--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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
(Registrant's telephone number, including area code)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The total number of shares of common stock, par value $0.01 per share,
outstanding as of November 8, 2000 was 19,394,084.
--------------------------------------------------------------------------------
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
2000 (unaudited) and December 31, 1999.......................... 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2000 and
1999 (unaudited)................................................ 4
Condensed Consolidated Statement of Shareholders' Equity
as of September 30, 2000 (unaudited)............................ 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999 (unaudited)....... 6
Notes to the Condensed Consolidated Financial Statements.......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk........ 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 22
Item 2. Changes in Securities and Use of Proceeds......................... 22
Item 3. Default Upon Senior Securities.................................... 22
Item 4. Submission of Matters to Vote of Security Holders................. 22
Item 5. Other Information................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................................. 23
SIGNATURES................................................................. 24
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 3,751 $ 3,619
Accounts receivable, net .......................... 35,302 19,002
Inventories ....................................... 10,286 8,079
Prepaid expenses .................................. 3,387 4,658
--------- ---------
Total current assets ............................ 52,726 35,358
PROPERTY, net ....................................... 188,989 184,311
GOODWILL AND OTHER INTANGIBLES, net ................. 236,969 242,421
OTHER ASSETS ........................................ 254 242
--------- ---------
TOTAL ............................................... $ 478,938 $ 462,332
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term obligations .......... $ 18,425 $ 13,126
Accounts payable .................................. 8,903 6,010
Payable to affiliates ............................. 362 89
Accrued expenses .................................. 16,591 20,985
--------- ---------
Total current liabilities ....................... 44,281 40,210
LONG TERM OBLIGATIONS ............................... 312,574 309,164
COMMITMENTS AND CONTINGENCIES ....................... -- --
MANDATORILY REDEEMABLE PREFERRED STOCK:
10% Exchangeable - 315,822 shares issued and
outstanding at September 30, 2000 and 300,861
at December 31, 1999, liquidation preference
of $100 per share ............................... 32,902 30,589
SHAREHOLDERS' EQUITY:
Preferred stock, Series C, $0.01 par value,
100 shares authorized and outstanding at
December 31, 1999 ............................... -- --
Common stock, $0.01 par value, 50,000,000
shares authorized; 19,664,967 shares issued
at September 30, 2000, and 19,606,940
shares issued at December 31, 1999 .............. 197 196
Additional paid-in capital ....................... 122,311 124,487
Less: 298,231 shares of treasury stock, at cost . (1,491) (1,491)
Accumulated deficit .............................. (31,836) (40,823)
--------- ---------
Total shareholders' equity .................... 89,181 82,369
--------- ---------
TOTAL ............................................... $ 478,938 $ 462,332
========= =========
See notes to consolidated financial statements.
3
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues ............................................ $ 89,712 $ 87,400 $ 201,438 $ 186,067
Cost of sales ....................................... 48,491 48,708 118,432 109,113
--------- --------- --------- ---------
Gross profit ........................................ 41,221 38,692 83,006 76,954
Operating expenses .................................. 9,525 10,326 28,048 28,121
Depreciation and amortization expense ............... 7,311 7,843 21,417 22,089
--------- --------- --------- ---------
Income from operations .............................. 24,385 20,523 33,541 26,744
Other income, net ................................... 6 22 14 19
Interest expense .................................... (8,319) (7,481) (24,568) (22,686)
--------- --------- --------- ---------
Income before income taxes .......................... 16,072 13,064 8,987 4,077
Income taxes ........................................ -- -- -- --
--------- --------- --------- ---------
Net income before preferred dividends ............... 16,072 13,064 8,987 4,077
Preferred dividends ................................. (794) (722) (2,314) (2,332)
--------- --------- --------- ---------
Net income attributable to common shareholders ...... $ 15,278 $ 12,342 $ 6,673 $ 1,745
========= ========= ========= =========
Net income per share of common stock:
Basic .......................................... $ 0.79 $ 0.65 $ 0.35 $ 0.10
========= ========= ========= =========
Diluted ........................................ $ 0.76 $ 0.63 $ 0.33 $ 0.10
========= ========= ========= =========
Weighted average common shares outstanding:
Basic .......................................... 19,356 18,938 19,330 16,983
========= ========= ========= =========
Diluted ........................................ 20,075 19,676 20,050 17,721
========= ========= ========= =========
</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, 1999 ............... 19,607 $ 196 $ 124,487 $ (1,491) $ (40,823) $ 82,369
Issuance of common stock ................... 58 1 139 -- -- 140
Redemption of Series C preferred
stock ................................... -- -- (1) -- -- (1)
Dividends accumulated on 10%
exchangeable preferred stock ............ -- -- (2,314) -- -- (2,314)
Net income ................................. -- -- -- -- 8,987 8,987
--------- --------- --------- --------- --------- ---------
Balance at September 30, 2000 .............. 19,665 $ 197 $ 122,311 $ (1,491) $ (31,836) $ 89,181
========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
-------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................... $ 8,987 $ 4,077
