pay in kind dividends on the 10%
exchangeable preferred stock, which totaled 13,532 shares of 10% exchangeable
preferred stock and 104,095 warrants to purchase company common stock at $13 per
share.
On May 17, 1999, the company issued to the former holders of the company's
12% notes 12,797 shares of common stock upon exercise of detachable warrants.
On July 2, 1999, the company issued to the former holders of the company's
12% notes 12,797 shares of common stock upon exercise of detachable warrants.
18
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 17, 1999, the company held its annual meeting of stockholders. At
the annual meeting, the following matters were vote upon:
1. Election of eight directors to hold office until the next annual
meeting of shareholders and until their respective successors are
duly elected and qualified; and
2. Consideration and vote upon a proposal to ratify the appointment of
the selection of Deloitte & Touche LLP as the company's independent
auditors for the fiscal year ending December 31, 1999.
A total of 17,997,457 shares of the company's common stock, par value
$0.01 per share, were entitled to vote at the meeting. Of these shares,
16,162,398 shares were present at the meeting and voted as follows:
With respect to each of the following eight nominees for election to
the Board of Directors, shares were voted for the election as follows:
James F. Stuart (16,130,843 for and 31,555 withheld); A. J. Lewis III
(16,008,543 for and 153,855 withheld); Steven P. Rosenberg (16,130,843 for
and 31,555 withheld); Richard A. Coonrod (16,130,843 for and 31,555
withheld); Robert G. Miller (16,130,843 for and 31,555 withheld); Rod J.
Sands (16,130,843 for and 31,555 withheld); Arthur E. Biggs (16,130,843
for and 31,555 withheld); and David J. Losito (16,130,843 for and 31,555
withheld).
With respect to the appointment of Deloitte & Touche LLP as the
company's independent auditors for the fiscal year ending December 31,
1999, shares were voted as follows: 16,130,453 for; 220 votes against and
31,725 votes withheld.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
The following is a list of exhibits filed as part of this Form 10-Q. Where
so indicated by footnote, exhibits, which were previously filed, are
incorporated by reference.
EXHIBIT NO. DESCRIPTION
3.1 Restated Articles of Incorporation of Packaged Ice filed with the
Secretary of State of the State of Texas on February 5, 1992.
(Exhibit 3.2)(1)
3.2 Articles of Amendment to the Restated Articles of Incorporation of
Packaged Ice filed with the Secretary of State of the State of Texas
on August 11, 1998. (Exhibit 3.2) (6)
3.3 Amended and Restated Bylaws of Packaged Ice, effective as of
January 20, 1997. (Exhibit 3.5)(1)
4.1 Certificate of Designation of Series C Preferred Stock. (Exhibit
4.1)(4)
4.2 Amended and Restated Certificate of Designation of 10%
Exchangeable Preferred Stock. (Exhibit 4.12)(5)
19
<PAGE>
4.3 Indenture by and among Packaged Ice, as Issuer, the Subsidiary
Guarantors and U.S. Trust Company of Texas, N.A. as Trustee dated as
of January 28, 1998, Amended and Restated as of April 30, 1998.
(Exhibit 4.1)(5)
4.4 Registration Rights Agreement dated April 30, 1998 by and among
Packaged Ice, Ares and Silver Brands Partners, L.P. (formerly SV
Capital Partners, L.P.). (Exhibit 4.8)(5)
4.5 Common Stock Purchase Warrant, dated July 17, 1997, executed by
Packaged Ice for the benefit of Silver Brands Partners. (Exhibit
10.39)(2)
4.6 Registration Rights Agreement by and between Packaged Ice and
Ares, dated February 3, 1999. (7)
4.7 Registration Rights Agreement by and between Packaged Ice and
Silver Brands Partners, L.P., dated February 3, 1999. (7)
4.8 Registration Rights Agreement by and among Packaged Ice, and Dale
Johnson, Alan Bernstein and Robert Miller, dated as of April 17,
1997. (Exhibit 10.9)(1)
4.9 Warrant Agreement among Packaged Ice and U.S. Trust Company of Texas,
N.A., a national banking association, as Warrant Agent, dated as of
April 17, 1997. (Exhibit 10.12)(1)
4.10 Registration Rights Agreement, dated as of July 17, 1997, by and
between Packaged Ice and Silver Brands Partners. (Exhibit 10.41)(2)
4.11 Warrant Agreement among Packaged Ice and U.S. Trust Company of Texas,
N.A., a national banking association, as Warrant Agent, dated as of
October 16, 1997. (Exhibit 10.7)(3)
4.12 Common Stock Purchase Warrant Agreement issued by Packaged Ice and
issued to Culligan Water Technologies, Inc. issuing 1,807,692 fully
paid and nonassessable shares of Packaged Ice's common stock at an
exercise price of $13.00 per share dated December 2, 1997.
(Exhibit 10.3)(4)
4.13 Registration Rights Agreement by and among Packaged Ice, Culligan
Water Technologies, Inc. and Erica Jesselson. (Exhibit 10.5)(4)
4.14 Registration Rights Agreement by and among Packaged Ice, A. J. Lewis
III and Liza B. Lewis, dated as of April 17, 1997. (Exhibit 10.5)(1)
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 Form 10-K, filed with the Commission on March
30, 1999.
(B) REPORTS ON FORM 8-K:
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
PACKAGED ICE, INC.
Date: August 10, 1999 By: /S/ JAMES F. STUART
James F. Stuart
Chief Executive Officer
Date: August 10, 1999 By: /S/ JAMES C. HAZLEWOOD
James C. Hazlewood
Chief Financial and Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM COMPANY'S
FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED IN THE COMPANY'S FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,901
<SECURITIES> 0
<RECEIVABLES> 29,520
<ALLOWANCES> 209
<INVENTORY> 9,105
<CURRENT-ASSETS> 45,838
<PP&E> 208,638
<DEPRECIATION> 29,655
<TOTAL-ASSETS> 466,465
<CURRENT-LIABILITIES> 39,624
<BONDS> 321,927
29,121
0
<COMMON> 185
<OTHER-SE> 75,608
<TOTAL-LIABILITY-AND-EQUITY> 466,465
<SALES> 98,667
<TOTAL-REVENUES> 98,667
<CGS> 60,405
<TOTAL-COSTS> 92,447
<OTHER-EXPENSES> 3
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,205
<INCOME-PRETAX> (8,988)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,988)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,988)
<EPS-BASIC> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