Adjustments to reconcile net income
to net cash provided by operating
activities (excluding working capital
from acquisitions):
Depreciation and amortization .................. 21,417 22,089
Amortization of debt discount, net ............. 30 30
Gain from disposal of assets ................... (14) (19)
Change in assets and liabilities:
Accounts receivable, inventory and
prepaid expenses ........................... (17,358) (13,972)
Accounts payable and accrued expenses ........ (1,227) (4,255)
-------- --------
Net cash provided by operating
activities ..................................... 11,835 7,950
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions ............................... (17,092) (28,145)
Cost of acquisitions ............................. (4,557) (10,565)
Increase in other noncurrent assets .............. (556) (424)
Proceeds from disposition of assets .............. 1,685 4,390
-------- --------
Net cash used in investing activities ............ (20,520) (34,744)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and
preferred stock ................................ 139 82,825
Proceeds from conversion of warrants ............. -- 1
Repurchase of common and preferred stock ......... (1) (43,607)
Borrowings from lines of credit .................. 42,125 49,845
Repayment of lines of credit ..................... (28,700) (63,090)
Repayment of debt ................................ (4,746) (210)
-------- --------
Net cash provided by financing
activities ..................................... 8,817 25,764
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................. 132 (1,030)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD ........................................ 3,619 3,427
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........... $ 3,751 $ 2,397
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash payments for interest ....................... $ 31,015 $ 29,180
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Common stock issued in consideration for
business acquisitions .......................... $ -- $ 6,958
======== ========
Accretion of warrants in connection with
13% exchangeable preferred stock ............... $ -- $ 43
======== ========
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
======== ========
See notes to consolidated financial statements.
6
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
1. GENERAL
The condensed consolidated financial statements of Packaged Ice and its
wholly owned subsidiaries ("the Company") included in this report are unaudited,
except for the balance sheet as of December 31, 1999 that has been prepared from
the audited financial statements for that date. The Company has prepared these
financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). As applicable under the SEC's 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 flows 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 in this report should be read in conjunction with the
consolidated financial statements and the related notes included in the
Company's annual report on Form 10-K for the year ended December 31, 1999. On
January 1, 2000, the Company changed the useful life of its Ice Factory
equipment from seven to 12 years. If the Company had continued using a
seven-year useful life, depreciation and amortization for the three and nine
months ended September 30, 2000 would have been $8.0 million and $23.6 million,
respectively. Net income attributable to common shareholders for the three and
nine months ended September 30, 2000 would have been $14.6 million and $4.5
million, respectively. Basic net income per common share for the three and nine
months ended September 30, 2000 would have been $0.75 and $0.23, respectively,
while the diluted net income per common share for the three and nine months
ended September 30, 2000 would have been $0.73 and $0.22, respectively. Certain
amounts from the prior year have been reclassified to conform to the current
presentation.
2. ACQUISITIONS
During the nine months ended September 30, 2000, the Company satisfied its
obligations related to two previous acquisitions by exercising its option to
purchase the real estate upon which two of the Company's ice plants are located
for approximately $4.2 million, and completed six small tuck-in acquisitions at
a cost of approximately $0.4 million, which were paid in cash from the
acquisition loan of the credit facility and generated from current operations.
These 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, property, plant and
equipment of $4.4 million. The excess of the aggregate purchase price over the
fair market value of the net assets acquired, of approximately $0.2 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 our acquisitions was $1.6 million for each of the three month
periods ended September 30, 2000 and 1999, and $4.8 million and $4.5 million for
the nine months ended September 30, 2000 and 1999, respectively.
7
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
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:
o a summary of the consolidated results of operations for the three and
nine months ended September 30, 2000 and 1999, as if the acquisitions
during 2000 and 1999 had occurred as of January 1, 1999;
o a summary of the consolidated results of operations for the three and
nine months ended September 30, 1999, as if the acquisitions during
the first nine months of 1999 had occurred as of January 1, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Acquisitions during 2000 and 1999:
Revenues ........................................ $ 89,712 $ 88,963 $201,717 $192,696
Net income attributable to common shareholders .. 15,278 13,025 6,655 2,823
Basic earnings per share ........................ 0.79 0.68 0.34 0.16
Diluted earnings per share ...................... 0.76 0.65 0.33 0.15
</TABLE>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------- -----------
1999 1999
----------- -----------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Acquisitions during 1999:
Revenues ..................................... $ 88,701 $ 192,155
Net income attributable to common shareholders 12,866 2,682
Basic earnings per share ..................... 0.67 0.15
Diluted earnings per share ................... 0.64 0.14
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.
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------- ---------
(IN THOUSANDS)
Raw materials and supplies............. $ 9,016 $ 7,041
Finished goods......................... 1,270 1,038
--------- ---------
Total............................... $ 10,286 $ 8,079
========= =========
8
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
4. EARNINGS PER SHARE
The computation of earnings per share is based on net income, after
deducting the dividend requirement of preferred stock, divided by the weighted
average number of shares outstanding. Options and warrants to purchase 3,731,696
and 3,137,198 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 the three and nine months ended September 30, 2000 and
1999 have not been included in the computation of earnings per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Earnings for Basic and Diluted Computation:
Net income before preferred dividends ............... $ 16,072 $ 13,064 $ 8,987 $ 4,077
Preferred dividends ................................. (794) (722) (2,314) (2,332)
-------- -------- -------- --------
Net income attributable to common shareholders ...... $ 15,278 $ 12,342 $ 6,673 $ 1,745
======== ======== ======== ========
Basic Earnings Per Share:
Weighted average common shares outstanding .......... 19,356 18,938 19,330 16,983
======== ======== ======== ========
Net income attributable to common shareholders ...... $ 0.79 $ 0.65 $ 0.35 $ 0.10
======== ======== ======== ========
Diluted Earnings per Share:
Weighted average common shares outstanding .......... 19,356 18,938 19,330 16,983
Shares issuable from assumed conversion of stock
options and warrants .............................. 719 738 720 738
-------- -------- -------- --------
Weighted average common shares outstanding,
as adjusted ....................................... 20,075 19,676 20,050 17,721
======== ======== ======== ========
Net income attributable to common shareholders ...... $ 0.76 $ 0.63 $ 0.33 $ 0.10
======== ======== ======== ========
</TABLE>
9
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
5. LONG TERM OBLIGATIONS
On April 30, 1998, the Company entered into an $80 million, five-year
senior credit facility with Antares Capital Corporation, consisting of a
revolving working capital facility of $25 million and a revolving acquisition
loan facility of $55 million.
The outstanding principal balance under the credit facility bears interest
per annum, at the Company's option, at LIBOR plus 3.25% or at the "prime" rate
plus 1.5% 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. The credit facility was amended
effective June 28, 2000 to defer the initial amortization payment due June 30,
2000, and to restructure certain of the financial covenant ratios. Amounts
outstanding under the acquisition loan of the credit facility will amortize in
10 equal quarterly installments of approximately $4.5 million commencing
September 30, 2000 and one final installment of the remaining balance on March
31, 2003. 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.
At September 30, 2000 and December 31, 1999, long term obligations
consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------- ---------
(IN THOUSANDS)
9 3/4% senior notes..................................... $270,000 $ 270,000
Less: unamortized debt discount on 9 3/4% senior notes.. (173) (203)
Credit facility......................................... 60,383 51,500
Other................................................... 789 993
-------- ---------
Total................................................... 330,999 322,290
Less: Current maturities............................... (18,425) (13,126)
-------- ---------
Long term obligations, net........................... $312,574 $ 309,164
======== =========
6. CAPITAL STOCK
The Company currently is authorized to issue up to 50,000,000 shares of
common stock, par value $0.01 per share, of which 19,366,736 shares were
outstanding at September 30, 2000 and up to 5,000,000 shares of preferred stock,
par value $0.01 per share, of which the board of directors has authorized the
designation of 500,100 shares. As of September 30, 2000, the Company had
authorized 500,000 shares of 10% exchangeable preferred stock, of which 315,822
shares were outstanding. As of September 30, 2000, 393,700 shares and 1,000,000
shares of common stock were reserved for issuance upon the exercise of stock
options under the 1994 and 1998 Stock Option Plans, respectively, of which
357,700 and 844,598 were outstanding. In addition, as of September 30, 2000,
3,250,605 shares were reserved for issuance upon the exercise of outstanding
warrants.
10
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
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. Proceeds of approximately
$43.6 million were used to repurchase the Company's 13% exchangeable preferred
stock, which included approximately $1.3 million of accrued but unpaid
dividends. The remaining proceeds of approximately $39.5 million were used 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.
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 our 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.
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -----------
(IN THOUSANDS)
Balance Sheet Data:
Current assets..................................... $ 50,007 $ 31,484
Property and equipment............................. 188,959 184,306
Total assets....................................... 469,380 450,468
Current liabilities................................ 21,004 15,257
Long term debt..................................... 530 742
Total shareholders' equity (deficit)............... 5,508 (6,480)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
Operating Data:
Net revenues............... $ 89,712 $ 87,400 $201,438 $186,067
Gross profit............... 41,221 38,692 83,006 76,954
Net income................. 17,189 14,134 11,988 7,689
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.
11
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
9. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". 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
(collectively referred to as derivatives), and for hedging activities. The
Company has evaluated the impact of SFAS 133 and determined that the adoption of
this statement will not have a material impact 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 EBITDA and does not allocate assets by
segment. Inter-segment sales are accounted for at current market prices.
Segment information for the three months ended September 30, 2000 and 1999 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000 THREE MONTHS ENDED SEPTEMBER 30, 1999
---------------------------------------------- ----------------------------------------------
ICE NON-ICE ELIMINATION TOTAL ICE NON-ICE ELIMINATION TOTAL
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............... $84,219 $ 5,493 $ - $89,712 $82,545 $ 4,855 $ - $87,400
Cost of sales .......... 45,245 3,246 - 48,491 45,707 3,001 - 48,708
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ........... 38,974 2,247 - 41,221 36,838 1,854 - 38,692
Operating expenses ..... 8,572 953 - 9,525 9,552 774 - 10,326
Other income, net ...... 6 -- - 6 22 -- - 22
------- ------- ------- ------- ------- ------- ------- -------
EBITDA ........ $30,408 $ 1,294 $ - $31,702 $27,308 $ 1,080 $ - $28,388
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Segment information for the nine months ended September 30, 2000 and 1999
is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000 NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------- ------------------------------------------
ICE NON-ICE ELIMINATION TOTAL ICE NON-ICE ELIMINATION TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .................................. $186,374 $ 15,064 $ -- $201,438 $171,064 $ 16,273 $ (1,270) $186,067
Cost of sales ............................. 109,974 8,458 -- 118,432 100,317 9,868 (1,072) 109,113
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit .............................. 76,400 6,606 -- 83,006 70,747 6,405 (198) 76,954
Operating expenses ........................ 25,360 2,688 -- 28,048 25,914 2,207 -- 28,121
Other income, net ......................... 14 -- -- 14 19 -- -- 19
-------- -------- -------- -------- -------- -------- -------- --------
EBITDA ........................... $ 51,054 $ 3,918 $ -- $ 54,972 $ 44,852 $ 4,198 $ (198) $ 48,852
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
12
<PAGE>
PACKAGED ICE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
Reconciliation of EBITDA to net income before preferred dividends for the
three and nine month periods ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2000 1999 2000 1999
------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
EBITDA................................... $31,702 $28,388 $ 54,972 $48,852
Depreciation and amortization expense.... (7,311) (7,843) (21,417) (22,089)
Interest expense......................... (8,319) (7,481) (24,568) (22,686)
Income taxes............................. -- -- -- --
------- ------- -------- -------
Net income before preferred dividends.. $16,072 $13,064 $ 8,987 $ 4,077
======= ======= ======== =======
</TABLE>
11. SUBSEQUENT EVENTS
On October 26, 2000, the Company announced that it had received a fully
underwritten commitment, subject only to documentation and customary closing
conditions, to expand and amend its existing credit facility to allow for term
and revolving loan borrowings of up to $88 million. After the closing of this
amendment to the credit facility, which is expected to occur in November, the
Company plans to have reduced principal amortization, lowered interest rates and
altered capital expenditure plans related to its Ice Factories.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and the related notes and other information included
elsewhere in this Form 10-Q and our Form 10-K, previously filed with the SEC.
UNCERTAINTY OF FORWARD LOOKING STATEMENTS AND INFORMATION
All statements, other than statements of historical facts, contained in
this Form 10-Q, made by us in periodic press releases, or made by our management
to analysts and shareholders in the course of presentations about our company,
including statements regarding our future financial position, business strategy,
budgets, projected costs and plans, and objectives of management for future
growth, 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 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 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. We have grown significantly since our
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 allowed 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.
We have two principal business segments - ice products and non-ice
operations. Ice products accounted for approximately 91% of revenues in 1999 and
approximately 93% for the nine months ended September 30, 2000. 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 equipment. We acquired the majority of our
non-ice operations 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.
14
<PAGE>
At September 30, 2000, we owned or operated 70 ice manufacturing plants,
one bottled-water manufacturing facility, 44 distribution centers, and nine
refrigerated warehouses; and had an installed base of 2,644 Ice Factories.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES: Revenues increased $2.3 million; from $87.4 million for the
three months ended September 30, 1999 to $89.7 million for the three months
ended September 30, 2000. Revenues increased $0.1 million as a result of
revenues contributed by the traditional ice companies, $1.6 million due to the
placement of Ice Factories and $0.6 million as a result of revenues contributed
by the non-ice manufacturing operations. The increases in revenues from the
traditional ice operations primarily were due to increased volume from national
accounts and new customers, higher average sales price and acquisitions
completed during the third quarter of 1999 offset by unseasonably cool and rainy
weather on the East coast and the timing of the Fourth of July holiday. The
increase in non-ice revenues primarily was due to increased bottled water sales
and acquisitions completed in the third quarter of 1999.
COST OF SALES: Cost of sales decreased $0.2 million; from $48.7 million
for the three months ended September 30, 1999 to $48.5 million for the three
months ended September 30, 2000. This decrease primarily resulted from a higher
level of efficiency in the production and distribution of traditional ice, the
elimination of the majority of ice transfers required in the third quarter of
1999 and the increased number of Ice Factories in place, offset by higher fuel
and health benefit costs than last year and the impact of using operating leases
to install new Ice Factories. Operating leases result in greater charges to cost
of sales than would be incurred if the company had acquired the Ice Factories as
property additions. The use of operating leases causes us not to incur the
typical expenses of ownership, depreciation and interest, as a result of
financing such additions. As a percentage of revenues, cost of sales was 55.7%
for the three months ended September 30, 1999 and 54.1% for the three months
ended September 30, 2000.
GROSS PROFIT: Gross profit increased $2.5 million; from $38.7 million for
the three months ended September 30, 1999 to $41.2 million for the three months
ended September 30, 2000. This increase primarily resulted from the greater
efficiency of the traditional ice companies, the significant reduction of
transferred product and the higher number of Ice Factories in place. As a
percentage of revenues, gross profit was 44.3% for the three months ended
September 30, 1999 and 45.9% for the three months ended September 30, 2000.
OPERATING EXPENSES: Operating expenses decreased $0.8 million; from $10.3
million for the three months ended September 30, 1999 to $9.5 million for the
three months ended September 30, 2000. This decrease resulted from the continued
consolidation of administrative functions. As a percentage of revenues,
operating expenses decreased from 11.8% for the three months ended September 30,
1999 to 10.6% for the three months ended September 30, 2000. This decrease was
due to greater efficiencies as our reduced current period general and
administrative expenses were spread over the larger base of revenues during the
three months ended September 30, 2000.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased
$0.5 million; from $7.8 million for the three months ended September 30, 1999 to
$7.3 million for the three months ended September 30, 2000. This decrease was
primarily due to the change in the useful life of the Ice Factory from 7 to 12
years and the use of operating leases to install new Ice Factories, which
results in no additional depreciation. As a percentage of revenues, depreciation
and amortization decreased from 9.0% for the three months ended September 30,
1999 to 8.1% for the three months ended September 30, 2000.
15
<PAGE>
INTEREST EXPENSE: Interest expense increased $0.8 million; from $7.5
million for the three months ended September 30, 1999 to $8.3 million for the
three months ended September 30, 2000. As a percentage of revenues, interest
expense increased from 8.6% for the three months ended September 30, 1999 to
9.3% for the three months ended September 30, 2000. The dollar increase in
interest expense was a result of higher levels of debt associated with the
acquisitions completed during the third quarter of 1999 and a higher average
interest rate than experienced during the similar period of 1999. We completed
our initial public offering in January 1999, and as a result, had significantly
less borrowings in the third quarter of 1999 than in the similar period in 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES: Revenues increased $15.3 million; from $186.1 million for the
nine months ended September 30, 1999 to $201.4 million for the nine months ended
September 30, 2000. Revenues increased $11.0 million as a result of revenues
contributed by traditional ice plants and $4.3 million due to the placement of
Ice Factories. Our non-ice manufacturing operations have remained constant for
the nine months ended September 30, 1999 compared with the same period in 2000
despite the divesture of certain operations in May 1999. The increase in
traditional ice primarily was due to greater sales volume from national accounts
and new customers, higher average sales price and acquisitions completed during
the first nine months of 1999.
COST OF SALES: Cost of sales increased $9.3 million; from $109.1 million
for the nine months ended September 30, 1999 to $118.4 million for the nine
months ended September 30, 2000. This increase primarily resulted from the
greater sales volume at the traditional ice plants, higher fuel and health
benefit costs than last year and the impact of the operating leases used for the
new Ice Factory installations. As a percentage of revenues, cost of sales
increased from 58.6% for the nine months ended September 30, 1999 to 58.8% for
the nine months ended September 30, 2000. This increase primarily was due to
higher fuel and health benefit costs than last year and the impact of the
operating leases offset by greater efficiency, the lack of transferred product
and a higher number of Ice Factories in place.
GROSS PROFIT: Gross profit increased $6.0 million; from $77.0 million for
the nine months ended September 30, 1999 to $83.0 million for the nine months
ended September 30, 2000. This increase was primarily due to the greater volume
of traditional ice plants. As a percentage of revenues, gross profit decreased
from 41.4% for the nine months ended September 30, 1999 to 41.2% for the nine
months ended September 30, 2000. This decrease was the result of higher fuel and
health benefit costs and the costs associated with the operating leases.
OPERATING EXPENSES: Operating expenses decreased $0.1 million; from $28.1
million for the nine months ended September 30, 1999 to $28.0 million for the
nine months ended September 30, 2000. This decrease primarily resulted from the
continued consolidation of administrative functions. As a percentage of
revenues, operating expenses decreased from 15.1% for the nine months ended
September 30, 1999 to 13.9% for the nine months ended September 30, 2000. This
decrease was due to greater efficiencies realized as our reduced current period
general and administrative expenses were spread over the larger base of revenues
during the nine months ended September 30, 2000.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased
$0.7 million; from $22.1 million for the nine months ended September 30, 1999 to
$21.4 million for the nine months ended September 30, 2000. This decrease was
primarily due to the change in useful life of the Ice Factory from 7 to 12
years, and impact of using operating leases to install new ice factories, which
results in no property additions. As a percentage of revenues, depreciation and
amortization decreased from 11.9% for the nine months ended September 30, 1999
to 10.6% for the nine months ended September 30, 2000.
16
<PAGE>
INTEREST EXPENSE: Interest expense increased $1.9 million; from $22.7
million for the nine months ended September 30, 1999 to $24.6 million for the
nine months ended September 30, 2000. As a percentage of revenues, interest
expense remained the same at 12.2% for each of the nine month periods ending
September 30. The dollar increase in interest expense was a result of higher
levels of debt associated with the acquisitions completed during or after the
first nine months of 1999 and a higher average interest rate than experienced
during the similar period of 1999. We completed our initial public offering in
January 1999, and as a result had significantly less borrowings in the first
nine months of 1999 than in the similar period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
We generate cash flow primarily from the sale of packaged ice through
traditional delivery methods, through the installation of Ice Factories and, to
a lesser extent, through non-ice operations. We primarily use cash for:
o cost of sales;
o operating expenses;
o debt service;
o capital expenditures related to replacing and modernizing capital
equipment; and the manufacturing and installation of additional Ice
Factories and
o acquisitions.
We estimate that our capital expenditures for 2000 will total an aggregate
of approximately $17.0 million, all of which will be to maintain and expand
traditional ice facilities. There can be no assurance that capital expenditures
will not exceed this estimate.
During the nine months ended September 30, 2000, we exercised our options
to purchase the real estate upon which two of our ice plants are located for
approximately $4.2 million, and completed six small tuck-in acquisitions at a
cost of approximately $0.4 million, which we paid in cash from the acquisition
loan portion of the credit facility and generated from current operations.
We believe we will have adequate working capital to meet debt service
requirements and to satisfy working capital and general corporate needs. At
September 30, 2000, we had working capital of approximately $8.4 million,
including approximately $3.8 million of cash and cash equivalents. In addition,
we had $11.6 million available under the working capital loan of the credit
facility.
At September 30, 2000, we had approximately $331.0 million of long term
debt, including current maturities, outstanding as follows:
o $ 270.0 million of 9 3/4% senior notes due 2005;
o $ 60.4 million outstanding under the company's credit facility; and
o $ 0.6 million of other debt, net of debt discount.
Our credit facility provides for a $80 million line of credit consisting
of a $25 million revolving working capital loan and a $55 million revolving
acquisition loan. At September 30, 2000, we had approximately $10.4 million
outstanding under the working capital loan (excluding $3.0 million of
availability supporting letters of credit) and approximately $50.0 million
outstanding under the acquisition loan. The revolving credit facility bears
interest per annum, at the company's option, at LIBOR plus 3.25%, or the "prime"
rate plus 1.5%, 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 are due quarterly (next scheduled payment due December 31,
2000), with 9 equal quarterly installments remaining of approximately $4.5
million, and one final installment due on March 31, 2003. We made the first
scheduled payment of approximately $4.5 million on the acquisition loan on
September 29, 2000.
17
<PAGE>
Covenants contained in our credit facility and indenture governing the 9
3/4% senior notes require us to meet certain financial tests, and other
restrictions limit our ability to pay dividends, borrow additional funds or to
acquire or dispose of assets. The credit facility is secured by all of our
assets and the capital stock of our significant subsidiaries. The 9 3/4% senior
notes are generally unsecured obligations 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.
Although we have periodically reported negative cash flows from operations
on a historical basis, we believe that our overall treasury management of cash
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. We may not have sufficient funds to finance intended acquisitions or
capital expenditures to sustain our recent rate of growth. See "Risk Factors."
On October 26, 2000, we announced that we had received a fully
underwritten commitment, subject only to documentation and customary closing
conditions, to expand and amend our existing credit facility to allow for term
and revolving loan borrowings of up to $88 million. After the closing of this
amendment to the credit facility, which we expect to occur in November, we plan
to have reduced principal amortization, lower interest rates and altered capital
expenditure plans related to our Ice Factories.
GENERAL ECONOMIC TRENDS AND SEASONALITY
Our results of operations are generally affected by economic trends in our
market area but results to date have not been impacted by inflation. If we
encounter an extended period of high inflation, we believe 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 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 may fluctuate
significantly if the weather is unusually cool or rainy. See "Risk Factors."
18
<PAGE>
RISK FACTORS
OUR SUBSTANTIAL DEBT OBLIGATIONS MAY PREVENT US FROM FUNDING PLANNED
ACTIVITIES, AND MAY REQUIRE US TO SEEK ADDITIONAL DEBT OR EQUITY FINANCING OR
SELL SELECTED ASSETS. OUR DEBT OBLIGATIONS ALSO DIMINISH OUR ABILITY TO REACT TO
CHANGES IN OUR INDUSTRY.
We financed most of our acquisitions by incurring debt, and, consequently,
we have substantial debt service requirements. At September 30, 2000 we had
approximately $331 million in total indebtedness. Because of our large amount of
debt, we have to devote a substantial portion of our cash flow to paying
principal and interest on our debt, and may not be able to fund planned capital
expenditures, desired acquisitions and working capital.
If we are unable to generate enough cash flow to make scheduled payments
on our debt, we may be required to:
o seek additional debt or equity financing, or renegotiate our existing
debt arrangements on less favorable terms;
o sell selected assets; or
o reduce or delay planned capital expenditures.
We cannot guarantee that we could accomplish any of these measures.
In addition, the indentures that govern the 9 3/4% senior notes and the
credit agreement for our revolving credit facility require us to meet certain
financial tests, and restrict our ability to pay dividends, borrow additional
funds or dispose of assets. These requirements and restrictions may affect our
flexibility in planning for and reacting to changes in our business, including
possible acquisition activities.
Our high level of debt also diminishes our ability to react to unfavorable
changes in general economic, industry and competitive conditions.
THE SEASONAL NATURE OF THE ICE BUSINESS OFTEN RESULTS IN LOWER PROFITS AND
EVEN LOSSES IN THE FIRST AND FOURTH QUARTERS.
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 expenses during the first and fourth quarters, we
experience lower profits and possibly even losses during these periods.
UNUSUALLY COLD OR RAINY WEATHER DEPRESSES ICE SALES, AND THEREFORE,
DECREASES OUR CASH FLOW. UNUSUALLY HOT WEATHER CAN CAUSE AN INCREASE IN OUR
EXPENSES, DUE TO ICE TRANSFERS REQUIRED TO SERVICE OUR BUSINESS, AND THEREFORE,
DECREASES OUR PROFITS.
Many of our ultimate customers, the ice consumers themselves, demand ice
for use in connection with outdoor recreational and leisure activities. As a
result, demand for ice increases when the weather is hotter and sunnier, which
increases our cash flow. However, unusually hot weather may not result in
greater profits. During unusually hot weather periods; we may be required to
transport ice between locations to satisfy consumer demands. As a result, during
unusually hot weather periods, our expenses may increase substantially, which
results in less profit.
19
<PAGE>
THE MARKET VALUE OF OUR COMMON STOCK COULD BE ADVERSELY AFFECTED IF WE
CONTINUE TO REPORT SUBSTANTIAL NET OPERATING LOSSES.
Since we began operating in 1990, we have frequently reported substantial
net operating losses due to the following factors:
o increased interest expense associated primarily with our 9 3/4%
senior notes and revolving credit facility;
o substantial amortization of goodwill and other intangible assets
associated with our acquisitions; and
o substantial depreciation of capital expenditures.
As of September 30, 2000, we had an accumulated deficit of $31.8 million,
and we cannot guarantee that we will be profitable in the future.
While many factors cause our stock price to fluctuate widely (perceived
industry prospects and general economic conditions, for example), if we continue
to report net operating losses, it could depress our stock price further because
it causes investors to doubt our ability to be profitable.
WE NOW HAVE A COMPETITOR IN THE ICE FACTORY MARKET, WHICH COULD TAKE SOME
OF OUR CUSTOMERS' BUSINESS.
Through the end of 1999, none of our competitors had successfully
developed and marketed an automated system. As the sole company using an on-site
ice production and delivery system, we had a distinct competitive advantage
because the Ice Factory is preferred to traditional ice delivery by many of our
high volume customers and the Ice Factory sector of our business gives us more
flexibility during peak seasons than our competitors. Early this year, a
competitor announced it would have a similar machine by the fourth quarter of
2000. If our competitor is successful, it is possible that we may lose business
we have gained and business we would gain as a result of the Ice Factory, which
will result in decreased cash flows and profits.
INCREASES IN THE PRICE OF CERTAIN RAW MATERIALS, ESPECIALLY POLYETHYLENE
AND FUEL USED IN THE MANUFACTURING AND DISTRIBUTION PROCESS, INCREASE OUR
EXPENSES, WHICH CAUSES A DECREASE IN OUR PROFITS.
We use large quantities of plastic bags in the manufacture of our product.
In the past, prices for plastic bags have fluctuated in response to a number of
factors, including changes in polyethylene prices. We cannot guarantee that
significant changes in plastic bags, water, fuel or other commodity prices would
not have a material adverse effect on our business, results of operations and
our ability to service our debt.
OUR DEPENDENCE ON A SINGLE MANUFACTURER FOR THE PROPRIETARY BAGGING DEVICE
USED IN THE ICE FACTORY EXPOSES US TO A RISK OF HAVING LITTLE OR NO SUPPLY OF
THESE BAGGING DEVICES FOR USE WITH 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 we cannot guarantee
that we would quickly locate, or ever locate, alternative sources of supply for
the bagging device if Lancer was unable to meet our requirements.
20
<PAGE>
WE ARE EXPOSED TO SIGNIFICANT ENVIRONMENTAL LIABILITIES.
Our ice manufacturing and storage operations may result in serious
environmental accidents, which may result in plaintiffs naming us in lawsuits
asserting large claims. We currently carry 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 any damage awards. If our
insurance could not pay for all or part of these losses, our income would
decline. In addition, we may not be able to maintain our insurance if insurance
rates or insurance industry policies change.
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 Packaged Ice, 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 us to do so. 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.
ACQUISITIONS MAY 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. Goodwill and other intangible assets represented 49.5% of our
total assets and exceeded shareholders' equity by $147.8 million as of September
30, 2000. Generally accepted accounting principles require 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.
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 is also 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.
It is possible that other companies may obtain patents necessary for, or
useful to, the development of our 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.
21
<PAGE>
DIFFICULTIES INTEGRATING OUR ACQUISITIONS COULD ADVERSELY AFFECT US.
We have acquired some new businesses over the last few years, and we may
continue to make more acquisitions. As a result, we continue to integrate past
acquisitions, and we may encounter difficulties integrating these acquisitions
and successfully managing the rapid growth we expect to experience from them. To
the extent we encounter problems in integrating acquisitions, we could be
materially adversely affected. In addition, we plan to pursue select
acquisitions in the future. Because we may pursue these acquisitions around the
world and may actively pursue a number of opportunities simultaneously, we may
encounter unforeseen expenses, complications and delays, including difficulties
in staffing and providing operational and management oversight.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
None.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are from time to time party to legal proceedings that arise in the
ordinary course of business. We do not believe that the resolution of any
threatened or pending legal proceedings will have a material adverse affect on
our financial position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 19, 2000, we issued 12,765 shares of common stock in a cashless
exercise of outstanding warrants with an exercise price of $0.01 per share.
On July 20, 2000, we issued 15,205 shares of common stock to employees
under our 2000 Employee Stock Purchase Plan at a price of $3.5063 per share.
On September 26, 2000, we issued 5,674 shares of common stock upon
exercise of detachable warrants to holders associated with the company's 12%
notes at an exercise price of $0.01 per share.
On October 24, 2000, we issued 27,348 shares of common stock to
employees under our 2000 Employee Stock Purchase Plan at a price of $2.3375 per
share.
On November 1, 2000, we elected to pay in kind dividends on the 10%
exchangeable preferred stock, which totaled 15,877 shares of 10% exchangeable
preferred stock and 122,133 warrants to purchase common stock at $13.00 per
share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
22
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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
---------- -----------
27.1+ Financial Data Schedule.
-----------------
+ Filed herewith.
(B) REPORTS ON FORM 8-K:
None
23
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
PACKAGED ICE, INC.
Date: November 13, 2000 By: /s/ JAMES F. STUART
James F. Stuart
Chief Executive Officer
Date: November 13, 2000 By: /s/ STEVEN J. JANUSEK
Steven J. Janusek
Chief Financial and Accounting Officer
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